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EX-32.1 - Solar Thin Films, Inc.v181152_ex32-1.htm
EX-31.1 - Solar Thin Films, Inc.v181152_ex31-1.htm
EX-31.2 - Solar Thin Films, Inc.v181152_ex31-2.htm
EX-32.2 - Solar Thin Films, Inc.v181152_ex32-2.htm
 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
          
For the fiscal year ended December 31, 2009
          
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
          
For the transition period from __________ to __________

Commission File Number: 001-13549

SOLAR THIN FILMS, INC.
(Exact name of registrant as specified in its charter)

Delaware
95-4356228
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

116 John Street, Suite 1120, New York, New York 10038
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code:
(212) 629-8260

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
 

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
 Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No  x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Yes ¨ No  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer  ¨     Accelerated filer  ¨ 
     
 Non-accelerated filer (Do not check if a smaller reporting company)  ¨    Smaller reporting company  x 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  Yes ¨ No  x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $27,094,615 as of June 30, 2009.

As of March 22, 2010, 19,039,850 shares of the registrant’s common stock, par value $.01 per share, were issued and outstanding.

Documents Incorporated by Reference: None.


 
SOLAR THIN FILMS, INC.

2009 FORM 10-K ANNUAL REPORT
 
TABLE OF CONTENTS

       
Page
PART I  
     
2
Item 1.
 
Business.
 
4
Item 1A.
 
Risk Factors. 
 
13
Item 1B.
 
Unresolved Staff Comments. 
 
21
Item 2.
 
Properties.  
 
22
Item 3.
 
Legal Proceedings.
 
23
Item 4.
 
Submission of Matters to a Vote of Security Holders.
 
23
PART II 
     
24
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.  
 
24
Item 6.
 
Selected Financial Data.
 
26
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
26
Item 7A.
 
Quantitative and Qualitative Disclosures About Market Risk.
 
40
Item 8.
 
Financial Statements and Supplementary Data.
 
41
Item 9.
 
Changes and Disagreements With Accountants on Accounting and Financial Disclosure. 
 
42
Item 9A.
 
Controls and Procedures.
 
42
Item 9B.
 
Other Information.
 
43
PART III
     
44
Item 10.
 
Directors, Executive Officers and Corporate Governance.
 
44
Item 11.
 
Executive Compensation.
 
46
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
55
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence.
 
56
Item 14.
 
Principal Accounting Fees and Services.
 
57
PART IV
     
58
Item 15.
 
Exhibits, Financial Statement Schedules.
 
58
   
Signatures
 
63
 
1


Cautionary Statement Concerning Forward-Looking Statements

Our representatives and we may from time to time make written or oral statements that are "forward-looking," including statements contained in this Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, reports to our stockholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements within the meaning of the Act. In addition, other written or oral statements which constitute forward-looking statements may be made by us or on our behalf. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "projects," "forecasts," "may," "should," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. These risks may relate to, without limitation:

 
·
we have a significant working capital shortage; as of the filing date of this report, we are currently in default in payment of $1 million of indebtedness which became due in March 2009 and $268,000 of indebtedness (plus redemption penalties and accrued interest) which became due in June 2009, and may face litigation or even bankruptcy if we are unable to meet or restructure our obligations;

 
·
we need to raise additional capital which may not be available on acceptable terms or at all;

 
·
we have a history of substantial losses, may incur additional losses in 2010 and beyond, and may never achieve or maintain profitability;

 
·
our revenues and operating results are likely to fluctuate significantly;

 
·
we have only generated limited revenues and may never achieve profitability;

 
·
our equipment business is small and projected revenues may not materialize;

 
·
we are required to raise additional capital to support our Kraft Elektronkai Zrt operating subsidiary and complete our acquisition of BudaSolar Technologies Co., Ltd.;

 
·
our sole customer has advised that they are withholding their final payment to us due to certain maintenance and repair complaints with respect to our amorphous silicon equipment line;

 
·
our inability to perform under significant contracts would have a material adverse effect on our consolidated business and prospects;

 
·
we may not be able to complete our proposed acquisition of BudaSolar Technologies Co., Ltd.;

 
·
we may be unable to acquire a significant equity interest in Algatec Solar AG;

 
·
our equipment business is dependent on one customer and loss of this customer will have a negative impact on our operations;

 
·
evaluating our business and future prospects may be difficult due to the rapidly changing market landscape;

 
·
our “turnkey” manufacturing facility may not gain market acceptance, which would prevent us from achieving increased sales and market share;

 
·
technological changes in the solar power industry could render our turnkey manufacturing facilities uncompetitive or obsolete, which could reduce our market share and cause our sales to decline;

 
·
we face risks associated with the marketing, development and sale of our turnkey facilities internationally, and if we are unable to effectively manage these risks, it could impair our ability to expand our business abroad;
 
2

 
 
·
we may not be able to successfully develop and commercialize our turnkey PV manufacturing facilities which would result in continued losses and may require us to curtail or cease;

 
·
our fixed-price contracts could subject us to losses in the event that we have cost overruns;

 
·
we have a few proprietary rights, the lack of which may make it easier for our competitors to compete against us;

 
·
we depend on the services of key executives and technical and other personnel, the loss of whom could materially harm our business or reduce our operational effectiveness;

 
·
we do not maintain theft or casualty insurance and only maintain modest liability and property insurance coverage and therefore we could incur losses as a result of an uninsured loss;

 
·
our research and development activities may not yield any commercially viable technologies; and

 
·
governmental regulation may have a negative impact on our business.

Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the factors described herein and in other documents we file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K, and any Current Reports on Form 8-K filed by us.
 
3

Item 1. Business

Overview

Solar Thin Films, Inc. (the “Company”) is a business focused on the solar energy industry.  We engage in the design, manufacture and installation of thin-film amorphous silicon (“a-Si”) photovoltaic manufacturing equipment. The equipment is used in plants that produce photovoltaic thin-film a-Si solar panels or modules. The Company operates through its wholly owned subsidiary, Kraft Elektronikai Zrt (“Kraft”). The Company expects the primary use of such photovoltaic thin film modules will be the construction of solar power plants by corporations and governments throughout the world.

On April 3, 2009, the Company and Kraft entered into a share exchange agreement with BudaSolar Technologies Co. Ltd. (“BudaSolar”) and its shareholders.  The agreement restated a prior agreement entered into in 2008.  Under the terms of the restated agreement, the BudaSolar shareholders were to have acquired a 49% equity interest in Kraft, in exchange for transferring 100% of the BudaSolar equity to Kraft.  Such agreement was subject to the satisfaction of certain closing conditions, including the Company’s repayment of all outstanding June 2006 convertible notes in order to secure the release of the shares of Kraft pledged as security to the June 2006 note holders.  Although only $268,000 of such notes are still outstanding, the Kraft shares still remain subject to the pledge agreement.  At the present time, the Company is negotiating a new agreement with the BudaSolar shareholders, the proposed terms of which are described below.

For more than the past 18 months, BudaSolar has been providing technical support to our Kraft subsidiary under a separate agreement.  In connection with these services, Kraft has paid $1,370,000 in advances to BudaSolar during the second quarter of 2009. BudaSolar has provided $747,891 worth of services in 2009 to Kraft, which left a credit balance of advances wired to BudaSolar of $622,109 as of December 31, 2009.  In addition, during 2008, BudaSolar received $750,000 in advances from the Company, which was fully repaid in the second quarter of 2009.

The Company’s Kraft subsidiary is highly dependent upon the ongoing technical expertise of the BudaSolar personnel in completing and making operational the Kraft line of a-Si solar module equipment.   In such connection, Kraft recently completed the installation of equipment for its sole customer, Grupo Unisolar SA in Spain.  The customer has resisted payment of the final €968,265 installment due under the April 8, 2008 contract allegedly due to certain maintenance and repair complaints with respect to our amorphous silicon equipment line.  Representatives of BudaSolar are assisting Kraft in attempting to resolve this problem.  If the Company is unable to satisfy its only existing customer, its a-Si module equipment business could be materially and adversely affected.

