Arise Technologies Corp.: 2008 Year-End Results

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ARISE Technologies Reports 2008 Year-End Results
Monday March 9, 5:35 pm ET

<< - Excellent progress in executing strategies in 2008, but financial results reflect demand slowdown and declining pricing that began late in the year as the severe economic recession started to affect customers - PV cell shipments total 11.2MW for the year generating $34.8 million of sales - Net loss of $42.3 million includes $9 million of write-downs and foreign exchange loss of $4 million, as well as significant scrap costs - Company is deferring capital investments and reducing costs to manage capital through the current economic environment - Adopts Shareholder Rights Plan - Conference call and webcast to be held Tuesday, March 10, 8:30am (Eastern) >>

WATERLOO, ON, March 9 / - ARISE Technologies Corporation, which is dedicated to becoming a leader in high-performance, cost-effective solar technology, today reported its financial results for the 2008 year-end and fourth quarter ended December 31, 2008. Financial results conform to Canadian generally accepted accounting principles (GAAP) and all currency amounts are in Canadian dollars.

"ARISE Technologies made excellent progress through 2008 in executing our strategies to become a leader in the rapidly growing solar industry. Unfortunately, our accomplishments during the past year now are overshadowed by the fact that commencing in late 2008 our industry and our company began to feel the consequences of the severe recession gripping global economies," said Vern Heinrichs, who has been serving as ARISE's interim President and Chief Executive Officer since January 28, 2009.

"As we advised in our February 3, 2009 news release, these consequences include a slackening in demand for solar products and systems that has caused our customers to defer purchases of PV (photovoltaic) cells from ARISE. With this drop in demand there has been a marked decline in the pricing for both silicon wafers and for PV cells. In addition, the lack of liquidity in global capital markets is affecting our industry, including ARISE.

"These developments," Mr. Heinrichs continued, "significantly adversely impacted our 2008 fourth-quarter and year-end financial results and have required that we closely examine all of our costs and planned capital investments for 2009. We have taken measures to significantly reduce our monthly operating expenses and to defer capital investments where possible.

"We intend to deploy our funds where we expect they can be the most productive in the short and medium term. Our objective, as for many companies, is to make our way through these difficult times with our core capabilities, operations, and strategies in place to where we can capitalize on these to meet our long-term goals for growth, profitability, and sustainable value creation for our shareholders," he continued.

"One promising area that we are pursuing are new opportunities that appear to be developing as the result of the Government of Ontario's recent announcement of Green Energy Act (GEA) legislation. We believe that ARISE's Systems Division is well positioned to participate in the programs that the GEA is expected to create," said Mr. Heinrichs.

        Operating Highlights

        -   In the 2008 fourth quarter, the new Bischofswerda, Germany plant
            continued to ramp up its production of PV cells on its first
            production line. The company shipped 6.1MW of PV cells, a 22%
            increase from the 5MW shipped in the third quarter. Total 2008
            shipments amounted to 11.2MW and the company could have shipped more,
            however, in December, customers began to defer purchasing as their
            requirements declined with softening business.

            Key performance drivers of the PV Cell Division include achieving
            targeted cell efficiency, scrap rate, and throughput levels. Since PV
            cell production began in April 2008 at the Bischofswerda plant,
            average PV cell efficiency has increased as production has ramped up.
            The company is continuing to strive for further increases.

            Since PV cell production began, scrap rates have continued to trend
            significantly downward, resulting in greater throughput, but they
            remained above target levels in the 2008 fourth quarter and have
            resulted in higher than anticipated scrap costs. In the fourth
            quarter of 2008, the company succeeded in reducing the scrap rate by
            approximately 20% compared with the prior quarter. ARISE has further
            significantly reduced the scrap rate in early 2009 and is committed
            to additional improvements as its manufacturing operations mature and
            it gains more production experience. The company is approaching its
            mature scrap rate for line 1.

