UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
  FORM
10-K
  (Mark
One)
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
fiscal year ended March 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
      Number)
  
 1288
Ala Moana Blvd., Suite 220
  Honolulu,
Hawaii 96814
 (Address
of principal executive offices, including zip code)
  (808)
682-7800
 (Registrant’s
telephone number, including area code)
 
  Securities
registered pursuant to Section 12(b) of the Act:
  Title
of each
class                                                                Name
of each exchange on which registered
 Common
Stock, par value $.001 per
share                                                                                                           The
NASDAQ Stock Market, LLC
 (NASDAQ Global Market)
  Securities registered pursuant to
Section 12(g) of the Act:   None
 
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes    ̈
    No   x
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes    ̈
    No   x
  Indicate
by a check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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. Yes   x
    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 (§ 229.405 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K   ̈
  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
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large
accelerated filer    ̈                                                                       Accelerated
filer    x
  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 Act).
Yes    ̈
     No   x
  The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 30, 2008 was approximately $87 million (based on
the closing sales price of the registrant’s common stock on September 30,
2008). Aggregate market value excludes an aggregate of 3,928,202 shares of
common stock held by officers and directors and by each person known by the
registrant to own 5% or more of the outstanding common stock on such date.
Exclusion of shares held by any of these persons should not be construed to
indicate that such person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the registrant, or that
such person is controlled by or under common control with the
registrant.
  
  As of
April 30, 2009, 21,095,079 shares of the Registrant’s common stock were issued
and outstanding.
  DOCUMENTS
INCORPORATED BY REFERENCE
  The
registrant has incorporated by reference portions of its Proxy Statement for its
2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission by July 29, 2009.
  
 
 INDEX
TO FORM 10-K [update]
  Part
      IItem 1.
                  
                  Business
                  
                  1Item 1A.
                  
                  Risk
      Factors
                  
                  18Item 1B.
                  
                  Unresolved
      Staff Comments
                  
                  32Item 2.
                  
                  Properties
                  
                  33Item 3.
                  
                  Legal
      Proceedings
                  
                  33Item 4.
                  
                  Submission
      of Matters to a Vote of Security Holders
                  
                  33Part
      IIItem 5.
                  
                  Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  
                  33Item 6.
                  
                  Selected
      Financial Data
                  
                  35Item 7.
                  
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  37Item 7A.
                  
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  
                  49Item 8.
                  
                  Financial
      Statements and Supplementary Data
                  
                  49Item 9.
                  
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  
                  50Item 9A.
                  
                  Controls
      and Procedures
                  
                  50Item 9B.
                  
                  Other
      Information
                  
                  52Part
      IIIItem 10.
                  
                  Directors,  Executive
      Officers and Corporate Governance
                  
                  53Item 11.
                  
                  Executive
      Compensation
                  
                  53Item 12.
                  
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  
                  53Item 13.
                  
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  
                  53Item 14.
                  
                  Principal
      Accountant Fees and Services
                  
                  53Part
      IVItem 15.
                  
                  Exhibits
      and Financial Statement Schedules
                  
                  54Signatures
                  
                  55
 
 
 
 PART
I
  Item 1.
              Business
  Forward-Looking
Statements
  This
Annual Report on Form 10-K 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 Annual Report on Form
10-K, including, but not limited to, statements about:
   •
              
              our
      ability to raise sufficient funds to construct and equip a 4,000 metric
      ton per year polysilicon manufacturing facility in Pocatello, Idaho,
      including payments for the engineering and procurement services from Stone
      & Webster, Inc., construction services from JH Kelly LLC, the purchase
      and installation of equipment from GEC Graeber Engineering Consultants
      GmbH and MSA Apparatus Construction for Chemical Equipment, Ltd., AEG
      Power Solutions USA Inc., formerly known as Saft Power Systems USA, Inc.,
      PVA Tepla Danmark and other vendors, contractors and consultants in
      general, and to comply with our obligations under our polysilicon supply
      agreements with Shanghai Alex New Energy Co., Ltd., Wuxi Suntech Power
      Co., Ltd., Solarfun Power Hong Kong Limited, Tianwei New Energy (Chengdu)
      Wafer Co., Ltd.,  Jiangxi Jinko Solar Co., Ltd. and Wealthy Rise
      International, Ltd.(Solargiga);•
              
              our
      ability to raise additional cash to provide the Company with sufficient
      liquidity to continue as a going
concern;
 
 •
              
              our
      ability to receive customer prepayments based on the agreed-upon schedules
      and contingent upon meeting certain milestones, if at all, under our
      polysilicon supply agreements with Shanghai Alex New Energy Co., Ltd.,
      Wuxi Suntech Power Co., Ltd., Solarfun Power Hong Kong Limited, Tianwei
      New Energy (Chengdu) Wafer Co., Ltd.,  Jiangxi Jinko Solar Co.,
      Ltd. and Wealthy Rise International, Ltd.(Solargiga);•
              
              our
      ability to secure additional long-term polysilicon supply customers and
      customer prepayments;
 
 •
              
              our
      cost to engineer, procure, construct and operate our planned polysilicon
      facility, including any cost increases resulting from the planned increase
      in production capacity from 3,500 metric tons per year to 4,000 metric
      tons per year;
 
 •
              
              our
      ability to meet our commitments under certain supply agreements to deliver
      polysilicon in the second half of calendar year
  2009;
 
 •
              
              the
      ability of 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 to meet the delivery schedules in
      their respective agreements with us;•
              
              our
      ability to engineer, construct and operate a production plant for
      polysilicon;•
              
              our
      ability to produce polysilicon, the quality of any polysilicon we produce,
      our costs to produce polysilicon, and our ability to offer pricing that is
      competitive with competing products;•
              
              our
      ability to raise sufficient funds to purchase raw materials needed for the
      production of polysilicon from vendors with whom we have current supply
      agreements, such as Polymet Alloys, Inc. and BHS Acquisitions, LLC, as
      well as from other vendors with whom we do not yet have supply
      agreements;•
              
              the
      performance by our existing customers of their obligations under
      polysilicon supply agreements, and our ability to secure new customers for
      additional prepayments;
 
 •
              
              our ability
      to diminish or defer capital expenditures for our polysilicon plant by
      delaying construction of our trichlorosilane production
      system;
 
 •
              
              our
      ability to produce trichlorosilane, and the efficiency and potential
      operating cost savings from the trichlorosilane production process to be
      designed by Dynamic Engineering
Inc.;
 
 •
              
              our
      ability to identify and reach agreements with vendors to supply us with
      the raw materials we will need to produce polysilicon, including our
      ability to identify and reach an agreement with a vendor of
      trichlorosilane and the cost of purchasing trichlorosilane from third
      parties;
  1
  •
              
              our
      ability to meet the quality, quantity and timing requirements under our
      polysilicon supply agreements with Shanghai Alex New Energy Co., Ltd.,
      Wuxi Suntech Power Co., Ltd., Solarfun Power Hong Kong Limited, Tianwei
      New Energy (Chengdu) Wafer Co., Ltd.,  Jiangxi Jinko Solar Co.,
      Ltd. and Wealthy Rise International, Ltd.(Solargiga);•
              
              our
      forecasted revenue from the potential future sale of
      polysilicon;
 
 •
              
              our ability to complete
      photovoltaic system installations, including potential future
      installations with The James Campbell Company and
      Hawaiian Electric Company, Inc.;•
              
              our
      ability to offer pricing for photovoltaic system installations that is
      competitive with competing products and installation
      providers;
 
 •
              
              the
      performance and durability of the photovoltaic systems we
      install;
 
 •
              
              the
      cost to procure and install photovoltaic
  systems;
  •
              
              our
      ability to offer pricing that is competitive with competing products and
      expected future revenue from the photovoltaic  system
      installation business;
 
 •
              
              our
      expectations regarding the potential size and growth of photovoltaic
      system installations and polysilicon markets in general and our revenues
      in particular;•
              
              our
      expectations regarding the market acceptance of our
    products;•
              
              our
      future financial performance;•
              
              our
      business strategy and plans; and•
              
              objectives
      of our management for future
operations.
  In
some cases, you can identify forward-looking statements by terms such as
“anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,”
“would” and similar expressions intended to identify forward-looking statements.
These statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance, time frames or
achievements to be materiallydifferent 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 Annual Report on Form 10-K in greater detail in Part I,
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 Annual Report on Form
10-K.
  Our
fiscal year ends on March 31. We designate our fiscal year by the year in
which that fiscal year ends; e.g., fiscal 2009 refers to our fiscal year ended
March 31, 2009.
 
 2
  Overview
  Hoku
Scientific, Inc. is 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 our 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  our polysilicon production facility
currently under construction. As of March 31, 2009, we had cash and cash
equivalents on hand of $17.4 million and short term liabilities of $40.0
million. Consequently, there is substantial doubt that we will have
sufficient cash to meet all of our obligations as they come due over the next
twelve months. 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. Furthermore, assuming the
total cost of construction and equipment does not exceed $390 million, that all
of our existing polysilicon customers make timely prepayments in full and that
we are able to secure additional prepayments from new polysilicon customers, we
believe we will still need to raise an amount between $35 and $55 million to
complete the construction of our 4,000 metric ton plant. If we are unable to
secure additional long-term supply contracts and prepayments, assuming the cost
to construct and equip the plant is $390 million and that all of our existing
customers make their prepayments when due, the amount we will need to raise
could be as much as $106 million. If we are unable to secure additional
long-term supply contracts and prepayments, if one or more of our polysilicon
supply customers fail to meet their obligations to make timely prepayments
and/or if the actual cost to complete the plant is more than $390 million, the
amount we will need to raise could exceed $106 million.  We previously
intended to finance the construction of our polysilicon production facility
through project financing; however, as of May 2009, we believe we will need to
raise additional capital through other means for the procurement and
construction of our polysilicon manufacturing facility.
  Our
ability to continue as a going concern depends on our ability to raise equity or
debt capital, increase revenues and reduce expenses. We have already modified
payment terms in purchase orders with more than twenty of our vendors to
structure payment plans for amounts past due and to be invoiced in the future.
Our management continues to evaluate a variety of alternatives to raise capital
and manage our liquidity.  These alternatives include, without
limitation:
  ·
              debt
      financing, including financing that is guaranteed by a private third
      party;
  ·
              one
      or more or 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;
  ·
              further
      extending the construction schedule and payment plans with vendors;
      and/or
  ·
              consummating
      a transaction, which could result in a change of
  control.
  There are
no assurances that we will be successful in executing any of the foregoing
alternatives. 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 March 31, 2010. The inability to continue as a going concern could
result in an orderly wind-down or other potential forms of restructuring. 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.
  Hoku
Materials
  In
February 2007, we incorporated Hoku Materials to manufacture polysilicon, a key
material used in PV modules. We had originally planned to use the polysilicon
internally by Hoku Solar to manufacture our own brand of solar modules, and for
sale to the larger solar market.  However, as a result of the
polysilicon supply shortages and strong demand from third-party customers that
existed in recent calendar years, and our revised strategy for Hoku Solar, we
revised our plan for Hoku Materials to sell all of our planned output of
polysilicon to third-party customers.
  In May
2007, we commenced construction of our planned polysilicon manufacturing
facility in Pocatello, Idaho.We had originally planned the annual capacity of the polysilicon
manufacturing facility to be 3,500 metric tons per year and for construction and
equipment to cost approximately $400 million. In April 2008, we issued a change
order with Stone & Webster, Inc., our engineering and procurement services
provider and, as a result, revised our estimate of the total actual cost to
construct and equip our polysilicon facility downward from $400 million to $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.
  3
 In
September 2008, we announced that we would be increasing our planned polysilicon
facility capacity from 3,500 metric tons per year to 4,000 metric tons per year.
We do not believe that this increase in capacity and related modifications to
the production facility will require a significant amount of additional capital,
if any; however, we are continuing to review the $390 million estimated actual
cost to complete the facility. In January 2009, we received six polysilicon
reactors at our Pocatello facility and all six reactors have been assembled and
put into place on our production floor. The reactors, which were manufactured in
Germany by GEC/MSA, are the first units to arrive in Pocatello out of a planned
total order of 28. The next shipment of 10 polysilicon reactors and related
equipment is scheduled to arrive at our facility no later than the third quarter
of calendar year 2009.
  We had
originally planned for our first commercial shipment of polysilicon to occur in
the first half of calendar year 2009. However, due to the effect of certain
delayed customer prepayments, this schedule has been adjusted and we now expect
our first commercial shipment to occur in the second half of calendar year 2009.
We intend to ramp-up production throughout the second half of calendar year
2009, and into calendar year 2010, when we expect to reach full production
capability. We expect this revised schedule will still allow us to meet all
delivery obligations to our current customers; however, there are no assurances
that we will not need to revise this schedule further.
  Once our
plant is operating at full capacity, we expect that we will be able to meet the
annual delivery requirements in our seven existing long-term polysilicon supply
contracts. In addition, as of May 15, 2009, we have approximately 600 to 800
metric tons of unallocated annual polysilicon production capacity from our
planned production output of 4,000 metric tons per year, which either may be
sold under one or more new long-term contracts, reserved for strategic purposes,
or sold on the spot market.
  As of
March 31, 2009, we had received a total of $134 million in customer prepayments.
In April 2009, we received a $7 million prepayment from Wealthy Rise
International, Ltd., and in May 2009, we received an additional $14.5 million
from Tianwei New Energy (Chengdu) Wafer Co., bringing the total customer
prepayments to $155.5 million. As of May 15, 2009, all of our customers were
current on their prepayment obligations. However, during fiscal 2009 certain
customer prepayments were less than we anticipated and/or received later than
originally expected. To manage the potential effects of such delays, we are
deferring approximately $40 million in capital expenditures by delaying
construction of our on-site trichlorosilane, or TCS, production facility. We are
in discussions with third-party TCS producers for a TCS supply contract to
enable us to execute on this strategy. The procurement of third-party TCS would
result in an increase in our near-term cost of goods sold.
 
 We
previously intended to finance the construction of our polysilicon production
facility through project financing; however, as of May 2009, we believe we will
need to raise additional capital through other means for the procurement and
construction of our polysilicon manufacturing facility.  We continue
to evaluate a variety of alternatives to finance the construction of our
polysilicon production facility. These alternatives include one or more debt or
equity offerings, government funding from grants, loan guarantees or other
transactions, a consequence of which could include the sale or issuance of stock
to third parties and/or a change of control.  Assuming the total
actual cost to complete the construction of our 4,000 metric ton plant is $390
million, that our existing polysilicon customers make their prepayments in full
when due and that we are able to secure additional prepayments from new
polysilicon customers, the amount of debt and/or equity we believe we will need
to raise could range between $35 and $55 million. If we are unable to secure one
or more additional long-term supply contracts and customer prepayments, the
amount we will need to raise could be as much as $106 million. If we are unable
to secure additional prepayments under new polysilicon supply contracts, if one
or more of our customers fail to meet their obligations to make timely
prepayments, and/or if the cost to complete the plant is $390 million, the
amount we will need to raise could exceed $106 million. If we are unable to
secure adequate debt or equity financing to complete construction of our
polysilicon production facility 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. If we must
raise capital through one or more equity offerings, depending on the size of the
offering, the issuance of our stock could result in material impairment to our
existing stockholders’ voting power, material impairment to our existing
stockholders’ share value and/or a change of control. 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.
  Hoku Solar
 In March
2007, we incorporated Hoku Solar to assemble and install our own brand of PV
modules. In June 2007, we announced a change in our strategy, which is to focus
on the sale of turnkey PV system installations, and related services, and not to
enter the solar-module manufacturing business. In connection with this revised
strategy, we resold our solar module manufacturing equipment in July 2007,
before it was delivered to us, and resold our inventory of solar
cells.
 
 We
continue to design, engineer and install turnkey PV systems and use modules
purchased from third-party suppliers, which we believe we can purchase at lower
cost than the cost at which we could manufacture our own brand of modules. In
December 2008, due to our decision not to enter the solar-module manufacturing
business, along with decreased activity in our fuel cell business, we sold our
real property and improvements, including our corporate headquarters, located in
Kapolei, Hawaii.
  4
  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. In August 2007, we completed our most recent material fuel cell
contract with the U.S. Navy.
 
 We intend
to selectively pursue 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.
  Our
Solar Businesses
  Solar
Industry Overview
  Solar
Power Systems
  Solar
power systems convert sunlight directly into electricity. These systems are used
for “on-grid” and “off-grid” residential, commercial and industrial
applications, and for a variety of consumer applications. “On-grid” markets
refer to applications where solar power is used to supplement a customer’s
electricity purchased from the utility network, whereas “off-grid” markets
include those applications where access to utility networks is not economical or
physically feasible, including road signs, highway call boxes and communications
support along remote pipelines and telecommunications equipment, as well as
rural residential applications. Consumer applications include garden lights,
other outdoor lighting and handheld devices such as calculators.
  A solar
power system consists of one or more PV modules electrically connected in
series, and typically includes a power inverter to convert the direct current,
or DC, electricity produced by the modules into alternative current, or AC,
electricity that is required for most applications. For “on-grid” applications,
an interconnect to the utility grid is required, and in “off-grid” applications,
a battery may be required to provide power at night, and at other times when the
sun is not providing enough solar radiation for the solar power system to
generate sufficient electricity to power the electrical load. The key components
of PV modules are PV cells, which are in turn made from silicon wafers. Silicon
wafers are made from silicon ingots, which are in turn made from raw
polysilicon. Following is a brief overview of these products and
technologies.
  Polysilicon
  Polysilicon
is an essential raw material in the production of PV cells. Polysilicon is
created by refining quartz or sand to produce electronic-grade or solar-grade
polysilicon. The key difference between electronic-grade and solar grade
polysilicon is the purity requirement. The purity requirement for solar-grade
polysilicon is typically 99.9999%-99.999999% pure, while electronic grade
polysilicon tends to be at least 99.9999999% pure. The majority of polysilicon
production begins with quartz or sand, which is refined into metallurgical grade
silicon, or MG-Si. MG-Si is then purified by various chemical processes. There
are two main methods in which this can be accomplished, namely silane-based and
trichlorosilane (TCS)-based processes. There are two technologies for producing
polysilicon from silane and TCS: the Siemens reactor method and the fluidized
bed reactor, or FBR method. In the Siemens reactor process, the silane or TCS
gas is introduced into a thermal decomposition furnace (reactor) with high
temperature polysilicon rods inside a jacketed bell jar. The silicon contained
in the gas will deposit on the heated rods, which gradually grow until the
desired diameter has been reached. In the FBR process, silane or TCS gas is
introduced into a tube-like reactor in which small polysilicon granules are
suspended in the gas stream, referred to as the fluidized bed. The silicon
contained in the gas deposits on the surface of the hot granules in the bed
until the desired diameter has been reached. The end product is in the form of
rods or chunks of polysilicon. The technology in the Siemens reactor was
developed in the late 1950’s, is widely implemented, accounting for a majority
of the polysilicon production today, and currently produces a higher purity of
material.
  Silicon
Ingots and Wafers
  Before polysilicon rods or chunks can
be used in PV cells, they must first be converted into ingots, which are cut
into wafers. There are two processes for making ingots from polysilicon: the
monocrystalline and the multicrystalline process. To make monocrystalline
ingots, a single crystal of polysilicon is grown, whereas, multicrystalline
ingots are made by melting chunks of polysilicon together in a crucible to form
a large block of multicrystalline polysilicon, which is then cut into smaller
bricks. Themonocrystalline ingot or the
multicrystalline brick is then cut into thin wafers, typically using a cable
saw. The end product is either a monocrystalline or a multicrystalline silicon
wafer.
  PV
Cells
  PV cells
are made from silicon wafers. The wafer undergoes a process to combine positive
and negative layers on the wafer, attach electrodes, and coat with
anti-reflective materials. The performance of a PV cell is measured by its solar
radiation conversion efficiency. The solar radiation conversion efficiency is a
measure of the net percentage of energy from solar radiation that the PV cell
converts into electricity. PV cells made from multicrystalline wafers may have
efficiencies in the range of 13-18%, whereas PV cells made from monocrystalline
wafers typically have higher efficiencies in the range of 20%, but are more
expensive to produce.
  5
 PV
Modules
  PV
modules are commonly known as solar panels. A PV module is made by electrically
wiring together PV cells in series to increase the total voltage output. The
connected cells are laminated in a glass or plastic covering and then framed.
The wires connecting the PV cells terminate in a junction box to allow multiple
PV modules to be electrically connected in series to further increase the
voltage and power output.
 
 Hoku
Materials
 
 Business
Strategy and Planned Polysilicon Product
 Our goal
is to be a leading provider of polysilicon. We plan to manufacture solar-grade
polysilicon using TCS in a Siemens reactor. We believe it is the most proven
process with the least technical risk.
 
 Current
Customers
 During
fiscal 2009, we added four new long-term supply contracts and also amended four
long-term polysilicon supply contracts, some of which were entered into earlier
in fiscal 2009. We also terminated two contracts during fiscal 2009. As of March
31, 2009, we have contracted future revenue with six leading solar companies for
the sale of up to approximately $1.9 billion of polysilicon over a ten-year
period, subject to meeting certain milestones and other conditions.Once our planned facility,
which is being designed to produce up to 4,000 metric tons of polysilicon per
year, is operating at full capacity, we expect that we will be able to meet the
annual delivery requirements in our seven existing polysilicon sales contracts
with our six existing long-term customers (we have two separate supply contracts
with one of our customers). In addition, we have approximately 600 to 800 metric
tons of unallocated annual polysilicon production capacity from our planned
production output of 4,000 metric tons per year, which may be sold under one or
more new long-term contracts, reserved for strategic purposes, or sold on the
spot market. If such polysilicon is sold under one or more long-term contracts,
such sales may provide additional prepayments that could possibly reduce the
amount of additional financing needed to complete construction of our
plant.
  Wuxi Suntech Power Co. Ltd.
In June 2007, we entered into a fixed price, fixed volume polysilicon supply
agreement, or the Suntech Supply Agreement, with Wuxi Suntech Power Co., Ltd.,
or Suntech, to provide Suntech with up to approximately $678 million of
polysilicon sales over either a seven or a ten-year period.
  In May
2008, we amended and restated the Suntech Supply Agreement, or the Amended
Suntech Supply Agreement, whereby approximately $678 million may be payable by
Suntech to us during a definite ten-year period, subject to achieving certain
milestones, the acceptance of product deliveries and other conditions.
Additional amounts may be payable for polysilicon products shipped in 2009.
Suntech has paid us a cash deposit of $2 million as prepayment for future
product deliveries and is obligated to pay an additional $45 million in three
equal installments based on the achievement of certain milestones within
specified timeframes, including the completion of a test demonstration of at
least two polysilicon reactors, completion of a test demonstration of our TCS
production facility, and the shipment of specified quantities of
polysilicon.
 
 The term
of the Amended Suntech Supply Agreement is ten years from the date of the first
shipment. Each party, however, may terminate the Amended Suntech Supply
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 Amended Suntech Supply Agreement by the other party.
Suntech may terminate the Amended Suntech Supply Agreement if we fail to meet
certain milestones in 2009 related to our polysilicon production facility
presently under construction. Upon Suntech’s termination of the Amended Suntech
Supply Agreement, we are generally required to refund to Suntech all of the
prepayments made as of the date of termination, which was $2 million as of March
31, 2009, less any part thereof that has been applied to the purchase price of
polysilicon delivered under the Amended Suntech Supply Agreement.
 
 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 obligation to repay the remaining amount
of all prepayments made by Suntech that has not been applied to the purchase
price of polysilicon delivered as of the date of such termination should Suntech
elect to terminate the contract under certain circumstances. Such security
interest is subordinated to any third-party debt secured to finance construction
of the polysilicon production facility and pari passu with security interests
granted to each of our other long-term polysilicon supply customers. The
security interest will continue until all prepayments have been credited against
the shipment of product, and only with respect to the amount of prepayment that
has not been so credited.
 
