Note 5 - Customer Deposits

9 Months Ended

Dec. 31, 2011

Note 5 - Customer Deposits Disclosure

(5) Customer Deposits

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 cash deposits to the Company 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. These prepayments were used by the Company to finance the construction of the Polysilicon Plant. Accordingly, the receipts of these prepayments have been reflected in the financing activities section of the statements of cash flows. Upon the sale of product under the long-term supply agreements, the Company will reflect the application of the deposit in exchange for the product as a cash inflow from operations with a corresponding cash outflow in financing activities.

As of December 31, 2011 and March 31, 2011, the Company had $139.8 million and $140.2 million, respectively, related to prepayments received under its various polysilicon supply agreements. Through December 31, 2011, the Company refunded $440,000 of customer deposits in accordance with the amended polysilicon supply agreements. In December 2009, an investment transaction with Tianwei was completed and the existing polysilicon supply agreements were amended such that $50.0 million of an aggregate of $79.0 million in secured prepayments previously paid by Tianwei to the Company was converted into shares of the Company’s common stock. The prepayments which are expected to be applied to deliveries one year subsequent to the balance sheet date have been reflected in the consolidated balance sheets as long-term customer deposits.

Under the terms of the various long-term polysilicon supply agreements with its 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.

The Company did not commence delivery of polysilicon to Shanghai Alex New Energy Co., Ltd. (Alex) or Hanwha SolarOne (SolarOne) in accordance with its agreements, which provided these customers with the right to terminate the agreements and require repayment of a $20.0 million, $49.0 million, and $2.0 million prepayment, respectively. 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. Such security interests are subordinated to bank financings.

The following is a summary of prepayments received as of December 31, 2011 and March 31, 2011:

Customer	December 31, 2011		March 31, 2011
	(in thousands)
Hanwha SolarOne, formerly Solarfun Power Hong Kong Ltd.	$	49,000		$	49,000
Tianwei New Energy (Chengdu) Wafer Co., Ltd.		29,000			29,000
Wealthy Rise International, Ltd. (Solargiga)		20,200			20,200
Jinko Solar Co., Ltd.		19,560			20,000
Shanghai Alex New Energy Co., Ltd.		20,000			20,000
Wuxi Suntech Power Co., Ltd.		2,000			2,000
	$	139,760		$	140,200

Based on existing terms of the various long-term polysilicon supply agreements, the $139.8 million of customer prepayments would be credited against future product deliveries in the years ending December 31, 2012 through 2016 and thereafter as indicated in the following table.

	Application of
	Customer Deposits
Year ending December 31,	(in thousands)
2012	$	95,227
2013		7,254
2014		10,021
2015		5,233
2016		3,100
Thereafter		18,925
	$	139,760

Hoku Corp 10-Q