        -   The company was able to get the installation of line 2 at the
            Bischofswerda plant back on track for commissioning in the 2009
            second quarter. ARISE previously warned of a potential four-to-eight
            week delay related to the timing of delivery of a key piece of
            equipment from its manufacturer. Line 2 is designed to produce
            annually PV cells with an electricity generating capacity of 45MW.
            The company expects to produce PV cells on line 2 using a proprietary
            process technology with a targeted efficiency of up to 18% when the
            line is fully optimized. The pace at which ARISE will ramp up
            commercial production of PV cells on line 2 will be subject to the
            level of demand from the company's customers.

            "While we expect to commission line 2 in the second quarter, we have
            not determined when it will begin producing commercially or how much
            it will ship this year as we continue discussing with our customers
            their requirements and pricing issues," Mr. Heinrichs noted.

        -   On October 7, 2008 ARISE announced that it signed a 10-year lease,
            with options for two additional five-year terms, for a 67,000-square-
            foot building in Kitchener, Ontario to house its new pilot plant for
            the production of 7N+ solar-grade polysilicon. As previously
            announced, ARISE's PV Silicon Division has planned to establish
            production capacity of 50 tonnes per year of its 7N+ silicon in 2009
            and to increase the production level to a target capacity of 400
            tonnes per year in 2010. ARISE expects to use the initial 7N+ silicon
            that it produces to manufacture PV cells at its manufacturing plant
            in Bischofswerda.

            Initial preparation of the building began following the lease
            signing. However, in view of current capital market conditions, as
            well as the company's own cash liquidity, completion of the 50-tonnes
            pilot plant is dependant on ARISE securing additional financing or a
            partner that will contribute to funding the project.

        -   In October, the company announced the appointment of Peter Currie to
            the Board. Mr. Currie was the second new director added within weeks,
            the other being Gary West. Both bring strong financial backgrounds to
            the Board. In January, ARISE announced that Bart Tichelman had
            resigned as a Director and as President and CEO. The Board appointed
            its Chairman, Vern Heinrichs, to serve as interim President and CEO.
            ARISE is working with an executive search firm in seeking a new
            President and CEO.

            ARISE announced in November that company founder Ian MacLellan was
            appointed President of its PV Systems Division. He relinquished his
            role as ARISE's Chief Technology Officer, while continuing as the
            company's Vice-Chairman.

        -   In November, ARISE confirmed with SOLON AG the volume and pricing of
            PV cells that it will ship to SOLON in 2009 under a five-year
            agreement signed in early 2008 to supply 212MW of PV cells.

        -   In December, ARISE announced that its wholly owned subsidiary, ARISE
            Germany, has signed a four-year contract to supply PV cells to Asola
            Advanced and Automotive Solar Systems GmbH. Under the terms of the
            contract, ARISE will supply approximately 80MW of PV cells to Asola.
            The value of the contract is approximately $200 million.

        -   Also in December, ARISE announced that it had met the fourth major
            milestone for its Silicon Feedstock Pilot Plant project. This
            included the initial construction phase of the pilot plant and
            successful completion and operation of a pilot plant-scale furnace.
            The silicon feedstock development project is being partially funded
            by Sustainable Development Technology Canada. The project is
            developing a new approach for refining high-purity silicon, which is
            needed for high-efficiency PV cells. The proprietary process is
            intended to produce 7N+ high-purity (99.99999%) silicon for PV
            applications  using a simplified chemical vapor deposition process.

        -   On December 18, ARISE announced that it agreed with Commerzbank AG to
            extend the maturity of a $15.3 million inventory credit facility to
            June 15, 2009. The secured bank credit facility, which the company
            entered into with Commerzbank on March 17, 2008, has been used for
            the purchase of silicon wafers.



Year-End and Fourth-Quarter Financial Highlights

ARISE's year-end and fourth-quarter financial results reflect the manufacturing start-up and commencement of commercial shipments of PV cells to its customers in June 2008.

Sales for 2008 were $35.7 million, compared with $1.2 million in 2007, an increase of 2,975%. Virtually all of the sales in 2008 ($34.8 million) were generated by shipments of PV cells; the balance consisted of PV systems sales. In 2007, PV systems accounted for all sales.

In the 2008 fourth quarter, sales totaled $18.9 million, compared with $314,629 in the 2007 period. The increase is entirely attributable to PV cell production. During the fourth quarter of 2008, 99% of sales were PV cell sales; there were no PV cell sales in the comparative quarter of 2007.