 If the
Amended Suntech Supply Agreement is terminated for any reason, our business will
be materially harmed and we will need to secure new funds in order to finance
the construction of our polysilicon production plant. Securing new funds may
delay the anticipated timing of completion of the production plant, 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 agreement with Suntech or at all. If we are unable to
secure new funds, we will not be able to complete construction of the production
plant, our business will be materially harmed and we may be forced to delay,
alter or abandon our planned business operations.
  Solarfun Power Hong Kong
Limited. In November 2007, we entered into a fixed price, fixed volume
supply agreement, or the Solarfun Supply Agreement, with Solarfun Power Hong
Kong Limited, or Solarfun, a subsidiary of Solarfun Power Holdings Co., Ltd. In
January 2008, we entered into the first Amended and Restated Supply Agreement
with Solarfun.  In May 2008, we entered into a Second Amended and
Restated Supply Agreement, or the Second Solarfun Supply Agreement with
Solarfun. In October 2008, we entered into Amendment No. 1 to the Second
Solarfun Supply Agreement. In March 2009, we entered into Amendment No. 2 to the
Second Solarfun Supply Agreement, or Solarfun Amendment No. 2. Pursuant to
Solarfun Amendment No. 2, Solarfun agreed to purchase from us specified
quantities of polysilicon over a ten-year period, during which up to
approximately $384 million may be payable to us. Under Solarfun Amendment No. 2,
we are obligated to commence shipments of polysilicon in March 2010. As of March
31, 2009, Solarfun had paid to us cash deposits of $37 million as prepayment for
future polysilicon product deliveries. Under Solarfun Amendment No. 2, Solarfun
must also make an additional prepayment of $18 million in installments. The
first installment of $5 million was paid in March 2009. The second installment
of $8 million is payable in July 2009. The remaining $5 million is to be paid in
increments of $1 million in each of August and September 2009, and $3 million in
October 2009. The final prepayment of $5 million is payable in January
2010.
  6
  The term
of the Second Solarfun Supply Agreement, as amended, or the Amended Solarfun
Supply Agreement, is ten years from the date of the first shipment. Each party,
however, may terminate the Amended Solarfun Supply 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
Amended Solarfun Supply Agreement by the other party. Our failure to commence
shipments of polysilicon by June 2010 constitutes a material breach by us under
the terms of the Amended Solarfun Supply Agreement, among other circumstances.
Solarfun’s failure to pay any part of the remaining $18 million in cash deposits
when due constitutes a material breach of the contract by Solarfun, among other
circumstances. Upon Solarfun’s termination of the Amended Solarfun Supply
Agreement under certain circumstances, we are required to refund to Solarfun all
of the prepayments made as of such termination, which was $37 million as of
March 31, 2009, less any part thereof that has been applied to the purchase
price of polysilicon delivered under the Amended Solarfun Supply Agreement. Upon
a termination of the Amended Solarfun Supply Agreement by us, we generally may
retain the entire amount of prepayments made as of the date of termination as
liquidated damages, less any part thereof that has been applied to the purchase
price of polysilicon delivered under the Amended Solarfun Supply
Agreement.
  Pursuant
to the Amended Solarfun Supply Agreement, 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 obligation to repay the remaining amount
of all prepayments made by Solarfun that has not been applied to the purchase
price of polysilicon delivered as of the date of such termination, should
Solarfun elect to terminate the contract under certain circumstances. Such
security interest is subordinated to any third-party debt we may secure to
finance construction of our polysilicon production facility and pari passu with
security interests granted to each of our other long-term polysilicon supply
customers. The security interest will continue until all prepayments have been
credited against the shipment of product, and only with respect to the amount of
prepayment that has not been so credited.
  If the
Amended Solarfun Supply Agreement is terminated for any reason, our business
will be materially harmed and we will need to secure new funds in order to
finance the construction of our polysilicon production plant. Securing new funds
may delay the anticipated timing of completion of the production plant, 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 agreement with Solarfun, or at all. If we are unable to
secure new funds, we will not be able to complete construction of the production
plant, our business will be materially harmed and we may be forced to delay,
alter or abandon our planned business operations.
  Jiangxi Jinko Solar Co., Ltd.In July 2008, we entered into a fixed price, fixed volume supply
agreement with Jiangxi Jinko Solar Co., Ltd., formerly known as Jiangxi Kinko
Energy Co., Ltd., or Jinko, for the sale and delivery of polysilicon to Jinko
over a ten-year period, or the Jinko Supply Agreement. In January 2009, we
entered into Amendment No. 1 to the Jinko Supply Agreement, or the First
Amendment. In February 2009, we entered into an Amended & Restated Supply
Agreement with Jinko, or the Amended Jinko Supply Agreement, under which the
total volume of polysilicon to be sold by us to Jinko has been reduced such that
up to approximately $119 million may be payable to us during the ten-year
period, subject to product deliveries and other conditions.
  Under the
Jinko Supply Agreement, Jinko previously paid us a cash deposit of $20 million
as prepayment for future product deliveries. Under the Amended Jinko Supply
Agreement, we and Jinko acknowledged and agreed that $5 million of the $20
million previously paid to us by Jinko would be credited to the prepayment
account of Shanghai Alex New Energy Co., Ltd.  See “Shanghai Alex New
Energy Co., Ltd.”, below. Jinko paid us an additional $3 million in March 2009.
Jinko is now obligated to pay an additional cash deposit of $2 million as a
prepayment for future product deliveries, which is payable in June 2009. The
Amended Jinko Supply Agreement provides that if Jinko does not provide the $2
million cash deposit when due, then we may immediately terminate the Amended
Jinko Supply Agreement and retain all previously paid cash deposits as
liquidated damages, which was $18 million as of March 31, 2009.
  The term
of the Amended Jinko Supply Agreement is ten years from the date of the first
shipment. Each party, however, may terminate the Amended Jinko Supply 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 Amended Jinko Supply Agreement by the other party. Our
failure to commence shipments of polysilicon by December 2009 constitutes a
material breach by us under the terms of the Amended Jinko Supply Agreement,
among other circumstances. Jinko’s failure to pay the $2 million cash deposit
when due constitutes a material breach of the contract by Jinko, among other
circumstances. Upon Jinko’s termination of the Amended Jinko Supply Agreement
under certain circumstances, we are required to refund to Jinko all prepayments
made as of the date of termination, which was $18 million as of March 31, 2009,
less any part thereof that has been applied to the purchase price of polysilicon
delivered under the Amended Jinko Supply Agreement. Upon a termination of the
Amended Jinko Supply Agreement by us, we generally may retain the entire amount
of prepayments made as of the date of such termination as liquidated damages,
less any part of thereof that has been applied to the purchase price of
polysilicon delivered under the Amended Jinko Supply Agreement.
  7
  Pursuant
to the Amended Jinko Supply Agreement, we have 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 obligation to repay the $20 million
deposit if the Amended Jinko Supply Agreement is terminated by Jinko. Such
security interest is subordinated to any third-party debt we may secure to
finance construction of our polysilicon production facility and pari passu with
security interests granted to each of our other long-term polysilicon supply
customers. The security interest will continue until all prepayments have been
credited against the shipment of product, and only with respect to the amount of
prepayment that has not been so credited.
  If the
Amended Jinko Supply Agreement is terminated for any reason, our business will
be materially harmed and we will need to secure new funds in order to finance
the construction of our polysilicon production plant. Securing new funds may
delay the anticipated timing of completion of the production plant, 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 agreement with Jinko or at all. If we are unable to
secure new funds, we will not be able to complete construction of the production
plant, our business will be materially harmed and we may be forced to delay,
alter or abandon our planned business operations.
  Tianwei New Energy (Chengdu) Wafer
Co., Ltd. Contract No. 1.  In August
2008, we entered into a fixed price, fixed volume supply agreement, or Tianwei
Supply Agreement No. 1, with Tianwei New Energy (Chengdu) Wafer Co., Ltd., or
Tianwei, for the sale and delivery of polysilicon to Tianwei over a ten-year
period. Under Tianwei Supply Agreement No. 1, up to approximately $284 million
may be payable to us during the ten-year period, subject to the acceptance of
product deliveries and other conditions. In addition, we have granted Tianwei a
right of first refusal on a specified volume of production output in January and
February 2010, that is not allocated to any of our other customers, and which we
intend to sell on the spot market if Tianwei does not exercise its
option.
  Under
Tianwei Supply Agreement No. 1, Tianwei paid us $42 million as a prepayment for
future product deliveries. An additional $5 million is payable when we complete
aggregate shipments of a specified volume of products to Tianwei. If Tianwei
does not pay the $5 million deposit when due, then we may immediately terminate
Tianwei Supply Agreement No. 1 and retain as liquidated damages the entire
amount of prepayments that have been paid as of the date of termination, which
was $42 million as of May 31, 2009.
  The term
of Tianwei Supply Agreement No. 1 is ten years from the date of the first
shipment. Each party, however, may terminate Tianwei Supply Agreement No. 1 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 contract by the other party. Our failure to commence shipments of
polysilicon by March 2010 constitutes a material breach by us under the terms of
Tianwei Supply Agreement No. 1, among other circumstances. Upon Tianwei’s
termination of Tianwei Supply Agreement No. 1 as a result of our failure to
deliver polysilicon in the amounts and by the dates required in Tianwei Supply
Agreement No. 1, we are required to refund to Tianwei 150% of the amount of
prepayments made as of the date of termination, which was $42 million as of May
31, 2009, less any part thereof that has been applied to the purchase price of
polysilicon delivered under Tianwei Supply Agreement No. 1. In most other cases,
if Tianwei terminates Tianwei Supply Agreement No. 1, then we are required to
refund to Tianwei 100% of all prepayments made as of the date of termination,
less any part thereof that has been applied to the purchase price of polysilicon
delivered under Tianwei Supply Agreement No. 1. If we terminate Tianwei Supply
Agreement No. 1 under most other circumstances, we generally may retain the
entire amount of prepayments made as of the date of termination as liquidated
damages, less any part thereof that has been applied to the purchase price of
polysilicon delivered under Tianwei Supply Agreement No. 1.
  Pursuant
to Tianwei Supply Agreement No. 1, we have granted to Tianwei a security
interest in all of our tangible and intangible assets related to our polysilicon
business to serve as collateral for our obligation to repay Tianwei’s deposit if
Tianwei Supply Agreement No. 1 is terminated by Tianwei. Such security interest
is subordinated to any third-party debt we may secure to finance construction of
our polysilicon production facility and pari passu with security interests
granted to each of our other long-term polysilicon supply customers. The
security interest will continue until all prepayments have been credited against
the shipment of product, and only with respect to the amount of prepayment that
has not been so credited.
  If
Tianwei Supply Agreement No. 1 is terminated for any reason, our business will
be materially harmed and we will need to secure new funds in order to finance
the construction of our polysilicon production plant. Securing new funds may
delay the anticipated timing of completion of the production plant, 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 Tianwei Supply Agreement No. 1, or at all. If we are unable
to secure new funds, we will not be able to complete construction of the
production plant, our business will be materially and adversely affected and we
may be forced to delay, alter or abandon our planned business
operations.
  Tianwei New Energy (Chengdu) Wafer
Co., Ltd. Contract No. 2.  In September 2008, we entered into
a second fixed price, fixed volume supply agreement, or Tianwei Supply Agreement
No. 2, with Tianwei for the sale and delivery of a predetermined volume of
polysilicon to Tianwei over a ten-year period. In addition, in October 2008, we
entered into an Amendment to Tianwei Supply Agreement No. 2 which requires us to
provide to Tianwei additional polysilicon in calendar year 2009 and calendar
year 2010.  We are subject to certain price reductions in the first
year if we fail to provide these additional amounts on schedule. Under Tianwei
Supply Agreement No. 2, as amended, up to approximately $244 million may be
payable to us during the ten-year period, subject to the acceptance of product
deliveries and other conditions.
  8
  Under
Tianwei Supply Agreement No. 2, Tianwei paid us cash deposits totaling $34.5
million, as a prepayment for future product deliveries, with $10 million paid in
September 2008, and two payments of $12 million and $12.5 million in
December 2008 and May 2009, respectively.  A final $2 million payment
is due when we complete aggregate shipments of a specified volume of products to
Tianwei.  If Tianwei does not pay the $2 million deposit when due,
then we may immediately terminate Tianwei Supply Agreement No. 2 and retain as
liquidated damages all deposits that have been paid as of the date of
termination.
  The term
of Tianwei Supply Agreement No. 2 is ten years from the date of the first
shipment. Each party, however, may terminate Tianwei Supply Agreement No. 2 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 contract by the other party. Our failure to commence shipments of
polysilicon by June 2010 constitutes a material breach by us under the terms of
Tianwei Supply Agreement No. 2, among other circumstances. Upon Tianwei’s
termination of Tianwei Supply Agreement No. 2 as a result of our failure to
deliver polysilicon in the amounts and by the dates required in Tianwei Supply
Agreement No. 2, we are required to refund to Tianwei 150% of the amount of
prepayments made as of the date of such termination, which was $34.5 million as
of May 31, 2009, less any part thereof that has been applied to the purchase
price of polysilicon delivered under Tianwei Supply Agreement No. 2. In most
other cases, if Tianwei terminates Tianwei Supply Agreement No. 2, then we are
required to refund to Tianwei 100% of the amount of prepayments made as of the
date of termination, less any part thereof that has been applied to the purchase
price of polysilicon delivered under Tianwei Supply Agreement No. 2. Tianwei’s
failure to pay any of the cash deposits when due, constitutes a material breach
of Tianwei Supply Agreement No. 2 by Tianwei, among other circumstances. If we
terminate Tianwei Supply Agreement No. 2 under most other circumstances, we
generally may retain the entire amount of prepayments made as of the date of
termination as liquidated damages, which was $34.5 million as of May 31, 2009,
less any part of thereof that has been applied to the purchase price of
polysilicon delivered under the Tianwei Supply Agreement No. 2.
  Pursuant
to Tianwei Supply Agreement No. 2, we have granted to Tianwei a security
interest in all of our tangible and intangible assets related to our polysilicon
business to serve as collateral for our obligation to repay Tianwei’s deposit if
Tianwei Supply Agreement No. 2 is terminated by Tianwei. Such security interest
is subordinated to any third-party debt we may secure to finance construction of
our polysilicon production facility and pari passu with security interests
granted to each of our other long-term polysilicon supply customers. The
security interest will continue until all prepayments have been credited against
the shipment of product, and only with respect to the amount of prepayment that
has not been so credited.
  If
Tianwei Supply Agreement No. 2 is terminated for any reason, our business will
be materially harmed and we will need to secure new funds in order to finance
the construction of our polysilicon production plant. Securing new funds may
delay the anticipated timing of completion of the production plant, 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 Tianwei Supply Agreement No. 2 or at all. If we are unable
to secure new funds, we will not be able to complete construction of the
production plant, our business will be materially and adversely affected and we
may be forced to delay, alter or abandon our planned business
operations.
  Wealthy Rise International, Ltd.In September 2008, we entered into a fixed price, fixed volume supply
agreement, or the Solargiga Supply Agreement, with Wealthy Rise International,
Ltd., a wholly-owned subsidiary of Solargiga Energy Holdings, Ltd., or
Solargiga, for the sale and delivery of polysilicon to Solargiga over a ten-year
period, pursuant to which up to approximately $455 million would have been
payable to us during the ten-year period. Under the Solargiga Supply Agreement,
Solargiga was required to make two initial cash prepayments totaling $63 million
as of March 2010, and a final $5 million payment to be made when we completed
certain aggregate shipments to Solargiga.
  In April
2009, we entered into an Amended and Restated Supply Agreement, or the Amended
Solargiga Supply Agreement, pursuant to which the volume of polysilicon that we
have agreed to sell to Solargiga, and that Solargiga has agreed to purchase from
us has been reduced such that up to approximately $136 million would be payable
to us during the ten-year period, subject to product deliveries and other
conditions.  The Amended Solargiga Supply Agreement also extends the
date by which we are obligated to commence shipments of polysilicon from March
2010 to June 2010, and extends the dates for price adjustments and termination
rights in the event of a delay in commencing shipment. All pricing terms from
the Original Solargiga Supply Agreement remain the same. Solargiga has the right
to terminate the Amended Solargiga Supply Agreement, and recover any prepayments
made if we have not commenced polysilicon shipments by October 2010, and we have
the right to terminate the Amended Solargiga Supply Agreement, and retain all
prepayments received, if Solargiga fails to pay any of its future prepayments
when due.  Pursuant to the Amended Solargiga Supply Agreement, in
addition to the initial deposit of $7 million which we received in April 2009,
Solargiga is obligated to pay us $13.4 million in four installments of $3.3
million in each of June, August, October and December 2009, with a final payment
of $200,000 upon Solargiga’s receipt of certain aggregate volumes of polysilicon
product from us.
  The term
of the Amended Solargiga Supply Agreement is ten years from the date of the
first shipment. Each party, however, may terminate the Amended Solargiga Supply
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 Amended Solargiga Supply Agreement by the other
party. Our failure to commence shipments of polysilicon by October 2010
constitutes a material breach by us under the terms of the Amended Solargiga
Supply Agreement, among other circumstances. We have the right to terminate the
Amended Solargiga Supply Agreement upon Solargiga’s failure to pay any part of
the $13.4 million cash deposit when due. Upon Solargiga’s termination of the
Amended Solargiga Supply Agreement under certain circumstances, we are required
to refund to Solargiga all of the prepayments made as of such termination, which
was $7 million as of May 15, 2009, less any part thereof that has been applied
to the purchase price of polysilicon delivered under the Amended Solargiga
Supply Agreement. Upon a termination of the Amended Solargiga Supply Agreement
by us, we generally may retain the entire amount of prepayments made as of such
date as liquidated damages, less any part thereof that has been applied to the
purchase price of polysilicon delivered under the Amended Solargiga Supply
Agreement.
  9
  Under the
Amended Solargiga Supply Agreement, we have 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 obligation to repay all of Solargiga’s
prepayments made as of the date of termination, which was $7 million as of May
15, 2009, if Solargiga terminates the Amended Solargiga Supply Agreement under
certain circumstances. The security interest is subordinated to any third-party
debt we may secure to finance construction of our polysilicon production
facility and pari passu with security interests granted to each of our other
long-term polysilicon supply customers. The security interest will continue
until all of Solargiga’s prepayments have been credited against the shipment of
product, and only with respect to the amount of prepayment that has not been so
credited.
  If the
contract with Solargiga is terminated for any reason, our business will be
materially harmed and we will need to secure new funds in order to finance the
construction of our polysilicon production plant. Securing new funds may delay
the anticipated timing of completion of the production plant, 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 agreement with Solargiga, or at all. If we are unable to
secure new funds, we will not be able to complete construction of the production
plant, our business will be materially harmed and we may be forced to delay,
alter or abandon our planned business operations.
  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 Supply
Agreement.  Under the Alex Supply Agreement, the total amount that may
be payable to us is approximately $119 million during the ten-year period,
subject to product deliveries and other conditions.  Alex has paid us
cash deposits of $15 million as prepayments for future product deliveries, which
includes $5 million that was previously paid to us by Jinko, and which we and
Jinko acknowledged and agreed would be credited to the prepayment account of
Alex.  See “Jiangxi Jinko Solar Co., Ltd.”, above. Alex is obligated
to pay an additional cash deposit of $5 million as a prepayment for future
product deliveries, $2 million of which is due in June 2009, and $3 million of
which is due in July 2009. The Alex Supply Agreement provides that if Alex does
not provide the $5 million cash deposit when due, then we may immediately
terminate the Alex Supply Agreement and retain all previously paid cash deposits
as liquidated damages, which was $15 million as of March 31, 2009.
  The term
of the Alex Supply Agreement is ten years from the date of the first shipment.
Each party, however, may terminate the Alex Supply 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 Supply Agreement by the other party. Our failure to commence shipments of
polysilicon by March 2010 constitutes a material breach by us under the terms of
the Alex Supply Agreement, among other circumstances.  Alex’s failure
to pay any part of the $5 million cash deposit when due constitutes a material
breach of the Alex Supply Agreement by Alex, among other circumstances. In most
cases, if Alex terminates the Alex Supply Agreement, then we are required to
refund to Alex all of their prepayments as of the date of such termination,
which was $15 million as of March 31, 2009, less any part thereof that has been
applied to the purchase price of polysilicon delivered under the Alex Supply
Agreement.
  Pursuant
to the Alex Supply Agreement, we have 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 obligation to repay Alex’s deposit if the Alex
Supply Agreement is terminated by Alex. Such security interest is pari passu
with security interests granted to each of our other long-term polysilicon
supply customers. The security interest will continue until all prepayments have
been credited against the shipment of product, and only with respect to the
amount of prepayment that has not been so credited.
  If the
contract with Alex is terminated for any reason, our business will be materially
harmed and we will need to secure new funds in order to finance the construction
of our polysilicon production plant. Securing new funds may delay the
anticipated timing of completion of the production plant, 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 agreement with Alex, or at all. If we are unable to secure
new funds, we will not be able to complete construction of the production plant,
our business will be materially harmed and we may be forced to delay, alter or
abandon our planned business operations.
  Terminated
Customer Agreements
 During
fiscal 2009, we terminated one polysilicon supply contract with SANYO Electric
Co., Ltd., and reached a mutual agreement to terminate a second polysilicon
supply contract with Global Expertise Wafer Division Ltd., pursuant to
provisions in each of the respective agreements providing for a right of
termination in the event we were unable to achieve certain financing milestones
within a prescribed timeframe. As a result of these terminations, we returned a
total of $4 million in prepayments received under these contracts.
 
 
 Hoku
Solar
 Business
Strategy and PV Products
 Our goal
is to be a leading provider in PV system installations. We plan to focus on
designing, engineering and installing turnkey PV systems and related services in
Hawaii using solar modules purchased from third-party suppliers.
 
 10
 Customers
 Hawaii Department of
Transportation. In October 2008, we were selected by the Hawaii State
Department of Transportation, or DOT, to design, engineer and install PV systems
at airports across the state of Hawaii and entered into a series of power
purchase agreements, or PPAs, with the DOT. Under the PPAs, the DOT will
purchase up to an aggregate of 779 kilowatts of solar electricity to be
generated by PV systems installed, owned and operated by us at a predetermined
rate over a contract period of 20 years. During the first and second quarters of
calendar year 2009, we installed PV systems at multiple DOT properties including
Lihue Airport on the island of Kauai, Kahului Airport on the island of Maui, and
Kona International Airport at Keahole and Hilo International Airport, each on
the island of Hawaii. All installations were completed in the second quarter of
calendar year 2009. As of May 2009 all of these PV systems are
operational.
 
 In fiscal
2009, we also completed PV system installations forParadise Beverages, Inc.,
and Resco, Inc., and other commercial and residential customers. We also
recognized revenue from the resale of solar inventory.
 
 Hawaiian Electric Company.In
May 2008, the Hawaii Public Utilities Commission approved the contract for
Hawaiian Electric Company to purchase electricity generated by a PV system that
we would install. We plan to install a 218-kilowatt PV system, and sell the
power generated by that system over a 20-year period to Hawaiian Electric
Company once financing is secured. We continue to explore financing alternatives
for this project.
 
 The James Campbell Company.In January 2008, we began discussions with The James Campbell Company to
plan and install the PV system for the Kapolei Sustainable Energy Park, which
would be capable of generating approximately 1.5 megawatts of PV power and would
be the largest PV facility on Oahu. The discussions to date have been
non-binding to both parties, and contingent upon, among other things, receiving
certain government approvals related to the capped solid waste storage area on
the site. Discussions with The James Campbell Company are ongoing.
  Our
Fuel Cell Business
  Fuel
Cell Industry Overview
  Based on
discussions with potential customers for our Hoku MEAs and Hoku Membranes during
fiscal 2007, we determined that the potential for future revenue opportunities
from our Hoku Fuel Cells division was uncertain. As a result, we do not plan on
actively pursuing any new contracts or committing material resources to further
develop our fuel cell products. We will, however, assess the financial viability
of any new opportunities that may arise on a case-by-case basis.
 
 Customers
 We do not
presently have any material customer contracts for our Hoku MEA or Hoku
Membranes.
 
 Backlog
 
 As of
March 31, 2009, we have entered into PV system installation and other related
service contracts that we have not completed; however, we do not have a
backlog.
 
 Sales
and Marketing
  We have
one employee that is dedicated to sales for our PV system installation business
in Hawaii. We are offering the sale and installation of our turnkey PV systems
or the option of a power purchase arrangement where we would install and own the
solar system and the end user would pay us for the electricity produced under a
long-term contract.
  Research
and Development
  Hoku
Materials and Hoku Solar
  We are
still at an early stage in our expansion into the polysilicon and PV module
market and have not, to date, conducted any research and development in this
area.
  Our
research and development expenses were $0, $86,000 and $1.8 million in fiscal
2009, 2008 and 2007, respectively, and all such expenses were related to our
fuel cell business. As of March 31, 2009, we had no individuals on our research
and development team for our solar or fuel cell businesses.
  Intellectual
Property
  Hoku
Materials and Hoku Solar
  We are
still at an early stage in our expansion into the polysilicon and PV systems
installation market and have not developed or licensed any proprietary
intellectual property addressed to this market. We may need to obtain licenses
to manufacture and/or sell polysilicon and PV modules using the technology that
we are planning to implement. However, based on our discussions with engineering
firms and equipment suppliers, we believe that we have obtained all necessary
licenses from these engineering firms and turnkey equipment suppliers that are
required to manufacture, market and/or sell the products made with their
equipment.
  11
 Manufacturing
  Hoku Materials
 In
September 2008, we announced that we would be increasing our planned polysilicon
facility capacity from 3,500 metric tons per year to 4,000 metric tons per year.
Our original estimated construction cost for a facility capable of producing
3,500 metric tons of polysilicon per year was $390 million. We do not believe we
will require significant additional capital to increase our facility capacity to
4,000 metric tons per year; however, we are continuing to review the $390
million estimated cost to complete the plant. 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 $390 million estimate. Alex, Suntech, Solarfun, Jinko,
Tianwei and Solargiga have collectively committed to contribute, in the form of
polysilicon supply prepayments, $243.4 million towards these costs, subject to
certain conditions and the achievement of various milestones and repayment
obligations under certain circumstances. As of May 31, 2009, we had collected
$155.5 million of combined prepayments that were committed to us from Alex,
Suntech, Solarfun, Jinko, Tianwei and Solargiga. Additionally, as of March 31,
2009, we had contributed approximately $41 million to the construction cost
of our polysilicon plant. Assuming the total cost to complete the construction
of our 4,000 metric ton plant is $390 million, that our existing polysilicon
customers make their prepayments in full when due and that we are able to secure
additional prepayments from one or more new polysilicon customers, we believe we
will need to raise through one or more debt or equity offerings for the
procurement and construction of our planned polysilicon manufacturing facility
an amount ranging between $35 million and $55 million. If we are unable to
secure one or more additional long-term polysilicon supply contracts and
additional customer prepayments, assuming the cost to complete construction of
the plant is $390 million and that our existing polysilicon customers make
timely prepayments in full, the amount we may need to raise could be as much as
$106 million. If we are unable to secure one or more additional long-term
polysilicon supply contracts and additional customer prepayments, if one or more
of our polysilicon supply customers fail to meet their obligations to make
timely prepayments and/or the actual cost to complete the plant is more than
$390 million, the amount we may need to raise could exceed $106
million.
 
 In fiscal
2009, reductions and delays in customer prepayments caused a shift of our
planned production demonstration for our polysilicon plant from the first
quarter of calendar year 2009, to the third quarter of calendar year 2009,
and a shift of our planned first commercial polysilicon shipment from the
first half of calendar year 2009 to the second half of calendar year 2009. These
reductions and delays in customer prepayments also have caused a delay in the
construction of our on-site TCS production facility. We plan to ramp-up
production throughout the second half of calendar year 2009 and into calendar
year 2010, when we expect to reach full production capability in the first
quarter of calendar year 2010. There are no assurances, however, that we will
not need to further revise our planned schedule.
  City of Pocatello.In March
2007, we entered into a 99-year ground lease with the City of Pocatello, Idaho,
for approximately 67 acres of land and, in May 2007, the City of Pocatello
approved an ordinance that authorizes the Pocatello Development Authority to
provide us certain tax incentives related to certain necessary infrastructure
costs we incur in the construction and operation of our polysilicon plant. In
May 2009, we entered into an Economic Development Agreement, or the PDA
Agreement, with the Pocatello Development Authority, or PDA, pursuant to which
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
production facility under construction in Pocatello, Idaho, or the
Plant.  The parties agreed that (a) the Infrastructure Reimbursement
will be an amount that is equal to 95% of the tax increment payments 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
(defined below), and (b) the Employment Reimbursement will be an amount that is
equal to 50% of the TIF Revenue, up to approximately $17
million.  Each of the Infrastructure Reimbursement and the Employment
Reimbursement will be made to us over time as TIF Revenue is received, and only
after the costs of completing a public access road to the Plant, in an amount
not to exceed $11 million, or the Road Costs, has been paid to PDA out of TIF
Revenue, and up to $2 million in capital costs has been paid to the City of
Pocatello out of TIF Revenue.
  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 polysilicon production plant, which was
amended in October 2007 by Change Order No. 1, and again in April 2008 by Change
Order No. 2, which are collectively the S&W Engineering Agreement. Under the
S&W Engineering Agreement, S&W was to provide all engineering,
procurement and construction management services necessary to complete the
design and planning for construction of our polysilicon plant, which had a
production capacity at that time of 3,500 metric tons per year. S&W was to
be paid on a time and materials basis plus a fee for its services and incentives
if certain schedule and cost targets were met. The target cost for the services
to be provided under the S&W Engineering Agreement was $50 million, plus up
to $5.0 million of incentives that would be payable if certain cost and schedule
milestones were achieved.
  In
February 2009, we and S&W agreed to Change Order Number 3 under the S&W
Engineering Agreement, or S&W Change Order 3, to, among other things: (i)
increase the rated polysilicon production capacity of our planned facility to up
to 4,000 metric tons per year; (ii) eliminate construction management services
from S&W’s scope of work; (iii) confirm the suspension of detailed
engineering services for our planned TCS production plant; (iv) remove $5
million of incentives that may have been payable if certain cost and schedule
milestones were achieved; and (v) allocate, based on specific dates, up to an
aggregate of $1 million of liquidated damages that S&W would pay to us if
engineering deliverables are not provided to us on or before such dates. S&W
may not be required to pay liquidated damages if S&W fails to meet a
deliverable date because we or our other contractors cause a delay, or request
changes to the work that increase the time for completion, or if force majeure
causes a delay.
  12
  The
target cost for the services to be provided under the S&W Engineering
Agreement, as modified by S&W Change Order 3, is unchanged at $50 million,
and the $5.0 million of incentives that may have been payable was eliminated.
Pursuant to the S&W Engineering Agreement, as modified by S&W Change
Order 3, S&W does not guarantee that the target cost will be met, and we are
obligated to pay for S&W's services regardless of whether this cost target
is ultimately achieved.  During fiscal 2009, we made payments to
S&W of $28 million, and as of March 31, 2009, we had paid S&W an
aggregate amount of $32 million.
  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 our planned polysilicon
production plant, which was amended in October 2007, by Change Order No. 1, and
again in April 2008 by Change Order No. 2, which are collectively the JH Kelly
Construction Agreement. Under the JH Kelly Construction Agreement, JH Kelly
agreed to provide construction services as our general contractor for the
construction of our polysilicon plant with production capacity of, at that time,
3,500 metric tons per year. The target cost for the services to be provided
under the JH Kelly Construction Agreement was $145 million, including up to $5.0
million of incentives that may have been payable under certain
circumstances.
  In March
2009, we and JH Kelly agreed to Change Order No. 3 under the JH Kelly
Construction Agreement, or JH Kelly Change Order 3, to, among other things: (i)
increase the rated polysilicon production capacity of our planned facility to up
to 4,000 metric tons per year; (ii) confirm our planned schedule to include a
reactor test demonstration in June 2009, the partial commercial operation of our
plant in September 2009, and full commercial operation of our plant in March
2010; (iii) reallocate the $5 million of incentives that may be payable such
that $3.5 million of the incentives may be payable if JH Kelly achieves the
foregoing schedule milestones, $1 million of the incentives may be payable if JH
Kelly’s actual costs are less than $145 million, and $500,000 may be payable if
JH Kelly achieves certain safety goals during the construction of the plant. Any
incentives that are earned would be paid after final completion of the
plant.
  Pursuant
to the JH Kelly Construction Agreement, as modified by JH Kelly Change Order 3,
JH Kelly does not guarantee that the cost or schedule targets will be met, and
there can be no assurances that either such target will be met. Moreover, we are
obligated to pay for JH Kelly's services regardless of whether these targets are
ultimately achieved; however, JH Kelly is required to pay liquidated damages of
up to $1 million for construction schedule delays that are directly caused by
the fault of JH Kelly.  During fiscal 2009, we made payments to JH
Kelly of $41.2 million, and as of March 31, 2009, we had paid JH Kelly an
aggregate amount of $45.5 million.
  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 our planned 4,000 metric tons per year polysilicon
production plant. The Dynamic process is to be integrated by S&W into the
overall polysilicon production facility, 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. During fiscal 2009, we made payments to Dynamic of $3.6 million,
and as of March 31, 2009, we had paid Dynamic an aggregate amount of $4.8
million.
  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 16 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.
During fiscal 2009, we made payments to GEC and MSA of 8.9 Euros or $13.5
million and, as of March 31, 2009, we had paid GEC and MSA an aggregate amount
of 15.2 Euros or $22.3 million.
  In
January 2009, we received the first shipment of six Siemens-process reactors at
our facility in Pocatello, Idaho, 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
shipment of 10 polysilicon reactors and related equipment is scheduled to arrive
at our facility no later than the third quarter of calendar year
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.
  13
 Idaho Power Company. In
December 2007, we entered into an agreement with Idaho Power Company, or Idaho
Power, to complete the construction of the electric substation to provide power
for our planned polysilicon production plant, or the Idaho Power Agreement. We
are obligated to pay Idaho Power an aggregate of $14.8 million for the
completion of the substation and associated facilities. Under the terms of the
Idaho Power Agreement, the substation and associated facilities were scheduled
to be completed in February 2009. The Idaho Power Agreement provided that Idaho
Power could invoice us additional amounts for temporary power to enable the
start-up and operation of the planned polysilicon production plant prior to
February 2009.
  In
September 2008, we amended and restated the Idaho Power Agreement by entering
into an Amended and Restated Agreement for Construction of the Hoku Electric
Substation and Associated Facilities, or the Amended Idaho Power Agreement.
Under the Amended Idaho Power Agreement, Idaho Power agreed to construct an
electric substation and associated transmission facilities with an increased
capacity beyond what was provided for in the original Idaho Power Agreement.
Idaho Power estimated that the costs of construction under the Amended Idaho
Power Agreement would increase to approximately $16.5 million. The Amended Idaho
Power Agreement also provides that upon completion of construction, there would
be a true-up of actual construction costs, so that either we would be refunded
any monies we had paid to Idaho Power over and above the actual costs of
construction, or we would pay Idaho Power any additional construction costs
beyond the original amount. Idaho Power agreed to use commercially reasonable
efforts to provide us with transmission services for specified wattages by May
2009, and July 2009, and to complete construction of the expanded electric
substation and associated transmission facilities by August
2009.  Pursuant to the Amended Idaho Power Agreement, during fiscal
2009, we made payments to Idaho Power of $12.9 million, and as of March 31,
2009, we had paid Idaho Power Company an aggregate amount of $17.5 million,
which is $1 million more than Idaho Power’s estimate under the Amended Idaho
Power Agreement.
  In
September 2008, we also entered into an Electric Service Agreement with Idaho
Power for the supply of electric power and energy to us for use in our
polysilicon facility, subject to the approval of Idaho’s Public Utilities
Commission, or the ESA. The term of the ESA is four years, beginning in June
2009. 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 Idaho Public Utilities Commission. 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.
  In May
2009, we reached an agreement, or the Letter Agreement, with Idaho Power to
amend certain provisions of the ESA, which amendment, or the ESA Amendment,
would be filed with, and is conditioned and effective only upon approval by, the
Idaho Public Utilities Commission, or PUC.  The ESA Amendment, if
approved by the PUC, would extend by six months the date when we are obligated
to begin purchasing prescribed amounts of electricity from Idaho Power, from
June 1, 2009 to December 1, 2009.  The ESA Amendment also would
provide for (a) electricity to be provided to us by Idaho Power at the current
tariff rate through November 30, 2009, (b) a commitment by us to take no more
than 5 megawatts, or MW, of electric power through July 2009, 10 MW during
August 2009 and 25 MW from September through November 2009, (c) a reduction in
the levels of electric power to be provided under the ESA to 43 MW during the
period of June 16, 2012 through August 15, 2012, and to 67 MW during the period
of August 16, 2009 to September 15, 2009, and (d) certain charges, referred to
as the Schedule 91 Energy Efficiency Rider, that would be added to a portion of
the electricity demand charges set forth in the ESA, beginning on December 1,
2011.  The Schedule 91 Energy Efficiency Rider is to recover costs
incurred by Idaho Power associated with providing energy efficiency services and
programs to its customers.
  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., 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 our planned
polysilicon production plant.  The total fees payable to AEG for all
Deliverables under the AEG Agreement was approximately $13 million, which was
payable in installments, the first of which was made in April 2008.
  In May
2009, we entered into an Amendment to the AEG Agreement, or the AEG
Amendment.  Under the AEG Amendment, the total fees to be paid to AEG
remain approximately $13 million, including approximately $1.2 million that was
previously paid, and the payment and delivery schedule was restructured such
that we are obligated to make payments of $500,000 on or before June 3, 2009,
$500,000 on or before June 29, 2009, $615,000 on or before July 31, 2009 and
$2,100,000 on or before August 31, 2009, related to certain Deliverables that
AEG is obligated to ship in August 2009.  After such shipment has
occurred, we are obligated to make payments of $800,000 on or before September
30, 2009, $813,995 on or before October 30, 2009, $906,795 on or before November
30, 2009 and $1,686,682 on or before December 21, 2009, related to the remaining
Deliverables which AEG is obligated to ship in October and December
2009.  During fiscal 2009, we made payments to AEG of $5.2 million,
and as of March 31, 2009, we had paid AEG an aggregate amount of $5.2
million.
  Polymet Alloys, Inc. In
November 2008, we entered into an agreement with Polymet Alloys, Inc., or
Polymet, for the supply of silicon metal to us for use in our planned
polysilicon production facility in Pocatello, Idaho. The term of the agreement
was three years, commencing in January 2009. Each year during the term of the
agreement, Polymet agreed to sell to us, and we agreed to purchase from Polymet,
specified volumes of silicon metal that meet certain purity and size
specifications. The volume was fixed during each of the three years; provided
that the parties could agree to increase the volume. Pricing was fixed during
calendar year 2009, and the aggregate net value of the silicon metal products to
be purchased by us under the agreement in calendar year 2009 was approximately
$6.5 million. In May 2009, we entered into an amended and restated supply
agreement with Polymet, or the Amended Polymet Agreement.  Under the
Amended Polymet Agreement, we revised the date of our first shipment from
calendar year 2009 to calendar year 2010, and increased our purchase commitment
to no less than 65% of our annual silicon metal requirement.  Pricing
is to be negotiated for each year of the 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 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 March 31, 2009, we
have not made any payments to Polymet.
  14
  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 our planned 4,000 metric tons per year
polysilicon production plant. 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. We expect to receive the deliverables under our contract with PVA in the
third quarter of calendar year 2009. 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.  During fiscal 2009, we made payments to PVA of $1.9 million
and, as of March 31, 2009, we had paid PVA an aggregate amount of $1.9
million.
  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, to us for use in our planned
polysilicon production facility in Pocatello, Idaho. 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
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 no later than January 2010, 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 March 31, 2009, we have not
made any payments to BHS.
  Hoku
Solar
  In June
2007, we announced our strategy to focus on the sale of turnkey PV system
installations, and related services, and our plan not to enter the solar module
manufacturing business.
  Due to
our decision not to enter the solar-module manufacturing business along with
reduced activity in our fuel cell business, in December 2008, we sold our real
property and improvements, including our corporate headquarters, in Kapolei,
Hawaii, or the Property. The Property was sold for an aggregate purchase price
of $5.8 million.
  In
December 2008, we and UFA Renewable Energy Fund I, LLC, a Delaware limited
liability company, or UFA, established and capitalized Hoku Solar Power I, LLC,
a California limited liability company, or Power I. Under the terms of the Power
I Operating Agreement by and between us and UFA, or the Operating Agreement, we
assigned our power purchase agreements, or PPAs, to Power I, which was created
to own and operate each system and which will sell the electricity generated by
the PV systems to the Hawaii State Department of Transportation, or DOT, at
predetermined contract rates.  Under the terms of the PPAs, Power I is
permitted to install, maintain and operate each of the seven planned energy
systems on DOT facilities over a term of 20 years, commencing on the date that a
system becomes operational and energy is delivered to DOT.
 
 In
December 2008, we entered into a Development Services Agreement with Power I, or
the Development Agreement, pursuant to which we agreed to construct, install,
develop and commission the PV systems on behalf of Power I.  We also
agreed to operate and maintain the systems pursuant to the terms and conditions
of the Purchase and Sale and Operation and Maintenance Agreement entered into
between us and Power I in December 2008. Each system will be transferred to
Power I prior to the commencement of commercial operation. In December 2008, we
completed the engineering, design and procurement phases for the projects and
commenced system installation at two DOT project sites on the island of
Kauai.  In March 2009, the two PV systems in Kauai have been completed
and transferred to Power I.  As of April 30, 2009, installation of the
remaining five PV systems was completed and the DOT has provided letters of
system acceptances on each of the seven PV systems, acknowledging that various
system requirements, including, but not limited to, system completion, permit
certification, and energy capacity, have been satisfied in accordance with the
provisions of the PPA. As of May 2009, all of these PV systems are
operational.
 
  Hoku
Fuel Cells
 We are
not currently manufacturing any Hoku Membranes or Hoku MEA products due to
reduced activity in our fuel cell business.
 