There can be no assurance that the Company will enter into the new share exchange agreement with BudaSolar and its shareholders, or if such agreement is entered into by the parties, that the Company will be able to consummate the acquisition of BudaSolar and the transactions contemplated therein.

Effective as of October 30, 2008, the Company entered into a stock exchange agreement with Algatec Solar AG and its shareholders, which expired on July 15, 2009.  Algatec produces, sells and distributes metallurgical and other types of crystalline silicon solar panels or modules.  As of the date of this report, the Company intends to acquire Algatec Equity Partners LP, a Delaware limited partnership (the “Algatec Partnership”), which, in turn, owns a 47% equity interest in the capital stock of Algatec Solar AG.  As previously disclosed, a trust established by Robert M. Rubin, the President and Chief Executive Officer of the Company, owns approximately 25% of the equity of the Algatec Partnership and is an affiliate of the general partner of the Algatec Partnership.  It is anticipated that the equity stake in Algatec will be obtained from the Algatec Partnership in exchange for approximately 43.0 million shares of the Company’s Common Stock.  However, such number of shares of Common Stock are subject to adjustment based on an independent fairness opinion to be obtained by the Company. The acquisition of the partnership and its equity in Algatec is subject to (i) execution of definitive exchange agreements, (ii) obtaining the requisite approvals and consents of the partners of the partnership, (iii) the delivery of audited financial statements of Algatec for the two fiscal years ended December 31, 2009, and (iv) receipt of the fairness opinion. The Company anticipates that the acquisition of the partnership and its 47% equity interest in Algatec will be completed within the next 90 days.  The Company is also continuing negotiations with the other shareholders of Algatec to acquire the remaining 53% interest in the capital stock of Algatec.  There can be no assurance that the conditions to complete the acquisition of the 47% equity interest in Algatec owned by the Algatec Partnership will be satisfied to enable the Company to acquire such equity, or that the Company will be able to acquire any additional equity interests in Algatec.

In the event that the Company is unable to acquire BudaSolar or any of the equity of Algatec, absent an alternative strategic acquisition or a significant increase in the current business of its Kraft subsidiary, it is unlikely that the Company will be able to achieve its expansion plans in the solar business, and may be required to cease doing business altogether.
 
4

 
Consummation of either or both of the BudaSolar and Algatec acquisitions, as well as all other expansion plans of the Company, are subject to its ability to solve its significant working capital shortages; make payment or other arrangements for the resolution of approximately $1.3 million of indebtedness currently in default as of the filing date of this report ($1 million of which became in default in March 2009 and $268,000 of indebtedness which became in default in June 2009 (plus redemption penalties and accrued interest)) and other accrued accounts payable, all of which are overdue.  In the event that the Company is unable to resolve these matters within the next 90 days, it may be unable to continue in business and/or may be required to seek protection from its creditors under the Federal Bankruptcy Act.

 Subject to consummation of either or both of the BudaSolar or Algatec transactions, the Company will seek to further vertically integrate itself within this industry through activities in, but not limited to, investing in and/or operating the module manufacturing plants, selling thin film photovoltaic modules, and installing and/or managing solar power plants. The Company also intends, directly and through joint ventures or strategic alliances with other companies or through governmental incentive programs, to sell equipment for and participate financially in solar power facilities using thin film a-Si solar modules or metallurgical and other crystalline solar modules as the power source to provide electricity to municipalities, businesses and consumers.

Kraft and BudaSolar are each Hungarian corporations and their headquarters are located in Budapest, Hungary.  Algatec is a German corporation and its headquarters are located in Proesen, Germany.  Solar Thin Films is a Delaware corporation and its headquarters are located at 116 John Street, Suite 1120, New York, New York 10038.  Solar Thin Films website is located at www.solarthinfilms.com.

Company History

Solar Thin Films History

The Company was initially organized as a New York corporation on June 22, 1988 under the name Alrom Corp. ("Alrom"), and completed an initial public offering of securities in August 1990. Alrom effected a statutory merger in December 1991, pursuant to which Alrom was reincorporated in the State of Delaware under the name American United Global, Inc. Prior to the acquisition of Kraft, the Company intended to focus its business strategy on acquisitions of operating businesses in various sectors. On June 14, 2006, in connection with its business strategy, the Company closed on the acquisition of 95.5% of the outstanding securities of Kraft. In addition, the Company acquired the remaining 4.5% minority interest in August 2007 and, as a result, now conducts its operations via Kraft, its wholly-owned subsidiary.

Kraft History
 
Kraft was founded in 1993, shortly after the breakup of the communist economy in Hungary. Its founding members were associated with the Hungarian Central Research Institute for Physics. In 1996, Kraft was contracted to develop thin-film photovoltaic deposition equipment for production of amorphous silicon based thin-film modules, as well as complete turnkey facilities. Photovoltaics (PV) is the physical phenomenon, which allows certain semiconductor materials to directly convert sunlight into electricity.
 
In the subsequent years, Kraft has manufactured equipment for production facilities in New Jersey, Germany, Hungary, China, Taiwan, Greece and Portugal. In producing equipment for these facilities, Kraft developed substantial equipment manufacturing expertise. More recently as a supplier for a solar project in Weihai, China, Kraft developed additional process expertise required to allow it to become a manufacturer of “turnkey” plants, including the delivery of both equipment and services that produce photovoltaics modules utilizing thin-film technology. Kraft has delivered its first "turnkey" plant in Spain which is now in final acceptance testing.

BudaSolar Technologies Co. Ltd.

On April 3, 2009, the Company and Kraft entered into a restated share exchange agreement with BudaSolar and its shareholders.  Under the terms of the agreement, the BudaSolar shareholders were to have acquired a 49% equity interest in Kraft, in exchange for transferring 100% of the BudaSolar equity to Kraft.  Such agreement was subject to the satisfaction of certain closing conditions, including the Company’s repayment of all outstanding June 2006 convertible notes in order to secure the release of the shares of Kraft pledged as security to the June 2006 note holders.  Although only $268,000 of such notes remain outstanding, the Kraft shares still remain subject to the pledge agreement.
 
5

 
At the present time, the Company is negotiating a new agreement with the BudaSolar shareholders.  The proposed revised transaction contemplates that the Company will directly acquire 100% of the share capital of BudaSolar in exchange for 70,000 shares of the Company’s Series B-5 convertible voting preferred stock (the “B-5 Preferred Stock”).  The B-5 Preferred Stock has a liquidation value of $7.0 million and is convertible at any time by the holders into a minimum of 2.1 million and a maximum of 49.0 million shares of the Company’s common stock, $0.01 par value per share (the “Common Stock”).  The aggregate number of shares of Company Common Stock into which all if the B-5 Preferred Stock would be convertible (the “Conversion Shares”) will depend upon the audited combined pre-tax income of the Company’s Kraft and BudaSolar subsidiary corporations (the “Corporations Pre-Tax Income”) at the end of each of the five consecutive fiscal years ending December 31, 2010 through December 31, 2014 (the “Measuring Period”).  The target Corporations Pre-Tax Income and the corresponding number of Conversion Shares that can be exercised at the end of any one or more fiscal years during the Measuring Period is based on a “grid” of such Pre-Tax Income and Conversion Shares.  For example if the Corporations Pre-Tax Profits at the end of any of the five fiscal years in the Measuring Period is 0 to $2.5 million, the number of Conversion Shares would be 2.1 million; if such Pre-Tax Income is $10.0 million, then the number of Conversion Shares would be 21.0 million; and if such Pre-Tax Income is $55.0 million or more, the Conversion Shares would be 49.0 million.  On March 31, 2015, any B-5 Preferred Stock not converted into Common Stock would automatically convert based upon the Corporations Pre-Tax Income for the fiscal year ending December 31, 2014.

At the time of execution of the BudaSolar purchase agreement, the Company will provide $55,000 to BudaSolar as a working capital advance, and is obligated to provide additional working capital thereafter.  In addition, we shall assume the obligations of repayment of all outstanding loans made by the BudaSolar shareholders or their affiliates to BudaSolar prior to the date of the agreement, so that, as of the closing date, BudaSolar will have either positive stockholders equity or capital of not less than US $1,000.  It is expected that such loans will be evidenced by a 5 year subordinated note of the Company, which shall (i) bear interest at an annual rate equal to LIBOR plus a margin of 3%; and (ii) will be repaid to the BudaSolar shareholders following completion of working capital contributions to BudaSolar and Kraft by the Company and thereafter only out of excess cash flow of BudaSolar and Kraft.