Gross profit for 2008 was a negative $15.8 million, compared with $75,047 in 2007. The negative gross profit for 2008 largely is attributable to the start up of PV Cell manufacturing. The PV Cell Division recorded a negative gross profit of $15.9 million (gross profit for the PV Systems Division was $0.2 million) largely as the result of a $3.9 million write-down of inventory, a $5.1 million write-down of silicon wafer prepayments, and significant scrap costs related to the start-up of production,. Scrap includes breakage as well as all off-spec production, which includes cells with an efficiency of less than 14%.

Management estimates that cost of sales for the year includes start-up costs of approximately $4.4 million. Start-up costs are scrap costs in excess of the mature rate of scrap. The inventory write-down reduced certain inventory to its net realizable value which was largely necessitated by the global decline in the pricing of PV cells and silicon. The silicon wafer prepayment write-down was necessitated by the unexpected significant decrease in silicon wafer prices as economies slumped around the world.

Gross profit for the 2008 fourth quarter was a negative $11.9 million, compared with a negative of $1,254 in the same quarter of 2007. The negative gross profit is attributable to start-up costs incurred for PV cell production as well as the impairment charges recognized in the fourth quarter of 2008 on inventory-related assets.

Operating expenses for 2008 were $21.5 million, compared with $11.5 million in 2007. For the 2008 quarter, operating expenses were $5.1 million compared with $3.7 million in the 2007 period.

R&D increased to $6.4 million in 2008 ($1.9 million in the fourth quarter) from $3.9 million in 2007 ($0.8 million in the fourth quarter). In 2008, R&D expenses were net of government funding of $2.7 million; in 2007 expenditures were net of $1.0 million of government funding. ARISE's R&D initiatives comprise its PV silicon and PV cell programs. R&D expenses in 2008 rose as the result of higher payroll expenses for those programs together with increased partner development expenses for the PV silicon program.

Increased general and administrative (G&A) expenses were the most significant factor accounting for the company's higher operating expenses in 2008. G&A in 2008 was $11.6 million ($2.6 million in the fourth quarter), compared with $6.7 million in 2007 ($2.6 million in the fourth quarter). The increase in G&A in 2008 compared with 2007 is the result of higher payroll expenses and stock-based compensation costs. The payroll cost increase is largely due to increased employment in Canada and Germany. The stock-based compensation expense (non cash) in 2008 was $4.9 million, compared with $2.2 million in 2007. As a percentage of sales, G&A expenses decreased significantly to 33% in 2008 compared with 581% in 2007.

Selling and marketing expenses for 2008 were $2.0 million, compared with $0.8 million in 2007. In the 2008 fourth quarter, selling and marketing expenses increased $423,339 compared with the same three months of 2007. The year over year increase in selling and marketing expenses is due to increased payroll expenses and feasibility costs for in-process solar farm projects.

Depreciation of capital assets (exclusive of depreciation included in cost of goods sold) and amortization of intangible assets rose significantly in 2008 to $1.1 million, compared with $25,374 in 2007 ($270,096 in the 2008 fourth quarter, compared with $6,518 in the 2007 period). The increase in 2008 was largely attributable to newly acquired R&D equipment.

Interest expense (net) for 2008 was $1.4 million, compared with interest income of $76,532 in 2007. Fourth quarter 2008 interest expense was $0.6 million, compared with interest expense of $0.2 million in the 2007 quarter. The increase in interest expense is the result of higher borrowing from Commerzbank AG in Germany. At December 31, 2008, the company had bank loans and long-term debt totaling $36.7 million ($1.1 million at December 31, 2007). Interest expense decreased 16% during the fourth quarter of 2008 compared with the third quarter of 2008 due to lower interest rates. All third-party debt of ARISE is subject to floating interest rates and is denominated in Euros.

Other income and expenses for 2008 included a foreign exchange loss of $4.0 million, compared with a foreign exchange loss of $0.2 million in 2007. The company realized a foreign exchange loss of $4.7 million in the fourth quarter of 2008, which was partially offset by foreign exchange gains in the second and third quarters of 2008. The significant loss in the fourth quarter was due to the strengthening Euro compared to the Canadian dollar. During the fourth quarter, the Euro strengthened by more than 14%. The largest component of the foreign exchange loss has resulted from the translation into Canadian dollars of financial liabilities of ARISE Germany which are denominated in Euros.