 15
 Supplier
Relationships
  We
utilize solar modules purchased through our supply relationship with Suntech and
Sanyo, among others, for our PV system installations. We have structured our
agreements as firm purchase orders at a predetermined price or non-binding
forecasts of our annual or quarterly product needs to our suppliers, and then
periodically issue purchase orders for specific projects. These suppliers are
generally under no legal obligation to supply solar modules until they have
accepted our purchase orders. Additionally, as part of the Alex Supply
Agreement, through its PV module manufacturing subsidiary, Alex has agreed to
provide us with discounted original equipment manufacturing (OEM) services for
up to a certain amount of PV modules per year for each year of their polysilicon
supply contract. The OEM manufacturing service would be at our sole option and
would be priced at Alex's most preferred rate. Additionally, as part of the
Jinko Supply Agreement, Jinko has agreed to provide discounted wafer
manufacturing (tolling) services to us for up to a certain amount of polysilicon
per year for each year of their polysilicon supply contract. This tolling
service would be at our sole option and will be priced at Jinko's most preferred
rate.
  Competition
  Hoku
Materials
  In the
polysilicon market, we will compete with companies such as Hemlock Semiconductor
Corporation, Renewable Energy Corporation ASA, Mitsubishi Polycrystalline
Silicon America Corporation, Mitsubishi Materials Corporation, Tokuyama
Corporation, MEMC Electronic Materials, Inc., and Wacker Chemie AG. In addition,
new companies are emerging in China, Korea, India, Europe, Brazil, Australia,
North America, and the Middle East, and new technologies, such as fluidized bed
reactors, are emerging which may have significant cost and other advantages over
the Siemens process we are planning to use to manufacture polysilicon. These
competitors may have longer operating histories, greater name recognition and
greater financial, sales and marketing, technical and other resources than us.
If we fail to compete successfully, we may be unable to successfully enter the
market for polysilicon.
  After a
period of polysilicon supply shortages, an essential raw material in the
production of PV modules, overall polysilicon supply increased in fiscal 2009.
We believe that supply increases will continue through at least fiscal 2010, and
potentially for a longer period, with the possibility of an oversupply of
polysilicon in fiscal 2011. In the near term, however, we believe that the
demand for polysilicon will support further competition in the polysilicon
market. Increasing polysilicon supply, however, has and will continue to
suppress spot market prices, which could adversely affect our ability to secure
additional long-term supply contracts, or to secure such contracts on favorable
terms.
  Hoku
Solar
  The
market for PV 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, REC Solar and other new and emerging
companies in Hawaii, Asia, North America and Europe. Some of our known
competitors are established players in the solar industry, and have a stronger
market position than ours and have larger resources and recognition than we
have. In addition, the PV market in general competes with other sources of
renewable energy and conventional power generation. In the near term, we believe
that the demand for PV installations will support further competition in the
market, enabling us to sell our services, specifically in Hawaii where we are
headquartered.
  Hoku
Fuel Cells
  We are
not actively seeking new contracts; however, we will assess the financial
viability of any new opportunities that may arise on a case-by-case
basis.
  Government
Regulation
  Hoku
Materials and Hoku Solar
  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 solar products. 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 consumers of solar
power systems, which could decrease the market for PV installations, thereby
harming our business, prospects, results of operations and financial
condition.
  The
installation of PV systems is subject to oversight and regulation in accordance
with national and local ordinances relating to building codes, safety,
environmental protection, utility interconnection and metering and related
matters. It is difficult to track the requirements of individual states and
design equipment to comply with the varying standards. Any new government
regulations or utility policies pertaining to PV systems may result in
significant additional expenses to us and, as a result, could cause a
significant reduction in demand for PV installations. In addition, the
manufacture 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. 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.
  16
 Federal
and Hawaii state tax credits are available for residential and commercial PV
systems placed in service. In October 2008, Congress extended the availability
of the federal tax credit for both residential and commercial solar
installations to 2016. Additionally, in February 2009, the American Recovery and
Reinvestment Act, or ARRA, was signed into law, which contains various programs
and taxpayer incentives with respect to renewable energy that could benefit us.
We are examining, but have not yet determined if, or to what extent, the ARRA
renewable energy incentives might benefit us.
   Financial
Information by Business Segment and Geographic Data
 In fiscal
2009, 100% of our total revenue was from our PV system installations and other
related services and the resale of solar inventory primarily from our contracts
with Paradise Beverages, Inc., and Resco, Inc. All of the revenue was generated
from customers in the United States. In fiscal 2008, 59% of our total revenue
was from our PV system installations, primarily from our contracts with Paradise
Beverages and Hardware Hawaii, and the remaining 41% of revenue was from our
fuel cell contracts with the U.S Navy. All of the revenue was generated from
customers in the United States. In fiscal 2007, all of our revenue was derived
from our fuel cell business. In fiscal 2007, our revenue was from the U.S. Navy,
Nissan and Sanyo, 40% in the aggregate of which was from Nissan and Sanyo, which
are located in Japan.
  Employees
 As of
March 31, 2009, we had 28 employees, consisting of 10 in Hoku Materials, 8 in
Hoku Solar and the remaining 10 employees are general administrative employees
in Hoku Scientific that provide support for all divisions, public company
requirements and other corporate initiatives.
  Executive
Officers of the Registrant
 Our
executive officers and their ages and positions as of March 31, 2009, are as
follows:
  Name
              
              Age
              
              PositionDustin
      M. Shindo
              
              35
              
              Chairman
      of the Board of Directors, President and Chief Executive
      OfficerKarl
      M. Taft III
              
              36
              
              Chief
      Technology Officer and DirectorDarryl
      S. Nakamoto
              
              35
              
              Chief
      Financial Officer, Treasurer and SecretaryScott
      B. Paul
              
              35
              
              Chief
      Operating Officer
  Dustin M.
Shindo, one of our founders, has served as our Chairman of the Board of
Directors, President and Chief Executive Officer since March 2001. From November
1999 to February 2001, Mr. Shindo was a founder and Chief Executive Officer
of Activitymax, Inc., a small privately-held travel reservation software
company, where Mr. Shindo was responsible for managing customer
relationships, developing the company’s marketing program and managing the
operations of the company. From August 1999 to April 2000, Mr. Shindo was a
business consultant at The Lucas Group, a strategic consulting firm, where
Mr. Shindo focused on business strategy projects as part of multi-person
engagement teams. In 1995, Mr. Shindo founded Mehana Brewing Company, a
privately-held microbrewery, which now serves as a holding company for the stock
of Hawaii Nui Brewing Company, a privately-held microbrewery. Mr. Shindo
continues to serve as a member of the board of directors of both Mehana Brewing
Company and Hawaii Nui Brewing Company. In 2006, Mr. Shindo founded Kai
Sensors, Inc., a privately held company formed to explore business opportunities
related to medical devices, where he continues to serve as Chairman of the Board
of Directors. Mr. Shindo’s time commitment to Kai Sensors, Inc. is not
significant.  Mr. Shindo devotes substantially all of his time to
the management of Hoku Scientific. Mr. Shindo has a B.A. in Accounting from
the University of Washington and an M.B.A. from the Darden Graduate School of
Business Administration at the University of Virginia.
  Karl M. Taft
III, one of our founders, has served as our Chief Technology Officer
since March 2001 and a member of our board of directors since August 2001. From
October 1996 to March 2001, Mr. Taft held various positions at PCC
Structurals, Inc., a manufacturer of titanium casting parts, including Lead
Manager for Research and Development, Industrial Engineer and Research Chemist.
In 2000, Mr. Taft was an Adjunct Professor at Portland State University.
Mr. Taft has a B.A. in Chemistry from Pacific University, an M.S. in
Environmental Science and Engineering from Oregon Graduate Institute and an
M.B.A. from Portland State University.
  Darryl S.
Nakamoto has served as our Chief Financial Officer and Treasurer since
January 2005 and our Secretary since March 2005. From January 2003 to December
2004, Mr. Nakamoto was a finance analyst for Frito-Lay of Hawaii, a
division of PepsiCo, Inc. From May 2002 to January 2003, Mr. Nakamoto was
not employed. From March 2001 to May 2002, Mr. Nakamoto was a sales and
marketing executive for Syntera Solutions, the software development and document
management division of Profitability of Hawaii, Inc., a software company. From
April 2000 to February 2001, he served as the regional director of Activitymax,
Inc., a travel reservation software company. From December 1996 to March 2000,
Mr. Nakamoto was an accountant at KPMG LLP, an accounting firm, where he
most recently was a senior accountant. Mr. Nakamoto has a B.A. in
Accounting and Finance from the University of Washington and is a certified
public accountant.
  Scott B.
Paul has served as our Chief Operating Officer since November
2008.  Previously, he served as Vice President, Business Development
and General Counsel from July 2003 to November 2008. Mr. Paul was also our
Secretary from November 2004 to March 2005. From June 2002 to June 2003,
Mr. Paul was Associate General Counsel and Director of Business Development
at Read-Rite Corporation, a component supplier for hard disk and tape drives.
From April 2000 to June 2002, he was an attorney in the Business and Technology
Group at Brobeck, Phleger & Harrison LLP, a law firm. From October 1999
to April 2000, Mr. Paul was an attorney in the Business Solutions Group at
Reed Smith Crosby Heafey, LLP, a law firm, and from October 1998 to October
1999, he was an attorney at Ropers, Majeski, Kohn & Bentley, a law
firm. Mr. Paul has a B.A. in Psychology from the University of California,
Los Angeles and a J.D. from Santa Clara University School of Law.
  17
 Available
Information
 Our
principal executive offices are located at 1288 Ala Moana Blvd., Suite 220,
Honolulu, Hawaii 96814, and our telephone number is (808) 682-7800. We
maintain a website with an Internet address of www.hokucorp.com. The
information contained on our website is not included as a part of, or
incorporated by reference into, this Annual Report on Form 10-K. We make
available free of charge, through our website, our Annual Report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
these reports, as soon as reasonably practicable after we have electronically
filed such material with, or furnished such material to, the Securities and
Exchange Commission.
 
 ITEM 1A.
              RISK
      FACTORS
  Risks
Related to Our Business
  We
will need to secure additional financing in the future and if 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
March 31, 2009, we had cash and cash equivalents on hand of $17.4 million and
short term liabilities of $40.0 million. Cash used in operations was
approximately $5.1 million for the fiscal year ended March 31,
2009.
  If we are
unable to generate revenue or secure additional financing when needed, we will
be forced to 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.
  Over the
next twelve months, we may have insufficient cash to meet all of our obligations
as they come due. We have already modified payment terms in purchase orders with
more than twenty 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 our
obligations under these agreements that we are unable to perform, which could
include asserting and/or foreclosing on materialman’s and laborer’s liens on the
Pocatello facility, 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 Company’s 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 capital and manage our liquidity, there
is substantial doubt that we will be able to continue as a going concern through
at least March 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
through the end of fiscal year 2010.
  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 our planned polysilicon production plant, 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 a facility to produce polysilicon, 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 a polysilicon production plant in Pocatello, Idaho, 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. As of May 31,
2009, we had received $155.5million in customer
prepayments under our supply contracts and expect to receive an additional $87.9
million in customer prepayments. As of March 31, 2009, we had also contributed
an additional approximately $41 million to the construction cost of our
polysilicon plant.
  18
 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, we could experience delays in our ability to continue the
engineering, construction, and procurement of our polysilicon plant in order to
deliver polysilicon in the second half of calendar year 2009, 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 our planned
polysilicon production plant 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 end of
calendar year 2009 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.
  Assuming
the total actual cost to complete the construction of our 4,000 metric ton plant
is $390 million, we believe we will need to raise through one or more debt or
equity offerings for the procurement and construction of our planned polysilicon
manufacturing facility.  If we must raise capital through one or more
equity offerings, depending on the size of the offering, the issuance of our
stock could result in material dilution to our existing stockholders’ voting
power and/or share value.
  Prior to
obtaining additional debt or equity financing we believe we will have to, among
other things, satisfy potential lenders and investors that we have adequately
addressed the principal risks that: (1) the construction of the polysilicon
plant is not completed on time, on budget, or at all; (2) the polysilicon plant
does not operate at its full capacity; (3) the polysilicon plant fails to
generate sufficient revenue to service any debt; or (4) that the financing will
not be sufficient to complete the construction, procurement and start-up of our
planned polysilicon plant. If we fail to successfully address the risks of
concern to potential lenders and investors, we may be unable to finance the
construction of our planned production plant, our business will be materially
harmed, and we may be forced to delay, alter or abandon our planned polysilicon
business operations.  In addition, any delay in achieving these
objectives may result in additional expense which would harm our
business.
  There are
no assurances that we will be successful in executing any of the foregoing
alternatives. 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 March 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 our planned polysilicon production facility may be significantly higher
than our estimated cost.
  Our
estimate of $390 million to construct and equip our polysilicon production
facility 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 planned polysilicon production
facility 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.
  Assuming
the cost to complete the facility 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
for the procurement and construction of our planned polysilicon manufacturing
facility in an amount ranging between $35 million and $106 million.
  We
previously intended to finance the construction of our polysilicon production
facility through project financing; however, as of May 2009, we believe we will
need to raise additional capital through other means for the procurement and
construction of our polysilicon manufacturing facility.  We continue
to evaluate a variety of alternatives to finance the construction of our
polysilicon production facility. These alternatives include one or more debt or
equity offerings, government funding from grants, loan guarantees or other
transactions, a consequence of which could include the sale or issuance of stock
to third parties and/or a change of control.  Assuming the total
actual cost to construct and equip the facility is $390 million, that we are
successful in receiving all customer prepayments that are presently committed to
us when due, and that we secure additional prepayments from new polysilicon
customers, we still believe we will need to raise no less than $35 million
through one or more debt or equity financings. In the event we are unable to
secure additional customer prepayments and supply contracts, assuming the cost
to complete the plant does not exceed $390 million and that all of our current
polysilicon supply customers honor their commitments to make timely prepayments,
the amount we will need to raise could be as much as $106 million. If we are
unable to secure additional customer prepayments and supply contracts, if one or
more of our polysilicon supply customers fail to meet their obligation to make
timely prepayments and/or the actual cost to complete the plant is more than
$390 million, the amount we will need to raise could exceed $106 million. If we
must raise capital through one or more equity offerings, depending on the size
of the offering, the issuance of our stock could result in material impairment
of our existing stockholders’ voting power, material impairment of our existing
stockholders’ share value and/or a change of control. 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
our polysilicon production facility 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.  This raises 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 our business or other potential forms of
restructuring.
  19
 We have a limited operating history
and, in calendar year 2006, determined to enter the photovoltaic installations
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 PV 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 March 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 a
polysilicon production facility in Pocatello, Idaho. We commenced construction
in May 2007, and expect to begin producing polysilicon beginning in the second
half of calendar year 2009, with full-scale production to begin in the first
half of calendar year 2010; however, there are no assurances that this schedule
will not need to be further modified. Any delays beyond the second half of
calendar year 2009 could result in the termination of one or more of our
customer supply contracts, which would require us to refund substantial amounts
of cash that has 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 polysilicon plant engineering, construction, or key equipment vendors
are late in providing their contract deliverables, we may be unable to complete
the construction of our planned polysilicon plant to begin commercial shipments
in the second half of calendar year 2009, 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 our planned polysilicon plant in
Pocatello, Idaho. 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 second half of calendar year
2009, to ramp-up production and commence commercial shipments in calendar year
2010, 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 are in discussions with third-party
TCS producers for a TCS supply contract 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 our planned polysilicon facility in Pocatello, Idaho.
Construction of the planned polysilicon facility 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.
  20
 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 with Wuxi Suntech Power Co.,
Ltd., or Suntech, for the sale and delivery of polysilicon to Suntech over a
ten-year period, or the Amended Suntech Supply Agreement. 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 plant construction.
  Each
party may elect to terminate the Amended Suntech 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.
  Suntech
may also terminate the agreement for the following material
breaches:
  •
              if
      we enter into customer commitments to deliver more than the rated capacity
      of our plant, subject to exceptions for planned expansion and increases in
      productivity; or
  •
              if
      we fail to deliver a predetermined quantity of our polysilicon product by
      December 2009; or
  •
              if
      we fail to complete successfully any of the polysilicon quality and
      production volume tests or the process implementation test set forth in
      the agreement within specified periods of time during calendar year
      2009.
  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 Suntech 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 Suntech or
otherwise satisfy our delivery requirements by delivering to Suntech third-party
polysilicon purchased in the open market, Suntech may terminate the Amended
Suntech Supply Agreement.
  There is
a material risk that we will be unable to meet one or more of the milestones set
forth in the Amended Suntech Supply Agreement within the specified period of
time during calendar year 2009.  If we are unable to meet one or more
milestones, Suntech has the right to terminate the Amended Suntech Supply
Agreement. If the Amended Suntech Supply Agreement is terminated for any reason,
our business will be materially harmed. In addition, if the Amended Suntech
Supply Agreement is terminated by Suntech, we will be required to return any
deposits and advance payments received up to the date of the termination, which
was $2 million as of as of March 31, 2009, and we will need to secure new funds
in order to finance the construction of our polysilicon production plant.
Securing new funds may delay the anticipated timing of completion of the
production plant, 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 production plant, 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 Second
Amended and Restated 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 Second Amended and Restated 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.
  Each
party may elect to terminate the Second Amended and Restated Solarfun Supply
Agreement and Solarfun Amendment No. 2 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
  21
  •
              a
      material breach of the other party.
  Solarfun
may also terminate the Second Amended and Restated Solarfun Supply Agreement and
Solarfun Amendment No. 2 if we fail to deliver a predetermined quantity of
polysilicon product by June 2010.  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, 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 Second Amended and Restated Solarfun Supply Agreement and Solarfun
Amendment No. 2.
  If the
Second Amended and Restated Solarfun Supply Agreement and Solarfun Amendment No.
2 are terminated for any reason, our business will be materially harmed. In
addition, if the Second Amended and Restated Solarfun Supply Agreement and
Solarfun Amendment No. 2 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 March 31, 2009, and we will need to
secure new funds in order to finance the construction of our polysilicon
production plant. Securing new funds may delay the anticipated timing of
completion of the production plant, 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 Second
Amended and Restated Solarfun Supply Agreement and Solarfun Amendment No. 2, or
at all. If we are unable to secure new funds, we will not be able to complete
construction of the production plant, 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 Amended Jinko Supply Agreement. Under the
Amended Jinko 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 Amended 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 Amended 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 plant construction.
  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, 2009. 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 $18 million as of
March 31, 2009, and we will need to secure new funds in order to finance the
construction of our polysilicon production plant. Securing new funds may delay
the anticipated timing of completion of the production plant, 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 production
plant, 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 August
2008, we entered into a supply agreement with Tianwei New Energy (Chengdu) Wafer
Co., Ltd., or Tianwei, for the sale and delivery of polysilicon to Tianwei over
a ten-year period, or Tianwei Supply Agreement No. 1.  Under Tianwei
Supply Agreement No. 1, up to approximately $284 million may be payable to us
during the ten-year period, subject to the acceptance of product deliveries and
other conditions.
  In
September 2008, we entered into a second supply agreement with Tianwei for the
sale and delivery of polysilicon to Tianwei over a ten-year period, or Tianwei
Supply Agreement No. 2. Under Tianwei Supply Agreement No. 2, as amended by that
Amendment to Tianwei Supply Agreement No. 2, up to approximately $244 million
may be payable to us during the ten-year period, subject to the acceptance of
product deliveries and other conditions.
  22
 Pursuant
to Tianwei Supply Agreement No. 1 and Tianwei Supply Agreement No. 2, or the
Tianwei Supply Agreements, we have granted to Tianwei 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 Tianwei Supply
Agreements.  This security interest is 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.
  Each
party may elect to terminate either of 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.
  Tianwei
may also terminate Tianwei Supply Agreement No. 1 if we fail to deliver a
predetermined quantity of our polysilicon product by March 2010. Tianwei may
terminate Tianwei Supply Agreement No. 2 if we fail to deliver a predetermined
quantity of our polysilicon product by June 2010.  Upon a termination
of Tianwei Supply Agreement No. 1 by Tianwei due to our failure to deliver
polysilicon in the amounts and by the dates required in the contract, we are
required to refund to Tianwei 150% of the prepayments made as of the date of
such termination, which is $42 million as of May 31, 2009, less any part of
thereof that has been applied to the purchase price of products previously
delivered to Tianwei.  In most other cases, if Tianwei terminates
Tianwei Supply Agreement No. 1, then we are required to refund to Tianwei 100%
of the prepayments made as of the date of termination, less any part of thereof
that has been applied to the purchase price of products previously delivered
under the contract. Upon a termination of Tianwei Supply Agreement No. 2 by
Tianwei due to our failure to deliver polysilicon in the amounts and by the
dates required in the contract, we are required to refund to Tianwei 150% of the
prepayments made as of the date of termination, which is $34.5 million as of May
31, 2009, less any part thereof that has been applied to the purchase price of
products previously delivered to Tianwei. In most other cases, if Tianwei
terminates Tianwei Supply Agreement, No. 2, then we are required to refund to
Tianwei 100% of the prepayments made as of the date of termination, less any
part thereof that has been applied to the purchase price of products previously
delivered under the contract.
  If either
or both of the Tianwei Supply Agreements is terminated for any reason, our
business will be materially harmed. In addition, if Tianwei Supply Agreement 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 $42 million as of May 31,
2009.  If Tianwei Supply Agreement 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 $34.5 million as of May 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 our polysilicon production
plant. Securing new funds may delay the anticipated timing of completion of our
production plant, 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 production plant, 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.
  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. 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.
  23
  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
April 30, 2009 ($0 as of March 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 our polysilicon production plant. Securing new
funds may delay the anticipated timing of completion of the production plant,
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 production plant, 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
plant construction.
  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 March 31, 2010. 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
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 Alex Supply Agreement.
  If the
Alex Supply Agreement is terminated for any reason, our business may be
materially and adversely affected.  In addition, if the 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 Alex Supply
Agreement, we are required to refund to Alex all of the prepayments made as of
the date of termination, which was $15 million as of March 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 our polysilicon production plant.
Securing new funds may delay the anticipated timing of completion of the
production plant, 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 Alex Supply
Agreement or at all. If we are unable to secure new funds, we will not be able
to complete construction of the production plant, our business will be
materially and adversely affected and we may be forced to delay, alter or
abandon our planned business operations.
  We will face intense competition in
the polysilicon market from large competitors with significantly greater
operating histories and financial and technological resources.  We
expect polysilicon supply to increase and competition to further
intensify.
  In the
polysilicon market, we will compete with companies such as Hemlock Semiconductor
Corporation, Renewable Energy Corporation ASA, Mitsubishi Polycrystalline
Silicon America Corporation, Mitsubishi Materials Corporation, Tokuyama
Corporation, MEMC Electronic Materials, Inc., and Wacker Chemie AG. In addition,
new companies have emerged in China, Korea, India, Europe, Brazil, Australia,
North America, and the Middle East, and new technologies, such as fluidized bed
reactors and direct solidification, are emerging, which may have significant
cost and other advantages over the Siemens process we are planning to use to
produce polysilicon at our production facility. These competitors may have
longer operating histories, greater name recognition and greater financial,
sales and marketing, technical and other resources than us. As a result of these
disparities, we may be unable to successfully obtain and retain the customer and
supplier relationships necessary to be successful in the polysilicon market and
PV system installation market, and our operating results and our businesses may
suffer.
  Certain
polysilicon producers have announced plans to invest heavily in the expansion of
their production capacities in view of the recent scarcity of solar-grade
silicon. These initiatives may increase the visibility of already-operational
competitors in the industry and their promised delivery capacities, making it
more difficult for us to establish market share as a new entrant, especially
given the fact that our production facility is not yet operational. Further, as
these initiatives develop, we expect significant additional production capacity
to come on-line in fiscal 2010, near in time to when our proposed polysilicon
facility is scheduled to become fully operational. This additional capacity may
suppress prices, which could make it more difficult to retain our existing
customer relationships and to make new relationships, and otherwise adversely
affect our business.
  24
 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 our proposed polysilicon facility 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 our planned polysilicon
production facility 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 our
polysilicon production facility.
  Even if we achieve our polysilicon
and PV system installation objectives on a timely basis and complete the
construction of 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 our polysilicon production facility, 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 the market by
      us or purchased by us from third-parties to settle customer commitments;
      and
  •
              future
      product liability or warranty
claims.
  25
  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 our production facility
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, our PV system
installation business run by Hoku Solar and our fuel cell business, 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 our planned polysilicon
facility in Pocatello, Idaho. Construction of the planned polysilicon facility
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.
  26
 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 photovoltaic 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.
  27
 The loss of any of our executive
officers or the failure to attract or retain specialized technical and
management personnel could impair our ability to grow our
business.
  We are
highly dependent on our executive officers, including Dustin M. Shindo, our
Chairman of the Board of Directors, President and Chief Executive Officer, and
Karl M. Taft III, our Chief Technology Officer. Due to the specialized knowledge
that each of our executive officers possesses with respect to our technology or
operations, the loss of service of any of our executive officers would harm our
business. We do not have employment agreements with any of our executive
officers, and each may terminate his employment without notice and without cause
or good reason. In addition, we do not carry key man life insurance on our
executive officers.
  There is
a limited pool of qualified applicants for our operations located in Hawaii
capable of meeting our specialized needs. Our future success will depend, in
part, on our ability to attract and retain qualified management and technical
personnel, many of whom must be relocated from the continental United States or
other countries. In addition, we will need to hire and train specialized
engineers to manage and operate our planned polysilicon facility in Pocatello,
Idaho. We may not be successful in hiring or retaining qualified personnel. Our
inability to hire qualified personnel on a timely basis, or the departure of key
employees, could harm our business.
  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 our facility
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
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.
  28
 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.
  29
 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 our polysilicon plant 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 our
planned polysilicon production plant, 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 our polysilicon plant; however, we need to apply for
additional permits with federal, state and local authorities, including building
permits to continue the construction of our polysilicon plant, and permits to
operate the plant 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.
  30
 If government incentives to locate
our planned polysilicon facility in the City of Pocatello, Idaho are not
realized then the costs of establishing our facility 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 our facility, 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 our polysilicon
facility.
  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 our planned polysilicon plant. In May 2009, we entered into an
Economic Development Agreement, or the PDA Agreement, with the Pocatello
Development Authority, or PDA, pursuant to which 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 production facility under construction in
Pocatello, Idaho, or the Plant.  The parties agreed that (a) the
Infrastructure Reimbursement will be an amount that is equal to 95% of the tax
increment payments 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 our planned polysilicon facility in Idaho 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. Between April 1, 2008 and March 31, 2009, our stock had low
and high sales prices in the range of $1.90 to $10.25 per share. During fiscal
year 2009, 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;
  •
              announcements
      by us, our competitors and our customers of acquisitions, new products,
      the acquisition or loss of significant contracts, commercial relationships
      or capital commitments;
  •
              the
      performance of the stock market generally and the over-all condition of
      the global macro economy;
  •
              failure
      to meet the expectations of securities analysts or investors with respect
      to our financial results;
  •
              our
      ability to develop and market new and enhanced products on a timely
      basis;
  •
              litigation;
  31
  •
              changes
      in our management;
  •
              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;
  •
              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.
  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:
  •
              establish
      a classified Board of Directors, so that not all members of our Board of
      Directors may be elected at one
time;
  •
              set
      limitations on the removal of
directors;
  •
              limit
      who may call a special meeting of
stockholders;
  •
              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;
  •
              prohibit
      stockholder action by written consent, thereby requiring all stockholder
      actions to be taken at a meeting of our stockholders;
  and
  •
              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, you 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 your
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 you purchased your
shares.
  We
may issue stock or engage in a transaction that results in a change of
control.
  In order
to raise capital and/or manage our liquidity, we may issue stock or engage in a
transaction that results in the acquisition of all or substantially all of our
assets, or a change of control. Presently, no single stockholder owns shares of
common stock representing a majority of the voting power of our common stock. If
a person or group were to acquire a majority of the voting power of our common
stock, such person or group would be able, over time, to elect all of the
members of our board of directors and determine the outcome of all matters
submitted to a vote of our stockholders, including matters involving the
acquisition or disposition of assets, the incurrence of indebtedness, the
issuance of any additional shares of common stock or other equity securities and
the payment of dividends on common stock.  Such person or group would
also have the power to prevent or cause a subsequent change in control, and
could take other actions that might be desirable to such person or group, but
not to other stockholders.
  
 Item 1B.
              Unresolved
      Staff Comments
  None.
  32
  Item 2.
              Properties
  In
January 2007, we announced our selection of the City of Pocatello, Idaho as the
planned location for Hoku Materials, where we plan to build and equip a
polysilicon production facility. 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. The annual rent for the ground lease is fixed at one dollar
per year until the expiration of the lease on December 31, 2106. In addition to
this 67-acre lease, we and the City of Pocatello have signed a separate
agreement granting us an option to lease an additional 450 acres of land owned
by the City of Pocatello, which we could use for any future expansion. The terms
of any future lease will be subject to good faith negotiations between us and
the City of Pocatello. Our operations in Pocatello, Idaho are headquartered in
trailers located on our leased property at the construction site of our planned
polysilicon production facility.
  In
October 2008, we entered into a lease for 5,868 square feet of commercial office
space in Honolulu, Hawaii. The lease has approximately 30 months remaining on
the current term, with an option to extend for an additional five
years.  This office space presently serves as our corporate
headquarters. We also have 5,990 square feet of leased warehouse and office
space located in Aiea, Hawaii, that is used primarily by Hoku Solar for
equipment storage and general operations.
  
 Item 3.
              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 4.
              Submission
      of Matters to a Vote of Security
Holders
  None.
  PART
II
  Item 5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
  Market Information
  Our
common stock has traded on The NASDAQ Global Market, or NASDAQ, under the symbol
“HOKU” since August 5, 2005. The high and low sales prices of our common
stock, as reported by the NASDAQ, for the quarters indicated are as
follows:
  Sales
      pricesHigh
                    
                    
                    LowFiscal
      year ended March 31, 20091st
      Quarter
                    
                    $
                    10.25
                    
                    
                    $
                    5.002nd
      Quarter
                    
                    $
                    6.77
                    
                    
                    $
                    4.023rd
      Quarter
                    
                    $
                    6.24
                    
                    
                    $
                    2.064th
      Quarter
                    
                    $
                    3.29
                    
                    
                    $
                    1.90Fiscal
      year ended March 31, 20081st
      Quarter
                    
                    $
                    12.80
                    
                    
                    $
                    4.002nd
      Quarter
                    
                    $
                    14.55
                    
                    
                    $
                    7.503rd
      Quarter
                    
                    $
                    13.53
                    
                    
                    $
                    5.874th
      Quarter
                    
                    $
                    14.88
                    
                    
                    $
                    7.05
  As of May
7, 2009, there were 57 stockholders of record of our common stock. Such number
does not include beneficial owners holding shares through nominee
names.
  Performance
Graph
  The
performance graph below shows the total stockholder return of an investment of
$100 in cash made on August 5, 2005 (the date our stock began trading on NASDAQ)
for our common stock, the NASDAQ composite and the Russell 3000
Technology.  All values assume reinvestment of the full amount of all
dividends.  We have selected the Russell 3000 Technology index for
comparison purposes, as we do not believe we can reasonably identify an
appropriate peer group index.  The comparisons shown in the graph
below are based on historical data and we caution that that the stock price
performance shown in the graph below is not indicative of, nor is it intended to
forecast, the future performance of our common stock.
  33
  
  8/05/05
                    
                    
                    3/31/09Hoku
      Scientific, Inc.
                    
                    $
                    100.00
                    
                    
                    $
                    47.57NASDAQ
      Composite
                    
                    $
                    100.00
                    
                    
                    $
                    71.20Russell
      3000
                    
                    $
                    100.00
                    
                    
                    $
                    78.93
   Dividend
Policy
  We have
never declared or paid any cash dividends on our capital stock. We currently
intend to retain any future earnings to finance the growth and development of
our business and, therefore, do not anticipate paying any cash dividends in the
foreseeable future. Any future determination to pay cash dividends will be at
the discretion of our Board of Directors and will depend upon our financial
condition, operating results and capital requirements, any contractual
restrictions and other factors that our Board of Directors deems
relevant.
  Unregistered
Sales of Equity Securities
  None.
 
 Equity
Compensation Plan Information
 
 The
number of shares issuable upon exercise of outstanding stock options, the
weighted-average exercise price of the outstanding options, and the number of
stock options remaining for future issuance for each of our equity compensation
plans as of March 31, 2009 are summarized as follows:
  34
  Plan Category
                                                  
                                                  Number of securities
                                                    to be issued upon
                                                    exercise of
                                                    outstanding options,
                                                    warrants and rights
                                                  
                                                  Weighted-average
                                                    exercise price of
                                                    outstanding options,
                                                    warrants and rights
                                                  
                                                  Number of securities
                                                    remaining available for
                                                    issuance under
                                                    equity compensation
                                                    plans (excluding securities
                                                    reflected in column (a))(a)
                                                  
                                                  (b)
                                                  
                                                  (c)Equity
      compensation plans approved by security holders(1)
                                                  
                                                  505,445
                                                  
                                                  $
                                                  2.40
                                                  (3)
                                                  1,038,171
                                                  (4)Equity
      compensation plans not approved by security holders(2)
                                                  
                                                  —
                                                  
                                                  
                                                  —
                                                  
                                                  —Total
                                                  
                                                  505,445
                                                  
                                                  $
                                                  2.40
                                                  (3)
                                                  1,038,171
                                                  (4)
 
  (1)
              This
      row includes our 2002 Stock Plan, 2005 Equity Incentive Plan, and 2005
      Non-Employee Directors’ Stock Option
Plan.
  (2)
              All
      of our equity compensation plans have been approved by our
      stockholders.
  (3)
              Represents
      weighted average exercise price of outstanding options
    only.
  (4)
                The
      number of shares of common stock reserved for issuance under our 2005
      Equity Incentive Plan will automatically increase on April 1st of each
      year, from 2006 through 2014, in an amount equal to the lesser of 133,333
      shares of our common stock or the number of shares of common stock granted
      pursuant to stock awards in the prior fiscal year. The number of shares of
      our common stock reserved for issuance under our 2005 Non-Employee
      Directors’ Stock Option Plan will automatically increase on April 1st of
      each year, from 2006 through 2014, by the number of shares of common stock
      subject to options granted during the preceding fiscal year, less the
      number of shares that reverted back to the share reserve during the
      preceding fiscal year. Our Board has the authority to designate a smaller
      number of shares by which the authorized number of shares of common stock
      will be increased under both plans prior to the last day of any fiscal
      year.
  Issuer
Purchases of Equity Securities
  None.
  Item 6.
              Selected
      Financial Data
  The
following selected financial data should be read in conjunction with our
financial statements and the notes thereto, and with Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” The
statement of operations data for the fiscal years ended March 31, 2009, March
31, 2008 and March 31, 2007 and the balance sheet data as of March 31, 2009
and March 31, 2008 have been derived from and should be read in conjunction with
our audited financialstatements and the notes
thereto included elsewhere in this Annual Report on Form 10-K. The statement of
operations data for the fiscal years ended March 31, 2006 and March 31,
2005 and the balance sheet data as of March 31, 2007 and March 31,
2006 are derived from audited financial statements and the notes thereto which
are not included in this Annual Report on Form 10-K. Historical results are not
necessarily indicative of future results.
 
