Contribution to Hawaii

Subsequent to the recent changes to Act 221, the Hawaii law that provides tax credits to encourage investment in local high technology companies, Hoku has received a number of inquiries about the importance of investment tax credits to the Company’s early financing.  Some specific information is provided below.

Origins & Early Financing

Hoku was founded in 2001, and focused on the development of proprietary hydrogen fuel cells and fuel cell membrane technologies.

At the time of Hoku’s initial public offering in August 2005, the Company had raised a total of just $7.8 million from equity investors. About $3.95 million of this financing came from private investors in Hawaii; the rest – about $3.85 million – came from international venture capital funds and technology partners, like Sanyo.

To fund its business, Hoku held three rounds of private fundraising before going public. In 2002, 2003, and 2004, the company sold shares to individual private investors at $0.75, $3.00, and $1.50 per share, respectively, adjusted for stock splits. (The second round of funding reflects a premium paid by Sanyo, who invested $1 million in Hoku in 2003, in conjunction with a joint development agreement.)

Over time, Hoku has proven itself to be extremely efficient with investment capital. With a pre-IPO expenditure of just $2.0 million out of the $7.8 million total raised, Hoku was able to develop and bring to market its fuel cell membrane electrode assembly, Hoku MEA™. Put another way, Hoku spent only $2.0 million of its investor’s money prior to its IPO in 2005.   This highlights Hoku’s focus on cost and cash management, and remains an important part of Hoku’s business approach today.

Net Benefit to the State

Hoku’s investors were only eligible for a maximum amount of approximately $6.35 million in Hawaii State tax credits. This is because not all of the total $7.8 million invested qualified for Act 221 incentives. Further, because Hoku’s IPO was in 2005, many of the investors sold their shares before all of the tax credits could be monetized. This resulted in the recapture of an estimated one-third of the total available credits. Thus, it is likely that only about $4.23 million of investment credits were actually claimed.

At the same time, Hoku was eligible for $1.06 million in direct research and experimentation tax incentives, which, when combined with the investors’ potential benefits, results in a total “investment” in Hoku by the State of Hawaii of between $5.29 and $7.41 million.

Since its founding in 2001, Hoku has generated direct benefits to the state of Hawaii and the local economy well in excess of $21 million, including:

• Payroll Taxes paid for corporate, fuel cell, and solar employees, all based in Hawaii;
• General Excise Tax generated from the sale of turnkey PV installations by Hoku Solar;
• Investments in capitalized goods, like the construction of its building in Kapolei (sold in 2008 to the Operating Engineers for use as a union hall);
• Hoku's operating expenditures to Hawaii vendors, subcontractors, and business partners; and
• An eight-year average of 14 full-time, high technology jobs in Hawaii.

The numbers above exclude payments and expenditures made outside of Hawaii (e.g. Idaho), and do not include a multiplier effect for the funds Hoku has spent in the state.  In other words, to be conservative, these numbers assume that the money Hoku has spent in Hawaii, and the local gains from the sale of Hoku stock have not been spent or invested again (and again) in the state. If one were to consider these multiplier benefits, Hoku’s contribution to the state is far greater than described above.

Therefore, conservatively, since its inception, Hoku’s contribution to the Hawaii state economy has been three to four times that of the total benefits it has received.

Beyond this net positive contribution in dollar terms, Hoku has the opportunity to bring its global clean energy industry relationships to bear for the benefit of its home market in the islands. As such, Hoku remains a local company both in practice and principle, and it is this combination of global insight and local values that differentiates Hoku from its competitors in Hawaii and abroad.