ARISE recorded a net loss for 2008 of $42.3 million (a loss of $0.36 per basic and diluted share), compared with a net loss $11.6 million (a loss of $0.18 per basic and diluted share) in 2007. For the fourth quarter of 2008, ARISE's net loss was $22.1 million ($0.18 per basic and diluted share), compared with a loss of $4.1 million ($0.04 per basic and diluted share) in the 2007 period.

Liquidity and Capital Resources

As at December 31, 2008, ARISE had positive working capital of $2.2 million consisting of current assets of $59.3 million less current liabilities of $57.1 million. This compares with positive working capital at the end of the 2008 third quarter of $23.7 million (current assets of $69.5 million and current liabilities of $45.8 million). The decline in working capital reflects the write-downs taken in the 2008 fourth quarter and increased liabilities. Cash and cash equivalents and restricted cash at the 2008 year-end totaled $22.6 million, a decrease of $15.3 million since the 2007 year-end. Restricted cash comprises funds held in escrow for the completion of leasehold improvements for the Silicon Feedstock Pilot Plant. Current liabilities include deferred revenue of $8.2 million, which represents customer deposits ($47,263 at December 31, 2007).

The decrease in cash and cash equivalents during 2008 is primarily the result of funding the operating loss, prepayments for the supply of silicon wafers, and capital expenditures related to the Silicon Feedstock Pilot Plant and PV cell production line 2.


As of March 6, 2009, the company had cash and cash equivalents of approximately $7.6 million. The decrease in cash and cash equivalents since the 2008 year-end primarily is due to the purchase of silicon wafers and capital expenditures related to the silicon pilot plant and PV cell line 2. The payments for production line 2 will be funded from the investment credit facility once required documentation is filed.

In view of the continuing profound global economic slump and its affect on demand in all industries, including for solar products and systems, as well as the ongoing turmoil in capital markets, ARISE has undertaken a review of all of its planned capital expenditures and expansion plans, as well as of all its staffing requirements and manageable costs. The company intends to deploy its funds where it expects them to be the most productive in the short and medium term.


"We naturally are concerned about the softening in customer demand that began in late 2008 and has continued in early 2009, as well as the weakening in pricing for PV cells that has taken place. It is uncertain whether or for how long these trends will continue," said Dave Chornaby, ARISE's Chief Financial Officer.

"Based on our current assessment of customer demand and market pricing, expenses according to the company's revised budgets and cost-reduction measures, we believe that ARISE has sufficient funds to finance our operations into at least the latter part of 2009. We are exploring financing options and potential partnerships, and are having further discussions with our current and potential lenders regarding our financing agreements and future operating and capital requirements." Mr. Chornaby said.

"As we advised in our February, 3, 2009, ARISE does not believe that it is prudent for us to provide guidance at this time regarding our financial or operating expectations for 2009. This caution is appropriate given the continuing economic volatility and its effect on our industry and on our customers and suppliers. We are in discussions with all of our customers and our suppliers to determine whether adjustments in our agreements with them may be warranted given the major reset that is taking place in our industry. These discussions may result in changes to our sales and previously agreed-on pricing from customers as well as the purchasing levels and pricing with suppliers." said Mr. Chornaby.

Shareholder Rights Plan

ARISE's Board of Directors has approved the adoption of a Shareholder Rights Plan (the plan).

"Our Shareholder Rights Plan is intended to encourage that ARISE's shareholders receive fair treatment should any unsolicited take-over bids be made for the outstanding shares of the company," said Mr. Heinrichs.

"The Shareholders Rights Plan should provide the company's Board of Directors with additional time to assess any offers and to seek out alternative proposals if the directors believe that would be in the best interests of the shareholders. This is consistent with our objective to maximize value for ARISE's shareholders. Our Board is concerned that the current price of ARISE's shares does not adequately reflect the value of the company in view of the progress we have made, the relationships that we have established with our customers and suppliers, the technologies and processes that we have been developing, and the team of skilled and experienced people that we have attracted," Mr. Heinrichs said.