 Fiscal
      Year Ended March 31,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2007
                                          
                                          
                                          2006
                                          
                                          
                                          2005(in
      thousands, except share and per share data)Statements
      of Operations Data:Revenue:Service,
      license, and product revenue
                                          
                                          $
                                          4,957
                                          
                                          
                                          $
                                          3,229
                                          
                                          
                                          $
                                          5,368
                                          
                                          
                                          $
                                          5,505
                                          
                                          
                                          $
                                          2,933Total
      revenue
                                          
                                          
                                          4,957
                                          
                                          
                                          
                                          3,229
                                          
                                          
                                          
                                          5,368
                                          
                                          
                                          
                                          5,505
                                          
                                          
                                          
                                          2,933Cost
      of revenue:Cost
      of service, license and product revenue (1)
                                          
                                          
                                          3,705
                                          
                                          
                                          
                                          2,312
                                          
                                          
                                          
                                          3,173
                                          
                                          
                                          
                                          954
                                          
                                          
                                          
                                          458Total
      cost of revenue
                                          
                                          
                                          3,705
                                          
                                          
                                          
                                          2,312
                                          
                                          
                                          
                                          3,173
                                          
                                          
                                          
                                          954
                                          
                                          
                                          
                                          458Gross
      margin
                                          
                                          
                                          1,252
                                          
                                          
                                          
                                          917
                                          
                                          
                                          
                                          2,195
                                          
                                          
                                          
                                          4,551
                                          
                                          
                                          
                                          2,475Operating
      expenses:Selling,
      general and administrative (1)
                                          
                                          
                                          4,548
                                          
                                          
                                          
                                          6,207
                                          
                                          
                                          
                                          4,487
                                          
                                          
                                          
                                          2,743
                                          
                                          
                                          
                                          2,132Research
      and development (
      1)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          86
                                          
                                          
                                          
                                          1,774
                                          
                                          
                                          
                                          1,326
                                          
                                          
                                          
                                          1,419Total
      operating expenses
                                          
                                          
                                          4,548
                                          
                                          
                                          
                                          6,293
                                          
                                          
                                          
                                          6,261
                                          
                                          
                                          
                                          4,069
                                          
                                          
                                          
                                          3,551Income
      (loss) from operations
                                          
                                          
                                          (3,296
                                          )
                                          
                                          
                                          (5,376
                                          )
                                          
                                          
                                          (4,066
                                          )
                                          
                                          
                                          482
                                          
                                          
                                          
                                          (1,076
                                          )Interest
      and other income
                                          
                                          
                                          284
                                          
                                          
                                          
                                          1,083
                                          
                                          
                                          
                                          1,039
                                          
                                          
                                          
                                          594
                                          
                                          
                                          
                                          98Income
      (loss) before noncontrolling interest and income tax
    benefit
                                          
                                          
                                          (3,012)
                                          
                                          
                                          
                                          (4,293
                                          )
                                          
                                          
                                          (3,027
                                          )
                                          
                                          
                                          1,076
                                          
                                          
                                          
                                          (978
                                          )Noncontrolling
      interest
                                          
                                          
                                          50Income
      tax benefit
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          275
                                          
                                          
                                          
                                          268
                                          
                                          
                                          
                                          250Net
      income (loss)
                                          
                                          $
                                          (2,962
                                          )
                                          
                                          $
                                          (4,293
                                          )
                                          
                                          $
                                          (2,752
                                          )
                                          
                                          $
                                          1,344
                                          
                                          
                                          $
                                          (728
                                          )
 
 35
 
 
 Basic
      net income (loss) per share
                                                            
                                                            $
                                                            (0.15
                                                            )
                                                            
                                                            $
                                                            (0.26
                                                            )
                                                            
                                                            $
                                                            (0.17
                                                            )
                                                            $
                                                            0.10
                                                            
                                                            $
                                                            (0.13
                                                            )Diluted
      net income (loss) per share
                                                            
                                                            $
                                                            (0.15
                                                            )
                                                            
                                                            $
                                                            (0.26
                                                            )
                                                            
                                                            $
                                                            (0.17
                                                            )
                                                            $
                                                            0.09
                                                            
                                                            $
                                                            (0.13
                                                            )Shares
      used in computing basic net income (loss) per share
                                                            
                                                            
                                                            20,325,433
                                                            
                                                            
                                                            
                                                            16,656,000
                                                            
                                                            
                                                            
                                                            16,449,537
                                                            
                                                            
                                                            13,033,263
                                                            
                                                            
                                                            5,474,499Shares
      used in computing diluted net income (loss) per share
                                                            
                                                            
                                                            20,325,433
                                                            
                                                            
                                                            
                                                            16,656,000
                                                            
                                                            
                                                            
                                                            16,449,537
                                                            
                                                            
                                                            15,264,763
                                                            
                                                            
                                                            5,474,499___________________1)
           Includes stock-based compensation as
      follows:Cost
      of service, license and product revenue
                                                            
                                                            $
                                                            14
                                                            
                                                            
                                                            $
                                                            42
                                                            
                                                            
                                                            $
                                                            126
                                                            
                                                            $
                                                            38
                                                            
                                                            $
                                                            24Selling,
      general and administrative
                                                            
                                                            
                                                            1,202
                                                            
                                                            
                                                            
                                                            954
                                                            
                                                            
                                                            
                                                            593
                                                            
                                                            
                                                            872
                                                            
                                                            
                                                            979Research
      and development
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            72
                                                            
                                                            
                                                            
                                                            501
                                                            
                                                            
                                                            146
                                                            
                                                            
                                                            261
 
 
 
 As
      of March 31,2009
                                                                                  
                                                                                  
                                                                                  2008
                                                                                  
                                                                                  
                                                                                  2007
                                                                                  
                                                                                  
                                                                                  2006
                                                                                  
                                                                                  
                                                                                  2005(in
      thousands)Balance
      Sheet Data:Cash,
      cash equivalents and short-term investments
                                                                                  
                                                                                  $
                                                                                  17,383
                                                                                  
                                                                                  
                                                                                  $
                                                                                  29,760
                                                                                  
                                                                                  
                                                                                  $
                                                                                  19,956
                                                                                  
                                                                                  
                                                                                  $
                                                                                  22,688
                                                                                  
                                                                                  
                                                                                  $
                                                                                  4,159Working
      capital
                                                                                  
                                                                                  
                                                                                  (20,268
                                                                                  )
                                                                                  
                                                                                  
                                                                                  25,432
                                                                                  
                                                                                  
                                                                                  
                                                                                  20,896
                                                                                  
                                                                                  
                                                                                  
                                                                                  21,036
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,688Total
      assets
                                                                                  
                                                                                  
                                                                                  224,211
                                                                                  
                                                                                  
                                                                                  
                                                                                  68,109
                                                                                  
                                                                                  
                                                                                  
                                                                                  30,625
                                                                                  
                                                                                  
                                                                                  
                                                                                  32,083
                                                                                  
                                                                                  
                                                                                  
                                                                                  10,782Long-term
      debt (Deposits- Hoku Materials)
                                                                                  
                                                                                  
                                                                                  133,625
                                                                                  
                                                                                  
                                                                                  
                                                                                  13,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  5Total
      stockholders’ equity
                                                                                  
                                                                                  
                                                                                  50,632
                                                                                  
                                                                                  
                                                                                  
                                                                                  45,995
                                                                                  
                                                                                  
                                                                                  
                                                                                  25,494
                                                                                  
                                                                                  
                                                                                  
                                                                                  27,932
                                                                                  
                                                                                  
                                                                                  
                                                                                  6,232
 
 36
 
 Item 7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
  Overview
  Hoku
Scientific, Inc. is 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.
  We have
historically focused our efforts on the design and development of fuel cell
technologies, including our Hoku membrane electrode assemblies, or MEAs, and
Hoku Membranes. In May 2006, we announced our plans to form an integrated
photovoltaic, or PV, module business, and our plans to manufacture polysilicon,
a primary material used in the manufacture of PV modules. In fiscal 2007, we
reorganized our business into three business units: Hoku Materials, Hoku Solar
and Hoku Fuel Cells. In February and March 2007, we incorporated Hoku Materials,
Inc. and Hoku Solar, Inc., respectively, as wholly-owned subsidiaries to operate
our polysilicon and PV system installation businesses,
respectively.
  
 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. 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 polysilicon production facility
currently under construction. As of March 31, 2009, we had cash and cash
equivalents on hand of $17.4 million and short term liabilities of $40.0
million. Consequently, there is substantial doubt that we will have sufficient
cash to meet all of our obligations as they come due through at least March 31,
2010. 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. Furthermore, assuming the total cost of
construction and equipment does not exceed $390 million, that all of our
existing polysilicon customers make timely prepayments in full and that we are
able to secure additional prepayments from new polysilicon customers, we believe
we will need to raise an amount between $35 and $55 million to complete the
construction of our 4,000 metric ton plant. If we are unable to secure
additional long-term supply contracts and prepayments, assuming the cost to
construct and equip the plant is $390 million and that all of our existing
customers make their prepayments when due, the amount we will need to raise
could be as much as $106 million. If we are unable to secure additional
long-term supply contracts and prepayments, if one or more of our polysilicon
supply customers fail to meet their obligations to make timely prepayments
and/or if the actual cost to complete the plant is more than $390 million, the
amount we will need to raise could exceed $106 million.  We previously
intended to finance the construction of our polysilicon production facility
through project financing; however, as of May 2009, we believe we will need to
raise additional capital through other means for the procurement and
construction of our polysilicon manufacturing facility.
  Our
ability to continue as a going concern depends on our ability to raise equity or
debt capital, increase revenues and reduce expenses. We have already modified
payment terms in purchase orders with more than twenty of our vendors to
structure payment plans for amounts past due and to be invoiced in the future.
Our management continues to evaluate a variety of alternatives to raise capital
and manage our liquidity.  These alternatives include, without
limitation:
  ·
              debt
      financing, including financing that is guaranteed by a private third
      party;
  ·
              one
      or more or 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;
  ·
              further
      extending the construction schedule and payment plans with vendors;
      and/or
  ·
              consummating
      a transaction, which could result in a change of
  control.
  There are
no assurances that we will be successful in executing any of the foregoing
alternatives. 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 March 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.
  
  Hoku
Materials
  In
February 2007, we incorporated Hoku Materials to manufacture polysilicon, a key
material used in PV modules. We had originally planned to use the polysilicon
internally by Hoku Solar to manufacture our own brand of solar modules, and for
sale to the larger solar market.  However, as a result of increased
demand from third-party customers, and our revised strategy for Hoku Solar, we
now intend to sell all of our planned output of polysilicon to third-party
customers.
  37
 In May 2007, we commenced construction
of our planned polysilicon manufacturing facility in Pocatello, Idaho.
In September 2008, we announced
that we would be increasing our planned polysilicon facility capacity from 3,500
metric tons per year to 4,000 metric tons per year. Our original estimated
construction cost for a facility capable of producing 3,500 metric tons of
polysilicon per year was $390 million. We do not believe we will require a
significant amount of additional capital, if any, to increase our facility
capacity to 4,000 metric tons per year; however, we are continuing to review the
$390 million estimated cost to complete the plant. 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 plant could have a material adverse effect on our business,
financial condition and results of operations. In April 2008, we issued a change
order with Stone & Webster, Inc., our engineering and procurement service
provider, and as a result our estimate of the total cost to construct and equip
our polysilicon facility decreased from $400 million to $390 million. Throughout
fiscal 2009, we reorganized and restructured our portfolio of polysilicon supply
contracts, including terminating certain agreements, amending others and
acquiring several new supply agreements. During fiscal 2009, we entered into new
supply agreements with Jinko, Tianwei, Solargiga and Alex.  In March
2009, we entered into Amendment No. 2 to our Second Amended and Restated Supply
Agreement with Solarfun, and an Amended and Restated Supply Agreement with
Jinko. In April 2009, we entered into an Amended and Restated Supply Agreement
with Solargiga.  In August 2008, we reached agreement with Sanyo to
terminate our supply contract, and in September 2008 we exercised our option to
unilaterally terminate our supply contract with GEWD.
  Amendments
to our supply contracts and delayed receipt of prepayments also resulted in
modification to our construction schedule for our polysilicon production
facility, which we now estimate will commence operations in the second half of
calendar year 2009, and to reach full operating capacity in the first half of
calendar year 2010. Once our plant is operating at full capacity, we expect that
we will be able to meet the annual delivery requirements in our seven existing
polysilicon sales contracts. In addition, we have approximately 600 to 800
metric tons of unallocated annual polysilicon production capacity from our
planned production output of 4,000 metric tons per year, which may be sold under
one or more new long-term contracts, reserved for strategic purposes, or sold on
the spot market. If this polysilicon is sold under one or more long-term
contracts, such sales, if any, may provide additional prepayments that could
potentially reduce the amount of additional financing needed.
   Hoku Solar
 In March
2007, we incorporated Hoku Solar to assemble and install our own brand of PV
modules. In June 2007, we announced a change in our strategy, which is to focus
on the sale of turnkey PV system installations, and related services, and not to
enter the solar module manufacturing business.
 
 We plan
to continue to design, engineer and install turnkey PV systems, but will use
modules purchased from third-party suppliers, which we believe we can purchase
at lower cost than the cost to manufacture our own brand of modules. Due to the
change in our business strategy and decision not to enter the solar-module
manufacturing business, along with decreased activity in our fuel cell business,
in December 2008, we closed the sale of our real property and improvements,
including our corporate headquarters, in Kapolei, Hawaii, or the Property. The
Property was sold for an aggregate purchase price of $5.8 million, and resulted
in a gain on the sale of approximately $550,000. We have relocated to a leased
warehouse and to an office space in Honolulu, Hawaii.
  In
December 2008, we and UFA Renewable Energy Fund I, LLC, a Delaware limited
liability company, or UFA, established and capitalized Hoku Solar Power I, LLC,
a California limited liability company, or Power I. Under the terms of the Power
I Operating Agreement by and between us and UFA, or the Operating Agreement, we
assigned our power purchase agreements, or PPAs, to Power I, which was created
to own and operate each system and which will sell the electricity generated by
the PV systems to the Hawaii State Department of Transportation, or DOT, at
predetermined contract rates.  Under the terms of the PPAs, Power I is
permitted to install, maintain and operate each of the seven planned energy
systems on DOT facilities over a term of 20 years, commencing on the date that a
system becomes operational and energy is delivered to DOT.  As of
March 31, 2009, installation of two PV systems on the island of Kauai have been
completed and transferred to Power I.
 
 In
December 2008, we entered into a Development Services Agreement with Power I, or
the Development Agreement, pursuant to which we agreed to construct, install,
develop and commission the PV systems on behalf of Power I.  We also
agreed to operate and maintain the systems pursuant to the terms and conditions
of the Purchase and Sale and Operation and Maintenance Agreement entered into
between us and Power I in December 2008. Each system will be transferred to
Power I prior to the commencement of commercial operation. In December 2008, we
completed the engineering, design and procurement phases for the projects and
commenced system installation at two DOT project sites on the island of
Kauai.  In March 2009, the two PV systems in Kauai have been completed
and transferred to Power I.  As of April 30, 2009, installation of the
remaining five PV systems was completed and the DOT has provided letters of
system acceptances on each of the seven PV systems, acknowledging that various
system requirements, including but not limited to: system completion, permit
certification, and energy capacity, have been satisfied in accordance with the
provisions of the PPA. As of May 2009 all of these PV systems are
operational.
 
 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. In August 2007, we completed our most recent material fuel cell
contract with the U.S. Navy.
 
 38
 We intend
to selectively pursue 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.
  Financial
Operations Review
  Revenue
  During
fiscal 2009, we derived all of our revenue through PV system installations and
related services performed by Hoku Solar and the resale of solar inventory. We
expect that all of our revenue will be derived through PV system installations
and related services, the resale of inventory and the sale of electricity until
the second half of calendar year 2009, when Hoku Materials is expected to
generate revenue through the sale of polysilicon manufactured at our planned
polysilicon production facility in Pocatello, Idaho.
  Cost
of Revenue
  Our cost
of revenue consists primarily of employee compensation, including stock-based
compensation, and supplies and materials. Beginning in fiscal 2006, we began
allocating overhead to our cost of revenue. Such costs were immaterial in all
prior fiscal years. We expect our cost of revenue to increase on an absolute
basis as our PV system installations increase.
  Selling,
General and Administrative Expenses
  Our
selling, general and administrative expenses consist primarily of employee
compensation, including stock-based compensation for executive, sales and
marketing, finance and administrative personnel. Other significant costs include
insurance costs and professional fees for accounting, legal and consulting
services. We expect our selling, general and administrative expenses to increase
by a significant factor as a result of our entry into the PV system installation
and polysilicon markets.
  Research
and Development Expenses
  Research
and development expenses consist primarily of compensation, including
stock-based compensation, for research and development personnel. Other
significant costs include facility costs, the cost of supplies and materials and
depreciation. We expense research and development expenses as they are incurred.
Although our research and development expenses have decreased significantly
since we reduced our investment in our fuel cell business, we expect to invest
in the research and development of new solar products, which will result in a
significant increase in our research and development expenses in the future.
  Consolidated
Results of Operations
  The
following analysis of the 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.
  
  Fiscal
Year 2009 vs. Fiscal Year 2008
  Revenue.   Revenue
was $5.0 million for fiscal 2009 compared to $3.2 million for fiscal 2008.
Revenue for fiscal 2009 was primarily comprised of PV system installations for
Paradise Beverages, Inc., and Resco, Inc., and the resale of solar
inventory.   Revenue for fiscal 2008 was comprised of PV system
installations primarily from contracts with Paradise Beverages, Bank of Hawaii
and Hardware Hawaii and fuel cell revenue from contracts with the U.S.
Navy.
  Cost of
Revenue.   Cost of revenue was $3.7 million for fiscal
2009 compared to $2.3 million for fiscal 2008. The cost of revenue for fiscal
2009 related primarily to PV system installation contracts and related services
compared to revenue primarily from PV system installation contracts and related
services and from fuel cell contracts with the U.S Navy in fiscal 2008. Cost of
revenue primarily consisted of employee compensation and supplies and
materials.
  Selling, General and Administrative
Expenses.   Selling, general and administrative expenses
were $4.5 million for fiscal 2009 compared to $6.2 million for fiscal 2008. The
decrease of $1.7 million was primarily due to the executive officers declining
cash bonuses in accordance with the Fiscal Year 2009 Executive Incentive
Compensation Plan compared to $1.3 million in cash bonuses provided in
accordance with the Fiscal Year 2008 Executive Incentive Compensation Plan. In
addition, there were decreases in professional fees consisting principally of
legal, accounting, consulting and other service fees of $595,000,
and  the recognition of losses in fiscal 2008 on the resale of solar
cells and write-down of solar and fuel cell equipment of $286,000 and $103,000,
respectively. Furthermore, there was a higher application of other direct and
indirect charges to customer contracts in fiscal 2009, as compared to fiscal
2008, resulting in a decrease in selling, general and administrative expenses of
$410,000.  The decrease was offset by increases in payroll, which
includes stock compensation of $755,000, rent of $112,000, interest and bank
loan expenses of $67,000 and marketing expenses of $56,000.
  39
 Research and Development
Expenses.   Research and development expenses were $0 for
fiscal 2009, compared to $86,000 for fiscal 2008. The decrease of $86,000 was
primarily due to due to a shift in business strategy from fuel cells to
solar.
  Interest and Other
Income.   Interest and other income was $284,000 for
fiscal 2009, compared to interest and other income of $1.1 million for the same
period in fiscal 2008. The decrease of $799,000 was due primarily to the losses
related to our foreign currency (Euro) forward contracts of $862,000 and a
reduction in interest income of $552,000. The decrease was offset by a net gain
of $483,000 on the sale of property and equipment and other expensed items,
including the sale of our fee simple interest in our real property and
improvements, including our corporate headquarters and taxes of $166,000
primarily related to a reversal of State of Hawaii tax reserves.
 
  Fiscal
Year 2008 vs. Fiscal Year 2007
  Revenue.   Revenue
was $3.2 million for fiscal 2008, compared to $5.4 million for fiscal 2007.
Revenue for fiscal 2008 was comprised of PV system installations primarily from
contracts with Paradise Beverages, Bank of Hawaii and Hardware Hawaii and fuel
cell revenue from contracts with the U.S. Navy, compared to fuel cell revenue
primarily from contracts with the U.S. Navy and Nissan in fiscal
2007.
  Cost of
Revenue.   Cost of revenue was $2.3 million for fiscal
2008, compared to $3.2 million for fiscal 2007. The cost of revenue for fiscal
2008 related primarily to PV system installation contracts and related services
and from fuel cell contracts with the U.S Navy compared to only fuel cell
revenue primarily from contracts with the U.S. Navy and Nissan in fiscal 2007.
Cost of revenue primarily consisted of employee compensation and supplies and
materials.
  Selling, General and Administrative
Expenses.   Selling, general and administrative expenses
were $6.2 million for fiscal 2008, compared to $4.5 million for fiscal 2007. The
increase of $1.7 million was primarily due to a $940,000 increase in
compensation to executive officers in accordance with the Fiscal Year 2008
Executive Incentive Compensation Plan, compared to the Fiscal Year 2007
Executive Incentive Compensation Plan.  In addition, there was a lower
application of other direct and indirect charges to customer contracts in fiscal
2008 as compared to fiscal 2007, resulting in an increase in selling, general
and administrative expenses of $401,000 and increases in professional fees of
$390,000, payroll, which includes stock compensation, of $117,000, and travel
expenses of $106,000.  Furthermore, we recognized expenses in fiscal
2008 related to the loss on the sale of solar cells of $286,000 and impairment
of solar and fuel cell equipment of $103,000. The increase was off-set by an
impairment to solar cells in fiscal 2007 of $379,000 and a reduction in
insurance of $89,000, Hawaii use tax of $97,000 and utilities expenses of
$57,000.
  Research and Development
Expenses.   Research and development expenses were $86,000
for fiscal 2008, compared to $1.8 million for fiscal 2007. The decrease of $1.7
million was primarily due to the write down of capital equipment and inventory
used in our fuel cell business of $928,000 and $57,000, respectively, and by a
decrease of $318,000 in employee compensation, primarily due to a reduction in
force in Hoku Fuel Cells.  There was also a decrease of $150,000 in
costs related to a redeployment of personnel, supplies and other costs, $128,000
in materials and services used for research and development and $80,000 in
depreciation.
  Interest and Other
Income.   Interest and other income was $1.1 million for
fiscal 2008 compared to interest and other income of $1.0 million for the same
period in fiscal 2007. The increase of $44,000 was due primarily to a net gain
of $177,000 on the sale of property and equipment and other expensed items,
partially offset by a reduction in interest income of $153,000.
 
 Income
Taxes
  Income
taxes are accounted for under the asset and liability method of Statement of
Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes,
which establishes financial accounting and reporting standards for the effect of
income taxes. In accordance with SFAS No. 109, we recognize federal and
state current tax liabilities or assets based on our 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 our assets and liabilities at
the tax rates we expect to be in effect when these deferred tax assets or
liabilities are anticipated to be recovered or settled. Our ultimate realization
of deferred tax assets depends upon the generation of future taxable income
during periods in which those temporary differences become deductible. Based on
the best available objective evidence, it is more likely than not that our
remaining net deferred tax assets will not be realized. Accordingly, we continue
to provide a valuation allowance against our net deferred tax assets as of March
31, 2009.
  We have
tax deductions from the exercise of certain stock options that exceed the amount
of stock compensation expense recorded in the accompanying financial statements
for the corresponding options (“Excess Tax Deductions”).  The deferred
tax assets of the Company are reported without inclusion of the Excess Tax
Deductions.  When realized, the tax benefit of the Excess Tax
Deductions is accounted for as a credit to additional paid-in-capital rather
than as a reduction of income tax expense.
  As of
March 31, 2009, total deferred tax assets of the Company were primarily
comprised of net operating loss carryforwards of $2.5 million, fixed assets,
depreciation and amortization of $195,000, Federal R&E tax credits of
$424,000, and stock-based compensation of $358,000.  There were no
deferred tax liabilities as of March 31, 2009.
  40
 During
fiscal 2007, we qualified as a “Hawaii Qualified High Technology Business,”
which provides certain tax credits to us for qualified research and
experimentation, or R&E, costs. In fiscal 2007, we recorded Hawaii R&E
refundable tax credits of approximately $275,000 and no such tax credits were
qualified in fiscal years 2009 and 2008.
  Analysis
of Operating Revenue and Loss by Segment
  Hoku
Materials
  We had no
revenue from the sale of polysilicon during fiscal 2009 and do not expect to
generate revenue until the second half of calendar year 2009.
  Our
operating losses of $2.6 million, $ 3.6 million and $1.2 million for fiscal
2009, 2008 and 2007, respectively, were primarily due to employee compensation
which includes both payroll and stock-based compensation and professional
fees.
  Hoku
Solar
  In fiscal
2009, we recognized revenue from PV system installations and related services
through contracts with Paradise Beverages, Inc., Resco, Inc., the resale of
solar inventory and other commercial and residential customers.  In
fiscal 2008, our PV system installation revenue was primarily from contracts
with Paradise Beverages, Bank of Hawaii and Hardware Hawaii.
  Our
operating loss of $639,000, $ 2.1 million and $1.3 million for fiscal 2009, 2008
and 2007, respectively, were primarily due to employee compensation, which
includes stock-based compensation.  In fiscal 2007, the loss was also
due to a write-down of our inventory of $379,000.
  Hoku
Fuel Cells
  All
revenue since inception to August 2007 was generated through our fuel cell
division.  In fiscal 2009, we recognized no fuel cell
revenue.  In fiscal 2008, we recognized $1.3 million in fuel cell
revenue through our contracts with the U.S. Navy, which were completed in August
2007.  In fiscal 2007, $5.4 million of revenue was primarily from the
U.S. Navy and Nissan of $3.2 million and $2.0 million,
respectively.
 
 Our
operating loss of $24,000 for fiscal 2009 was primarily due to legal
fees.  Our operating profit of $245,000 for fiscal 2008 was primarily
due to contract revenues with the U.S. Navy along with a reduction in operating
expenses as we significantly scaled back our expenditures and investments in the
fuel cell business.  Our operating loss of $1.7 million for fiscal
2007 was primarily due to the expenditures and investments in the fuel cell
business as it was our only line of business.
  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 financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these 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. Our management has discussed
the development and selection of these critical accounting policies and
estimates with the audit committee of our board of directors and the audit
committee has reviewed our disclosures relating to our critical accounting
policies and estimates in this report. Actual results may differ from these
estimates.
  While our
significant accounting policies are more fully described in Note 1 to
the  financial statements included elsewhere in this Annual Report on
Form 10-K, 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 and the resale of PV system
installation inventory is recognized in accordance with Staff Accounting
Bulletin No. 104, Revenue
Recognition, 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 generally recognized when
the installation is complete.
  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 as we completed a milestone.
Customer acceptance is usually required prior to invoicing. We recognized
revenue for these arrangements under the completed contract method in accordance
with Statement of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. Under the
completed-contract method, we deferred the contract fulfillment costs and any
advance payments received from the customer and recognized the costs and revenue
in our statement of operations once the contract was complete and the final
customer acceptance, if required, had been obtained.
  41
 Stock-Based
Compensation.
  We
account for stock-based employee compensation arrangements using the fair value
method in accordance with the provisions of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, or SFAS
123(R). In accordance with SFAS 123(R), 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.
  Prior to
our initial public offering, there was an absence of an active market for our
common stock, and therefore our board of directors estimated the market value of
our common stock on the date of grant of the stock option based on several
factors, including progress and milestones achieved in our business and sales of
our preferred stock. We did not obtain contemporaneous valuations from a
valuation specialist during this period. Subsequent to our initial public
offering, the market value is based on the public market for our common stock.
Due to our limited operating history, we have assumed a volatility of 100% based
on competitive benchmarks and management’s judgment and an expected life based
on the average of the typical vesting period and the option’s contractual life
which ranges from 6.5 to 7.5 years.
  The
assumptions used in calculating the fair value of our stock options and
restricted stock awards represent our 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. In
accordance with SFAS 123(R), we do not record any deferred stock-based
compensation on our balance sheet for our stock options and restricted stock
awards. We expect to incur an aggregate of $966,000 of future stock-based
compensation expense and associated with unvested stock options and restricted
stock awards outstanding as of March 31, 2009 through fiscal 2014 as set forth
in the table below. We expect that some of the amounts noted below will be
included as costs of delivering our products and services and as such, will be
deferred and recognized as cost of revenue in conjunction with the recognition
of revenue.
  
 Fiscal
      Year Ending March 31,2010
                  
                  2011
                  
                  2012
                  
                  2013
                  
                  2014
                  
                  Total(in
      thousands)$
      539
                  
                  $295
                  
                  $88
                  
                  $36
                  
                  $8
                  
                  $966
   We expect our stock-based compensation
expense from restricted stock awards to increase as we expand our operations and
hire new employees. These expenses will increase our overall expenses and may
increase our losses for the foreseeable future. As a restricted stock award is a
non-cash expense, it will not have any effect upon our liquidity or capital
resources.
  Accounting for the Impairment or
Disposal of Long Lived Assets.In accordance with Statement of Financial
Accounting Standards No. 144, or SFAS No. 144, Accounting for the Impairment or
Disposal for Long-Lived Assets, we evaluate the carrying value of our
long-lived assets whenever certain events or changes in circumstances indicate
that the carrying amount of these assets may not be recoverable. Such events or
circumstances include, but are not limited to, a prolonged industry downturn, a
significant decline in our market value, or significant reductions in projected
future cash flows.
  We
believe that our future revenue opportunities for our fuel cell division are
uncertain and believe that the fuel cell industry as a whole is experiencing
similar challenges in sustaining future revenue. As a result, in December 2006,
we recorded an aggregate write-down of equipment and inventory used by Hoku Fuel
Cells of $729,000 and $57,000, respectively, and in March 2007, we recorded a
further write-down of equipment used in our fuel cell business of $200,000. In
March 2007, we recorded a write-down of our solar cell inventory of $379,000 to
reflect the lower of cost or market and in June 2007, we recorded a write-down
of our solar module production equipment of $67,000. In assessing the
recoverability of our long-lived assets, we compared the carrying value to the
undiscounted future cash flows the assets are expected to generate. As the total
of the undiscounted future cash flows was less than the carrying amount of the
assets, we wrote down such assets based on the excess of the carrying amount
over the fair value of the assets. Fair value was determined based on
discussions with third party equipment and inventory providers.
  Recent
Accounting Pronouncements
  In
September 2006, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or
SFAS 157. This new standard establishes a framework for measuring the fair value
of assets and liabilities. This framework is intended to provide increased
consistency in how fair value determinations are made under various existing
accounting standards which permit, or in some cases require, estimates of fair
market value. SFAS 157 also expands financial statement disclosure requirements
about a company’s use of fair value measurements, including the effect of such
measures on earnings. This standard is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. We
adopted SFAS 157 on April 1, 2008, and the adoption of this statement did not
have a material impact on our consolidated financial statements.
  42
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of SFAS No. 115,or SFAS 159. This new standard permits companies to choose to measure
many financial instruments and certain other items at fair value that are
currently not required to be measured at fair value. This standard is effective
for fiscal years beginning after November 15, 2007. We adopted SFAS 159 on April
1, 2008, and adoption of this statement did not have a material impact on our
consolidated financial statements.
  In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements- an amendment of ARB No. 51, or SFAS
160. The objective of SFAS 160 is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements in the accounting treatment and financial
reporting of noncontrolling interests. This standard is effective for financial
statements issued for fiscal years and interim periods within those fiscal
years, beginning on or after November 15, 2008 (i.e. April 1, 2009 for the
Company).  Earlier adoption is prohibited. We are in the process of
evaluating the new requirements under SFAS 160 and cannot at this time estimate
the effects of implementing the new standard.
  In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities -an amendment of SFAS 133, or SFAS
161. SFAS 161 seeks to improve financial reporting for derivative instruments
and hedging activities by requiring enhanced disclosures regarding the impact on
financial position, financial performance, and cash flows. To achieve this
increased transparency, SFAS 161 requires: (1) the disclosure of the fair value
of derivative instruments and gains and losses in a tabular format; (2) the
disclosure of derivative features that are credit risk-related; and (3)
cross-referencing within the footnotes. This standard shall be effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 and early application is encouraged. We are in the process of
evaluating the new disclosure requirements under SFAS 161 and do not expect the
adoption to have a material impact on our consolidated financial
statements.
  In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles, or SFAS 162.  SFAS 162
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepting accounting principles (GAAP) in the United States (the GAAP
hierarchy).  The current GAAP hierarchy is based on the American
Institute of Certified Public Accountants Statement on Auditing Standards No.
69, The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles, which
is directed to the auditor rather than to the reporting entity.  SFAS
162 was issued because FASB believed that the GAAP hierarchy should reside in
the accounting literature established by the FASB and be directed to the entity
rather than to the auditor.  This standard is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.  We
do not expect the adoption of SFAS 162 to have a material impact on our
consolidated financial statements.
  Variability
of Results
  Although
we have begun generating revenue from our PV installation business, in the near
term, we have limited sources of revenue.  As of March 31, 2009, we
have $2.5  million in PV system installation and/or related services
under contract that we expect to complete in fiscal 2010.  In October
2008, we were selected by the Hawaii State Department of Transportation, or DOT,
to design, engineer and install PV systems at airports across the state of
Hawaii and entered into a series of power purchase agreements, or PPAs, with the
DOT. Under the PPAs, the DOT will purchase up to an aggregate of 779 kilowatts
of solar electricity to be generated by PV systems installed, owned and operated
by us at a predetermined rate over a contract period of 20 years. During the
first and second quarters of calendar year 2009, we installed the PV systems at
multiple DOT properties including Lihue Airport on the island of Kauai, Kahului
Airport on the island of Maui, and Kona International Airport at Keahole and
Hilo International Airport, each on the island of Hawaii. Installations were
completed in the second quarter of calendar year 2009. We also are in
discussions with The James Campbell Company to plan and install the Kapolei
Sustainable Energy Park, which would be capable of generating approximately 1.5
megawatts of PV power.  In addition, in May 2008, the Hawaii Public
Utilities Commission approved the contract for Hawaiian Electric Company to
purchase electricity generated by a PV system that we would install. We plan to
install a 218 kilowatt PV system and sell the power generated by that system
over a 20-year period to Hawaiian Electric Company. We continue to explore
financing alternatives for this project.  While there is a possibility
that we will generate revenue through these agreements, at this time, it is not
guaranteed.
  Our
future operating results and cash flows will depend on many factors that impact
Hoku Materials, Hoku Solar and Hoku Fuel Cells including the
following:
  •
              
              the
      size and timing of customer orders, milestone achievement, product
      installation or delivery and customer acceptance, if
    required;
  •
              
              our
      success in obtaining pre-payments from customers for future shipments of
      polysilicon;
 