Under the terms of a separate agreement with BudaSolar, Kraft has contracted to purchase from BudaSolar (1) equipment assembly services on some of its equipment based on a fixed fee per equipment, and (2) installation related technical services based on hourly rates.  In connection with these services, Kraft has paid $1,370,000 in advances to BudaSolar during the second quarter of 2009. BudaSolar has provided $747,891 worth of services in 2009 to Kraft, which left a balance of advances wired to BudaSolar of $622,109 as of December 31, 2009.  During 2008, BudaSolar received $750,000 pursuant to the Stock Exchange Agreement from the Company, which was fully repaid in the second quarter of 2009.

In the event that the Company consummates the BudaSolar acquisition, each of Messrs. Robert M. Rubin, Gary Maitland and Dr. Boris Goldstein (the current board members of the Company) and Istvan Krafcsik and Attila Horvath, the principal stockholders and executive officers of BudaSolar, have agreed to vote their shares of voting capital stock of the Company to elect to the board of directors of the Company and its Kraft and BudaSolar subsidiaries five persons, two of whom shall be Istvan Krafcsik and Attila Horvath, two of which would be designated by the Company and a fifth independent director acceptable to Messrs. Krafcsik and Horvath.   In addition, such parties and the Company agreed that during the five year Measuring Period, so long as the Corporations Pre-Tax Income equaled or exceeded $5.0 million, the members of the Company’s board of directors will include Messrs. Krafscik and Horvath and other persons reasonably acceptable to them.

BudaSolar currently operates its business at Kraft’s facility in Budapest, and the BudaSolar personnel and management work closely with the Kraft personnel and management.  Kraft is highly dependent upon the ongoing technical expertise of the BudaSolar personnel in executing the turn-on and related computer functions of the Kraft line of a-Si solar module equipment, and making such equipment lines operational.   In such connection, in April 2010 the Company recently completed the installation of equipment for Grupo Unisolar SA in Spain.  The customer has resisted payment of the final €968,265 installment due under the April 8, 2008 contract allegedly due to certain maintenance and repair complaints with respect to our amorphous silicon equipment line.  Representatives of BudaSolar are assisting Kraft in attempting to resolve this problem and the Company expects to collect the payment in full. If the Company is unable to satisfy its only existing customer, its a-Si module equipment business could be materially and adversely affected.

The ongoing operations of Kraft and BudaSolar will require approximately $3.2 million of working capital to sustain and expand their operations during 2010.   In addition, if the Company were to acquire Algatec, it is anticipated that a condition of such acquisition would be that the Company provide expansion financing of not less than $5.0 million for that corporation.  Accordingly, the Company’s ability to achieve it acquisition plans and expand its business will require the Company to source additional debt or equity financing from third party.  Absent receipt of the final €968,265 installment due under the April 8, 2008 contract with Group Solar AG, the Company’s operating subsidiaries may be unable to pay its obligations as they come due.
 
6

 
Agreements with Algatec Solar AG

On October 20, 2008, Robert M. Rubin, Chairman, Chief Executive Officer and Chief Financial Officer of Solar Thin Films, formed Algatec Equity Partners, L.P., a Delaware limited partnership (the “Partnership”), for the purpose of acquiring up to 49% of the share capital of Algatec.  Effective as October 30, 2008, Algatec and members of Algatec senior management consisting of Messrs. Rainer Ruschke, Ullrich Jank, Dr. Stefan Malik and Andre Freud (collectively, the “Algatec Management Stockholders”), and Anderkonto R. Richter, Esq., as trustee for Mr. Ruschke and another Algatec stockholder (the “Trustee”), entered into a share purchase agreement (the “Algatec Share Purchase Agreement”).  Under the terms of the Algatec Share Purchase Agreement, on November 3, 2008 (the “First Closing”) the Partnership invested an aggregate of $3,513,000, of which approximately €2,476,000 was represented by a contribution to the equity of Algatec to enable it to acquire all of the assets and equity of Trend Capital, the predecessor to Algatec.  The Partnership also purchased for €1.00 per share a total of 13,750 Algatec shares, representing 27.5% of the outstanding share capital of Algatec.

The general partner of the Partnership is Algatec Management LLP, a Delaware limited liability company owned by The Rubin Family Irrevocable Marital Trust and other persons.  Mr. Rubin and Barry Pomerantz, a business associate of Mr. Rubin, are the managers of the general partner.  Under the terms of the limited partnership agreement, the general partner agreed to invest a total of $165,000 in the Partnership in consideration for 5.0% of the assets, profits and losses of the Partnership.  The limited partners, who invested an aggregate of $3,200,000 at the First Closing and additional persons the Partnership will seek to admit as limited partners by the Second Closing, will own 95.0% of the Partnership assets, profits and losses. As part of the First Closing, The Rubin Family Irrevocable Marital Trust invested an additional $1,500,000, as a limited partner, on the same terms as other limited partners of the Partnership.

In addition to its equity investment, the Partnership has agreed under the terms of a loan agreement entered into at the same time as the Algatec Share Purchase Agreement, to lend to Algatec on or about November 30, 2008 (the “Second Closing”), an additional $2,600,000 or approximately €2,000,000.  The proceeds of the loan were to be used to assist Algatec in paying the balance of the purchase price for all of the assets and equity of the Trend Capital limited partnership.  Upon funding of the loan, the Partnership would purchase for €9,250 an additional 9,250 shares, representing 21.5% of the outstanding share capital of Algatec, thereby increasing its ownership to an aggregate of up to 49% of the outstanding share capital of Algatec.  The loan, together with interest at the rate of 6% per annum, is repayable on the earlier of December 31, 2012 or the completion of a financing providing Algatec with up to $50.0 million of proceeds for expansion (the “Algatec Financing”).  Upon the Partnership funding the entire €2,000,000 loan at the Second Closing, the Management Group would own the remaining 51% of the share capital of Algatec.  If the Partnership funds less than the full €2,000,000 loan, the additional 21.5% equity to be issued to the Partnership at the Second Closing was to have been appropriately pro-rated.  On December 29, 2008, the Partnership consummated the Second Closing with Algatec and funded a loan of €2,000,000 ($2.6 million). Ultimately, the Partnership provided total funding of approximately $5.75 million to Algatec which, after allowing for unfavorable currency conversion rates, left the Partnership with a total equity ownership in Algatec of approximately 47% of the total number of outstanding Algatec shares.

Effective as of October 30, 2008, the Trustee, the Management Group and the Partnership (collectively, the “Algatec Stockholders”) and Algatec entered into a stock exchange agreement. Under the terms of the stock exchange agreement the Algatec stockholders agreed, subject to certain conditions, to exchange 100% of the share capital of Algatec for shares of shares of Company capital stock. Consummation of the Algatec acquisition is subject to certain conditions, including Algatec obtaining up to $50.0 million financing for Algatec to enable it to construct the addition to its existing manufacturing facility and purchase the necessary equipment to expand its business.  On April 10, 2009, the parties agreed to extend the anticipated closing date of the transactions contemplated by the Stock Exchange Agreement to July 15, 2009.  The requisite financing for Algatec was not obtained and the agreement expired on July 15, 2009.
 
Solar Thin Power

In 2007, the Company formed Solar Thin Power, Inc. under the laws of the State of Delaware.  Solar Thin Power was to engage in power projects.  It owned a 15% interest in CG Solar Company Limited, the Company’s joint venture in China (and agreed to purchase another 5%), and was in preliminary discussions with other prospective joint venture partners with respect to marketing and financing of various power projects.