ARISE has not adopted the plan in response to any specific proposal to acquire control of its outstanding shares. The plan is similar to those adopted by other Canadian companies and ratified by their shareholders. The plan does not apply to take-over bids that meet certain requirements (a "Permitted Bid"), including that the bid be made by way of a take-over bid circular and be left open for at least 60 days so as to ensure that shareholders have an adequate opportunity to assess the merits of the bid.

The Toronto Stock Exchange has conditionally accepted the plan, subject to shareholder approval. ARISE will be seeking shareholder ratification of the Rights Plan at its upcoming Annual and Special Meeting. If ratified, the plan will have an initial term that expires at the annual meeting of shareholders of ARISE in 2012, and may be extended for a second term lasting until the annual meeting of shareholders to be held in 2015. A copy of the plan is available for viewing on SEDAR at www.sedar.com, and can also be obtained from ARISE upon written request.

Outlook - Company Will Continue to Execute Growth Strategies

"Few, if any, would question the importance of solar technology for the future. At ARISE, we remain confident of our technical capabilities to capitalize on the enormous opportunities that lie ahead," said Mr. Heinrichs. "At the same time, we must deal with the significant issues posed by the rapid deterioration in demand and pricing that has taken place in recent months in our industry together with the tightness of the global capital markets.

"It is admittedly frustrating not to be able to continue moving ahead as we were and as we planned, but we must slow down our expansion plans, reduce our costs, and secure additional capital either through financing or partnerships if we are to meet our longer-term objectives. We are seeing similar measures throughout our industry, as is true in most and perhaps all other sectors as well," he continued.

"We are working in close consultation with our current customers and suppliers, while also continuing to seek additional sales opportunities in Europe as well as in North America. These discussions could result in changes to our expectations for sales and purchasing volumes in 2009 as well as in pricing. Our core strengths and strategies, in silicon technology and PV cells, as well as in systems, remain intact and we will continue to focus on developing these," Mr. Heinrichs said.

ARISE will hold a conference call for analysts and investors at 8:30 a.m. (Eastern) on March 10. The company will file its financial statements, and Management Discussion and Analysis with SEDAR and these documents will be available on ARISE's website prior to the conference call. Vern Heinrichs, interim President and Chief Executive Officer, and Dave Chornaby, Chief Financial Officer, will be available to answer questions during the call.

To participate in the call, please dial 416-644-3414 or 1-800-733-7560 (Canada and the U.S. only) at least five minutes prior to the start of the call.

A live audio webcast of the conference call will be available at www.newswire.ca and www.arisetech.com.

An archived recording of the call will be available at 416-640-1917 or 1-877-289-8525 (Canada and the U.S. only) (Passcode 21295523 followed by the number sign) from 10:30 a.m. on March10 to 11:59 p.m. on March 18.

About ARISE Technologies

ARISE Technologies Corporation, based in Waterloo, Ontario, is dedicated to becoming a leader in high-performance, cost-effective solar technology. The company operates through three divisions. The PV Cell Division manufactures PV (photovoltaic) cells at its first manufacturing plant opened in April 2008 in Bischofswerda, Germany. The division is developing proprietary technology with a target of achieving a step-by-step progression to a high-efficiency level of greater than 20%. The PV Silicon Division is using a proprietary method to produce silicon at 7N+ high-purity (99.99999% purity) for PV cell applications, based on a simplified chemical vapor deposition process. The division is focusing on scaling up its process to provide ARISE with control over its supply, costs, and quality. The PV Systems Division provides complete turnkey PV solutions for solar farms and rooftop installations under the Ontario standard offer program.

The company's shares are listed on the Toronto Stock Exchange under the symbol APV and on the Frankfurt Open Market Exchange under the symbol A3T. Additional information is available at www.arisetech.com and www.sedar.com.


For further information

    ARISE Technologies Corporation, 65 Northland Road, Waterloo, Ontario, Canada, N2V 1Y8, Dave Chornaby, Chief Financial Officer, (519) 772-5732, Dave.Chornaby@arisetech.com, www.arisetech.com


Source: ARISE Technologies Corporation
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