 •
              
              our
      ability to finance power purchase agreements for The James Campbell
      Company, Hawaiian Electric Company and other potential
      customers;  43
  •
                
                the
      condition of the state, national and global economies;•
                
                our
      success in maintaining and enhancing existing strategic relationships and
      developing new strategic relationships with potential
      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;
  •
              
              external
      economic and industry conditions;
and
  •
              
              our
      ability to protect our intellectual
property.
  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.
  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  our polysilicon production facility
currently under construction. As of March 31, 2009, we had cash and cash
equivalents on hand of $17.4 million and short term liabilities of $40.0
million. Consequently, there is substantial doubt that we will have
sufficient cash to meet all of our obligations as they come due over the next
twelve months.
  Our
ability to continue as a going concern depends on our ability to raise equity or
debt capital, increase revenues and reduce expenses. We have already modified
payment terms in purchase orders with more than twenty of our vendors to
structure payment plans for amounts past due and to be invoiced in the future.
Our management continues to evaluate a variety of alternatives to raise capital
and manage our liquidity.  These alternatives include, without
limitation:
  ·
              debt
      financing, including financing that is guaranteed by a private third
      party;
  ·
              one
      or more or 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;
  ·
              further
      extending the construction schedule and payment plans with vendors;
      and/or
  ·
              consummating
      a business transaction, which could result in a change of
      control.
  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.
  There are
no assurances that we will be successful in executing any of the foregoing
alternatives. 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 March 31, 2010. The inability to continue as a going concern could
result in an orderly wind-down or other potential forms of restructuring.
  We had
net income for fiscal 2006; however, we incurred cumulative net losses since our
inception through March 31, 2009. As of March 31, 2009, we had an accumulated
deficit of $15.2million. Hoku Materials
does not currently generate any revenue and we do not anticipate revenue from
Hoku Materials until the second half of calendar year 2009.  During
fiscal 2009, our revenue was from PV system installations and related services
primarily from Hoku Solar contracts with Paradise Beverages, Inc., and Resco,
Inc., and resale of solar inventory.  At this time, we do not believe
we will receive any meaningful revenue from Hoku Fuel Cell products and services
in the foreseeable future.
  44
 The total
actual cost of construction and equipment for our planned 4,000 metric ton per
year polysilicon production facility 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 $243.4 million towards these
costs in the form of polysilicon supply prepayments, subject to the achievement
of various milestones and repayment obligations under certain circumstances. As
of May 15, 2009, we had collected $153.0 million of combined prepayments that
were committed to us from these customers. As of March 31, 2009, we had
contributed approximately $41 million to the construction cost of our
polysilicon plant. Additionally, assuming the total cost of construction and
equipment is $390 million, we believe we will need to raise an amount between
$35 and $55 million to complete the construction of our 4,000 metric ton plant,
depending on factors such as the timing and amount of contract prepayments and
assuming we are able to secure additional prepayments from new polysilicon
customers. If we are unable to secure additional long-term supply contracts and
prepayments, the amount we will need to raise could be as much as $106
million.  If we are unable to secure additional long-term supply
contracts and prepayments, if one or more of our polysilicon supply customers
fail to meet their obligations to make timely prepayments and/or if the actual
cost to complete the plant is more than $390 million, the amount we will need to
raise could exceed $106 million We previously intended to finance the
construction of our polysilicon production facility through project financing;
however, as of May 2009, we believe we will need to raise additional capital
through other means for the procurement and construction of our polysilicon
manufacturing facility.  We continue to evaluate a variety of
alternatives to finance the construction of our polysilicon production facility.
These alternatives include one or more debt or equity offerings, government
funding from grants, loan guarantees or other transactions, a consequence of
which could include the sale or issuance of stock to third parties and a change
of control. The result is that we expect our costs to increase
significantly, which will result in further losses.
  If we are
unable to sign new polysilicon customers and raise additional financing through
debt or equity, we believe that our cash, cash equivalent and short-term
investment balances will not be sufficient to meet the anticipated capital
expenditures and cash requirements for Hoku Solar and Hoku Materials through
March 31, 2010.  The sale of additional equity and convertible debt
instruments may result in additional dilution to our current stockholders and/or
a change of control. 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.
  Net Cash Used In
Operating Activities Net cash used in operating activities
was $5.1 million, $654,000 and $4.0 million in fiscal 2009, 2008 and 2007,
respectively.  Net cash used in operating activities in fiscal 2009
increased by $4.5 million over fiscal 2008 as the Company incurred higher
operating expenditures for inventory and costs of uncompleted contracts and
increased payments to vendors and suppliers.  Net cash used in
operating activities in fiscal 2008 decreased by $3.4 million over fiscal 2007
primarily reflecting decreases in accounts payable and accrued expenses of $2.9
million and lower inventory and costs of uncompleted contracts, compared to
fiscal 2007. The net cash used in operating activities in fiscal 2007 primarily
was a result of the net loss, purchase of inventory and the recognition of
revenue which was deferred in prior years.
  Net Cash Provided
By (Used In) Investing Activities Net cash used in investing
activities was $128.6 millionand$12.6 million in fiscal
2009 and 2008, respectively.  In fiscal 2007, net cash provided by
investing activities was $4.4 million.  Net cash used in investing
activities in fiscal 2009 was primarily due to the addition of property and
equipment related to the construction of our planned polysilicon facility in
Pocatello, Idaho, offset by the sale of our real property and improvements,
including our corporate headquarters, in Kapolei, Hawaii, reduction of
restricted cash due to the settlement of our  remaining purchase
agreements for Euros with Bank of Hawaii prior to their original maturity dates
and proceeds of short-term investments.Net cash provided by (used
in) investing activities in fiscal 2008 and 2007 was primarily related to net
proceeds of short-term investments and the addition of property and equipment
related to the construction of our planned polysilicon facility in Pocatello,
Idaho.
  Net Cash Provided
By Financing Activities. Net cash provided by financing activities was
$123.3 million, $38.4 million and $2.0 million in fiscal 2009, 2008 and 2007,
respectively. In fiscal 2009, net cash provided by financing activities is
primarily due to deposits received related to long-term polysilicon contracts of
$117 million.  In fiscal 2008, net proceeds were from our sale of
common stock of $23 million and deposits received related to long-term
polysilicon contracts of $15 million.  In fiscal 2007, net proceeds
were from deposits received related to long-term polysilicon contracts of $2
million.
  Contractual
Obligations
  The
following table summarizes the contractual obligations that existed at March 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 $1.3308/Euro as of March 31,
2009.
  
 Payment
      due by PeriodContractual
      Obligations
                            
                            Total
                            
                            
                            Less Than
                              One Year
                            
                            
                            One to
                              Three Years
                            
                            
                            Three to
                              Five Years
                            
                            
                            More Than
                              Five Years(in
      thousands)Construction
      in progress
                            
                            $
                            18,941
                            
                            
                            $
                            18,941
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —Equipment
      purchases
                            
                            
                            109,888
                            
                            
                            
                            106,498
                            
                            
                            
                            3,390
                            
                            
                            
                            —
                            
                            
                            
                            —Supply
      purchases
                            
                            
                            80,937
                            
                            
                            
                            7,466
                            
                            
                            
                            60,617
                            
                            
                            
                            12,854
                            
                            
                            
                            —Leases
                            
                            
                            633
                            
                            
                            
                            226
                            
                            
                            
                            407
                            
                            
                            
                            —
                            
                            
                            
                            —Deposits
      – Hoku Solar
                            
                            
                            158
                            
                            
                            
                            158
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Deposits
      – Hoku Materials
                            
                            
                            134,000
                            
                            
                            
                            375
                            
                            
                            
                            37,446
                            
                            
                            
                            32,589
                            
                            
                            
                            63,590Total
                            
                            $
                            344,557
                            
                            
                            $
                            133,664
                            
                            
                            $
                            101,860
                            
                            
                            $
                            45,443
                            
                            
                            $
                            63,590
  45
  Over the
next twelve months, we may have insufficient cash to meet all of our obligations
as they come due. We have already modified payment terms in purchase orders with
more than twenty 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 our
obligations under these agreements that we are unable to perform, which could
include asserting and/or foreclosing on materialman’s and laborer’s liens on the
Pocatello facility, 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 Company’s 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 polysilicon production plant, which was
amended in October 2007 by Change Order No. 1, and again in April 2008 by Change
Order No. 2, which are collectively the S&W Engineering Agreement. Under the
S&W Engineering Agreement, S&W was to provide all engineering,
procurement and construction management services necessary to complete the
design and planning for construction of our polysilicon plant with production
capacity, at that time, of 3,500 metric tons per year. S&W was to be paid on
a time and materials basis plus a fee for its services and incentives if certain
schedule and cost targets were met. The target cost for the services to be
provided under the S&W Engineering Agreement was $50 million, plus up to
$5.0 million of incentives that would be payable if certain cost and schedule
milestones were achieved.
  In
February 2009, we and S&W agreed to Change Order Number 3 under the S&W
Engineering Agreement, or S&W Change Order 3, to, among other things: (i)
increase the rated polysilicon production capacity of our planned facility to up
to 4,000 metric tons per year; (ii) eliminate construction management services
from S&W’s scope of work; (iii) confirm the suspension of detailed
engineering services for our planned TCS production plant; (iv) remove $5
million of incentives that may have been payable if certain cost and schedule
milestones are achieved; and (v) allocate, based on specific dates, up to an
aggregate of $1 million of liquidated damages that S&W would pay to us if
engineering deliverables are not provided to us on or before such dates. S&W
may not be required to pay liquidated damages if S&W fails to meet a
deliverable date because we or our other contractors cause any delays, or
request changes to the work that increase the time for completion, or if force
majeure causes any delays.
  The
target cost for the services to be provided under the S&W Engineering
Agreement, as modified by S&W Change Order 3, is unchanged at $50 million,
and the $5.0 million of incentives that may have been payable were eliminated.
Pursuant to the S&W Engineering Agreement, as modified by S&W Change
Order 3, S&W does not guarantee that the target cost will be met, and we are
obligated to pay for S&W's services regardless of whether this cost target
is ultimately achieved. During fiscal 2009, we made payments to S&W of $28
million, and as of March 31, 2009, we had paid S&W an aggregate amount of
$32 million.
  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 our planned polysilicon
production plant, which was amended in October 2007, by Change Order No. 1, and
again in April 2008 by Change Order No. 2, which are 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 our polysilicon plant with production capacity of, at that time,
3,500 metric tons per year. The target cost for the services to be provided
under the JH Kelly Construction Agreement was $145 million, including up to $5.0
million of incentives that could be payable.
  In March
2009, we and JH Kelly agreed to Change Order No. 3 under the JH Kelly
Construction Agreement, or JH Kelly Change Order 3, to, among other things: (i)
increase the rated polysilicon production capacity of our planned facility to up
to 4,000 metric tons per year; (ii) confirm our planned schedule to include a
reactor test demonstration in June 2009, the partial commercial operation of our
plant in September 2009, and full commercial operation of our plant in March
2010; (iii) reallocate the $5 million of incentives that may be payable such
that $3.5 million of the incentives may be payable if JH Kelly achieves the
foregoing schedule milestones, $1 million of the incentives may be payable if JH
Kelly’s actual costs are less than $145 million, and $500,000 may be payable if
JH Kelly achieves certain safety goals during the construction of the plant. Any
incentives that are earned would be paid after final completion of the
plant.
  46
  Pursuant
to the JH Kelly Construction Agreement, as modified by JH Kelly Change Order 3,
JH Kelly does not guarantee that the cost or schedule targets will be met, and
there can be no assurances that either such target will be met. Moreover, we are
obligated to pay for JH Kelly's services regardless of whether these targets are
ultimately achieved; however, JH Kelly is required to pay liquidated damages of
up to $1 million for construction schedule delays that are directly caused by
the fault of JH Kelly. During fiscal 2009, we made payments to JH Kelly of $41.2
million, and as of March 31, 2009, we had paid JH Kelly an aggregate amount of
$45.5 million.
  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 our planned 4,000 metric tons per year polysilicon
production plant. The Dynamic process is to be integrated by S&W into the
overall polysilicon production facility, 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.  During fiscal 2009, we made payments to Dynamic of $3.6
million, and as of March 31, 2009, we had paid Dynamic an aggregate amount of
$4.8 million.
  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. During fiscal 2009, we made
payments to GEC and MSA of 8.9 Euros or $13.5 million and, as of March 31, 2009,
we had paid GEC and MSA an aggregate amount of 15.2 Euros or $22.3
million.
  In
January 2009, we received the first shipment of six Siemens-process reactors at
our facility in Pocatello, Idaho, 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
shipment of 10 polysilicon reactors and related equipment is scheduled to arrive
at our facility no later than the third quarter of 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.
  Idaho Power Company. In
December 2007, we entered into an agreement with Idaho Power Company, or Idaho
Power, to complete the construction of the electric substation to provide power
for our planned polysilicon production plant, or the Idaho Power Agreement. We
are obligated to pay Idaho Power an aggregate of $14.8 million for the
completion of the substation and associated facilities. Under the terms of the
Idaho Power Agreement, the substation and associated facilities were scheduled
to be completed on or before February 2009. The Idaho Power Agreement provided
that Idaho Power could invoice us additional amounts for temporary power to
enable the start-up and operation of the planned polysilicon production plant
prior to February 2009.
  In
September 2008, we amended and restated the Idaho Power Agreement by entering
into an Amended and Restated Agreement for Construction of the Hoku Electric
Substation and Associated Facilities, or the Amended Idaho Power Agreement.
Under the Amended Idaho Power Agreement, Idaho Power agreed to construct an
electric substation and associated transmission facilities with an increased
capacity beyond what was provided for in the original Idaho Power Agreement.
Idaho Power estimates that the costs of construction under the Amended Idaho
Power Agreement will increase to $16.5 million. 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. Idaho Power will use commercially reasonable efforts
to provide us with transmission services for specified wattages by May 2009, and
July 2009, and to complete construction of the expanded electric substation and
associated transmission facilities by August 2009.  Pursuant to the
Amended Idaho Power Agreement, during fiscal 2009, we made payments to Idaho
Power of $12.9 million, and as of March 31, 2009, we had paid Idaho Power
Company an aggregate amount of $17.5 million, which is $1 million more than
Idaho Power’s estimate under the Amended Idaho Power Agreement.
  In
September 2008, we also entered into an Electric Service Agreement with Idaho
Power for the supply of electric power and energy to us for use in our
polysilicon facility, subject to the approval of Idaho’s Public Utilities
Commission, or the ESA. The term of the ESA is four years, beginning in June
2009. 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 Idaho Public Utilities Commission. 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.
  47
 In May
2009, we reached an agreement, or the Letter Agreement, with Idaho Power to
amend certain provisions of the ESA, which amendment, or the ESA Amendment,
would be filed with, and is conditioned, and effective, only upon approval by
the Idaho Public Utilities Commission, or PUC.  The ESA Amendment, if
approved by the PUC, would extend by six months the date when we are obligated
to begin purchasing prescribed amounts of electricity from Idaho Power, from
June 1, 2009 to December 1, 2009.  The ESA Amendment also would
provide for (a) electricity to be provided to us by Idaho Power at the current
tariff rate through November 30, 2009, (b) a commitment by us to take no more
than 5 megawatts, or MW, of electric power through July 2009, 10 MW during
August 2009 and 25 MW from September through November 2009, (c) a reduction in
the levels of electric power to be provided under the ESA to 43 MW during the
period of June 16, 2012 through August 15, 2012, and to 67 MW during the period
of August 16, 2009 to September 15, 2009, and (d) certain charges, referred to
as the Schedule 91 Energy Efficiency Rider, that would be added to a portion of
the electricity demand charges set forth in the ESA, beginning on December 1,
2011.  The Schedule 91 Energy Efficiency Rider is to recover costs
incurred by Idaho Power associated with providing energy efficiency services and
programs to its customers.
  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., 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 our planned
polysilicon production plant.  The total fees payable to AEG for all
Deliverables under the AEG Agreement was approximately $13 million, which was
payable in installments, the first of which was made in April 2008.
  In May
2009, we entered into an Amendment to the AEG Agreement, or the AEG
Amendment.  Under the AEG Amendment, the total fees to be paid to AEG
remain approximately $13 million, including approximately $1.2 million that was
previously paid, and the payment and delivery schedule was restructured such
that we are obligated to make payments of $500,000 on or before June 3, 2009,
$500,000 on or before June 29, 2009, $615,000 on or before July 31, 2009 and
$2,100,000 on or before August 31, 2009, related to certain Deliverables that
AEG is obligated to ship in August 2009.  After such shipment has
occurred, we are obligated to make payments of $800,000 on or before September
30, 2009, $813,995 on or before October 30, 2009, $906,795 on or before November
30, 2009 and $1,686,682 on or before December 21, 2009, related to the remaining
Deliverables which AEG is obligated to ship in October and December
2009.  During fiscal 2009, we made payments to AEG of $5.2 million,
and as of March 31, 2009, we had paid AEG an aggregate amount of $5.2
million.
  Polymet Alloys, Inc. In
November 2008, we entered into an agreement with Polymet Alloys, Inc., or
Polymet, for the supply of silicon metal to us for use in our planned
polysilicon production facility in Pocatello, Idaho. The term of the agreement
was three years, commencing in January 2009. Each year during the term of the
agreement, Polymet agreed to sell to us, and we agreed to purchase from Polymet,
specified volumes of silicon metal that meet certain purity and size
specifications. The volume was fixed during each of the three years; provided
that the parties could agree to increase the volume. Pricing was fixed during
calendar year 2009, and the aggregate net value of the silicon metal products to
be purchased by us under the agreement in calendar year 2009 was approximately
$6.5 million. In May, 2009, we entered into an amended and restated supply
agreement with Polymet, or the Amended Polymet Agreement.  Under the
Amended Polymet Agreement, we revised the date of our first shipment from
calendar year 2009 to calendar year 2010, and reduced our purchase commitment to
no less than 65% of our annual silicon metal requirement.  Pricing is
to be negotiated for each year of the 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 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 March 31, 2009, we
have 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 our planned 4,000 metric tons per year
polysilicon production plant. 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. We expect to receive the deliverables under our contract with PVA in the
third quarter of calendar year 2009. 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.  During fiscal 2009, we made payments to PVA of $1.9 million,
and as of March 31, 2009, we had paid PVA an aggregate amount of $1.9
million.
  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, to us for use in our planned
polysilicon production facility in Pocatello, Idaho. 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
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 no later than January 2010, 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 March 31, 2009, we have not
made any payments to BHS.
  48
 See Item
1,Our Solar
Business,Current
Customers
  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.
  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. Furthermore, assuming the total cost of construction and
equipment is $390 million, that all of our existing polysilicon customers make
timely prepayments in full and that we are able to secure additional prepayments
from new polysilicon customers, we believe we will need to raise an amount
between $35 and $55 million to complete the construction of our 4,000 metric ton
plant. If we are unable to secure additional long-term supply contracts and
prepayments, assuming the cost to construct and equip the plant is $390 million
and that all of our existing customers make their prepayments when due, the
amount we will need to raise could be as much as $106 million. If we are unable
to secure additional long-term supply contracts and prepayments, if one or more
of our polysilicon supply customers fail to meet their obligations to make
timely prepayments and/or if the actual cost to complete the plant is more than
$390 million, the amount we will need to raise could exceed $106
million.  We previously intended to finance the construction of our
polysilicon production facility through project financing; however, as of May
2009, we believe we will need to raise additional capital through other means
for the procurement and construction of our polysilicon manufacturing facility.
We continue to evaluate a variety of alternatives to finance the construction of
our polysilicon production facility. These alternatives include one or more debt
or equity offerings, government funding from grants, loan guarantees or other
transactions, a consequence of which could include the sale or issuance of stock
to third parties and a change of control.  If we are unable to sign
new polysilicon customers and raise additional financing through debt or equity,
we believe that our cash, cash equivalent and short-term investment balances
will not be sufficient to meet the anticipated capital expenditures and cash
requirements for Hoku Solar and Hoku Materials through at least March 31, 2010.
The sale of additional equity and convertible debt instruments may result in
additional dilution to our current stockholders and/or a change of control. 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.”
  Related
Party Transactions
  For a
description of our related party transactions, see Part III, Item 13,
“Certain Relationships and Related Transactions, and Director
Independence.”
  Off-Balance
Sheet Arrangements
  None.
 
 Item 7A.
              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 March 31, 2009, we did not maintain any short-term
investments.  Our cash and cash equivalents as of March 31, 2009 were
$17.4 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 8.
              Financial
      Statements and Supplementary Data
  Our
financial statements included in this Report beginning at page F-1 are
incorporated in this Item 8 by reference.
  49
  Item 9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
  None.
  Item 9A.
              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.
  Report
of Management on Internal Control Over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rule 13a-15(f) under the
Exchange Act.
  Under the
supervision and with the participation of our management, we assessed the
effectiveness of internal controls over financial reporting as of March 31,
2009.  In making this assessment, we used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission in Internal
Control – Integrated Framework.  Based on our assessment we determined
that, as of March 31, 2009, our internal control over financial reporting is
effective based on those criteria.
  Ernst
& Young LLP, our independent registered public accounting firm, has
independently assessed the effectiveness of our internal control over financial
reporting as of March 31, 2009. Ernst & Young LLP has issued an attestation
report concurring with management’s assessment, which is included
below.
  50
 
  Report
of Independent Registered Public Accounting Firm
  The Board
of Directors and Stockholders
 Hoku
Scientific, Inc.
  
  We have
audited Hoku Scientific, Inc.’s internal control over financial reporting as of
March 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Hoku Scientific, Inc.’s management is
responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Report of Management on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  In our
opinion, Hoku Scientific, Inc. maintained, in all material respects, effective
internal control over financial reporting as of March 31, 2009, based on the
COSO criteria.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Hoku
Scientific, Inc. and subsidiaries as of March 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders’ equity and comprehensive
income (loss), and cash flows for each of the three years in the period ended
March 31, 2009 and our report dated June 12, 2009 expressed an unqualified
opinion thereon.
  /s/ Ernst
& Young LLP
  Honolulu,
Hawaii
  June 12,
2009
 
 51
  Changes
in Internal Control over Financial Reporting
  There
were no changes in our internal controls over financial reporting during our
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
   Item 9B.
              Other
      Information
  None.
  52
 PART
III
  Item 10.
              Directors,
      Executive Officers and Corporate
Governance
  Identification
of Directors
  Reference
is made to the information regarding directors under the heading “Proposal
No. 1 - Election of Directors” to be included in our 2009 Proxy Statement,
which information is hereby incorporated by reference.
  Identification
of Executive Officers
  Reference
is made to the information regarding executive officers under the heading
“Executive Officers of the Registrant” in Part I, Item 1. “Business” of this
Annual Report on Form 10-K, which information is hereby incorporated by
reference.
  Identification
of Audit Committee and Financial Expert
  Reference
is made to the information regarding directors under the heading “Report of the
Audit Committee of the Board of Directors” and “Information about the Board of
Directors and Corporate Governance” to be included in our 2009 Proxy Statement,
which information is hereby incorporated by reference.
  Material
Changes to Procedures for Recommending Directors
  Reference
is made to the information regarding directors under the heading “Proposal
No. 1 - Election of Directors” to be included in our 2009 Proxy Statement,
which information is hereby incorporated by reference.
  Compliance
with Section 16(a) of the Exchange Act
  Reference
is made to the information under the heading “Section 16(a) Beneficial Ownership
Reporting Compliance” to be included in our 2009 Proxy Statement, which
information is hereby incorporated by reference.
  Code
of Ethics
  Reference
is made to the information under the heading “Code of Business Conduct and
Ethics” to be included in our 2009 Proxy Statement, which information is hereby
incorporated by reference. The full text of our “Code of Business Conduct and
Ethics” is published on our Internet website under the “Company Information”
page at www.hokucorp.com.
  Item 11.
              Executive
      Compensation
  Reference
is made to the information under the heading “Compensation Discussion and
Analysis” to be included in our 2009 Proxy Statement, which information is
hereby incorporated by reference.
 
 Item 12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
  Beneficial
Ownership
  Reference
is made to the information under the heading “Security Ownership of Certain
Beneficial Owners and Management” to be included in our 2009 Proxy Statement,
which information is hereby incorporated by reference.
  Equity
Compensation Plan Information
  Reference
is made to the information under the heading “Equity Compensation Plan
Information” to be included in our 2009 Proxy Statement, which information is
hereby incorporated by reference.
  Item 13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
  Reference
is made to the information under the heading “Certain Relationships and Related
Transactions” to be included in our 2009 Proxy Statement, which information is
hereby incorporated by reference.
  
 Item 14.
              Principal
      Accountant Fees and Services
  Reference
is made to the information under the heading “Proposal No. 2 – Ratification
of Independent Registered Public Accounting Firm” in our 2009 Proxy Statement,
which information is hereby incorporated by reference.
  53
 PART
IV
  Item 15.
              Exhibits
      and Financial Statement Schedules
  (a)(1)
Financial Statements
  The
      financial statements and notes are listed in the Index to Financial
      Statements on page F-1 of this
Report.
  (a)(2)
Financial Statement Schedules
  Financial
statement schedules not filed herein have been omitted as they are not
applicable or the required information or equivalent information has been
included in the financial statements or the notes thereto.
  (a)(3) Exhibits
  See
Exhibit Index attached hereto and incorporated by reference herein.
  54
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) 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.
  HOKU
      SCIENTIFIC, INC.By:
              
              /s/    DUSTIN M. SHINDODustin
      M. ShindoChairman
      of the Board of Directors,President
      and Chief Executive Officer
  Date:
June 15, 2009
  KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Dustin M. Shindo and Karl M. Taft III, and each or any
one of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-facts and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitutes or substitutes, may
lawfully do or cause to be done by virtue hereof.
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
  Signature
              
              Title
              
              Date/s/
      DUSTIN M. SHINDO
                Dustin
      M. Shindo
              
              Chairman
      of the Board of Directors, President and Chief Executive Officer (Principal Executive
      Officer)
              
              June
      15, 2009/s/
      DARRYL S. NAKAMOTO
                Darryl
      S. Nakamoto
              
              Chief
      Financial Officer, Treasurer and Secretary (Principal Financial and
      Accounting Officer)
              
              June
      15, 2009/s/
      KARL M. TAFT III
                Karl
      M. Taft III
              
              Chief
      Technology Officer and Director
              
              June
      15, 2009/s/
      KARL E. STAHLKOPF
                Karl
      E. Stahlkopf
              
              Director
              
              June
      15, 2009/s/
      KENTON T. ELDRIDGE
                Kenton
      T. Eldridge
              
              Director
              
              June
      15, 2009/s/
      DEAN K. HIRATA
                Dean
      K. Hirata
              
              Director
              
              June
      15, 2009
  
 55
  HOKU
SCIENTIFIC, INC.
  INDEX TO FINANCIAL STATEMENTS
  PageReport
      of Independent Registered Public Accounting Firm - Ernst & Young
      LLP
                  
                  F-2Consolidated
      Balance Sheets as of March 31, 2009 and March 31,
2008
                  
                  F-3Consolidated
      Statements of Operations for the fiscal years ended March 31, 2009, 2008
      and 2007
                  
                  F-4Consolidated
      Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the
      fiscal years ended
                    March
      31, 2009, 2008 and 2007
                  
                  F-5Consolidated
      Statements of Cash Flows for the fiscal years ended March 31, 2009, 2008
      and 2007
                  
                  F-6Notes
      to Consolidated Financial Statements
                  
                  F-7
  
 F-1
  Report
of Independent Registered Public Accounting Firm
 
 
 The Board
of Directors and Stockholders
 Hoku
Scientific, Inc.
 
 We have
audited the accompanying consolidated balance sheets of Hoku Scientific, Inc.
and subsidiaries, or the Company, as of March 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders’ equity and comprehensive
income (loss), and cash flows for each of the three years in the period ended
March 31, 2009. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Hoku Scientific, Inc.
and subsidiaries at March 31, 2009 and 2008, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended March 31, 2009, in conformity with U.S. generally accepted accounting
principles.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As more fully described in Note 1,
the Company has incurred recurring operating losses and has a working capital
deficiency.  These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans in regard
to these matters also are described in Note 13. The 2009 financial statements do
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 may result from the outcome of this uncertainty.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Hoku Scientific, Inc.’s internal control over
financial reporting as of March 31, 2009, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated June 12, 2009
expressed an unqualified opinion thereon.
 
 
 
 /s/ Ernst
& Young LLP
 
 Honolulu,
Hawaii
 June 12,
2009
  F-2
  HOKU
SCIENTIFIC, INC. AND SUBSIDIARIES
  CONSOLIDATED
BALANCE SHEETS
 (in
thousands, except share data)
  March 31,2009
                                                            
                                                            
                                                            2008AssetsCash
      and cash equivalents
                                                            
                                                            $
                                                            17,383
                                                            
                                                            
                                                            $
                                                            27,768Short-term
      investments
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            1,992Accounts
      receivable
                                                            
                                                            
                                                            420
                                                            
                                                            
                                                            
                                                            113Inventory
                                                            
                                                            
                                                            1,549
                                                            
                                                            
                                                            
                                                            803Costs
      of uncompleted contracts
                                                            
                                                            
                                                            108
                                                            
                                                            
                                                            
                                                            54Equipment
      held for sale
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            29Other
      current assets
                                                            
                                                            
                                                            226
                                                            
                                                            
                                                            
                                                            3,787Total
      current assets
                                                            
                                                            
                                                            19,686
                                                            
                                                            
                                                            
                                                            34,546Property,
      plant and equipment, net
                                                            
                                                            
                                                            204,525
                                                            
                                                            
                                                            
                                                            33,563Total
      assets
                                                            
                                                            $
                                                            224,211
                                                            
                                                            
                                                            $
                                                            68,109Liabilities
      and Stockholders’ EquityAccounts
      payable and accrued expenses
                                                            
                                                            
                                                            38,191
                                                            
                                                            
                                                            
                                                            3,258Deferred
      revenue
                                                            
                                                            
                                                            784
                                                            
                                                            
                                                            
                                                            36Deposits
      – Hoku Materials
                                                            
                                                            
                                                            375
                                                            
                                                            
                                                            
                                                            4,000Deposits
      – Hoku Solar
                                                            
                                                            
                                                            158
                                                            
                                                            
                                                            
                                                            --Other
      current liabilities
                                                            
                                                            
                                                            446
                                                            
                                                            
                                                            
                                                            1,820Total
      current liabilities
                                                            
                                                            
                                                            39,954
                                                            
                                                            
                                                            
                                                            9,114Long-term
      debt (Deposits – Hoku Materials)
                                                            
                                                            
                                                            133,625
                                                            
                                                            
                                                            
                                                            13,000Total
      liabilities
                                                            
                                                            
                                                            173,579
                                                            
                                                            
                                                            
                                                            22,114Commitments
      and ContingenciesStockholders’
      equity:Preferred
      stock, $0.001 par value. Authorized 5,000,000 shares; no shares issued and
      outstanding as of March 31, 2009 and 2008.
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --Common
      stock, $0.001 par value. Authorized 100,000,000 shares; issued and
      outstanding 21,092,079 and 19,786,420 shares as of March 31, 2009 and
      2008, respectively.
                                                            
                                                            
                                                            21
                                                            
                                                            
                                                            
                                                            20Additional
      paid-in capital
                                                            
                                                            
                                                            65,780
                                                            
                                                            
                                                            
                                                            58,182Accumulated
      deficit
                                                            
                                                            
                                                            (15,169
                                                            )
                                                            
                                                            
                                                            (12,207
                                                            )Total
      stockholders’ equity
                                                            
                                                            
                                                            50,632
                                                            
                                                            
                                                            
                                                            45,995Total
      liabilities and stockholders’ equity
                                                            
                                                            $
                                                            224,211
                                                            
                                                            
                                                            $
                                                            68,109
  See
accompanying notes to financial statements.
  F-3
 
 HOKU SCIENTIFIC,
INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF OPERATIONS
 (in
thousands, except share and per share data)
  Fiscal
      Year Ended March 31,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2007Statements
      of Operations Data:Service
      and license revenue
                                        
                                        $
                                        4,390
                                        
                                        
                                        $
                                        3,229
                                        
                                        
                                        $
                                        5,368Product
      revenue
                                        
                                        
                                        567
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Total
      revenue
                                        
                                        
                                        4,957
                                        
                                        
                                        
                                        3,229
                                        
                                        
                                        
                                        5,368Cost
      of service and license revenue(1)
                                        
                                        
                                        3,240
                                        
                                        
                                        
                                        2,312
                                        
                                        
                                        
                                        3,173Cost
      of product revenue
                                        
                                        
                                        465
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Total
      cost of revenue
                                        
                                        
                                        3,705
                                        
                                        
                                        
                                        2,312
                                        
                                        
                                        
                                        3,173Gross
      margin
                                        
                                        
                                        1,252
                                        
                                        
                                        
                                        917
                                        
                                        
                                        
                                        2,195Operating
      expenses:Selling,
      general and administrative(1)
                                        
                                        
                                        4,548
                                        
                                        
                                        
                                        6,207
                                        
                                        
                                        
                                        4,487Research
      and development(1)
                                        
                                        
                                        --
                                        
                                        
                                        
                                        86
                                        
                                        
                                        
                                        1,774Total
      operating expenses
                                        
                                        
                                        4,548
                                        
                                        
                                        
                                        6,293
                                        
                                        
                                        
                                        6,261Loss
      from operations
                                        
                                        
                                        (3,296
                                        )
                                        
                                        
                                        (5,376
                                        )
                                        
                                        
                                        (4,066
                                        )Interest
      and other income
                                        
                                        
                                        284
                                        
                                        
                                        
                                        1,083
                                        
                                        
                                        
                                        1,039Loss
      before noncontrolling interest  and income tax benefit
                                        
                                        
                                        (3,012
                                        )
                                        
                                        
                                        (4,293
                                        )
                                        
                                        
                                        (3,027
                                        )Noncontrolling
      interest
                                        
                                        
                                        50Income
      tax benefit
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        275Net
      loss
                                        
                                        $
                                        (2,962
                                        )
                                        
                                        $
                                        (4,293
                                        )
                                        
                                        $
                                        (2,752
                                        )Basic
      net loss per share
                                        
                                        $
                                        (0.15
                                        )
                                        
                                        $
                                        (0.26
                                        )
                                        
                                        $
                                        (0.17
                                        )Diluted
      net loss per share
                                        
                                        $
                                        (0.15
                                        )
                                        
                                        $
                                        (0.26
                                        )
                                        
                                        $
                                        (0.17
                                        )Shares
      used in computing basic net loss per share
                                        
                                        
                                        20,325,433
                                        
                                        
                                        
                                        16,656,000
                                        
                                        
                                        
                                        16,449,537Shares
      used in computing diluted net loss per share
                                        
                                        
                                        20,325,433
                                        
                                        
                                        
                                        16,656,000
                                        
                                        
                                        
                                        16,449,537__________________________(1)
      Includes stock-based compensation as follows:Cost
      of service and license revenue
                                        
                                        $
                                        14
                                        
                                        
                                        $
                                        42
                                        
                                        
                                        $
                                        126Selling,
      general and administrative
                                        
                                        
                                        1,202
                                        
                                        
                                        
                                        954
                                        
                                        
                                        
                                        593Research
      and development
                                        
                                        
                                        --
                                        
                                        
                                        
                                        72
                                        
                                        
                                        
                                        501
  See
accompanying notes to financial statements.
  F-4
  HOKU SCIENTIFIC,
INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
 (in
thousands, except share data)
  Shares
      of
                                                  Common
                                                  Stock
                                                
                                                
                                                Common
                                                  Stock
                                                
                                                
                                                Additional
                                                  Paid-in
                                                  Capital
                                                
                                                
                                                Accumulated
                                                  Deficit
                                                
                                                
                                                Accumulated
                                                  Other
                                                  Comprehensive
                                                  Loss
                                                
                                                
                                                Total
                                                  Stockholders’
                                                  Equity
                                                
                                                
                                                Comprehensive
                                                  Income
      (Loss)Balances
      as of March 31, 2006
                                                
                                                
                                                16,432,655
                                                
                                                
                                                $
                                                16
                                                
                                                
                                                $
                                                32,555
                                                
                                                
                                                $
                                                (5,162
                                                )
                                                
                                                $
                                                (17
                                                )
                                                
                                                $
                                                27,392
                                                
                                                
                                                $
                                                1,374Net
      loss
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (2,752
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (2,752
                                                )
                                                
                                                $
                                                (2,752
                                                )Stock-based
      compensation
                                                
                                                
                                                19,109
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                828
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                828
                                                
                                                
                                                
                                                —Unrealized
      gain or loss on available-for-sale securities
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                12
                                                
                                                
                                                
                                                12
                                                
                                                
                                                
                                                12Exercise
      of common stock options
                                                
                                                
                                                52,167
                                                
                                                
                                                
                                                1
                                                
                                                
                                                
                                                13
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                14
                                                
                                                
                                                
                                                —Balances
      as of March 31, 2007
                                                
                                                
                                                16,503,931
                                                
                                                
                                                $
                                                17
                                                
                                                
                                                $
                                                33,396
                                                
                                                
                                                $
                                                (7,914
                                                )
                                                
                                                $
                                                (5
                                                )
                                                
                                                $
                                                25,494
                                                
                                                
                                                $
                                                (2,740
                                                )Net
      loss
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (4,293
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (4,293
                                                )
                                                
                                                $
                                                (4,293
                                                )Stock-based
      compensation
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                620
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                620
                                                
                                                
                                                
                                                —Unrealized
      gain or  loss on available-for-sale securities
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                5
                                                
                                                
                                                
                                                5
                                                
                                                
                                                
                                                5Exercise
      of common stock warrants and options
                                                
                                                
                                                112,165
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                92
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                92
                                                
                                                
                                                
                                                —Grants
      of stock awards
                                                
                                                
                                                276,805
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                739
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                739
                                                
                                                
                                                
                                                —Private
      investment in public equity proceeds
                                                
                                                
                                                2,893,519
                                                
                                                
                                                
                                                3
                                                
                                                
                                                
                                                24,997
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                25,000
                                                
                                                
                                                
                                                —Private
      investment in public equity costs
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (1,662
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (1,662
                                                )Balances
      as of March 31, 2008
                                                
                                                
                                                19,786,420
                                                
                                                
                                                $
                                                20
                                                
                                                
                                                $
                                                58,182
                                                
                                                
                                                $
                                                (12,207
                                                )
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                45,995
                                                
                                                
                                                $
                                                (4,288
                                                )Net
      Loss
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (2,962
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (2,962
                                                )
                                                
                                                
                                                (2,962
                                                )Stock-based
      compensation
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,077
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,077Exercise
      of common stock options
                                                
                                                
                                                61,710
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                76
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                76Grants
      of stock awards
                                                
                                                
                                                83,233
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                203
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                203Proceeds
      related to shelf registration
                                                
                                                
                                                1,160,716
                                                
                                                
                                                
                                                1
                                                
                                                
                                                
                                                6,727
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                6,728Costs
      related to shelf registration
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (516
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (516
                                                )Private
      investment in public equity costs
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                31
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                31Balances
      as of March 31, 2009
                                                
                                                
                                                21,092,079
                                                
                                                
                                                $
                                                21
                                                
                                                
                                                $
                                                65,780
                                                
                                                
                                                $
                                                (15,169
                                                )
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                50,632
                                                
                                                
                                                $
                                                (2,962
                                                )
  See
accompanying notes to financial statements.
  