In 2007 and 2008, Solar Thin Power received an aggregate of $3,498,396 of financing from ten unaffiliated investors who purchased common stock of Solar Thin Power at $0.50 per share.  Approximately $1,500,000 of the proceeds of such financing used by Solar Thin Power to acquire a 20% minority interest in CG Solar and the balance of such proceeds were loaned to Solar Thin Films for working capital.  Under the terms of the transaction, if Solar Thin Power was not a publicly traded corporation by June 2009, the investors in Solar Thin Power had the right to require Solar Thin Films to repurchase half of their portion of their minority equity in Solar Thin Power for $1,767,500. This obligation was eliminated with the merger of Solar Thin Power into Solar Thin Films effective June 30, 2009.
 
7

 
At the time of the merger, an aggregate of 64,403,333 shares of Solar Thin Power were issued and outstanding, of which Solar Thin Films owned 43,000,000 shares or 66.77% of Solar Thin Power common stock, and stockholders of Solar Thin Power, other than Solar Thin Films, owned an aggregate of 21,403,333 shares of the 64,403,333 outstanding shares of Solar Thin Power common stock.   The Company consummated an Agreement and Plan of Merger dated effective June 30, 2009 pursuant to which Solar Thin Power was merged with and into the Company (the “Merger”).  Following the consummation of the Merger, effective June 30, 2009, Solar Thin Power is operated as a division of the Company and will seek to facilitate power projects and joint ventures designed to provide solar electricity using thin film a-Si solar modules. 

Under the terms of the Merger:
 
·
the shareholders of Solar Thin Power, other than the Company, received an aggregate of 6,421,000 shares of the Company’s common stock, or one and one-half shares of the Company’s common stock for each share of Solar Thin Power common stock owned by them;

·
each full share of Solar Thin Power common stock that is issuable upon exercise of any Solar Thin Power warrants as at the effective time of the Merger will be converted into and exchanged for the right to purchase or receive one full share of the Company’s common stock upon exercise of such Solar Thin Power warrants; and

·
all of the 43,000,000 shares of Solar Thin Power common stock owned by the Company were cancelled.

Description of Our Business

Amorphous Silicon Solar Module Manufacturing Equipment

Kraft is engaged in the design, development, manufacture, and installation of thin-film amorphous silicon (“a-Si”) photovoltaic manufacturing equipment. The equipment is used in plants that produce photovoltaic thin-film a-Si solar panels or modules. The primary buyers of photovoltaic thin-film manufacturing equipment are businesses as well as investment partnerships, engaged in the production of photovoltaic thin-film modules. Governments and government agencies throughout the world support the industry with marketing and incentive schemes. The photovoltaic manufacturing equipment deposits a-Si as the active layer in the production of photovoltaic thin-film modules and is one of the least expensive technologies currently available for the production of commercial solar panels. We believe that customers using its technology and equipment can produce power from a-Si solar modules at a cost of less than $1.15 per Watt of capacity.
 
BudaSolar is a corporation formed in 2007 and engaged in the development of a-Si technology and integrated systems using photovoltaic manufacturing equipment.  BudaSolar offers turn-key solutions for the production of 49” x 25” amorphous silicon solar modules. In 2009, Kraft further consolidated the BudaSolar operations. Personnel and company assets have been integrated into the Company. For example, the two companies, Kraft and BudaSolar, operated as one for the turn-key line manufacturing of its client Grupo Unisolar and also provided installation and training.

Kraft has been providing equipment that is incorporated into a single manufacturing line capable of manufacturing a-Si solar modules that produce approximately 5MW of solar power annually. Kraft has been able to improve the throughput of a single line to 6MW as well as make other qualitative improvements in its offering. Through the successful consolidation with BudaSolar Kraft accelerated its transition from an equipment vendor to an integrated supplier by offering a holistic turn-key program. This provides its customers with high margin production facilities incorporating multiple solar module equipment lines with the annual capacity of manufacturing a-Si solar modules that generate from 6MW over 18MW to 36MW solar power.

BudaSolar started a new photovoltaic R&D laboratory in Budapest Hungary, which opened in April 2010. The construction of the lab is the first step of the €3 million budget “TFsolar2” project that has heavy support of the Hungarian National Office for Research and Technology. The new laboratory will enable the company to develop further the existing know-how of Kraft in the field of quality and operational improvement for a-Si solar cell processes and equipment to maximize the efficiency of the a-Si modules in short term and elaborate the processing technology of the high efficiency micromorph solar modules by the end of the three year project and reduce cost.
 
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Pricing Factors

Based on available market information, a-Si solar module manufacturing equipment is currently available at costs averaging $1.50 for each peak Watt of “production capacity.”  Production capacity is the cumulative rated capacity of a-Si solar modules that can be produced annually using such equipment.  Accordingly, a “6MW (1,000,000 Watts) equipment facility” consists of a single line of manufacturing equipment that is capable of producing a-Si solar modules with a cumulated rated capacity of 6MW (6,000,000 Watts) of solar power on an annual basis.  The Company believes that the current market price for a-Si solar modules has fallen from between $2.50 and $3.00 per Watt of rated capacity, or approximately $15.0 to $18.0 million of a-Si solar module sales output from a 6MW facility to between $0.84 to $1.90 per Watt of rated capacity, or roughly $5.04 and $11.4 million for a 6MW facility, and between $15.12 and $34.2 million for a 18MW facility and between $30.24 and $68.4 million for semi-automated 36MW turn-key facilities, respectively.  The current cost of manufacture of a-Si solar modules using the Company’s equipment is estimated between approximately $0.81 to $1.15 per Watt from our “turn-key” facility, depending on line size, location and its relating expenses, costs competitive with any process on the market today. We believe that this will provide a-Si solar module manufacturers with an important competitive advantage given that the anticipated average price per Watt for a-Si and other modules is expected to continue to fall towards $1.33 per Watt over the next two to three years, while crystalline module prices will range between $1.50 to $1.95 per Watt.

Backlog and Order Pipeline

In April 2008, Kraft entered into a purchase agreement with Grupo Unisolar SA of Bejar, Spain to furnish the customer with a turn-key photovoltaic manufacturing equipment production facility in Spain for a contract price payable to Kraft of €7.9 million ($12.3 million at the time of signing of the purchase agreement). Kraft received a contract deposit in June 2008 and began delivery of the system in December of 2008. Kraft and Grupo Unisolar are currently in acceptance testing of the 6MW a-Si thin-film PV plant Kraft provided. We anticipate that substantially all of the revenues from the Grupo Unisolar order will be recognized in the second quarter of 2010. Grupo Unisolar has also indicated an interest in expanding the facility to 12MW in 2010.

China City Investments Limited, a project company set up by Chinese investors, signed a contract with BudaSolar as technology provider for the turnkey delivery of production lines at the capacity of 85MWp/year using silicon based thin film PV technology. The agreement is the first phase of the Dalian City Industrial Park Project targeting the development of a complex, vertically integrated production center with cumulative PV production capacity of 1GW to be achieved in 10 phases.

In addition, both Kraft and BudaSolar have submitted detailed proposals and contracts for additional orders, both single line and multi-line, totaling in tens of millions of dollars, with companies based in Europe, Russia, the Ukraine, Pakistan, China, North America, India, and Southeast Asia. There can be no assurance that any of such additional orders will be obtained on commercially attractive terms, if at all.

The Market and Competition

The photovoltaic (or PV) industry is a significant global industry in which buyers are dominant. We believe that the current state of affairs is merely growing pains of a rapidly maturing industry, based on the aftermath of a global recession and a strong winter. We are anticipating a phase of further consolidation within the industry. The Company believes this consolidation is needed to prepare the industry for further growth that will be aided by the concerns of global warming, governmental incentives, political and institutional involvement. STF believes the strongest forces promoting the industry will be combined effects of the further improving economics of PV and rising fuel prices. Module cost will further drop and will represent a decreasing share of total system costs (approximately 45% currently), as raw material and module prices continue to decline. Manufacturers will have to pay attention to the total cost and efficiency of systems and their manufacturing costs.

