Summary of HOKU SCIENTIFIC INC

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including, but not limited to, statements about:

• The closing of our financing agreement with Tianwei, and our receipt of the proceeds of our $50 million loan agreement with Tianwei and China Construction Bank;

• 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 first quarter of calendar year 2010;

• 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 and other terms 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;

• 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;

• 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 materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail in Part II, Item IA. "Risk Factors." Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date hereof. We hereby qualify all of our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

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

Overview

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 long-term polysilicon contracts. Assuming the closing of the Tianwei transaction, even if we are successful in securing additional long-term polysilicon contracts that could provide additional prepayments, and our existing customers fulfill their obligations to make additional prepayments when due (of which there can be no assurances), we will still need to seek additional financing to complete our planned polysilicon production facility currently under construction in Pocatello, Idaho, or the Project. As of September 30, 2009, we had cash and cash equivalents on hand of $9.1 million and short term liabilities of $67.0 million.

To help address our cash needs to meet our obligations, we have modified payment terms in purchase orders with more than thirty of our vendors to structure payment plans for amounts past due and to be invoiced in the future. Furthermore, in September 2009, we entered into a definitive agreement providing for a majority investment in us by Tianwei New Energy Holdings Co., Ltd., or Tianwei, and debt financing by Tianwei through China Construction Bank, as agent, for the construction and development of the Project. Subject to closing of the Tianwei financing transaction, which is anticipated to occur in November 2009 after the satisfaction of closing conditions, including but not limited to the approval of Chinese government authorities, Tianwei will convert $50 million of an aggregate of $79 million in secured prepayments previously paid by Tianwei to us under certain polysilicon supply agreements into shares of our common stock. In addition, we will issue Tianwei a warrant to purchase an additional 10 million shares of common stock and Tianwei will arrange for $50 million in debt financing for us, together with a commitment from Tianwei to assist us in obtaining additional financing that may be required by us to construct and operate the Project. We currently expect to receive the $20 million of the debt financing in November 2009, and $30 million in December 2009.

The $50 million in debt, plus $63 million in additional prepayments from our existing customers, will be used to pay current liabilities and complete construction of the Project to the point where we could commence shipments to customers, and we intend to delay any additional financing until such time. On the basis of these funding sources, we anticipate resuming full scale plant construction in November 2009. We do not expect to generate significant revenue until we successfully commence the manufacture and shipment of polysilicon and begin meeting the obligations under our supply contracts. In addition, we will still need to seek additional financing to complete the Project. If we are unable to secure additional long-term supply contracts and prepayments, assuming the cost to construct and equip the Project does not exceed $390 million and that all of our existing customers make their prepayments when due, the amount we will need to raise could be as much as $71 million. If we are unable to secure additional long-term supply contracts and prepayments, if for any reason (e.g. contract amendment, termination, breach, etc.) one or more of our polysilicon supply customers do not pay the full amount of the prepayments to which they are presently committed and/or if the actual cost to complete the Project is more than $390 million, the amount we will need to raise could exceed $71 million. Furthermore, if there is a delay in receiving the $50 million in debt from the Tianwei transaction, or we do not receive our anticipated prepayments from our customers, or other unfavorable factors occur, it could raise substantial doubt about our ability to continue as a going concern. The inability to continue as a going concern could result in an orderly wind-down of us or other potential forms of restructuring.

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.

In May 2007, we commenced construction of our planned polysilicon manufacturing facility in Pocatello, Idaho, or the Project. 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 Project capacity to 4,000 metric tons per year; however, we are continuing to review the $390 million estimated cost to complete the Project. This estimate is based on our discussion with vendors, declining costs of materials and labor and ongoing adjustments of certain design elements; however, changes in costs, modifications in construction timelines and other factors could cause the actual cost to significantly exceed our estimate. Any significant increase in the cost to complete the Project could have a material adverse effect on our business, financial condition and results of operations. 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 the Project decreased from $400 million to $390 million.

During the three and six months ended September 30, 2009, Hoku Materials incurred an operating loss of $888,000 and $1.5 million respectively, in expenses, which mainly consists of payroll, travel expenses, and professional fees. In addition, as of September 30, 2009, Hoku Materials has capitalized $262.1 million related to construction costs for the Project and received $165 million in customer deposits as prepayments on long-term polysilicon supply agreements.