 F-5
  HOKU SCIENTIFIC, INC. AND
SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (in
thousands)
  Fiscal
      Year Ended March 31,2009
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2007Cash
      flows from operating activities:Net
      loss
                                                                  
                                                                  $
                                                                  (2,962
                                                                  )
                                                                  
                                                                  $
                                                                  (4,293
                                                                  )
                                                                  
                                                                  $
                                                                  (2,752
                                                                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                                  
                                                                  
                                                                  66
                                                                  
                                                                  
                                                                  
                                                                  143
                                                                  
                                                                  
                                                                  
                                                                  221Impairment
      of production and research equipment, inventory and equipment held for
      sale
                                                                  
                                                                  
                                                                  3
                                                                  
                                                                  
                                                                  
                                                                  103
                                                                  
                                                                  
                                                                  
                                                                  1,364Stock-based
      compensation
                                                                  
                                                                  
                                                                  1,216
                                                                  
                                                                  
                                                                  
                                                                  1,068
                                                                  
                                                                  
                                                                  
                                                                  828Loss
      on sale of inventory
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  285
                                                                  
                                                                  
                                                                  
                                                                  —Loss
      (gain) on sale of property and equipment
                                                                  
                                                                  
                                                                  (550
                                                                  )
                                                                  
                                                                  
                                                                  47
                                                                  
                                                                  
                                                                  
                                                                  —Changes
      in operating assets and liabilities:Accounts
      receivable
                                                                  
                                                                  
                                                                  (307
                                                                  )
                                                                  
                                                                  
                                                                  264
                                                                  
                                                                  
                                                                  
                                                                  (127
                                                                  )Costs
      of uncompleted contracts
                                                                  
                                                                  
                                                                  (54
                                                                  )
                                                                  
                                                                  
                                                                  664
                                                                  
                                                                  
                                                                  
                                                                  1,391Inventory
                                                                  
                                                                  
                                                                  (746
                                                                  )
                                                                  
                                                                  
                                                                  1,297
                                                                  
                                                                  
                                                                  
                                                                  (2,638
                                                                  )Equipment
      held for sale
                                                                  
                                                                  
                                                                  26
                                                                  
                                                                  
                                                                  
                                                                  (58
                                                                  )
                                                                  
                                                                  
                                                                  —Other
      current assets
                                                                  
                                                                  
                                                                  986
                                                                  
                                                                  
                                                                  
                                                                  (3,250
                                                                  )
                                                                  
                                                                  
                                                                  41Other
      assets
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  803
                                                                  
                                                                  
                                                                  
                                                                  (802
                                                                  )Accounts
      payable and accrued expenses
                                                                  
                                                                  
                                                                  (2,349
                                                                  )
                                                                  
                                                                  
                                                                  2,895
                                                                  
                                                                  
                                                                  
                                                                  158Deferred
      revenue
                                                                  
                                                                  
                                                                  748
                                                                  
                                                                  
                                                                  
                                                                  (954
                                                                  )
                                                                  
                                                                  
                                                                  (2,999
                                                                  )Deposits-
      Hoku Solar
                                                                  
                                                                  
                                                                  158
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —Other
      current liabilities
                                                                  
                                                                  
                                                                  (1,374
                                                                  )
                                                                  
                                                                  
                                                                  332
                                                                  
                                                                  
                                                                  
                                                                  1,281Net
      cash used in operating activities
                                                                  
                                                                  
                                                                  (5,139
                                                                  )
                                                                  
                                                                  
                                                                  (654
                                                                  )
                                                                  
                                                                  
                                                                  (4,034
                                                                  )Cash
      flows from investing activities:Proceeds
      from maturities of short-term investments
                                                                  
                                                                  
                                                                  112,055
                                                                  
                                                                  
                                                                  
                                                                  57,702
                                                                  
                                                                  
                                                                  
                                                                  7,295Purchases
      of short-term investments
                                                                  
                                                                  
                                                                  (110,063
                                                                  )
                                                                  
                                                                  
                                                                  (42,300
                                                                  )
                                                                  
                                                                  
                                                                  (2,150
                                                                  )Decrease
      in restricted cash
                                                                  
                                                                  
                                                                  2,575Acquisition
      of property and equipment
                                                                  
                                                                  
                                                                  (138,600
                                                                  )
                                                                  
                                                                  
                                                                  (28,039
                                                                  )
                                                                  
                                                                  
                                                                  (724
                                                                  )Disposition
      of property and equipment
                                                                  
                                                                  
                                                                  5,468
                                                                  
                                                                  
                                                                  
                                                                  62
                                                                  
                                                                  
                                                                  
                                                                  —Net
      cash provided by (used in) investing activities
                                                                  
                                                                  
                                                                  (128,565
                                                                  )
                                                                  
                                                                  
                                                                  (12,575
                                                                  )
                                                                  
                                                                  
                                                                  4,421Cash
      flows from financing activities:Proceeds
      from shelf registration stock sales
                                                                  
                                                                  
                                                                  6,728
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —Costs
      from shelf registration and related stock sales
                                                                  
                                                                  
                                                                  (485
                                                                  )
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —Proceeds
      from private investment in public equity
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  25,000
                                                                  
                                                                  
                                                                  
                                                                  —Private
      investment in public equity costs
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (1,662
                                                                  )
                                                                  
                                                                  
                                                                  —Exercise
      of common stock options
                                                                  
                                                                  
                                                                  76
                                                                  
                                                                  
                                                                  
                                                                  92
                                                                  
                                                                  
                                                                  
                                                                  14Proceeds
      from long-term debt (deposits - Hoku Materials)
                                                                  
                                                                  
                                                                  117,000
                                                                  
                                                                  
                                                                  
                                                                  15,000
                                                                  
                                                                  
                                                                  
                                                                  2,000Net
      cash provided by financing activities
                                                                  
                                                                  
                                                                  123,319
                                                                  
                                                                  
                                                                  
                                                                  38,430
                                                                  
                                                                  
                                                                  
                                                                  2,014Net
      increase (decrease) in cash and cash equivalents
                                                                  
                                                                  
                                                                  (10,385
                                                                  )
                                                                  
                                                                  
                                                                  25,201
                                                                  
                                                                  
                                                                  
                                                                  2,401Cash
      and cash equivalents at beginning of year
                                                                  
                                                                  
                                                                  27,768
                                                                  
                                                                  
                                                                  
                                                                  2,567
                                                                  
                                                                  
                                                                  
                                                                  166Cash
      and cash equivalents at end of year
                                                                  
                                                                  $
                                                                  17,383
                                                                  
                                                                  
                                                                  $
                                                                  27,768
                                                                  
                                                                  
                                                                  $
                                                                  2,567Supplemental
      disclosure of non-cash investing activities:Acquisition
      of property and equipment
                                                                  
                                                                  $
                                                                  37,282
                                                                  
                                                                  
                                                                  $
                                                                  2,934
                                                                  
                                                                  
                                                                  $
                                                                  248
 See
accompanying notes to financial statements.
   F-6
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  (1)
              Summary
      of Significant Accounting Policies and
Practices
  (a)
              Description
      of Business
  Hoku
Scientific, Inc. 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 March 31, 2009
has a working capital deficiency. The losses, in part, have occured as the
Company has redirected its efforts to focus on the development of its
polysilicon and solar businesses. The Company's current operating plan
anticipates raising cash over the next year through a combination of debt and/or
equity financing and polysilicon customer prepayments to enable the continued
construction of the Company’s planned polysilicon production facility in
Pocatello, Idaho. There have been delays in securing adequate financing, and
should these delays continue, the Company may need to implement cost and expense
reduction measures and other programs to generate cash that are not currently
planned, but which would be responsive to the Company's liquidity requirements.
These factors, among others, raise substantial doubt about the Company’s ability
to continue as a going concern. 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
this 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 13 for further
discussion of management’s plans and efforts related to the Company’s ability to
continue as a going concern.
  (c)
              Principles
      of Consolidation
  The
consolidated financial statements include the accounts of Hoku Scientific, Inc.
and all wholly-owned subsidiaries, after elimination of significant intercompany
amounts and transactions and Hoku Solar Power I LLC as discussed in Note
10.
  (d)
              Segment
      Information
  The
Company has three operating segments 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 system installation and the polysilicon
production segments.  The Company reports segment information in the
same way that the chief operating decision maker assesses segment performance.
Additional information regarding these segments is found in Note
11.
  (e)
              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.
  (f)
              Revenue
      Recognition
  Revenue
from polysilicon and PV system installations is recognized in accordance with
Staff Accounting Bulletin No. 104, Revenue Recognition, 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.
  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 as it completed a milestone.
Customer acceptance is usually required prior to invoicing. The Company
recognized revenue for these arrangements under the completed contract method in
accordance with Statement of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. Under the
completed-contract method, we deferred the contract fulfillment costs and any
advance payments received from the customer and recognized the costs and revenue
in its statement of operations once the contract was complete and the final
customer acceptance, if required, had been obtained.
  F-7
  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.
  (g)
              Cost
      of Uncompleted Contracts
  Cost of
uncompleted contracts represents services performed and/or materials used
towards completing customer contracts.   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 March 31, 2009 and 2008, cost of uncompleted contracts was $108,000 and
$54,000, respectively, related to PV system installation contracts.
  (h)
              Concentration
      of Credit Risk
  Significant
customers represent those customers that account for more than 10% of the
Company’s total revenue or accounts receivable. Revenue and revenue as a
percentage of total revenue and accounts receivable and accounts receivable as a
percentage of total accounts receivable for significant customers were as
follows:
  RevenueFiscal
      Year Ended March 31,2009
                                                                                                                              
                                                                                                                              
                                                                                                                              2008
                                                                                                                              
                                                                                                                              
                                                                                                                              2007Customer
                                                                                                                              
                                                                                                                              $
                                                                                                                              
                                                                                                                              
                                                                                                                              %
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              
                                                                                                                              
                                                                                                                              %
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              
                                                                                                                              
                                                                                                                              %(dollars
      in thousands)Paradise
      Beverages
                                                                                                                              
                                                                                                                              
                                                                                                                              3,094
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              62
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              987
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              31
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —Resco,
      Inc.
                                                                                                                              
                                                                                                                              
                                                                                                                              655
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              13
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —U.S.
      Navy – Naval Air Warfare Center Weapons Division
                                                                                                                              
                                                                                                                              
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              1,337
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              41
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              3,205
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              60Hardware
      Hawaii
                                                                                                                              
                                                                                                                              
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              385
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              12
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —Nissan
                                                                                                                              
                                                                                                                              
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              —
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              1,988
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              37
  Accounts
      ReceivableMarch
      31,2009
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2008Customer
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  %
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  %(dollars
      in thousands)Namalu
      LLC
                                                                                                  
                                                                                                  
                                                                                                  323
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  77
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  —
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  —D.R.
      Horton
                                                                                                  
                                                                                                  
                                                                                                  71
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  17
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  26
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  23Hardware
      Hawaii
                                                                                                  
                                                                                                  
                                                                                                  —
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  —
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  38
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  33General
      Growth Properties
                                                                                                  
                                                                                                  
                                                                                                  —
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  —
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  18
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  16Residential
      Installations
                                                                                                  
                                                                                                  
                                                                                                  —
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  —
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  24
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  21
 (i)
              Cash
      and Cash Equivalents
  The
Company considers money market, savings and checking accounts as cash and cash
equivalents. All other investments, including those with maturities of three
months or less are considered short-term investments.
  (j)
              Short-Term
      Investments
  The
Company’s short-term investments include commercial paper and government bonds.
These securities are highly liquid and may include investments with maturities
of three months or less.
  The
Company accounts for its investment instruments in accordance with Statement of
Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. All of the Company’s short-term
investments are treated as “available-for-sale” under SFAS No. 115.
Short-term investments are recorded by the Company at fair market value.
Dividend and interest income is recognized by the Company when earned. The
Company reflects unrealized gains and lossesrelated to its short-term
investments as a separate component of stockholders’ equity. Realized gains or
losses from the sale of available-for-sale securities are determined using the
specific-identification method.
  The Company’s short-term investments as
of March 31, 2008 consisted of $1,992,000 of commercial paper in which fair
value equaled amortized cost.All investments matured in
fiscal 2009 and no investments were outstanding as of March 31,
2009.
 
 (k)
              Accounts
      Receivable
  Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The Company had no allowance for doubtful accounts as of March 31,
2009 and 2008 and did not record bad debt expense in the periods
presented.
  F-8
  When
necessary, allowances for doubtful accounts represent the Company’s best
estimate of the amount of probable credit losses in the Company’s accounts
receivable. Past due balances over 90 days and over a specified amount are
reviewed individually for collectability. Account balances are charged off
against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote.  As of March 31, 2009,
there were no balances over 90 days past due.
  (l)
              Inventory
  Inventory
is stated at the lower of average cost or market and consists of raw materials,
work-in-progress and finished goods in accordance with Statement of Financial
Accounting Standards No. 151, or SFAS No. 151, Inventory Costs.
  (m)
              Property,
      Plant and Equipment
  Property,
plant and equipment are stated at cost and depreciated using the straight-line
method over the estimated useful life of the asset. For leasehold improvements,
amortization is computed using the straight-line method over the shorter of the
lease term or the estimated useful life of the asset.
  Estimated
useful lives of the Company’s assets are as follows:
  Building
              
              39 yearsResearch
      equipment
              
              4-7 yearsOffice
      equipment and furniture
              
              5-7 yearsProduction
      equipment
              
              7 yearsAutomobile
              
              5 years
  The
Company evaluates the assets for impairment in accordance with Statement of
Financial Accounting Standards No. 144, or SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets.
  (n)
              Income
      Taxes
  Income
taxes are accounted for under the asset and liability method of Statement of
Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes,
which establishes financial accounting and reporting standards for the effect of
income taxes. In accordance with SFAS No. 109, the Company recognizes
federal and state current tax liabilities or assets based on the Company’s
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 any deferred tax assets by the amount of any tax
benefits that, based on available evidence and judgment, are not expected to be
realized.
  (o)
              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
applicable 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
applicable 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:
  Fiscal
      Year Ended March 31,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2007(in
      thousands, except share and per share
                                          data)Numerator:Net
      income (loss)
                                        
                                        $
                                        (2,962
                                        )
                                        
                                        $
                                        (4,293
                                        )
                                        
                                        $
                                        (2,752
                                        )Denominator:Weighted
      average shares of common stock (basic)
                                        
                                        
                                        20,325,433
                                        
                                        
                                        
                                        16,656,000
                                        
                                        
                                        
                                        16,449,537Effect
      of Dilutive SecuritiesAdd:Weighted
      average convertible preferred shares
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Weighted
      average stock options and warrants
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Weighted
      average shares of common stock (diluted)
                                        
                                        
                                        20,325,433
                                        
                                        
                                        
                                        16,656,000
                                        
                                        
                                        
                                        16,449,537Basic
      net income (loss) per share
                                        
                                        $
                                        (0.15
                                        )
                                        
                                        $
                                        (0.26
                                        )
                                        
                                        $
                                        (0.17
                                        )Diluted
      net income (loss) per share
                                        
                                        $
                                        (0.15
                                        )
                                        
                                        $
                                        (0.26
                                        )
                                        
                                        $
                                        (0.17
                                        )
  F-9
 Due to
the Company’s net losses in the fiscal years ended March 31, 2009, 2008 and
2007, all potential common equivalent shares were anti-dilutive and were
excluded in computing diluted net loss per share. Potential dilutive securities
included options to purchase 162,318, 239,218 and 240,724 shares of common stock
as of March 31, 2009, 2008 and 2007, respectively.
  (p)
              Stock-based
      Compensation
  The
Company accounts for stock-based employee compensation arrangements using the
fair value method in accordance with the provisions of Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment, or SFAS
123(R). In accordance with SFAS 123(R), 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 award and the expected volatility of the option/restricted
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.
  (q)
              Advertising
      and Marketing Expenses
  The Company expenses advertising and
marketing expenditures as they are incurred.  For the fiscal years
ending March 31, 2009, 2008 and 2007, advertising and marketing expenses were
$59,000, $3,000 and 10,000, respectively.
 
 (r)
              Guarantees
      and Indemnifications
  In
November 2002, the FASB issued FIN No. 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN No. 45 requires that, upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligations it assumes under that guarantee.
  The
Company has entered into PV system installation contracts which warrants 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 the 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 March 31, 2009
and 2008.
  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.
  (s)
              Recently
      Issued Standards
  In
September 2006, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or
SFAS 157. This new standard establishes a framework for measuring the fair value
of assets and liabilities. This framework is intended to provide increased
consistency in how fair value determinations are made under various existing
accounting standards which permit, or in some cases require, estimates of fair
market value. SFAS 157 also expands financial statement disclosure requirements
about a company’s use of fair value measurements, including the effect of such
measures on earnings. This standard is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years.   See further discussion in Note 2.
   In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of SFAS No. 115,
or SFAS 159. This new standard permits companies to voluntarily choose to
measure many financial instruments and certain other items at fair value that
are currently not required to be measured at fair value. This standard is
effective for fiscal years beginning after November 15, 2007.  The
Company adopted SFAS 159 on April 1, 2008, but did not elect to measure any
items at fair value that are currently not required to be measured at fair
value.
  F-10
  In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements- an amendment of ARB No. 51, or SFAS
160. The objective of SFAS 160 is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements in the accounting treatment and financial
reporting of noncontrolling interests. This standard is effective for financial
statements issued for fiscal years and interim periods within those fiscal
years, beginning on or after November 15, 2008 (i.e. April 1, 2009 for the
Company).  Earlier adoption is prohibited. The Company is in the
process of evaluating the new  requirements under SFAS 160 and the
effects of implementing the new standard cannot be estimated at this
time.
  In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of SFAS 133, or SFAS
161. SFAS 161 seeks to improve financial reporting for derivative instruments
and hedging activities by requiring enhanced disclosures regarding the impact on
financial position, financial performance, and cash flows. To achieve this
increased transparency, SFAS 161 requires: (1) the disclosure of the fair value
of derivative instruments and gains and losses in a tabular format; (2) the
disclosure of derivative features that are credit risk-related; and (3)
cross-referencing within the footnotes. This standard shall be effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 and early application has been encouraged by FASB. The Company
is in the process of evaluating the new disclosure requirements under SFAS 161
and does not expect the adoption to have a material impact on its consolidated
financial statements.
  In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, or SFAS 162.  SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepting accounting
principles (GAAP) in the United States (the GAAP hierarchy).  The
current GAAP hierarchy is based on the American Institute of Certified Public
Accountants Statement on Auditing Standards No. 69, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles, which is
directed to the auditor rather than to the reporting entity.  SFAS 162
was issued because FASB believed that the GAAP hierarchy should reside in the
accounting literature established by the FASB and be directed to the entity
rather than to the auditor.  This standard is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.  The
Company does not expect the adoption of SFAS 162 to have a material impact on
our consolidated financial statements.
  (t)
              Reclassification
 
 Certain
prior period amounts have been reclassified to conform to current period
classifications.
 
 (2)
              Fair
      Value of Assets and Liabilities
  Effective
April 1, 2008, the Company, as required, adopted the provisions of Statement of
Financial Accounting Standards No. 157, Fair Value Measurements, or
SFAS 157, for financial instruments.  SFAS 157 defines fair value,
establishes a framework for measuring fair value in accordance with GAAP, and
requires enhanced disclosures about fair value measurements.  SFAS 157
does not require any new fair value measurements; rather it specifies valuation
methods and disclosures to be applied when fair value measurements are required
under existing or future accounting pronouncements.
  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, SFAS 157 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.
  F-11
  As of
March 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 March 31, 2009Total
                      
                      
                      Level
      1
                      
                      
                      Level
      2
                      
                      
                      Level
      3Cash
      equivalents
                      
                      $
                      16,743
                      
                      
                      $
                      16,743
                      
                      
                      $
                      —
                      
                      
                      $
                      —Total
      assets measured at fair value
                      
                      $
                      16,743
                      
                      
                      $
                      16,743
                      
                      
                      $
                      —
                      
                      
                      $
                      —
  (3)
              Property,
      Plant and Equipment
  As of
March 31, 2009 and 2008, property, plant and equipment consisted of the
following:
  March 31,2009
                            
                            
                            2008(in
      thousands)Building
                            
                            $
                            —
                            
                            
                            $
                            3,830Land
                            
                            
                            —
                            
                            
                            
                            1,366Construction
      in progress- Idaho plant and equipment
                            
                            
                            199,338
                            
                            
                            
                            28,515Construction
      in progress- Hoku Solar Power I, LLC
                            
                            
                            5,096Production
      equipment
                            
                            
                            108
                            
                            
                            
                            108Office
      equipment and furniture
                            
                            
                            115
                            
                            
                            
                            87Automobile
                            
                            
                            98
                            
                            
                            
                            98204,755
                            
                            
                            
                            34,004Less
      accumulated depreciation and amortization
                            
                            
                            (230
                            )
                            
                            
                            (441
                            )Property,
      plant and equipment, net
                            
                            $
                            204,525
                            
                            
                            $
                            33,563
  In March 2007, the Company entered into a 99-year
ground lease with the City of Pocatello for approximately 67 acres of land in
Pocatello, Idaho. The annual rent for the ground lease is fixed at one dollar
per year until the expiration of the lease on December 31,
2106.
  In
addition to this 67-acre lease, the Company and the City of Pocatello have
signed a separate agreement granting the Company an option to lease an
additional 450 acres of land owned by the City of Pocatello, which the Company
could use for any future expansion. The terms of any future lease will be
subject to good faith negotiations between the City of Pocatello and the
Company.
  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. As the total of the undiscounted future cash flows was less than the
carrying amount of the assets, the Company wrote down such assets based on the
excess of the carrying amount over the fair value of the assets. Fair value was
determined based on discussions with third-party equipment
providers.  During fiscal year 2008, the Company recorded a write-down
of its solar module production equipment of $67,000 and a write-down of $36,000
related to certain production and research equipment, which is included in
selling, general and administrative expenses for Hoku Solar and Hoku Fuel Cells,
respectively. In addition, the Company sold certain fuel cell equipment during
fiscal year 2008 and recorded a net loss from these sales of $47,000 which is
included in interest and other income in the consolidated statements of
operations for fiscal 2008.
  In
December 2008, the Company sold its real property and improvements, including
our corporate headquarters, in Kapolei, Hawaii, or the Property. The Property
was sold for an aggregate purchase price of $5.8 million, and resulted in a gain
on the sale of approximately $550,000.
  During
fiscal 2009, we granted security interests to each of Shanghai Alex New Energy
Co., Ltd., Tianwei New Energy (Chengdu) Wafer Co., Ltd., Jiangxi Jinko Solar
Co., Ltd., and Wealthy Rise International, Ltd.(Solargiga), in all of our
tangible and intangible assets related to our polysilicon business to serve as
collateral for our obligation to repay the remaining amount of each customer’s
respective prepayments made as of the date of any termination and that has not
been applied to the purchase price of polysilicon delivered under the respective
contract should the respective customer elect to terminate the contract under
certain circumstances. Such security interest is subordinated to any third-party
debt secured to finance construction of the polysilicon production facility and
pari passu with security interests granted to each of our other long-term
polysilicon supply customers. The security interest will continue until all
prepayments have been credited against the shipment of product, and only with
respect to the amount of prepayment that has not been so credited.
  As of
March 31, 2009 and 2008, the Company had no physical assets located outside of
the United States.
  Over the
next twelve months, the Company may have insufficient cash to meet all of its
obligations as they come due. The Company has already modified payment terms in
purchase orders with more than twenty 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
materialman’s and laborer’s liens on the Pocatello facility, 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.
  F-12
  (4)
              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 to the Company cash
deposits 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
March 31, 2009 and 2008, the Company had $134 million and $17 million,
respectively, related to prepayments received under the various polysilicon
supply agreements.  The prepaid amounts that are expected to be
applied to future product deliveries after March 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 the Company’s
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.  As discussed in Note 3, 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 March 31,
2009:
  PrepaymentCustomer
                        
                        (in
      thousands)Suntech
                        
                        $
                        2,000Solarfun
                        
                        
                        37,000Tianwei
                        
                        
                        62,000Jinko
                        
                        
                        18,000Alex
                        
                        
                        15,000$
                        134,000
  Based on
existing terms of the various long-term polysilicon supply agreements as of
March 31, 2009, the $134 million of customer prepayments would be credited
against future product delivers in the fiscal years ending March 31, 2010
through 2014 and thereafter as follows:
  Application
      ofCustomer
      DepositFiscal Year Ending
                        
                        (in
      thousands)2010
                        
                        $
                        3752011
                        
                        
                        14,5912012
                        
                        
                        22,8552013
                        
                        
                        22,5562014
                        
                        
                        22,256Thereafter
                        
                        
                        51,367$
                        134,000
  F-13
  (5)
              Income
      Taxes
  There was
no income tax provision or benefit in fiscal years 2008 and 2009.  The
components of the Company’s income tax benefit for the fiscal year ended March
31, 2007 were as follows:
 Current
                                  
                                  
                                  Deferred
                                  
                                  
                                  Total(in
      thousands)Fiscal
      Year Ended March 31, 2007Federal
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —State
                                  
                                  
                                  275
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  275Total
      income tax benefit
                                  
                                  $
                                  275
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  275
 
 There
were no payments for federal and state income taxes for the years ended March
31, 2009, 2008 and 2007.
  A
reconciliation of the U.S. statutory tax rate to the effective tax rate for the
years ended March 31, 2009, 2008 and 2007 is as follows:
  Fiscal
      Year Ended
                      March 31,2009
                    
                    
                    2008
                    
                    
                    2007(in
      thousands)Expected
      tax benefit
                    
                    $
                    1,008
                    
                    
                    $
                    1,460
                    
                    
                    $
                    1,029State
      tax benefit, net of federal benefit
                    
                    
                    118
                    
                    
                    
                    172
                    
                    
                    
                    121Non-deductible
      stock-based compensation
                    
                    
                    (123
                    )
                    
                    
                    (353
                    )
                    
                    
                    (137
                    )R&E
      expenses
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (265
                    )Change
      in valuation allowance
                    
                    
                    (1,043
                    )
                    
                    
                    (1,297
                    )
                    
                    
                    (773
                    )State
      R&E tax credit
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    275Federal
      R&E tax credit
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12Other
                    
                    
                    40
                    
                    
                    
                    18
                    
                    
                    
                    13Income
      tax benefit
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    275
  During
the fiscal year ended March 31, 2007, the Company qualified as a “Hawaii
Qualified High Technology Business,” which provides potential tax credits to its
investors as well as certain tax credits to the Company for qualified research
and experimentation (R&E) costs. The Company recorded Hawaii R&E
refundable tax credits of approximately $275,000 during the fiscal year ended
March 31, 2007, and did not qualify for such tax credits for the fiscal years
ended March 31, 2008 and March 31, 2009.
  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. A
summary of the tax effects of the temporary differences is as
follows:
  March 31,2009
                                          
                                          
                                          2008(in
      thousands)Deferred
      tax assets:Federal
      R&E tax credits
                                          
                                          $
                                          424
                                          
                                          
                                          $
                                          336Stock-based
      compensation
                                          
                                          
                                          358
                                          
                                          
                                          
                                          256Fixed
      assets
                                          
                                          
                                          195
                                          
                                          
                                          
                                          431Joint
      venture activity
                                          
                                          
                                          41
                                          
                                          
                                          
                                          -Net
      operating loss carryforwards
                                          
                                          
                                          2,527
                                          
                                          
                                          
                                          1,479Total
      deferred tax assets
                                          
                                          
                                          3,545
                                          
                                          
                                          
                                          2,502Less
      valuation allowance for deferred tax assets
                                          
                                          
                                          (3,545
                                          )
                                          
                                          
                                          (2,502
                                          )Net
      deferred tax assets
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Deferred
      tax liabilities
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Net
      deferred taxes
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          —
  F-14
  The
Company’s ultimate realization of deferred tax assets depends upon the
generation of future taxable income during periods in which those temporary
differences become deductible. 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 has continued to provide a valuation
allowance against its net deferred tax assets as of March 31, 2009.
  The valuation allowance for deferred
tax assets increased by approximately $1.0 million for the fiscal year ended
March 31, 2009 and increased by approximately $1.3 million for fiscal year ended
March 31, 2008.
  In June
2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109, or FIN 48,
which clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB Statement
No. 109, Accounting for
Income Taxes. This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. The
Company adopted FIN 48 on April 1, 2007. The adoption of this
interpretation did not have a material impact on the Company’s consolidated
financial statements.  The Company has not identified any material
unrecognized tax benefits as of March 31, 2009.  Any interest expense
and penalties related to unrecognized tax benefits and interest income on tax
overpayments will be recorded as components of income tax expense.
  The
Company has tax deductions from the exercise of certain stock options that
exceed the amount of stock compensation expense recorded in the accompanying
financial statements for the corresponding options (“Excess Tax
Deductions”).  The deferred tax assets of the Company are reported
without inclusion of the Excess Tax Deductions.  When realized, the
tax benefit of the Excess Tax Deductions is accounted for as a credit to
additional paid-in-capital rather than as a reduction of income tax
expense.
 