As of the first quarter of 2010, global economies are slowly growing again. Consolidation, cheaper Asian products, and overcapacity have however led to falling prices with narrower and shrinking margins within the solar industry. After additional global installations of 6.4 GW, despite the difficult economic climate, we believe that the industry will further stabilize in the second quarter of 2010 and that the outlook for the third quarter of 2010 is generally favorable on a global basis. We expect strong markets in Germany, Italy (while both the German and the Italian incentive scheme remain in flux), France (expected stronger incentive scheme), and Japan (among other parts of Asia). We expect strong prospects in the U.S. and upcoming future markets, such as China, Mexico, Brazil, South Africa, and India. We expect the market to grow 33% in 2010 (to approximately 8.51GW) on a global level due to cost savings, efficiency improvements and the expansion of distribution channels. Using a very conservative estimate of 25% annual industry growth, we expect 17GW of new installations by 2013. The main obstacle will be the difficulty of raising capital for plants and projects, especially in the thin film field.
 
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Thin film technologies have had an especially challenging time, as a market with heavily decreased crystalline product prices and a lack of financing have favored more efficient cells and modules. The market presently consists substantially of modules produced using crystalline silicon. Most of the thin-films that have been produced, until now, use amorphous silicon on a glass substrate. Thin film a-Si modules are primarily installed on solar “farms” to serve utilities and power projects to provide electricity to a large number of users, whereas crystalline modules are more suited to commercial and residential uses. 

Approximately 20% of the world’s supply of solar modules is of the thin film a-Si type and approximately 80% are crystalline modules. The Company believes that most of the planned thin film capacity extensions will be deferred to 2011, but that it can continue to drive costs down through further process improvements for existing technology (a-Si) and the introduction of newer technologies, including CIGS, to service existing thin film companies and large cap companies (new entrants) that will access awakening capital markets to add capacity necessary for a low cost base.

The market for solar cell-embedded building materials (“BIPV for building integrated photovoltaic), such as roofing shingles or sides of a building, is an additional opportunity. Through the integration of BudaSolar and Kraft, the Company can offer equipment for BIPV manufacturing companies. Globally, we believe there is a trend for subsidies concentrating more toward roof-top and BIPV installations for solar PV. Markets, such as France, already offer high BIPV subsidies as extra premiums (here the feed-in tariff for BIPV is 0.60 EUR/kWh, and 0.33 EUR/kWh for large scale plants). We believe all growth markets offer potential for BIPV products. The U.S. BIPV market, as an example, is currently small with approximately 85MW BIPV installed; however, we estimate that the market will become the second most important market after Europe with a CAGR of 113% to 3,700MW in 2013.

Since October 2008, crystalline prices have fallen by 30% to 50%, depending on region. We believe that, upon completion of its expansion plans, the Company and Kraft will be significant suppliers of thin-film amorphous silicon solar module equipment. The Company will thus be affected by the deferral of thin film technologies, but backed by its ability and opportunity to gain new business in the expectedly strong crystalline and BIPV markets, which will reach 17GW-20GW of annual new installed capacity by 2013.
 
Our Growth Strategy

The Company’s strategy is to market complete turn-key manufacturing equipment and training to manufacture thin-film based PV modules. The Company’s main focus will be the delivery of turn-key amorphous silicon production lines, and in future turn-key production lines based on newer materials. Customers include companies with manufacturing expertise (such as large cap companies entering the solar space) and local knowledge, but without the technology base required to build and manage their own production lines.

We offer a “turn-key” amorphous silicon manufacturing facility that is sold, installed and with certain guarantees regarding throughput, module efficiency, and therefore by implication, manufacturing cost. Such turn-key facilities consist of all the hardware and machinery manufactured, assembled, and installed by the Company together with all the software, know-how and training associated with the manufacturing process.

On a case-by-case basis and subject to financing we will also consider investing in our clients turn-key production lines as an equity partner and may secure distribution and/or purchase rights for modules for resale or for use in power projects.

In addition, Solar Thin Films may seek to enter into joint ventures with third parties, including utilities, to establish fully integrated power systems or power projects using either of its low cost technologies. We are also considering integrating or acquiring a solar developer. The Company or its subsidiaries may also seek arrangements with certain of its module manufacturing customers to purchase low cost a-Si modules (the output of the equipment provided by Kraft and BudaSolar) for use in power projects in Europe, India, Russia, the Ukraine, North America, the Middle East, and Asia. 

However, there are an increasing number of competitors for the Company in this market, and through well funded research and development activities, these competitors have developed their own pilot lines for thin-films PV module manufacturing and are introducing both modules and equipment into the marketplace. Competitors will consist of 1) companies who build their own PV plants utilizing internal technology and know how - and who may represent customer opportunities for specific pieces of equipment, and 2) companies who manufacture and deliver production equipment to third parties. Many players in this latter market specialize in the sale of individual pieces of equipment rather than “turn-key” production lines, while others compete directly for “turn-key” business.
 
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As an equipment and “turn-key” systems supplier Kraft and BudaSolar compete with a broad range of suppliers into the photovoltaic or “PV” industry. Within the amorphous silicon space two of its largest competitors include Applied Materials and Oerlikon, both of which offer larger scale systems.  Kraft (with BudaSolar) offers several advantages for prospective customers including a lower price point for its entry or single line systems, and a highly cost effective manufacturing design based on its batch process - sometimes called the “box carrier” system - that yields high materials utilization and high finished product yield, and therefore commensurately lower cost. Additionally its process has the further advantage that its systems do not require costly clean rooms, which further raise the cost of equipment and production, allowing  Kraft to price its offering below that of its major competitors. Kraft has historically offered scalable systems starting with a 6MW line available for approximately $2.00 per Watt, providing a much lower cost of entry into the business.

While maintaining the low cost design of the current system, we believe that, with their newer 18 and 36 semi automated systems, Kraft (together with BudaSolar) will be able to offer larger systems capable of meeting customer plans for rapid expansion, and capable of producing a-Si modules for less than $1.00 per Watt.  Indirect competitors, competing within this low cost space, include a-Si module manufacturers like EPV Solar and Cadmium manufacturer First Solar.
 
Customers
 
The current customer of Kraft is located in Spain. Prospective customers of Kraft and BudaSolar are located in the US, Europe, Russia, the Ukraine and Asia.  In 2009, our Kraft subsidiary had one key customer, which accounted for approximately 100% of total revenue.
 
Government Regulation

The Company’s operations are subject to local, state and federal laws and regulations governing environmental quality and pollution control. To date, the Company’s compliance with these regulations had no material effect on its operations, capital, earnings, or competitive position, and the cost of such compliance has not been material. STF is unable to assess or predict at this time the effects that additional regulations or legislation could have on the activities.
  
Seasonality

We do not anticipate that our business will be substantially affected by seasonality.

Employees
 
As of December 31, 2009, the Company employed 6 full-time and 22 part-time employees, respectively, none of whom is a member of a union or work council. None of our employees are covered by the by collective bargaining agreements. We believe that our relations with our employees are good.
 
Sales and Project Management
 
One member of management and one sales engineer are currently focused on the company’s sales activity including finding and contacting potential customers and managing contracts and bids - for both “turn-key” and equipment sales. In addition the company currently has one project manager, responsible for managing contracts and projects from inception through completion. The sales and project management groups work together with the engineering and equipment manufacturing groups to assure timely production and deliveries.
 
Engineering

The Companies engineering department consists of two dedicated mechanical engineers and five dedicated electrical engineers as well as a number of vacuum and field services engineers. The engineering department works closely with the manufacturing unit to guarantee quality and timely delivery, under the guidance of its project management staff.

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Production (Equipment manufacturing)

The largest group in the Company is the production (equipment manufacturing) department, consisting of 12 employees. These people perform the actual assembly of equipment, including activities related to the mechanical, electrical and vacuum system parts of the finished product. The manufacturing activities are actively supported by input from the engineering group.

Algatec - Potential manufacture of crystalline silicon solar modules
 
The following sets forth a discussion of the business of Algatec, assuming the transactions contemplated by the acquisition will be consummated.  See “Agreements with Algatec Solar AG” above.
 
Algatec is a business that is focused on the development of solar modules.  Specifically, its is engaged in the manufacture, sale and distribution of metallurgical crystalline silicon solar modules at its manufacturing facility located in Prosen, Germany, approximately 80 miles from Dresden, Germany.  
 