Construction/Financing Update

In September 2009, we entered into a definitive agreement providing for a majority investment in us by Tianwei New Energy Holdings Co., Ltd., or Tianwei, and debt financing by Tianwei through China Construction Bank, as agent, for the construction and development of the Project. Subject to closing of the Tianwei financing transaction, which is anticipated to occur in November 2009 after the satisfaction of closing conditions, including but not limited to the approval of Chinese government authorities, Tianwei will convert $50 million of an aggregate of $79 million in secured prepayments previously paid by Tianwei to us under certain polysilicon supply agreements into shares of our common stock. In addition, we will issue Tianwei a warrant to purchase an additional 10 million shares of common stock and Tianwei will arrange for $50 million in debt financing for us, together with a commitment from Tianwei to assist us in obtaining additional financing that may be required by us to construct and operate the Project. We expect to receive $20 million of the debt financing in November 2009, and $30 million in December 2009.

Polysilicon Supply Agreement Updates

Wuxi Suntech Power Co., Ltd.

In July 2009, Hoku Materials and Wuxi Suntech Power Co., Ltd., or Suntech, amended the existing agreements between the two parties such that Suntech agreed to waive the following rights:

• Its right to enforce the obligation of Hoku Materials to complete the Test Demonstration (as defined in the Suntech Supply Agreement) by September 30, 2009, or the Demo Final Date. Suntech's waiver will expire on December 31, 2009, with the result that if we have not completed the Test Demonstration by that date, we will be in breach of our obligation to complete the Test Demonstration.

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

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

In exchange for the Suntech waivers described above, we agreed to waive our right to payment of the TCS Demonstration Installment and, as a result, Suntech is no longer required to make $15 million in additional prepayments. In addition, we authorized Suntech to replace its $45 million Stand-by Letter of Credit with a $30 million stand-by letter of credit issued by a bank in China, which may be collateralized with non-cash assets. The amendment, anticipated to close in November 2009, will result in a change of control of us.

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

Subject to closing of the Tianwei financing transaction, which is anticipated to occur in November 2009 after the satisfaction of closing conditions, including but not limited to the approval of Chinese government authorities, we will enter into amendments with Tianwei New Energy (Chengdu) Wafer Co., Ltd., or Tianwei. Pursuant to the amendments, we (a) will convert $50 million of the total $79 million of prepayments previously paid to us by Tianwei into shares of our common stock and (b) will reduce the price at which Tianwei purchases polysilicon by approximately 11% per year. Under the amendments, the amount of polysilicon to be delivered will remain unchanged and Tianwei will still be required to pay us an additional $2 million in prepayments; however, the total revenue for the polysilicon to be sold by us to Tianwei will be modified such that up to approximately $418 million may be payable to us during the ten-year term (exclusive of amounts Tianwei may purchase pursuant to its right of first refusal), subject to product deliveries and other conditions.

Wealthy Rise International, Ltd.

We have granted to Wealthy Rise International, Ltd., or Solargiga, an extension of time, or the Extension, to make an aggregate of $9.9 million in prepayments that were payable between June and October, 2009. Pursuant to the Extension, the date on which the $9.9 million is due has been extended to the earlier of November 15, 2009, or the date on which we and Wealthy Rise enter into a definitive amendment to the Agreement pursuant to which the schedule and conditions for Wealthy Rise's prepayments could be adjusted.

Hoku Solar

We incorporated Hoku Solar to design, engineer and install PV systems and related services. During the three and six months ended September 30, 2009, Hoku Solar incurred an operating loss of $563,000 and $913,000, respectively, primarily reflecting the operational focus on completing the installation and system acceptance of the seven PV systems for Power I which began generating PPA revenues in May 2009.

Hoku Fuel Cells

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

We 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.

During the three and six months ended September 30, 2009, Hoku Fuel Cells had insignificant activity primarily associated with patent applications in order to protect our technology, inventions and improvements related to our fuel cell products.

Financial Operations Review

During the three and six months ended September 30, 2009, we derived all of our revenue through PV system installation and ancillary services related to Hoku Solar. We expect that all of our revenue will be derived through PV system installations and the sale of electricity until the first half of calendar year 2010, when Hoku Materials is expected to generate revenue through the sale of polysilicon.

During the three and six months ended September 30, 2009, our revenue was $1.5 million and $1.6 million, respectively, comprised of commercial PV system installations and electricity sales.