 As of
March 31, 2009, the Company had net operating loss, or NOL, carryforwards of
approximately $7.9 million and $7.8 million for federal and state tax purposes,
respectively. If not utilized, the federal carryforwards will begin to expire in
the fiscal year ending March 31, 2027. The Company’s utilization of these
NOL carryforwards may be subject to annual limitations pursuant to
Section 382 of the Internal Revenue Code, and similar state provisions, as
a result of changes in the Company’s ownership structure. These annual
limitations may result in the expiration of NOL carryforwards prior to
utilization.
  The
Company has approximately $424,000 of Federal R&E tax credits as of March
31, 2009, which, if not utilized, will begin to expire in the fiscal year ending
March 31, 2023.
  (6)
                Stockholders’
      Equity
  (a)
              Reincorporation
  The
Company was reincorporated in Delaware in December 2004. Immediately prior to
the reincorporation and under its certificate of incorporation, the Company was
authorized to issue 27,254,695 shares of capital stock, consisting of 8,587,095
shares of preferred stock, par value $0.001, and 18,667,600 shares of common
stock, par value $0.001. Of the authorized preferred stock, 2,036,768 shares
were designated as Series A preferred stock, 333,350 as Series B preferred
stock, 3,550,177 as Series C preferred stock and 2,666,800 as Series D preferred
stock. In connection with the reincorporation, each share of Class A common
stock outstanding immediately prior to the reincorporation was converted into
one share of common stock, each outstanding option and warrant that was
exercisable for shares of Class A common stock became exercisable for a
like number of shares of common stock, and each outstanding share of Series A, B
and C preferred stock, which was previously convertible into shares of
Class A common stock, became convertible into shares of common stock. Prior
to conversion in connection with the reincorporation, there were no differences
in rights between the Company’s common stock and Class A common
stock.
  (b)
              Common
      and Preferred Stock
  As of
March 31, 2009, the Company is authorized to issue 5,000,000 and 100,000,000
shares of preferred and common stock, respectively, each with a par value of
$0.001.
  In
February 2008, the Company issued 2,893,519 shares of its common stock pursuant
to a Securities Purchase Agreement, by and among the Company and certain
institutional investors, and a wholly owned subsidiary of Suntech Power Holdings
Co., Ltd.  The wholly owned subsidiary of Suntech Power Holdings Co.,
Ltd acquired 2,314,815 of the Company’s common stock.  The Company
received aggregate gross proceeds of approximately $25 million from the sale of
the common stock which it used to fund the construction of its polysilicon
plant.
  In June
2008, the Company sold registered shares of its common stock pursuant to the
Equity Distribution Agreement, or the EDA, with UBS Securities LLC, or UBS, in
which we had raised gross aggregate proceeds of $6.9 million, less broker fees,
commissions, and expenses, from the public offer and sale of an aggregate of
1,160,716 shares of common stock.
  F-15
  The
Company has reserved the shares of common stock for future issuance at March 31,
2009 and 2008 as follows:
  March
      31,2009
                        
                        
                        2008Stock
      options and awards outstanding
                        
                        
                        505,445
                        
                        
                        
                        564,491Stock
      options and awards available for future grants
                        
                        
                        1,038,171
                        
                        
                        
                        970,7371,543,616
                        
                        
                        
                        1,535,228
  (c)
              Stock
      Options and Awards
  As of
April 1, 2007, the Company had authorized 1,866,666 shares of common stock for
issuance under the Company’s 2002 Stock Plan, 2005 Equity Incentive Plan, 2005
Non-Employee Directors Stock Option Plan and Calendar Year 2005 Executive
Incentive Compensation Plan. The Company authorized additional shares of common
stock for issuance under the 2005 Non-Employee Directors Stock Option Plan and
Calendar Year 2005 Executive Incentive Compensation Plan by 153,331 on June 24
2008 and by 211,822 on July 10, 2007, increasing the total authorized shares of
common stock for issuance to 2,231,819.  Stock options issued
generally vest at the rate of 1/5th on the
first anniversary of the vesting commencement date and an additional 1/60th of the
shares each month thereafter. The options also typically have a ten-year
contractual term. Stock awards that are unrestricted are generally fully-vested
stock awards when issued. Restricted stock awards grant the holder voting rights
on the date of issuance and generally vest over 3-5 years with a $0 exercise
price.
  The
following table summarizes stock option and award activity for fiscal years
ended March 31, 2007 through 2009:
 Options
      OutstandingOptions and Awards
                                        Available
      for Grant
                                      
                                      
                                      Number
                                        of
      Shares
                                      
                                      
                                      Weighted Average
                                        Exercise
      PriceBalances
      as of March 31, 2006
                                      
                                      
                                      1,240,789
                                      
                                      
                                      
                                      542,864
                                      
                                      
                                      $
                                      1.02Authorized
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Granted
                                      
                                      
                                      (275,432
                                      )
                                      
                                      
                                      275,432
                                      
                                      
                                      $
                                      2.82Exercised
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (52,167
                                      )
                                      
                                      $
                                      0.26Cancelled
                                      
                                      
                                      97,748
                                      
                                      
                                      
                                      (97,748
                                      )
                                      
                                      $
                                      1.80Stock
      awards granted
                                      
                                      
                                      (19,109
                                      )
                                      
                                      
                                      —Balances
      as of March 31, 2007
                                      
                                      
                                      1,043,996
                                      
                                      
                                      
                                      668,381
                                      
                                      
                                      $
                                      1.71Authorized
                                      
                                      
                                      211,822
                                      
                                      
                                      
                                      —Granted
                                      
                                      
                                      (19,998
                                      )
                                      
                                      
                                      19,998
                                      
                                      
                                      $
                                      10.39Exercised
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (112,165
                                      )
                                      
                                      $
                                      0.82Cancelled
                                      
                                      
                                      11,723
                                      
                                      
                                      
                                      (11,723
                                      )
                                      
                                      $
                                      1.24Restricted
      stock awards granted
                                      
                                      
                                      (210,100
                                      )
                                      
                                      
                                      —Stock
      awards granted
                                      
                                      
                                      (66,706
                                      )
                                      
                                      
                                      —Balances
      as of March 31, 2008
                                      
                                      
                                      970,737
                                      
                                      
                                      
                                      564,491
                                      
                                      
                                      $
                                      2.20Authorized
                                      
                                      
                                      153,331
                                      
                                      
                                      
                                      —Granted
                                      
                                      
                                      (19,998
                                      )
                                      
                                      
                                      19,998
                                      
                                      
                                      $
                                      5.55Exercised
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (61,710
                                      )
                                      
                                      $
                                      1.23Cancelled
                                      
                                      
                                      17,334
                                      
                                      
                                      
                                      (17,334
                                      )
                                      
                                      $
                                      3.78Restricted
      stock awards granted
                                      
                                      
                                      (89,150
                                      )
                                      
                                      
                                      —Restricted
      stock awards cancelled
                                      
                                      
                                      12,280
                                      
                                      
                                      
                                      —Stock
      awards granted
                                      
                                      
                                      (6,363
                                      )
                                      
                                      
                                      —Balances
      as of  March 31, 2009
                                      
                                      
                                      1,038,171
                                      
                                      
                                      
                                      505,445
                                      
                                      
                                      $
                                      2.40
  The
weighted-average grant-date fair value of options granted during the fiscal
years ended March 31, 2009, 2008 and 2007 was $5.55, $10.39 and $2.40,
respectively. The total intrinsic value of options exercised during the fiscal
years ended March 31, 2009, 2008 and 2007 was $296,000, $892,000 and $153,000,
respectively. As of March 31, 2009, there was $966,000 of total unrecognized
compensation cost related to nonvested stock-based compensation under the 2002
Stock Plan and 2005 Equity Incentive Plan combined; that cost is expected to be
recognized over the respective vesting period.
  To date,
cancelled shares are a result of forfeitures rather than the expiration of
options.
  F-16
 The
following table summarizes options outstanding and exercisable as of March 31,
2009:
  Options
      Outstanding and Exercisable(dollars
      in thousands except for share data)Price
      Range
                                      
                                      Shares
                                      
                                      Weighted
                                        Average
                                        Remaining
                                        Contractual
                                        Life
                                      
                                      Weighted
                                        Average
                                        Exercise
                                        Price
                                      
                                      Aggregate
                                        Intrinsic
                                        Value$0.075
                                      
                                      74,166$0.15-0.375
                                      
                                      81,502$0.525
                                      
                                      29,433$2.60
                                      
                                      190,000$2.75-3.93
                                      
                                      42,332$4.50
                                      
                                      46,666$5.55
                                      
                                      19,998$5.68
                                      
                                      1,000$9.81
                                      
                                      350$10.39
                                      
                                      19,998505,445
                                      
                                      6.52
                                      
                                      $
                                      2.40
                                      
                                      $
                                      76
  
 F-17
  The
following table summarizes options vested and exercisable as of March 31,
2009:
  Options
      Vested and Exercisable(dollars
      in thousands except for share data)Price
                        Range
                      
                      Shares
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      Aggregate
                        Intrinsic
                        Value$0.075
                      
                      74,166$0.15-0.375
                      
                      70,720$0.525
                      
                      17,432$2.60
                      
                      39,999$2.75-3.93
                      
                      25,160$4.50
                      
                      46,666$5.68
                      
                      416$9.81
                      
                      233274,792
                      
                      5.72
                      
                      $
                      1.58
                      
                      $
                      268
  The
following table summarizes the number of stock options and restricted stock
shares remaining to be vested as of March 31, 2009 and 2008 and changes during
the fiscal years ended March 31, 2009 and 2008:
  Number
                              of
      Shares
                            
                            
                            Weighted Average
                              Grant
      Date Fair
                              ValueMarch 31,
      2007
                            
                            
                            423,565
                            
                            
                            $
                            3.25Outstanding
                            
                            
                            423,565
                            
                            
                            $
                            3.25Granted
                            
                            
                            230,098
                            
                            
                            $
                            5.20Vested
                            
                            
                            (206,730
                            )
                            
                            $
                            5.14Cancelled
                            
                            
                            (11,723
                            )
                            
                            $
                            1.24March 31,
      2008
                            
                            
                            435,210
                            
                            
                            $
                            4.16Outstanding
                            
                            
                            435,210
                            
                            
                            $
                            4.16Granted
                            
                            
                            109,148
                            
                            
                            $
                            7.28Vested
                            
                            
                            (198,723
                            )
                            
                            $
                            4.34Cancelled
                            
                            
                            (29,614
                            )
                            
                            $
                            2.21March
      31, 2009
                            
                            
                            316,021
                            
                            
                            $
                            4.70
  Stock-based
awards were measured at the grant date fair value of the equity instruments
issued using the Black-Scholes option pricing model. The fair value of stock
options granted is charged to expense over the requisite period. The fair value
of options vested was $862,000, $626,000 and $708,000 for the fiscal years ended
March 31, 2009, 2008 and 2007, respectively.
  Cash
received from option exercises for the years ended March 31, 2009, 2008 and 2007
was $76,000, $92,000 and $14,000, respectively. There were no tax benefits
realized for the tax deductions from the exercise of stock options and issuance
of stock awards for the fiscal years ended March 31, 2009, 2008 and
2007.
  (d)
              Stock-based
      Compensation
  Stock
Options   The Company granted options to purchase 19,998
shares, 19,998 shares,  and 275,432 shares of common stock during the
fiscal years ended March 31, 2009, 2008 and 2007, respectively, under the
Company’s 2005 Equity Incentive Plan. The Company recorded stock-based
compensation expense of $585,000, $578,000 and $1.2 million during the fiscal
years ended March 31, 2009, 2008 and 2007, respectively. The stock-based
compensation expense excludes $14,000 and $29,000 which was capitalized to cost
of uncompleted contracts and construction in progress, respectively, during
fiscal year ended March 31, 2009. The stock-based compensation expense excludes
$13,000 and $30,000 which was capitalized to cost of uncompleted contracts and
construction in progress, respectively, during fiscal year ended March 31,
2008.  The stock-based compensation expense excludes $39,000 and
$127,000 which was capitalized to cost of uncompleted contracts and construction
in progress, respectively, during fiscal year ended March 31, 2007.
  The fair value of the
stock options granted is calculated using the Black-Scholes option pricing model
as allowed by Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS
123(R). The assumptions used to estimate fair value included:
  F-18
 
 Fiscal
      Year Ended March 31,2009
                
                2008
                
                2007Risk-free
      interest rate
                1.71%
      -3.23%
                
                4.20%
                
                4.74% - 5.10%Dividend
      yield
                None
                
                None
                
                NoneExpected
      volatility
                100%
                
                100%
                
                100%Expected
      life (in years)
                2.0
      - 6.5
                
                6.5
                
                6.5
      - 7.5
  The
risk-free interest rate is based on the market yield of U.S. Treasury securities
with a five year constant maturity at the time of grant.  The Company
has not issued any dividends to date and due to the Company’s limited operating
history, a volatility of 100% was assumed.  The expected life is based
on the average of the vesting and expiration term. The vesting term of options
granted is generally three or five years and the contractual term is generally
ten years.
  Stock-based
compensation expense is recognized on a straight-line basis as the stock options
vest. The expected forfeiture rate was 15%, 30% and 35% for fiscal years 2009,
2008 and 2007, respectively.  The expected forfeiture rates are
applied against stock-based compensation expense, based on the Company’s
historical experience. The Company recognized additional charges of
approximately $206,000 and a credit of approximately $76,000 related to stock
option expense for the difference in actual forfeitures and the expected
forfeiture rate used in fiscal years 2009 and 2008, respectively.
  Stock Awards.
  During
the fiscal year ended March 31, 2009, the Company granted 89,150 restricted
shares of common stock. The Company recorded stock-based compensation expense of
$134,000 related to the restricted stock awards granted during fiscal year ended
March 31, 2009, which excluded $35,000 which was capitalized to construction in
progress. During the fiscal year ended March 31, 2008, the Company granted
210,100 restricted shares of common stock, which includes 200,000 shares of
restricted stock awarded to the Chief Executive Officer under the Fiscal Year
2008 Executive Incentive Compensation Plan. The Company recorded stock-based
compensation expense of $438,000 and $447,000, respectively, in fiscal years
2009 and 2008 related to the restricted stock awards granted during fiscal year
ended March 31, 2008. During the fiscal year ended March 31, 2007 no restricted
stock awards were granted.
  During
fiscal years ended March 31, 2009, 2008 and 2007, the Company granted 6,363,
66,706 and 19,109 fully-vested common stock awards, respectively.  The
fully-vested stock awards were granted to our directors in fiscal year 2009, in
accordance with the 2005 Equity Incentive Plan, and to executive officers in
fiscal year 2008, in accordance with the 2007 Executive Incentive Compensation
Plan.  Although the fully-vested stock awards related to the 2007
Executive Incentive Compensation Plan were granted in fiscal 2008, the Company
accrued the expense in fiscal 2007. In fiscal 2009, the Company recorded
stock-based compensation for all fully-vested stock awards of $45,000. In fiscal
2007, the Company recorded stock-based compensation for all fully-vested stock
awards of $840,000 which excludes $122,000 which was capitalized to construction
in progress. There was no stock-based compensation recorded in fiscal 2008
related to fully-vested stock awards.
  
 (7)
Interest and Other Income
  During
fiscal 2009, interest and other income was primarily due to the $660,000 related
to the net gain on the sale of assets and other expensed items, including the
sale of the Company’s fee simple interest in its real property and improvements,
including the Company’s corporate headquarters and the reversal of State of
Hawaii tax reserves of $172,000 and interest income of $323,000, offset by
losses in foreign currency exchange valuations and the settlement of the forward
exchange contracts in the aggregate of $862,000. During fiscal 2008, interest
and other income was primarily due to interest income of $875,000 and a net gain
on the sale of assets and other expensed items of $177,000.  In fiscal
2007, other income was primarily due to interest income of $1.0
million.
  
 (8)
Leases
  As of
March 31, 2009, the Company had lease obligations on its corporate and warehouse
facilities, expiring in fiscal 2012.  Minimum annual lease payments on
these facilities are $226,000, $242,000 and $165,000 for fiscal 2010 through
fiscal 2012, respectively.
  
 (9)
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 Company’s
polysilicon production plant, which was amended in October 2007 by Change Order
No. 1, and again in April 2008 by Change Order No. 2, which are collectively the
S&W Engineering Agreement. Under the S&W Engineering Agreement, S&W
was to provide all engineering, procurement and construction management services
necessary to complete the design and planning for construction of the Company’s
polysilicon plant with production capacity, at that time, of 3,500 metric tons
per year. S&W was to be paid on a time and materials basis plus a fee for
its services and incentives if certain schedule and cost targets were met. The
target cost for the services to be provided under the S&W Engineering
Agreement was $50 million, plus up to $5.0 million of incentives that would be
payable if certain cost and schedule milestones were achieved.
  F-19
  In
February 2009, the Company and S&W agreed to Change Order Number 3 under the
S&W Engineering Agreement, or S&W Change Order 3, to, among other
things: (i) increase the rated polysilicon production capacity of the Company’s
planned facility to up to 4,000 metric tons per year; (ii) eliminate
construction management services from S&W’s scope of work; (iii) confirm the
suspension of detailed engineering services for the Company’s planned TCS
production plant; (iv) remove $5 million of incentives that may have been
payable if certain cost and schedule milestones are achieved; and (v) allocate,
based on specific dates, up to an aggregate of $1 million of liquidated damages
that S&W would pay to the Company if engineering deliverables are not
provided to it on or before such dates. S&W may not be required to pay
liquidated damages if S&W fails to meet a deliverable date because the
Company or its other contractors cause any delays, or request changes to the
work that increase the time for completion, or if force majeure causes any
delays.
  The
target cost for the services to be provided under the S&W Engineering
Agreement, as modified by S&W Change Order 3, is unchanged at $50 million,
and the $5.0 million of incentives that may have been payable were eliminated.
Pursuant to the S&W Engineering Agreement, as modified by S&W Change
Order 3, S&W does not guarantee that the target cost will be met, and the
Company is obligated to pay for S&W's services regardless of whether this
cost target is ultimately achieved. During fiscal 2009, the Company made
payments to S&W of $28 million, and as of March 31, 2009, the Company had
paid S&W an aggregate amount of $32 million.
  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 Company’s planned
polysilicon production plant, which was amended in October 2007, by Change Order
No. 1, and again in April 2008 by Change Order No. 2, 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 Company’s polysilicon plant with
production capacity of, at that time, 3,500 metric tons per year. The target
cost for the services to be provided under the JH Kelly Construction Agreement
was $145 million, including up to $5.0 million of incentives that could be
payable.
  In March
2009, the Company and JH Kelly agreed to Change Order No. 3 under the JH Kelly
Construction Agreement, or JH Kelly Change Order 3, to, among other things: (i)
increase the rated polysilicon production capacity of the Company’s planned
facility to up to 4,000 metric tons per year; (ii) confirm the Company’s planned
schedule to include a reactor test demonstration in June 2009, the partial
commercial operation of the Company’s plant in September 2009, and full
commercial operation of the Company’s plant in March 2010; (iii) reallocate the
$5 million of incentives that may be payable such that $3.5 million of the
incentives may be payable if JH Kelly achieves the foregoing schedule
milestones, $1 million of the incentives may be payable if JH Kelly’s actual
costs are less than $145 million, and $500,000 may be payable if JH Kelly
achieves certain safety goals during the construction of the plant. Any
incentives that are earned would be paid after final completion of the
plant.
  Pursuant
to the JH Kelly Construction Agreement, as modified by JH Kelly Change Order 3,
JH Kelly does not guarantee that the cost or schedule targets will be met, and
there can be no assurances that either such target will be met. Moreover, the
Company is obligated to pay for JH Kelly's services regardless of whether these
targets are ultimately achieved; however, JH Kelly is required to pay liquidated
damages of up to $1 million for construction schedule delays that are directly
caused by the fault of JH Kelly. During fiscal 2009, the Company made payments
to JH Kelly of $41.2 million, and as of March 31, 2009, the Company had paid JH
Kelly an aggregate amount of $45.5 million.
  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 Company’s planned 4,000 metric tons per year
polysilicon production plant. The Dynamic process is to be integrated by S&W
into the overall polysilicon production facility, 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
completed facility, and has agreed to indemnify the Company for any third-party
claims of intellectual property infringement.  During fiscal 2009, the
Company made payments to Dynamic of $3.6 million, and as of March 31, 2009, the
Company had paid Dynamic an aggregate amount of $4.8 million.
  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. During fiscal 2009, the Company
made payments to GEC and MSA of 8.9 Euros or $13.5 million and, as of March 31,
2009, the Company had paid GEC and MSA an aggregate amount of 15.2 Euros or
$22.3 million.
  F-20
  In
January 2009, the Company received the first shipment of six Siemens-process
reactors at its facility in Pocatello, Idaho, and all of these polysilicon
reactors have been assembled and put into place on the production floor. The
reactors are the first units to arrive in Pocatello out of a planned total order
of 28. The next shipment of 10 polysilicon reactors and related equipment is
scheduled to arrive at the Company’s facility no later than the third quarter of
2009.
 
 The
Company is in discussions with GEC to purchase additional 12 reactors necessary
for the Company’s 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.
  Idaho Power Company. In
December 2007, 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 Company’s planned polysilicon production plant, or the
Idaho Power Agreement. The Company is obligated to pay Idaho Power an aggregate
of $14.8 million for the completion of the substation and associated facilities.
Under the terms of the Idaho Power Agreement, the substation and associated
facilities were scheduled to be completed on or before February 2009. The Idaho
Power Agreement provided that Idaho Power could invoice the Company additional
amounts for temporary power to enable the start-up and operation of the planned
polysilicon production plant prior to February 2009.
  In
September 2008, the Company amended and restated the Idaho Power Agreement by
entering into an Amended and Restated Agreement for Construction of the Hoku
Electric Substation and Associated Facilities, or the Amended Idaho Power
Agreement. Under the Amended Idaho Power Agreement, Idaho Power agreed to
construct an electric substation and associated transmission facilities with an
increased capacity beyond what was provided for in the original Idaho Power
Agreement. Idaho Power estimates that the costs of construction under the
Amended Idaho Power Agreement will increase to $16.5 million. 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 the Company 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. Idaho Power will use commercially
reasonable efforts to provide the Company with transmission services for
specified wattages by May 2009, and July 2009, and to complete construction of
the expanded electric substation and associated transmission facilities by
August 2009.  Pursuant to the Amended Idaho Power Agreement, during
fiscal 2009, the Company made payments to Idaho Power of $12.9 million, and as
of March 31, 2009, the Company has paid Idaho Power Company an aggregate amount
of $17.5 million, which is $1 million more than Idaho Power’s estimate under the
Amended Idaho Power Agreement.
  In
September 2008, the Company also entered into an Electric Service Agreement with
Idaho Power for the supply of electric power and energy to the Company for use
in its polysilicon facility, subject to the approval of Idaho’s Public Utilities
Commission, or the ESA. The term of the ESA is four years, beginning in June
2009. 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 Idaho Public Utilities Commission. 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 the Company
at the same fixed rates.
  In May
2009, the Company reached an agreement, or the Letter Agreement, with Idaho
Power to amend certain provisions of the ESA, which amendment, or the ESA
Amendment, would be filed with, and is conditioned, and effective, only upon
approval by the Idaho Public Utilities Commission, or PUC.  The ESA
Amendment, if approved by the PUC, would extend by six months the date when the
Company is obligated to begin purchasing prescribed amounts of electricity from
Idaho Power, from June 1, 2009 to December 1, 2009.  The ESA Amendment
also would provide for (a) electricity to be provided to us by Idaho Power at
the current tariff rate through November 30, 2009, (b) a commitment by the
Company to take no more than 5 megawatts, or MW, of electric power through July
2009, 10 MW during August 2009 and 25 MW from September through November 2009,
(c) a reduction in the levels of electric power to be provided under the ESA to
43 MW during the period of June 16, 2012 through August 15, 2012, and to 67 MW
during the period of August 16, 2009 to September 15, 2009, and (d) certain
charges, referred to as the Schedule 91 Energy Efficiency Rider, that would be
added to a portion of the electricity demand charges set forth in the ESA,
beginning on December 1, 2011.  The Schedule 91 Energy Efficiency
Rider is to recover costs incurred by Idaho Power associated with providing
energy efficiency services and programs to its customers.
  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., 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 Company’s planned polysilicon production plant.  The total
fees payable to AEG for all Deliverables under the AEG Agreement was
approximately $13 million, which was payable in installments, the first of which
was made in April 2008.
  In May
2009, the Company entered into an Amendment to the AEG Agreement, or the AEG
Amendment.  Under the AEG Amendment, the total fees to be paid to AEG
remain approximately $13 million, including approximately $1.2 million that was
previously paid, and the payment and delivery schedule was restructured such
that the Company is obligated to make payments of $500,000 on or before June 3,
2009, $500,000 on or before June 29, 2009, $615,000 on or before July 31, 2009
and $2,100,000 on or before August 31, 2009, related to certain Deliverables
that AEG is obligated to ship in August 2009.  After such shipment has
occurred, the Company is obligated to make payments of $800,000 on or before
September 30, 2009, $813,995 on or before October 30, 2009, $906,795 on or
before November 30, 2009 and $1,686,682 on or before December 21, 2009, related
to the remaining Deliverables which AEG is obligated to ship in October and
December 2009.  During fiscal 2009, the Company made payments to AEG
of $5.2 million, and as of March 31, 2009, the Company had paid AEG an aggregate
amount of $5.2 million.
  F-21
 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
Company’s planned polysilicon production facility in Pocatello, Idaho. The term
of the agreement was three years, commencing in January 2009. Each year during
the term of the agreement, Polymet agreed to sell to the Company, and the
Company agreed to purchase from Polymet, specified volumes of silicon metal that
meet certain purity and size specifications. The volume was fixed during each of
the three years; provided that the parties could agree to increase the volume.
Pricing was fixed during calendar year 2009, and the aggregate net value of the
silicon metal products to be purchased by the Company under the agreement in
calendar year 2009 was approximately $6.5 million. In May, 2009, the Company
entered into an amended and restated supply agreement with Polymet, or the
Amended Polymet Agreement.  Under the Amended Polymet Agreement, the
Company revised the date of the Company’s first shipment from calendar year 2009
to calendar year 2010, and reduced the Company’s purchase commitment to no less
than 65% of the Company’s annual silicon metal requirement.  Pricing
is to be negotiated for each year of the 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 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
March 31, 2009, the Company has 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 Company’s planned 4,000 metric tons per
year polysilicon production plant. 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 fees payable to PVA is approximately $6
million, which is payable in four installments, the first of which was made in
August 2008. The Company expects to receive the deliverables under the Company’s
contract with PVA in the third quarter of calendar year 2009. 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.  During fiscal 2009, the Company made payments to PVA
of $1.9 million, and as of March 31, 2009, the Company had paid PVA an aggregate
amount of $1.9 million.
  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 us for use in the
Company’s planned polysilicon production facility in Pocatello, Idaho. 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 no later than January
2010, 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 March 31, 2009, the Company has not made any payments to
BHS.
 
 (10)
Hoku Solar Power I LLC
  In
December 2008, the Company and UFA Renewable Energy Fund I, LLC, a Delaware
limited liability company, or UFA established and capitalized Hoku Solar Power
I, LLC, a California limited liability company, or Power I. Under the terms of
the Power I Operating Agreement by and between the Company and UFA, or the
Operating Agreement, the Company assigned its power purchase agreements, or
PPAs, to Power I, which was created to own and operate each system and which
will sell the electricity generated by the PV systems to the Hawaii State
Department of Transportation, or DOT, at predetermined contract
rates.  Under the terms of the PPAs, Power I is permitted to install,
maintain and operate each of the seven planned energy systems on DOT facilities
over a term of 20 years, commencing on the date that the system is operational
for energy to be delivered to DOT.  As of March 31, 2009, installation
of two PV systems on the island of Kauai have been completed and transferred to
Power I.  The Company is currently evaluating whether certain
provisions of the PPAs require that the energy systems be accounted for as
leased equipment in accordance with EITF 01-8-Determining Whether an
Arrangement Contains a Lease.
  In
connection with the Operating Agreement, the Company also entered into a
Guaranty by and among Power I, UFA, Firstar Development LLC, a Delaware limited
liability company and the Company, or the Guaranty, whereby the Company has
guaranteed certain obligations set forth in the Operating Agreement. The terms
of the Operating Agreement and Guaranty provide for specific limitations on the
losses that may be realized by UFA.  In addition to other limitations
described above, the Company is required to fund any excess development costs
and any operating deficits of Power I.  Also, UFA’s expected residual
return from Power I is capped pursuant to the Operating Agreement. The Company
has evaluated certain provisions of the Operating Agreement and the related
accounting treatment in accordance with FIN46R- Consolidation of Variable
Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51. FIN 46R clarifies the application of
Accounting Research Bulletin
No. 51, Consolidated Financial Statements as it concerns the
consolidation of certain entities in which (a) the equity investment at risk
does not provide its holders with the characteristics of a controlling financial
interest or (b) the equity investments at risk is not sufficient for the entity
to finance its activities without additional subordinated financial support. For
such entities, a controlling financial interest cannot be identified based upon
voting equity interests. FIN 46R refers to such entities as variable interest
entities, or VIEs and requires consolidation of a VIE by its primary
beneficiary. The primary beneficiary is the entity, if any, that will absorb a
majority of the VIE’s expected losses, receive a majority of its expected
residual returns, or both, as a result of holding variable
interests.  The Company has determined that Power I is a VIE and that
certain provisions of the Operating Agreement deem it to be the primary
beneficiary of Power I.  Consequently, in accordance with FIN 46R, the
financial and operating results of Power I are consolidated with the Company’s
financials as of March 31, 2009.
  F-22
 In
December 2008, the Company and Power I entered into a Development Services
Agreement, or the Development Agreement, pursuant to which the Company agreed to
construct, install, develop and commission the PV systems on behalf of Power
I.  The Company also agreed to operate and maintain the systems
pursuant to the terms and conditions of the Purchase and Sale and Operation and
Maintenance Agreement entered into between the Company and Power I in December
2008. Each system will be transferred to Power I prior to the commencement of
commercial operation. In December 2008, the Company completed the engineering,
design and procurement phases for the projects and commenced system installation
at two DOT project sites on the island of Kauai.  In March 2009, the
two PV systems in Kauai have been completed and transferred to Power
I.  As of April 30, 2009, installation of the remaining five PV
systems was completed and the DOT has  provided letters of system
acceptances on each of the seven PV systems, acknowledging that various system
requirements, including but not limited to: system completion, permit
certification,  and energy capacity, have been satisfied in accordance
with the provisions of the PPA.  As of May 2009 all of these PV
systems are operational.  As of March 31, 2009, no revenues have been
recognized from the operations of Power I, and approximately $111,000 of
start-up costs have been incurred.
  (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 the 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 system
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 of the Consolidated Financial
Statements.
 
 2009
                      
                      
                      2008
                      
                      
                      2007For
      the fiscal yearRevenue:Hoku
      Fuel Cells
                      
                      $
                      —
                      
                      
                      $
                      1,337
                      
                      
                      $
                      5,368Hoku
      Solar
                      
                      
                      4,957
                      
                      
                      
                      1,892
                      
                      
                      
                      —Hoku
      Materials
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
      consolidated revenue:
                      
                      $
                      4,957
                      
                      
                      $
                      3,229
                      
                      
                      $
                      5,368
 The
reconciliation of segment operating results to the Company’s consolidated totals
was as follows for the following fiscal years ended March 31:
  2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007Income
      (loss) from operations:Hoku
      Fuel Cells
                                    
                                    $
                                    (24
                                    )
                                    
                                    $
                                    245
                                    
                                    
                                    $
                                    (1,651
                                    )Hoku
      Solar
                                    
                                    
                                    (639
                                    )
                                    
                                    
                                    (2,060
                                    )
                                    
                                    
                                    (1,256
                                    )Hoku
      Materials
                                    
                                    
                                    (2,633
                                    )
                                    
                                    
                                    (3,561
                                    )
                                    
                                    
                                    (1,159
                                    )Total
      consolidated loss from operations:
                                    
                                    $
                                    (3,296
                                    )
                                    
                                    $
                                    (5,376
                                    )
                                    
                                    $
                                    (4,066
                                    )
 
 F-23
  The
reconciliation of segment operating results to the Company’s consolidated totals
was as follows:
 Fiscal
      Year Ended March 31,2009
                                                
                                                
                                                2008
                                                
                                                
                                                2007Consolidated
      loss from operations
                                                
                                                $
                                                (3,296
                                                )
                                                
                                                $
                                                (5,376
                                                )
                                                
                                                $
                                                (4,066
                                                )Interest
      and other income
                                                
                                                
                                                284
                                                
                                                
                                                
                                                1,083
                                                
                                                
                                                
                                                1,039Loss
      before noncontrolling interest and income tax benefit
                                                
                                                
                                                (3,012
                                                )
                                                
                                                
                                                (4,293
                                                )
                                                
                                                
                                                (3,027
                                                )Noncontrolling
      interest
                                                
                                                
                                                50Income
      tax benefit
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                275Net
      loss
                                                
                                                $
                                                (2,962
                                                )
                                                
                                                $
                                                (4,293
                                                )
                                                
                                                $
                                                (2,752
                                                )
 The
Company allocates its assets to its business units based on the primary business
units benefiting from the assets.  Unallocated assets are composed
primarily of cash and cash equivalents and short-term
investments.
  2009
                                  
                                  
                                  2008For
      the fiscal yearIdentifiable
      assets:Hoku
      Fuel Cells
                                  
                                  $
                                  --
                                  
                                  
                                  $
                                  140Hoku
      Solar
                                  
                                  
                                  9,738
                                  
                                  
                                  
                                  2,037Hoku
      Materials
                                  
                                  
                                  199,473
                                  
                                  
                                  
                                  29,522Unallocated
      assets
                                  
                                  
                                  15,000
                                  
                                  
                                  
                                  36,410$
                                  224,211
                                  
                                  
                                  $
                                  68,109Capital
      additions:Hoku
      Fuel Cells
                                  
                                  $
                                  --
                                  
                                  
                                  $
                                  --Hoku
      Solar
                                  
                                  
                                  5,097
                                  
                                  
                                  
                                  50Hoku
      Materials
                                  
                                  
                                  170,850
                                  
                                  
                                  
                                  27,989$
                                  175,947
                                  
                                  
                                  $
                                  28,039Depreciation
      and amortization:Hoku
      Fuel Cells
                                  
                                  $
                                  --
                                  
                                  
                                  $
                                  9Hoku
      Solar
                                  
                                  
                                  54
                                  
                                  
                                  
                                  125Hoku
      Materials
                                  
                                  
                                  12
                                  
                                  
                                  
                                  9$
                                  66
                                  
                                  
                                  $
                                  143
 
 (12)
              Unaudited
      Quarterly Financial Data
 
 Quarters
      EndedMarch 31,
                                                                    2009
                                                                  
                                                                  
                                                                  December 31,
                                                                    2008
                                                                  
                                                                  
                                                                  September 30,
                                                                    2008
                                                                  
                                                                  
                                                                  June 30,
                                                                    2008(amounts
      in thousands, except per share data)Service,
      license and product revenue
                                                                  
                                                                  $
                                                                  112
                                                                  
                                                                  
                                                                  $
                                                                  767
                                                                  
                                                                  
                                                                  $
                                                                  1,870
                                                                  
                                                                  
                                                                  $
                                                                  2,208Gross
      profit
                                                                  
                                                                  
                                                                  19
                                                                  
                                                                  
                                                                  
                                                                  175
                                                                  
                                                                  
                                                                  
                                                                  374
                                                                  
                                                                  
                                                                  
                                                                  684Net
      income (loss)
                                                                  
                                                                  
                                                                  (904
                                                                  )
                                                                  
                                                                  
                                                                  (863
                                                                  )
                                                                  
                                                                  
                                                                  (1,373
                                                                  )
                                                                  
                                                                  
                                                                  178Basic
      net income (loss) per share
                                                                  
                                                                  
                                                                  (0.04
                                                                  )
                                                                  
                                                                  
                                                                  (0.04
                                                                  )
                                                                  
                                                                  
                                                                  (0.07
                                                                  )
                                                                  
                                                                  
                                                                  .01Diluted
      net income (loss) per share
                                                                  
                                                                  
                                                                  (0.04
                                                                  )
                                                                  
                                                                  
                                                                  (0.04
                                                                  )
                                                                  
                                                                  
                                                                  (0.07
                                                                  )
                                                                  
                                                                  
                                                                  .01
 F-24
 March 31,
                                              2008
                                            
                                            
                                            December 31,
                                              2007
                                            
                                            
                                            September 30,
                                              2007
                                            
                                            
                                            June 30,
                                              2007Service,
      license and product revenue
                                            
                                            $
                                            621
                                            
                                            
                                            $
                                            1,271
                                            
                                            
                                            $
                                            239
                                            
                                            
                                            $
                                            1,098Gross
      profit
                                            
                                            
                                            67
                                            
                                            
                                            
                                            466
                                            
                                            
                                            
                                            44
                                            
                                            
                                            
                                            340Net
      loss
                                            
                                            
                                            (2,098
                                            )
                                            
                                            
                                            (538
                                            )
                                            
                                            
                                            (1,004
                                            )
                                            
                                            
                                            (653
                                            )Basic
      net loss per share
                                            
                                            
                                            (0.12
                                            )
                                            
                                            
                                            (0.03
                                            )
                                            
                                            
                                            (0.06
                                            )
                                            
                                            
                                            (0.04
                                            )Diluted
      net loss per share
                                            
                                            
                                            (0.12
                                            )
                                            
                                            
                                            (0.03
                                            )
                                            
                                            
                                            (0.06
                                            )
                                            
                                            
                                            (0.04
                                            )
 Quarterly
and year-to-date computations of per share amounts are made independently,
therefore they may differ when comparing annual per share amounts to aggregated
quarterly per share amounts.
 