Based upon inquiries from a number of potential customers, Algatec believes that there is significant demand for metallurgical crystalline modules, both in Europe and in many other areas in Asia and North America.

 As of the date of this report, the Company intends to acquire Algatec Equity Partners LP, a Delaware limited partnership (the “Algatec Partnership”), which, in turn, owns a 47% equity interest in the capital stock of Algatec.  As previously disclosed, a trust established by Robert M. Rubin, the President and Chief Executive Officer of the Company, owns approximately 25% of the equity of the Algatec Partnership and is an affiliate of the general partner of the Algatec Partnership.   It is anticipated that the equity stake in Algatec will be obtained from the Algatec Partnership in exchange for approximately 43.0 million shares of the Company’s Common Stock.  However, such number of shares of Common Stock are subject to adjustment based on an independent fairness opinion to be obtained by the Company.

The acquisition of the partnership and its equity in Algatec is subject to (i) execution of definitive exchange agreements, (ii) obtaining the requisite approvals and consents of the partners of the partnership, (iii) the delivery of audited financial statements of Algatec for the two fiscal years ended December 31, 2009 described below, and (iv) receipt of the fairness opinion. The Company anticipates that the acquisition of the partnership and its 47% equity interest in Algatec will be completed within the next 90 days.

The Company is also continuing discussions with the other shareholders of Algatec to acquire the remaining 53% interest in the capital stock of Algatec.  However, such acquisition is subject to a number of factors and conditions, including (a) receipt of financial statements of Algatec for the two fiscal years ended December 31, 2009 audited in accordance with GAAP or International Financial Reporting Accounting Standards by an accounting firm recognized by the Public Company Accounting Oversight Board, (b) completion of mutually satisfactory working capital financing for Algatec, and (c) if the Company consummates the acquisition of BudaSolar, the approval of the former stockholders of BudaSolar.

There can be no assurance that the conditions to complete the acquisition of the 47% equity interest in Algatec owned by the Algatec Partnership will be satisfied to enable the Company to acquire such equity, or that the Company will be able to acquire any additional equity interests in Algatec.

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Item 1A. Risk Factors.

An investment in our common stock is risky. You should carefully consider the following risks, as well as the other information contained in this Form 10-K, before investing. If any of the following risks actually occurs, our business, business prospects, financial condition, cash flow and results of operations could be materially and adversely affected. In this case, the trading price of our common stock could decline, and you might lose part or all of your investment.  We may amend or supplement the risk factors described below from time to time by other reports we file with the SEC in the future.


Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
 
Our consolidated financial statements as of December 31, 2009 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm issued a report that was included in this annual report which included an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern ultimately is dependent on our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
We have a significant working capital shortage; are currently in default in payment of approximately $1 million of indebtedness which became due in March 2009, $268,000 of indebtedness (plus redemption penalties and accrued interest) which became due in June 2009, and accounts payable and accrued liabilities of approximately $1.8 million that are also due, and may face litigation or even bankruptcy if we are unable to meet or restructure our obligations.
 
As at December 31, 2009, the Company’s consolidated current liabilities exceeded its consolidated current assets by $3,878,549.   The Company is currently in default in the payment of $1 million of indebtedness which became due in March 2009, $268,000 of indebtedness (plus redemption penalties and accrued interest) which became due in June 2009, and accounts payable and accrued liabilities of approximately $1.8 million that are also due, and unless the Company is able to obtain additional capital or other financing within the next 60 to 90 days, or sooner, its creditors may sue to collect on their notes and accounts, which action may accelerate the due date of the Company’s other indebtedness that is not currently in default.  In such event, the Company may be required to seek protection from its creditors under the Federal Bankruptcy Act.  Although the Company is actively pursuing such financing, there is no assurance that it will be obtained on commercially reasonable terms, if at all.  Even if such financing is obtainable, it may be expected that the terms thereof will significantly dilute the equity interests of existing stockholders of the Company.

Our existing and potential subsidiaries need to raise significant additional capital which may not be available on acceptable terms or at all.
 
In addition to the indebtedness and other obligations of Solar Thin Films, our Kraft subsidiary requires additional capital to meet its expansion plans.   There is no assurance that such additional financing will be obtained on commercially reasonable terms, if at all.

If adequate funding is not available on acceptable terms, Kraft may be unable to develop or enhance its products or take advantage of its acquisition opportunities, either of which could have a material adverse effect on the Company's business, results of operations and financial condition and may reduce our ability to continue to conduct business operations. Any additional equity or equity-type financing (including the issuance of convertible securities or warrants) will likely involve substantial dilution to our then existing shareholders

We have a history of losses, expect to incur substantial further losses and may not achieve or maintain profitability in the future, which may decrease the market value of our stock.
 
The Company has reported a loss from operations of $2,872,048and $6,974,675 for the years ended December 31, 2009 and 2008, respectively.
 
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The Company has suffered operating losses and negative cash flows from operations since inception and, at December 31, 2009, the Company had an accumulated deficit of $29,551,979. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, we will continue to incur losses. We will continue to incur losses until we are able to establish significant sales. Our possible success is dependent upon the successful development and marketing of our products, as to which there is no assurance. Any future success that we might enjoy will depend upon many factors, including factors out of our control or which cannot be predicted at this time. These factors may include changes in or increased levels of competition, including the entry of additional competitors and increased success by existing competitors, changes in general economic conditions, increases in operating costs, including costs of supplies, personnel, marketing and promotions, reduced margins caused by competitive pressures and other factors. These conditions may have a materially adverse effect upon us or may force us to reduce or curtail operations. In addition, we will require additional funds to sustain and expand our sales and marketing activities, particularly if a well-financed competitor emerges. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. The inability to obtain sufficient funds from operations or external sources would require us to curtail or cease operations.

Our revenues and operating results are likely to fluctuate significantly.

As a result of our limited operating history and the rapidly changing nature of the markets in which the Company competes, our quarterly and annual revenues and operating results are likely to fluctuate from period to period. These fluctuations may be caused by a number of factors, many of which are beyond our control. These factors include the following, as well as others discussed elsewhere in this section:

·
how and when we introduce new products and services and enhance our existing products and services;
                    
·
our ability to attract and retain new customers and satisfy our customers' demands;
                    
·
the timing and success of our brand-building and marketing campaigns;
                    
·
our ability to establish and maintain strategic relationships;
                    
·
our ability to attract, train and retain key personnel;
                    
·
the emergence and success of new and existing competition;
                    
·
varying operating costs and capital expenditures related to the expansion of our business operations and infrastructure, domestically and internationally, including the hiring of new employees;
 
·
changes in the mix of products and services that we sell to our customers;
 
·
costs and effects related to the acquisition of businesses or technology and related integration; and

·
costs of litigation and intellectual property protection.

In addition, because the market for our products and services is relatively new and rapidly changing, it is difficult to predict future financial results.
  
For these reasons, you should not rely on period-to-period comparisons of our financial results, if any, as indications of future results. Our future operating results could fall below the expectations of public market analysts or investors and significantly reduce the market price of our common stock. Fluctuations in our operating results will likely increase the volatility of our stock price.

Risks Related to our Current Business Operations

Kraft has generated limited revenues and it may never achieve profitability.

To date, the Company, through its Kraft subsidiary, has generated limited revenues of $8,720,938 and $3,436,779 for the years ended December 31, 2009 and December 31, 2008, respectively, and the Company incurred losses from operations of $2,827,048 and $6,974,675 for the years ended December 31, 2009 and 2008, respectively. Kraft’s future existence is dependent upon management’s ability to develop profitable operations and resolve its liquidity problems. We cannot assure you that the Company can achieve or sustain profitability in the future. Kraft’s operations are subject to the risks and competition inherent in the establishment of a business enterprise. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether our PV manufacturing facilities development will achieve market acceptance. The Company may not achieve its business objectives and the failure to achieve such goals would have an adverse impact on Kraft. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
 
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We are required to raise additional capital to support our Kraft operating subsidiary and complete our proposed acquisitions of  BudaSolar and Algatec.

