Trouble Brewing at Hoku Scientific?

(MoneyWatch) 

• The Company: Hoku Scientific, a designer of solar-cell materials
• The Filing: Form DEF 14A filed on July 25 with the SEC
• The Finding: Although he failed to meet fiscal 2008 goals -- implementation of Sarbanes-Oxley initiatives and gross margin and net income targets -- Hoku's board of directors is paying chairman and CEO Dustin M. Shindo a cash incentive payment of $760,000, or 200 percent of base salary for the year that ended in March. Hoku Scientific is rewarding Shindo for his ability to raise capital, a performance metric more in demand at solar companies than actual management or business strategy skills.

The Upshot: Hoku began construction in May 2007 on a 3,500 metric-ton-per-year polysilicon production facility in Pocatello, Idaho. Management says it remains on track to complete pilot demonstration in the fall of 2008, deliver polysilicon in the first half of calendar year 2009, and run at name-plate capacity in first-half of 2010.

In fiscal 2007, ignoring its original compensation mandate, the Board awarded Shindo a cash incentive payment of $240,000, or 100 percent of base salary, based on his success in securing a polysilicon supply agreement with Sanyo Electric. In February 2007, the company abandoned a proton exchange membrane fuel-cell program to focus exclusively on its new solar business model.

Hoku Materials estimates it will cost approximately $390 million to engineer, procure and construct its planned polysilicon production plant, which management believes will be funded through a combination of $240 million in customer product prepayment commitments (with Sanyo Electric, Suntech Power, Solar-Fabrik AG, and Solarfun) and approximately $150 million in additional debt and/or equity financing.

The announced $1.7 billion in customer commitments are "non-binding," with terms of initial delivery dates and financing deadlines already extended in some cases. Proceeds from a pending sale of common stock depends on the success of the pilot production demonstration. A previous debt financing arrangement with Merrill Lynch was canceled in May 2008.

In view of strong demand for -- and the current scarcity of -- solar-grade silicon, producers, such as Hemlock Semiconductor, Renewable Energy, Mitsubishi, and MEMC Electronic Materials, are investing heavily in the expansion of their production capacities

That expansion, combined with the entry of electronic-grade silicon makers such as Applied Materials to the solar-grade space, could result in an excess supply just when Hoku is looking to ramp up production in 2010 -- leading to pressure on global market prices.

The Question: Can the owner of a Hawaiian-based microbrewery find success as the CEO of a commodity-based business?