 (13)
              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  its polysilicon production
facility currently under construction. As of March 31, 2009, the Company had
cash and cash equivalents on hand of $17.4 million and short term liabilities of
$40.0 million. Consequently, there is substantial doubt that the Company will
have sufficient cash to meet all of its obligations as they come due through at
least March 31, 2010. 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. Furthermore, assuming the total cost of construction and equipment is
$390 million, that all of the Company’s existing polysilicon customers make
timely prepayments in full and that the Company is able to secure additional
prepayments from new polysilicon customers, the Company believes that it will
need to raise an amount between $35 and $55 million to complete the construction
of the Company’s 4,000 metric ton plant. If the Company is unable to secure
additional long-term supply contracts and prepayments, assuming the cost to
construct and equip the plant does not exceed $390 million and that all of the
Company’s existing customers make their prepayments when due, the amount the
Company will need to raise could be as much as $106 million. If the Company is
unable to secure additional long-term supply contracts and prepayments, if one
or more of the Company’s polysilicon supply customers fail to meet their
obligations to make timely prepayments and/or if the actual cost to complete the
plant is more than $390 million, the amount the Company will need to raise could
exceed $106 million.  The Company previously intended to finance the
construction of its polysilicon production facility through project financing;
however, as of May 2009, the Company believes it will need to raise additional
capital through other means for the procurement and construction of the
Company’s polysilicon manufacturing facility.
  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 twenty 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 or 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;
  ·
              further
      extending the construction schedule and payment plans with vendors;
      and/or
  ·
              consummating
      a transaction, which could result in a change of
  control.
  There are
no assurances that the Company will be successful in executing any of the
foregoing alternatives. 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 through at least March 31, 2010. The inability to continue as
a going concern could result in an orderly wind-down of the Company or other
potential forms of restructuring.
  F-25
  Exhibit
                                                                  No.
                                                                
                                                                Exhibit
      Description
                                                                
                                                                Form
                                                                
                                                                File Number
                                                                
                                                                Exhibit
                                                                
                                                                Filing
                                                                  Date
                                                                
                                                                Filed
                                                                  Herewith3.1
                                                                
                                                                Amended
      and Restated Certificate of Incorporation
                                                                
                                                                S-1/A#4
                                                                
                                                                333-124423
                                                                
                                                                3.1
                                                                
                                                                7/13/053.2
                                                                
                                                                Amended
      and Restated Bylaws
                                                                
                                                                8-K
                                                                
                                                                000-51458
                                                                
                                                                3.2
                                                                
                                                                10/23/074.1
                                                                
                                                                Reference
      is made to Exhibits 3.1 and 3.210.1
                                                                
                                                                Amended
      and Restated Rights Agreement dated December 31, 2003
                                                                
                                                                S-1
                                                                
                                                                333-124423
                                                                
                                                                10.1
                                                                
                                                                4/28/0510.6+
                                                                
                                                                Form
      of Addendum to Stock Option Agreement under the 2002 Stock Plan, as
      amended, by and between Scott Paul and Hoku Scientific,
    Inc.
                                                                
                                                                S-1
                                                                
                                                                333-124423
                                                                
                                                                10.6
                                                                
                                                                4/28/0510.7+
                                                                
                                                                Form
      of Addendum to Stock Option Agreement under the 2002 Stock Plan, as
      amended, by and between each of the non-employee directors and Hoku
      Scientific, Inc.
                                                                
                                                                S-1
                                                                
                                                                333-124423
                                                                
                                                                10.7
                                                                
                                                                4/28/0510.8
                                                                
                                                                Form
      of Indemnity Agreement entered into between Hoku Scientific, Inc. and each
      of its directors and officers
                                                                
                                                                S-1
                                                                
                                                                333-124423
                                                                
                                                                10.8
                                                                
                                                                4/28/0510.9+
                                                                
                                                                2002
      Stock Plan, as amended
                                                                
                                                                S-1
                                                                
                                                                333-124423
                                                                
                                                                10.9
                                                                
                                                                4/28/0510.10+
                                                                
                                                                Form
      of Stock Option Agreement under the 2002 Stock Plan, as
      amended
                                                                
                                                                S-1
                                                                
                                                                333-124423
                                                                
                                                                10.10
                                                                
                                                                4/28/0510.11+
                                                                
                                                                2005
      Equity Incentive Plan
                                                                
                                                                8-K
                                                                
                                                                000-51458
                                                                
                                                                10.11
                                                                
                                                                9/13/0610.12+
                                                                
                                                                Form
      of Stock Option Agreement under the 2005 Equity Incentive
    Plan
                                                                
                                                                8-K
                                                                
                                                                000-51458
                                                                
                                                                10.12
                                                                
                                                                9/13/0610.13+
                                                                
                                                                2005
      Non-Employee Directors’ Stock Option Plan
                                                                
                                                                S-1/A#4
                                                                
                                                                333-124423
                                                                
                                                                10.13
                                                                
                                                                7/13/0510.14+
                                                                
                                                                Form
      of Stock Option Agreement under the 2005 Non-Employee Directors’ Stock
      Option Plan
                                                                
                                                                S-1/A#4
                                                                
                                                                333-124423
                                                                
                                                                10.14
                                                                
                                                                7/13/0510.15
                                                                
                                                                2153
      King Street Lease, dated January 1, 2003, by and between Dreal Hawaii, LLC
      and Hoku Scientific, Inc.
                                                                
                                                                S-1
                                                                
                                                                333-124423
                                                                
                                                                10.15
                                                                
                                                                4/28/0510.16
                                                                
                                                                Letter
      Agreement for Modification of the 2153 King Street Lease, dated April 9,
      2003, by and between Dreal Hawaii, LLC and Hoku Scientific,
      Inc.
                                                                
                                                                S-1
                                                                
                                                                333-124423
                                                                
                                                                10.16
                                                                
                                                                4/28/0510.17†
                                                                
                                                                MEA
      Engineering Agreement, dated September 1, 2004, by and between Nissan
      Motor Co., Ltd. and Hoku Scientific, Inc.
                                                                
                                                                S-1/A#7
                                                                
                                                                333-124423
                                                                
                                                                10.17
                                                                
                                                                8/3/05
   56
 10.18†
                                                                                                      
                                                                                                      Membrane
      & MEA Purchase Agreement, dated September 1, 2004, by and between
      Nissan Motor Co., Ltd. and Hoku Scientific, Inc.
                                                                                                      
                                                                                                      S-1/A#7
                                                                                                      
                                                                                                      333-124423
                                                                                                      
                                                                                                      10.18
                                                                                                      
                                                                                                      8/3/0510.19†
                                                                                                      
                                                                                                      Collaboration
      Agreement, dated March 22, 2005, by and between Nissan Motor Co., Ltd. and
      Hoku Scientific, Inc.
                                                                                                      
                                                                                                      S-1/A#7
                                                                                                      
                                                                                                      333-124423
                                                                                                      
                                                                                                      10.19
                                                                                                      
                                                                                                      8/3/0510.20
                                                                                                      
                                                                                                      Solicitation,
      Offer and Award, dated March 7, 2005, by and between the U.S. Navy, Naval
      Air Warfare Center Weapons Division and Hoku Scientific,
    Inc.
                                                                                                      
                                                                                                      S-1/A#5
                                                                                                      
                                                                                                      333-124423
                                                                                                      
                                                                                                      10.20
                                                                                                      
                                                                                                      7/26/0510.21†
                                                                                                      
                                                                                                      Agreement
      (Subcontract No. USN-001), dated April 7, 2005, by and between IdaTech,
      LLC and Hoku Scientific, Inc.
                                                                                                      
                                                                                                      S-1
                                                                                                      
                                                                                                      333-124423
                                                                                                      
                                                                                                      10.21
                                                                                                      
                                                                                                      4/28/0510.22†
                                                                                                      
                                                                                                      Agreement,
      dated March 17, 2003, by and between Sanyo Electric Co., Ltd. and Hoku
      Scientific, Inc.
                                                                                                      
                                                                                                      S-1/A#7
                                                                                                      
                                                                                                      333-124423
                                                                                                      
                                                                                                      10.22
                                                                                                      
                                                                                                      8/3/0510.23†
                                                                                                      
                                                                                                      Amendment
      to the Agreement dated March 17, 2003 by and between Sanyo Electric Co.,
      Ltd. and Registrant dated September 30, 2004
                                                                                                      
                                                                                                      S-1/A#7
                                                                                                      
                                                                                                      333-124423
                                                                                                      
                                                                                                      10.23
                                                                                                      
                                                                                                      8/3/0510.24†
                                                                                                      
                                                                                                      Membrane
      Testing Agreement, dated March 19, 2004, by and between Nissan Motor Co.,
      Ltd. and Hoku Scientific, Inc.
                                                                                                      
                                                                                                      S-1/A#6
                                                                                                      
                                                                                                      333-124423
                                                                                                      
                                                                                                      10.24
                                                                                                      
                                                                                                      8/3/0510.25†
                                                                                                      
                                                                                                      Amendment
      No. 1 to Membrane Testing Agreement, dated May 17, 2004, by and between
      Nissan Motor Co., Ltd. and Hoku Scientific, Inc.
                                                                                                      
                                                                                                      S-1/A#6
                                                                                                      
                                                                                                      333-124423
                                                                                                      
                                                                                                      10.25
                                                                                                      
                                                                                                      6/23/05
 
 57
 
 
 10.27
                    
                    Amendment
      of Solicitation/Modification of Contract, dated September 30, 2005, by and
      between the U.S. Navy, Naval Air Warfare Center Weapons Division and Hoku
      Scientific, Inc.
                    
                    8-K
                    
                    000-51458
                    
                    10.30
                    
                    10/5/0510.28†
                    
                    Step
      3 Collaboration Agreement, dated February 13, 2006, by and between Nissan
      Motor Company, Ltd., and Hoku Scientific, Inc.
                    
                    10-Q
                    
                    000-51458
                    
                    10.31
                    
                    2/14/0610.29†
                    
                    Material
      Transfer & Collaborative Testing Agreement, dated December 5, 2005, by
      and between Sanyo Electric Company, Ltd., and Hoku Scientific,
      Inc.
                    
                    10-Q
                    
                    000-51458
                    
                    10.32
                    
                    2/14/0610.30
                    
                    Termination
      Agreement by and between Hoku Scientific, Inc. and Central Pacific Bank,
      dated March 29, 2006
                    
                    8-K
                    
                    000-51458
                    
                    10.1
                    
                    4/4/0610.31
                    
                    Amendment
      of Solicitation/Modification of Contract, dated March 2, 2006, by and
      between the U.S. Navy, Naval Air Warfare Center Weapons Division and Hoku
      Scientific, Inc.
                    
                    10-K
                    
                    000-51458
                    
                    10.31
                    
                    6/29/06
 
 
 58
 
 10.32
                                                                    
                                                                    Amendment
      No. 1 to Agreement (Subcontract No. USN-001.01), dated March 7, 2006, by
      and between IdaTech, LLC and Hoku Scientific, Inc.
                                                                    
                                                                    10-K
                                                                    
                                                                    000-51458
                                                                    
                                                                    10.32
                                                                    
                                                                    6/29/0610.33
                                                                    
                                                                    Fiscal
      Year 2007 Executive Incentive Compensation Plan
                                                                    
                                                                    8-K
                                                                    
                                                                    000-51458
                                                                    
                                                                    10.33
                                                                    
                                                                    7/20/0610.34
                                                                    
                                                                    Consulting
      Agreement, dated August 20, 2006, by and between Paul Yonamine and Hoku
      Scientific, Inc.
                                                                    
                                                                    10-Q
                                                                    
                                                                    000-51458
                                                                    
                                                                    10.34
                                                                    
                                                                    11/6/0610.35†
                                                                    
                                                                    Swiss
      Wafer AG Agreement, dated October 14, 2006
                                                                    
                                                                    10-Q
                                                                    
                                                                    000-51458
                                                                    
                                                                    10.35
                                                                    
                                                                    2/14/0710.36†
                                                                    
                                                                    Purchase
      Agreement, dated October 23, 2006, by and between E-Ton Solar Tech Co.,
      Ltd and Hoku Scientific, Inc.
                                                                    
                                                                    10-Q
                                                                    
                                                                    000-51458
                                                                    
                                                                    10.36
                                                                    
                                                                    2/14/0710.37†
                                                                    
                                                                    Purchase
      and Sale Agreement, dated October 13, 2006, by and between Spire
      Corporation and Hoku Scientific, Inc.
                                                                    
                                                                    10-Q
                                                                    
                                                                    000-51458
                                                                    
                                                                    10.37
                                                                    
                                                                    2/14/0710.38
                                                                    
                                                                    Ground
      Lease, dated March 22, 2007, by and between Hoku Materials, Inc. and The
      City of Pocatello
                                                                    
                                                                    8-K
                                                                    
                                                                    000-51458
                                                                    
                                                                    10.38
                                                                    
                                                                    3/28/0710.39
                                                                    
                                                                    Credit
      Agreement, dated March 23, 2007, by and between Hoku Materials, Inc. and
      Bank of Hawaii.
                                                                    
                                                                    8-K
                                                                    
                                                                    000-51458
                                                                    
                                                                    10.39
                                                                    
                                                                    3/29/0710.40†
                                                                    
                                                                    Pledge
      and Security Agreement, dated March 23, 2007, by and between Hoku
      Materials, Inc. and Bank of Hawaii
                                                                    
                                                                    8-K
                                                                    
                                                                    000-51458
                                                                    
                                                                    10.40
                                                                    
                                                                    3/29/0710.41
                                                                    
                                                                    Amendment
      No. 1 to Purchase and Sale Agreement, dated October 13, 2006, by and Spire
      Corporation and Hoku Scientific, Inc.
                                                                    
                                                                    8-K
                                                                    
                                                                    000-51458
                                                                    
                                                                    10.41
                                                                    
                                                                    6/20/0710.42†
                                                                    
                                                                    Supply
      Agreement , dated January 17, 2007, by and between Sanyo Electric Company,
      Ltd. and Hoku Scientific, Inc.
                                                                    
                                                                    10-K
                                                                    
                                                                    000-51458
                                                                    
                                                                    10.42
                                                                    
                                                                    6/29/07
  59
 10.43†
                                                                                  
                                                                                  Contract
      dated January 21, 2007 by and between GEC Graeber Engineering Consultants
      GmbH and MSA Apparatus Construction for Chemical Equipment Ltd. and Hoku
      Scientific, Inc.
                                                                                  
                                                                                  10-K
                                                                                  
                                                                                  000-51458
                                                                                  
                                                                                  10.43
                                                                                  
                                                                                  6/29/0710.44
                                                                                  
                                                                                  Amendment
      No. 1 of Supply Agreement, dated May 26, 2007, by and between Sanyo
      Electric Company, Ltd. and Hoku Scientific, Inc.
                                                                                  
                                                                                  10-K
                                                                                  
                                                                                  000-51458
                                                                                  
                                                                                  10.44
                                                                                  
                                                                                  6/29/0710.45
                                                                                  
                                                                                  Amendment
      No. 1 to Contract, dated May 29, 2007, by and between Graeber Engineering
      Consultants GmbH and MSA Apparatus Construction for Chemical Equipment
      Ltd. and Hoku Scientific, Inc.
                                                                                  
                                                                                  10-K
                                                                                  
                                                                                  000-51458
                                                                                  
                                                                                  10.45
                                                                                  
                                                                                  6/29/0710.46†
                                                                                  
                                                                                  Supply
      Agreement, dated June 18, 2007, by and between and Global Expertise Wafer
      Division Ltd. and Hoku Materials, Inc.
                                                                                  
                                                                                  10-Q
                                                                                  
                                                                                  000-51458
                                                                                  
                                                                                  10.46
                                                                                  
                                                                                  08/06/0710.47
      †
                                                                                  
                                                                                  Agreement
      for Engineering of Hoku Electric Substation and Associated Facilities,
      dated June 14, 2007, by and between Idaho Power Co. and Hoku Materials,
      Inc.
                                                                                  
                                                                                  10-Q
                                                                                  
                                                                                  000-51458
                                                                                  
                                                                                  10.47
                                                                                  
                                                                                  08/06/0710.48
      †
                                                                                  
                                                                                  Supply
      Agreement, dated June 13, 2007, by and between Wuxi Suntech Power Co.,
      Ltd. and Hoku Materials, Inc.
                                                                                  
                                                                                  10-Q
                                                                                  
                                                                                  000-51458
                                                                                  
                                                                                  10.48
                                                                                  
                                                                                  08/06/0710.49
                                                                                  
                                                                                  Loan
      Modification Agreement, dated August 6, 2007, by and between Bank of
      Hawaii and Hoku Materials, Inc.
                                                                                  
                                                                                  10-Q
                                                                                  
                                                                                  000-51458
                                                                                  
                                                                                  10.49
                                                                                  
                                                                                  08/06/0710.50
                                                                                  
                                                                                  Amendment
      No. 1 of Supply Agreement, dated August 30, 2007, by and between Wuxi
      Suntech Power Co., Ltd. and Hoku Materials, Inc.
                                                                                  
                                                                                  8-K
                                                                                  
                                                                                  000-51458
                                                                                  
                                                                                  10.50
                                                                                  
                                                                                  08/31/07
  
 60
 
 10.51
                                                  
                                                  Amendment
      No. 2 of Supply Agreement, dated October 12, 2007, by and between Sanyo
      Electric Company, Ltd. and Hoku Materials, Inc.
                                                  
                                                  8-K
                                                  
                                                  000-51458
                                                  
                                                  10.51
                                                  
                                                  10/16/0710.52
      †
                                                  
                                                  Cost
      Plus Incentive Construction Contract, dated August 8, 2007, by and between
      JH Kelly LLC and Hoku Materials, Inc.
                                                  
                                                  10-Q
                                                  
                                                  000-51458
                                                  
                                                  10.52
                                                  
                                                  11/13/0710.53
      †
                                                  
                                                  Engineering,
      Procurement and Construction Management Agreement, dated August 7, 2007,
      by and between Stone & Webster, Inc. and Hoku Materials,
      Inc.
                                                  
                                                  10-Q
                                                  
                                                  000-51458
                                                  
                                                  10.53
                                                  
                                                  11/13/0710.54
      †
                                                  
                                                  Purchase
      and Sale Agreement , dated August 30, 2007, by and between Solar Energy
      Partners Pte Ltd. and Hoku Scientific, Inc.
                                                  
                                                  10-Q
                                                  
                                                  000-51458
                                                  
                                                  10.54
                                                  
                                                  11/13/0710.55
      †
                                                  
                                                  Engineering
      Services and Technology Transfer Agreement, dated October 6, 2007, by and
      between Dynamic Engineering Inc. and Hoku Materials, Inc.
                                                  
                                                  10-Q
                                                  
                                                  000-51458
                                                  
                                                  10.55
                                                  
                                                  11/13/07
  61
 10.56
      †
                      
                      Amendment
      and Restatement of Contract, dated October 15, 2007, by and between
      Graeber Engineering Consultants GmbH and MSA Apparatus Construction for
      Chemical Equipment Ltd. and Hoku Materials, Inc.
                      
                      10-Q
                      
                      000-51458
                      
                      10.56
                      
                      11/13/0710.57
                      
                      Amendment
      No. 3 to Supply Agreement, dated December 28, 2007, by and between Sanyo
      Electric Co., Ltd., and Hoku Materials, Inc.
                      
                      8-K
                      
                      000-51458
                      
                      10.57
                      
                      01/02/0810.58
      †
                      
                      Supply
      Agreement, dated November 19, 2007, by and between Solarfun Power Hong
      Kong Limited and Hoku Materials, Inc.
                      
                      10-Q
                      
                      000-51458
                      
                      10.58
                      
                      02/01/0810.59
      †
                      
                      Agreement
      for Construction of Hoku Electric Substation and Associated Facilities,
      dated December 28, 2007, by and between Idaho Power Company and Hoku
      Materials, Inc.
                      
                      10-Q
                      
                      000-51458
                      
                      10.59
                      
                      02/01/0810.60
      †
                      
                      First
      Amended & Restated Supply Agreement, dated January 7, 2008, by and
      between Solarfun Power Hong Kong Limited and Hoku Materials,
      Inc.
                      
                      10-Q
                      
                      000-51458
                      
                      10.60
                      
                      02/01/0810.61
      †
                      
                      First
      Amended & Restated Supply Agreement, dated January 30, 2008, by and
      between Sanyo Electric Co., Ltd., and Hoku Materials, Inc.
                      
                      10-Q
                      
                      000-51458
                      
                      10.61
                      
                      02/01/0810.62
                      
                      Amendment
      No. 2 to Supply Agreement, dated February 21, 2008, by and between Hoku
      Materials, Inc., and Wuxi Suntech Power Co., Ltd.
                      
                      8-K
                      
                      000-51458
                      
                      10.62
                      
                      02/25/0810.63
                      
                      Securities
      Purchase Agreement, dated February 21, 2008, by and between Hoku
      Scientific, Inc., and the Purchasers named therein
                      
                      8-K
                      
                      000-51458
                      
                      10.63
                      
                      02/25/08
  
 62
 
 10.64
                      
                      PowerPoint
      Presentation dated January 2008
                      
                      8-K
                      
                      000-51458
                      
                      10.64
                      
                      02/25/0810.65
                      
                      Registration
      Rights Agreement, dated February 29, 2008, by and among Hoku Scientific,
      Inc., and the Purchasers named therein
                      
                      8-K
                      
                      000-51458
                      
                      10.65
                      
                      02/29/0810.66
                      
                      Amendment
      No. 1 to Supply Agreement, dated March 4, 2008, by and between Hoku
      Materials, Inc., and Global Expertise Wafer Division Ltd.
                      
                      8-K
                      
                      000-51458
                      
                      10.66
                      
                      03/05/0810.67
                      
                      Amendment
      No. 1 to Engineering Services & Technology Transfer Agreement, dated
      April 4, 2008, by and between Hoku Materials, Inc and Dynamic Engineering
      Inc.
                      
                      8-K
                      
                      000-51458
                      
                      10.67
                      
                      04/09/0810.68
      †
                      
                      Equipment
      Purchase & Sale Agreement, dated March 4, 2008, by and between Hoku
      Materials, Inc. and Saft Power Systems USA Inc.
                      
                      10-K
                      
                      000-51458
                      
                      10.68
                      
                      6/6/0810.69
      †
                      
                      Change
      Order Number 2 to Engineering, Procurement & Construction
      Management Agreement, dated April 8, 2008, by and between Hoku Materials,
      Inc. and Stone & Webster, Inc.
                      
                      10-K
                      
                      000-51458
                      
                      10.69
                      
                      6/6/0810.70
      †
                      
                      Change
      Order Number 2 to Cost Plus Incentive Construction Contract, dated April
      7, 2008, by and between Hoku Materials, Inc. and JH Kelly
    LLC
                      
                      10-K
                      
                      000-51458
                      
                      10.70
                      
                      6/6/0810.71
      †
                      
                      Equipment
      Purchase & Sale Agreement, dated April 8, 2008, by and between Hoku
      Materials, Inc and PVA Tepla Danmark
                      
                      10-K
                      
                      000-51458
                      
                      10.71
                      
                      6/6/08
  63
 10.72
      †
                      
                      First
      Amended & Restated Supply Agreement, dated as of May 12,
      2008, by and between Hoku Materials, Inc. and Wuxi Suntech Power Co.,
      Ltd.
                      
                      10-K
                      
                      000-51458
                      
                      10.72
                      
                      6/6/0810.73†
                      
                      Second
      Amended and Restated Supply Agreement, dated as of May 13, 2008, by
      and between Hoku Materials, Inc. and Solarfun Power Hong Kong
      Limited
                      
                      10-K
                      
                      000-51458
                      
                      10.73
                      
                      6/6/0810.74
                      
                      Offer
      to Purchase between Hoku Scientific, Inc. and Operating Engineers Local
      Union No. 3 - District 17 - Hawaii, effective July 10,
2008
                      
                      8-K
                      
                      000-51458
                      
                      10.74
                      
                      7/16/0810.75
                      
                      Credit
      Agreement, dated July 25, 2008, by and between Hoku Scientific, Inc. and
      Bank of Hawaii
                      
                      8-K
                      
                      000-51458
                      
                      10.75
                      
                      7/30/0810.76
                      
                      Real
      Property Mortgage; Security Agreement; Assignment of Rents; Fixture Filing
      and Financing Statement, dated July 25, 2008, by and between Hoku
      Scientific, Inc. and Bank of Hawaii
                      
                      8-K
                      
                      000-51458
                      
                      10.76
                      
                      7/30/0810.77†
                      
                      Supply
      Agreement, dated as of July 24, 2008, by and between Hoku Materials, Inc.
      and Jiangxi Kinko Energy Co., Ltd.
                      
                      10-Q
                      
                      000-51458
                      
                      10.77
                      
                      7/31/0810.78
                      
                      Electric
      Service Agreement, dated September 17, 2008, between Hoku Materials, Inc.
      and Idaho Power Company
                      
                      8-K
                      
                      000-51458
                      
                      10.78
                      
                      9/22/0810.79
                      
                      Amended
      and Restated Agreement for Construction of Hoku Electric Substation and
      Associated Facilities, dated September 17, 2008, between Hoku Materials,
      Inc. and Idaho Power Company
                      
                      8-K
                      
                      000-51458
                      
                      10.79
                      
                      9/22/08
   64
  10.80
                    
                    Loan
      Agreement , dated October 1, 2008, between Hoku Scientific, Inc. and First
      Hawaiian Bank
                    
                    8-K
                    
                    000-51458
                    
                    10.80
                    
                    10/8/0810.81
                    
                    Amendment
      No. 1 to Second Amended and Restated Supply Agreement, between Hoku
      Materials, Inc. and Solarfun Power Hong Kong Limited, with Solarfun Power
      Holdings Co., Ltd. signing as guarantor, dated as of October 22,
      2008
                    
                    8-K
                    
                    000-51458
                    
                    10.81
                    
                    10/23/0810.82†
                    
                    Supply
      Agreement, dated as of August 4, 2008, by and between Hoku Materials, Inc.
      and Tianwei New Energy (Chengdu) Wafer Co., Ltd.
                    
                    10-Q
                    
                    000-51458
                    
                    10.82
                    
                    10/31/0810.83†
                    
                    Supply
      Agreement, dated as of September 4, 2008, by and between Hoku Materials,
      Inc. and Wealthy Rise International, Ltd.
                    
                    10-Q
                    
                    000-51458
                    
                    10.83
                    
                    10/31/0810.84†
                    
                    Supply
      Agreement No. 2, dated September 14, 2008, by and between Hoku Materials,
      Inc. and Tianwei New Energy (Chengdu) Wafer Co., Ltd.
                    
                    10-Q
                    
                    000-51458
                    
                    10.84
                    
                    10/31/0810.85†
                    
                    Amendment
      No. 2 to Supply Agreement, dated October 24, 2008, by and between Hoku
      Materials, Inc. and Tianwei New Energy (Chengdu) Wafer Co.,
      Ltd.
                    
                    10-Q
                    
                    000-51458
                    
                    10.85
                    
                    10/31/0810.86†
                    
                    Amendment
      to Supply Agreement No. 2, dated October 24, 2008, by and between Hoku
      Materials, Inc. and Tianwei New Energy (Chengdu) Wafer Co.,
      Ltd.
                    
                    10-Q
                    
                    000-51458
                    
                    10.86
                    
                    10/31/0810.87†
                    
                    Supply
      Agreement, dated as of November 13, 2008, by and between Hoku Materials,
      Inc. and Polymet Alloys, Inc.
                    
                    10-Q
                    
                    000-51458
                    
                    10.87
                    
                    2/3/09
 65
  10.88†
                        
                        Supply
      Agreement, dated as of November 19, 2008, by and between Hoku Materials,
      Inc. and BHS Acquisitions, LLC
                        
                        10-Q
                        
                        000-51458
                        
                        10.88
                        
                        2/3/0910.89†
                        
                        Hoku
      Solar Power I, LLC Operating Agreement, dated as of December 23, 2008, by
      and between UFA Renewable Energy Fund I, LLC and Hoku Solar,
      Inc.
                        
                        10-Q
                        
                        000-51458
                        
                        10.89
                        
                        2/3/0910.90†
                        
                        Development
      Service Agreement, dated as of December 23, 2008, by and between Hoku
      Solar, Inc. and Hoku Solar Power I, LLC
                        
                        10-Q
                        
                        000-51458
                        
                        10.90
                        
                        2/3/0910.91†
                        
                        Purchase
      and Sale and Operation and Maintenance Agreement, dated as of December 23,
      2008, by and between Hoku Solar, Inc. and Hoku Solar Power I,
      LLC
                        
                        10-Q
                        
                        000-51458
                        
                        10.91
                        
                        2/3/0910.92
                        
                        Right
      of First Refusal Agreement, dated as of December 23, 2008, by and between
      UFA Renewable Energy Fund I, LLC and Hoku Solar, Inc.
                        
                        10Q
                        
                        000-51458
                        
                        10.92
                        
                        2/3/0910.93
                        
                        Guaranty,
      dated as of December 23, 2008, by and between Hoku Solar Power I, LLC; UFA
      Renewable Energy Fund I, LLC; Firstar Development LLC; Hoku Scientific,
      Inc.; and Hoku Solar, Inc.
                        
                        10Q
                        
                        000-51458
                        
                        10.93
                        
                        2/3/0910.94†
                        
                        Amendment
      No. 1 to Supply Agreement, dated as of January 8, 2009, between Hoku
      Materials, Inc. and Jiangxi Jinko Solar Co., Ltd. (formerly known as
      Jiangxi Kinko Energy Co., Ltd.)
                        
                        10Q
                        
                        000-51458
                        
                        10.94
                        
                        2/3/0910.95
                        
                        Development
      Agreement, dated as of May 27, 2009, by and between Hoku Materials, Inc.
      and Pocatello Development Authority
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        *
   66
  10.96
                    
                    Amended
      Agreement, dated as of May 29, 2009, by and between Hoku Materials, Inc.
      and AEG Power Solutions USA Inc. (formerly known as Saft Power Systems USA
      Inc.)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    *10.97†
                    
                    First
      Amended and Restated Supply Agreement, dated as of May 21, 2009, by and
      between Hoku Materials, Inc. and Polymet Alloys, Inc.
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    *10.98†
                    
                    Change
      Order Number 3 to Engineering, Procurement & Construction Management
      Agreement, dated February 19, 2009, by and between Hoku Materials, Inc.
      and Stone & Webster, Inc.
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    *10.99†
                    
                    Supply
      Agreement, dated as of February 27, 2009, by and between Hoku Materials,
      Inc. and Shanghai Alex New Energy Co., Ltd.
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    *10.100†
                    
                    Amended
      & Restated Supply Agreement, dated as of February 26, 2009, by and
      between Hoku Materials, Inc and Jiangxi Jinko Solar Co.,
    Ltd.
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    *10.101†
                    
                    Amendment
      No. 2 to Second Amended & Restated Supply Agreement, dated as of March
      26, 2009 by and between Hoku Materials, Inc. and Solarfun Power Hong Kong
      Limited
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    *10.102†
                    
                    Change
      Order Number 3 to Cost Plus Incentive Construction Contract, dated March
      27, 2009 by and between Hoku Materials, Inc. and JH Kelly
    LLC
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    *10.103†
                    
                    Amended
      & Restated Supply Agreement, dated as of April 2, 2009, by and between
      Hoku Materials, Inc and Wealthy Rise International, Ltd.
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    *
   67
  16.1
                    
                    Letter
      regarding Change in Certifying Accountant pursuant to Item 304(a)(3) of
      Regulation S-K
                    
                    8-K
                    
                    000-51458
                    
                    16.1
                    
                    12/28/0523.1
                    
                    Consent
      of independent registered public accounting firm
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    *24.1
                    
                    Power
      of Attorney (included in signature page)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    *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
      required of Chief Financial officer as required by Rule 13a-14(a) of the
      Securities Exchange Act of 1934, as amended
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    *
   68
   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 Annual Report on Form 10-K and have been filed
      separately with the Securities and Exchange
  Commission.
  +
              Management
      contract, compensatory plan or
arrangement.
  #
              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-K and will
      not be deemed “filed” for purpose 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.
 
 
 69