Both our existing operating subsidiary Kraft Elektronikai Zrt and our proposed additional subsidiary BudaSolar Technologies Co., Ltd., require additional working capital to obtain additional orders for a-Si module equipment lines and, if such orders are obtained, to finance infrastructure and component purchases.  There can be no assurance that Kraft will receive in the near future the final payment due from Grupo Unisolar SA or that the Company will be able to provide such working capital from third party financing. Although the Company is actively seeking financing, given the current market price of the Company’s Common Stock, raising equity or equity related capital may be difficult if not impossible.  In addition, even if the Company is able to raise such financing, it may not be on attractive terms, and will likely result in significant dilution of the equity interests of the Company’s existing stockholders.

Our sole customer has advised that they are withholding their final payment to us due to certain maintenance and repair complaints with respect to our amorphous silicon equipment line.

Kraft recently completed the installation of equipment for its sole customer, Grupo Unisolar SA in Spain.  The customer has resisted payment of the final €968,265 installment due under the April 8, 2008 contract allegedly due to certain maintenance and repair complaints with respect to our amorphous silicon equipment line.  Representatives of BudaSolar are assisting Kraft in attempting to resolve this problem.  If the Company is unable to satisfy its only existing customer, Kraft may not receive final payment from Grupo Unisolar SA.  In addition, the issue could result in adversely affect Kraft’s reputation as a turn-key equipment supplier and its a-Si module equipment business could be materially and adversely affected.

We may not be able to complete our proposed acquisition of BudaSolar Technologies Co., Ltd.

As at the date of this report, we have not signed a definitive purchase agreement to acquire BudaSolar and are still negotiating final terms and conditions.  There can be no assurance that we will be able to reach a final agreement with the shareholders of BudaSolar on terms that are attractive to the Company, if at all.  Even if we are successful in completing the BudaSolar acquisition, we may be unable to raise adequate financing to support our a-Si equipment manufacturing business. Our existing Kraft subsidiary is highly dependent upon the technical expertise of the BudaSolar to facilitate the turn-on function and operation of our a-Si equipment line.  If we are unable to acquire BudaSolar and if BudaSolar terminates its existing business relationship with Kraft, it is probable that we will never be able to develop our a-Si equipment business.

We may never be able to acquire any equity of Algatec

Our proposed acquisition of a 47% equity interest in Algatec Solar AG is dependent upon certain factors, some of which may not be within our control, including receipt of acceptable audited financial statements of Algatec Solar AG, the approval of the holders of a majority of the limited partnership interests in the Algatec Partnership, and the approval of the existing stockholders of BudaSolar.  In addition, even if we are able to acquire a significant minority interest in Algatec, there can be no assurance that we will reach agreement with the current owners of 53% of the Algatec equity to acquire their shares.   Our failure to acquire any equity in Algatec could have a material adverse effect on our future business prospects or operations.

Our equipment business is small and projected revenues may not materialize.

Since its inception, our thin film amorphous silicon equipment business located in Hungary has only delivered $14,932,828 of equipment to customers and has never sold more than $5,000,000 of equipment in any one year.  Our ability to achieve or even approach our sales and profit projections are subject to a number of factors, some of which are beyond our control. Such factors include, without limitation:

·
entering into definitive agreements with financially credible customers that provide for adequate profit margins;
 
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·
our obtaining meaningful down payments to provide sufficient cash flow to enable Kraft to purchase necessary components and pay labor costs;
 
·
significantly increasing our personnel and infrastructure;
 
·
our having or obtaining sufficient manufacturing capacity;
 
·
our ability to meet contracted for delivery schedules; and
 
·
our ability to obtain and post completion bonds or other guarantees, if required by certain customers.
 
Kraft is dependent on one customer and any loss of this customer will have a negative impact on our operations. 
 
For the year ended December 31, 2009, Kraft derived approximately 100% of its total revenues from one key customer. A loss of this relationship, for any reason could cause the Company to experience difficulties in obtaining revenue and implementing its business strategy. There can be no assurance that the Company could establish other relationships of adequate revenue in a timely manner or at all. In the event that STF is not able to significantly increase the number of customers or vendors that purchase its products its financial condition and results of operations will be materially and adversely affected.
 
Evaluating our business and future prospects may be difficult due to the rapidly changing market landscape.

There is limited historical information available about our company upon which you can base your evaluation of our business and prospects. Although Kraft was formed in 1993 for the development of vacuum based technologies it has only recently developed four turnkey PV module manufacturing facilities pursuant to which it has only recognized limited revenues.
 
The market we are addressing is rapidly evolving and is experiencing technological advances and new market entrants. Our future success will require us to scale our manufacturing capacity significantly beyond the capacity of our Budapest, Hungary manufacturing facility, and our business model and technology are unproven at significant scale. Moreover, Kraft’s strategic partnerships with BudaSolar and Algatec are only in the early stages of development and have not been officially agreed to and formalized. Kraft has limited experience upon which to predict whether it will be successful. As a result, you should consider its business and prospects in light of the risks, expenses and challenges that we will face as an early-stage company seeking to develop and manufacture new products in a growing and rapidly evolving market.
 
Our future success substantially depends on our ability to significantly increase our manufacturing capacity through the development of additional manufacturing facilities. We may be unable to achieve our capacity expansion goals as a result of a number of risks, which would limit our growth potential, impair our operating results and financial condition and cause our stock price to decline.

Our future success depends on our ability to increase our manufacturing capacity through the development of additional manufacturing facilities. If we are unable to do so, we may not be able to achieve the production volumes and per unit costs that will allow us to meet customer demand, maintain our competitive position and achieve profitability. Our ability to develop additional manufacturing facilities is subject to significant risk and uncertainty, including:

·
we may need to continue to raise significant additional capital through the issuance of equity or convertible or debt securities in order to finance the costs of development of any additional facility, which we may be unable to do on reasonable terms or at all, and which could be dilutive to our existing stockholders;
                    
·
the build-out of any additional facilities will be subject to the risks inherent in the development of a new manufacturing facility, including risks of delays and cost overruns as a result of a number of factors, many of which may be out of our control, such as delays in government approvals or problems with supplier relationships;
                    
·
our manufacturing processes, particularly those for the development of the equipment used in the turnkey PV manufacturing facilities, are unproven at large scale and may prove difficult to implement in any new facility; and
                    
·
if a new facility is established internationally, we may encounter legal restrictions and liability, encounter commercial restrictions and incur taxes and other expenses to do so and otherwise be subject to the risks inherent in conducting business in a foreign jurisdiction as described elsewhere in this section.
 
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If we are unable to develop and successfully operate additional manufacturing facilities, or if we encounter any of the risks described above, we may be unable to scale our business to the extent necessary to achieve profitability, which would cause our stock price to decline. Moreover, there can be no assurance that if we do expand our manufacturing capacity that we will be able to generate customer demand for our turnkey PV manufacturing facilities at these production levels or that we will increase our revenues or achieve profitability.

Our “turnkey” manufacturing facility may not gain market acceptance, which would prevent us from achieving increased sales and market share.

The development of a successful market for turnkey manufacturing facility may be adversely affected by a number of factors, many of which are beyond our control, including, without limitation:
 
·
our ability to market our services together with our equipment;
                   
·
our failure to produce a turnkey facility that competes favorably against companies electing to develop these facilities internally;

·
our failure to produce a turnkey facility that produces PV modules that compete favorably against conventional energy sources and alternative distributed generation technologies, such as wind and biomass, on the basis of cost, quality and performance; and
         
        
·
our failure to develop and maintain successful relationships with strategic partners, including, BudaSolar and Algatec.

If our “turnkey” facilities or the PV solar modules produced by our facilities fail to gain market acceptance, we would be unable to increase our sales and market share and to achieve and sustain profitability.

Technological changes in the solar power industry could render our turnkey manufacturing facilities uncompetitive or obsolete, which could reduce our market share and cause our sales to decline.

Our failure to further refine our technology and develop and introduce the next generation of our turnkey facility could cause our products to become uncompetitive or obsolete, which could reduce our market share and cause our sales to decline. The solar power industry is rapidly evolving and competitive. We will need to invest significant financial resources in research and development to keep pace with technological advances in the solar power industry and to effectively compete in the future. We believe that a variety of competing solar power technologies are under development by other companies that could result in lower manufacturing costs or higher product performance than those expected to be produced utilizing our turnkey facilities. Our development efforts may be rendered obsolete by the technological advances of others and other technologies may prove more advantageous for the commercialization of solar power products.
 