Consolidated Results of Operations

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

Comparison of Three Months Ended September 30, 2009 and 2008

Revenue. Revenue was $1.5 million for the three months ended September 30, 2009 compared to $1.9 million for the same period in 2008. Revenue in both periods was primarily comprised of PV system installations and related services.

Cost of Revenue. Cost of revenue was $1.4 million for the three months ended September 30, 2009 compared to $1.5 million for the same period in fiscal 2009. Cost of service and license revenue primarily consisted of employee compensation and supplies and materials.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1.5 million for the three months ended September 30, 2009 compared to $1.1 million for the same period in fiscal 2009. The increase of $479,000 was primarily due to compensation to Board Directors of $210,000, retention payments for officers and other key employees of $130,000 and higher payroll expenses of $125,000.

Interest and Other Income/(Loss). Interest and other income was $217,000 for the three months ended September 30, 2009 compared to a loss of $687,000 for the same period in fiscal 2009. Interest and other income for the three months ended September 30, 2009 was primarily comprised of $210,000 in prior accruals for general excise tax reserves due to statute limitations and interest income of $7,000. Interest and other loss for the three months ended September 30, 2008 was primarily comprised of unrealized losses related to our foreign currency (Euro) forward contracts of $780,000, offset by interest income and from the sale of fuel cell equipment of $53,000 and $40,000, respectively.

Comparison of Six Months Ended September 30, 2009 and 2008

Revenue. Revenue was $1.6 million for the six months ended September 30, 2009 compared to $4.1 million for the same period in 2008. Revenue for both periods was primarily comprised of PV system installations and related services.

Cost of Revenue. Cost of revenue was $1.4 million for the six months ended September 30, 2009 compared to $3.0 million for the same period in 2008. Cost of service and license revenue primarily consisted of employee compensation and supplies and materials.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $2.6 million for the six months ended September 30, 2009 compared to $2.3 million for the same period in fiscal 2009. The increase of $300,000 was primarily due to higher payroll expenses of $290,000, compensation to Board Directors of $210,000 and retention payments for officers and other key employees of $130,000 The increase was offset by lower stock based compensation of $351,000.

Interest and Other Income/(Loss). Interest and other income was $302,000 for the six months ended September 30, 2009 compared to $51,000 for the same period in fiscal 2009. Interest and other income for the six months ended September 30, 2009 was primarily comprised of the reversal of $221,000 in accruals for general excise tax reserves, $40,000 from the sale of fuel cell equipment and interest income of $20,000. Interest and other income for the six months ended September 30, 2008 was primarily comprised of interest income and the sale of fuel cell equipment of $245,000 and $74,000, respectively, offset by unrealized losses related to our foreign currency (Euro) forward contracts of $268,000.

Liquidity and Capital Resources

We have incurred significant net losses since inception and we have relied on our ability to fund our operations principally through both registered and unregistered offerings of our securities and prepayments on long-term polysilicon contracts. Even if we are successful in securing additional long-term polysilicon contracts that could provide additional prepayments, and our existing customers fulfill their obligations to make additional prepayments when due (of which there can be no assurances), we will still need to seek additional financing to complete our polysilicon production facility currently under construction. As of September 30, 2009, we had cash and cash equivalents on hand of $9.1 million and short term liabilities of $67.0 million.

To help address our cash needs to meet our obligations, we have modified payment terms in purchase orders with more than thirty of our vendors to structure payment plans for amounts past due and to be invoiced in the future. Furthermore, in September 2009, we entered into a definitive agreement providing for a majority investment in us by Tianwei New Energy Holdings Co., Ltd., or Tianwei, and debt financing by Tianwei through China Construction Bank, as agent, for the construction and development of our polysilicon production facility in Pocatello, Idaho. Subject to closing of the Tianwei financing transaction, which is anticipated to occur in November 2009 after the satisfaction of closing conditions, including but not limited to the approval of Chinese government authorities, $50 million of an aggregate of $79 million in secured prepayments previously paid by Tianwei to us under certain polysilicon supply agreements will be converted into shares of our common stock. In addition, we will issue Tianwei a warrant to purchase an additional 10 million shares of common stock and Tianwei will arrange for $50 million in debt financing for us, together with a commitment from Tianwei to assist us in obtaining additional financing that may be required by us to construct and operate the Project. We expect to receive the $20 million of the loan proceeds in November 2009, and $30 million in December 2009.

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