We face risks associated with the marketing, development and sale of our turnkey facilities internationally, and if we are unable to effectively manage these risks, it could impair our ability to expand our business abroad.

To date, Kraft has delivered equipment for facilities in New Jersey, Germany, Hungary, China, Taiwan, Greece and Portugal, and is now delivering a “turnkey” system in Spain. Going forward we expect to seek to develop turnkey facilities on an international basis. It will require significant management attention and financial resources to successfully develop our international sales channels either internally (with BudaSolar) or through outside agents. In addition, the marketing, development and sale of our turnkey facilities internationally could expose us to a number of markets with which we have limited experience. If we are unable to effectively manage these risks, it could impair our ability to grow our business abroad. These risks include:

·
difficult and expensive compliance with the commercial and legal requirements of international markets, with which we have only limited experience;
                    
·
inability to obtain, maintain or enforce intellectual property rights;
 
·
encountering trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could affect the competitive pricing of our turnkey facilities;
 
17

 
·
fluctuations in currency exchange rates relative to the United States dollar and the Hungarian Florint;

·
difficulty in recruiting and retaining individuals skilled in international business operations; and

·
difficulty of enforcing revenue collection internationally.

We expect that a portion of our international sales will be denominated in United States dollars. As a result, increases in the value of the United States dollar relative to foreign currencies would cause our products to become less competitive in international markets and could result in limited, if any, sales and profitability.
 
Furthermore, in the development of our facilities in foreign markets, we may encounter legal restrictions, commercial restrictions and incur taxes and other expenses to establish our manufacturing facilities in certain countries. In addition, we may potentially forfeit, voluntarily or involuntarily, foreign assets due to economic or political instability in the countries where our local manufacturing facilities are located.

We may not be able to successfully develop and commercialize our turnkey PV manufacturing facilities which would result in continued losses and may require us to curtail or cease.

While we have made progress in the development of our PV manufacturing facilities, we have generated limited revenues and we are unable to project when we will achieve profitability, if at all. As is the case with any new technology, we expect the development process to continue. We cannot assure that our engineering resources will be able to modify the product fast enough to meet market requirements. We can also not assure that our product will gain market acceptance and that we will be able to successfully commercialize the technologies. The failure to successfully develop and commercialize the technologies passed its current stage would result in continued losses and may require us to curtail or cease operations.

Our fixed-price contracts could subject us to losses in the event that we have cost overruns.

Substantially all of our agreements with customers are based upon fixed-price contracts.  In a fixed-price contract, the price is not subject to adjustment based on cost incurred to perform the required work under the contract. Therefore, we fully absorb cost overruns on fixed-price contracts, thereby reducing our profit margin.  Further risks associated with fixed-price contracts include the difficulty of estimating costs that are related to performance in accordance with contract specifications and the possibility of obsolescence in connection with long-term procurements.  We may not be able to accurately estimate the costs of the components and materials that we use to manufacture our products, because their prices have been, and we expect them to continue to be, subject to volatility. Also, any failure to anticipate technical problems, estimate costs accurately or control costs during performance of a contract can reduce our profitability. Under fixed-price contracts, we may not be able to pass price and cost increases on to our customers, which could have an adverse effect on our financial results.

We have a few proprietary rights, the lack of which may make it easier for our competitors to compete against us.
 
We attempt to protect our limited proprietary property through copyright, trademark, trade secret, nondisclosure and confidentiality measures. Such protections, however, may not preclude competitors from developing similar technologies. Any inability to adequately protect our proprietary technology could harm our ability to compete.
 
Our future success and ability to compete depends in part upon our proprietary technology and our trademarks, which we attempt to protect with a combination of patent, copyright, trademark and trade secret laws, as well as with our confidentiality procedures and contractual provisions. These legal protections afford only limited protection and are time-consuming and expensive to obtain and/or maintain. Further, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.

We depend on the services of key executives and technical and other personnel, the loss of whom could materially harm our business or reduce our operational effectiveness.

Some of our senior executives are important to our success because they have been instrumental in setting our strategic direction, operating our business, identifying, recruiting and training key personnel, identifying opportunities and arranging necessary financing. We are highly dependent on our management, in particular, Robert Rubin, the Chief Executive Officer and Chief Financial Officer, and Gary Maitland, Esq., our Vice President and General Counsel, and consultants who are all critical to the development of our financing arrangements, technologies and business. Losing the services of any of these individuals, including, without limitation, Robert Rubin or Gary Maitland, Esq., could adversely affect our business until a suitable replacement could be found. If we were to lose any one of these individuals, we may experience difficulties in competing effectively, developing our technology and implementing our business strategies or financing arrangements. We believe that they could not quickly be replaced with executives of equal experience and capabilities. We do not maintain key person life insurance policies on any of our executives. The agreements entered between our company and Rubin expired in June 2009, subject to one year automatic renewal provisions.
 
18

 
There is a continuing demand for qualified technical personnel, and we believe that our future growth and success will depend upon our ability to attract, train and retain such personnel.  Competition for personnel in our industry is intense, and there are a limited number of persons with knowledge of, and experience in, this industry. Although we currently experience relatively low rates of turnover for our technical personnel, the rate of turnover may increase in the future. During surge production periods, we rely on a substantial number of temporary employees. An inability to attract or maintain a sufficient number of technical or temporary personnel could have a material adverse effect on our contract performance or on our ability to capitalize on market opportunities.

We do not maintain theft or casualty insurance and only maintain modest liability and property insurance coverage and therefore we could incur losses as a result of an uninsured loss.

We do not maintain theft or casualty insurance and we have modest liability and property insurance coverage. We cannot assure that we will not incur uninsured liabilities and losses as a result of the conduct of our business. Any such uninsured or insured loss or liability could have a material adverse affect on our results of operations.

Other Business Risks

Fixed-price contracts could subject us to losses in the event that we have cost overruns.

Substantially all of agreements with customers of Algatec and Kraft are based upon fixed-price contracts.  In a fixed-price contract, the price is not subject to adjustment based on cost incurred to perform the required work under the contract. Therefore, we and Kraft fully absorb cost overruns on fixed-price contracts, thereby reducing our profit margin.  Further risks associated with fixed-price contracts include the difficulty of estimating costs that are related to performance in accordance with contract specifications and the possibility of obsolescence in connection with long-term procurements.  We may not be able to accurately estimate the costs of the components and materials that we use to manufacture our products, because their prices have been, and we expect them to continue to be, subject to volatility. Also, any failure to anticipate technical problems, estimate costs accurately or control costs during performance of a contract can reduce our profitability. Under fixed-price contracts, we may not be able to pass price and cost increases on to our customers, which could have an adverse effect on our financial results.

We have no excess production facilities. Therefore, the loss of one of our facilities would adversely affect our production capability.

Our manufacturing operations occur at one facility located in Prosen, Germany.  We have no other production facilities at the present time.  We may lose production capability if a natural or other disaster were to occur that affected one of our facilities or if we were unable to renew an expired lease for any such facility. The loss of any of our facilities would adversely affect our production capacity and could have a material adverse effect on our results of operations or financial condition.

Governmental regulation may have a negative impact on our business.

Our operations and properties are subject to regulation by various government entities and agencies. Our manufacturing, processing and distribution facilities are subject to various workplace regulations. We believe that our current compliance programs adequately address such concerns and that we are in substantial compliance with applicable laws and regulations. However, compliance with, or any violation of, current and future laws or regulations could require material expenditures or otherwise adversely affect our business and financial results.
 
Product recalls could have a material adverse effect on our business.

Manufacturers of solar modules are sometimes subject to the recall of their products for a variety of reasons, including for product defects or failure to adequately perform to contract specifications. If any of our products are recalled due to a product defect or for any other reason, we could be required to incur the expense of the recall or the expense of any resulting legal proceeding. Additionally, if one of the significant products of Algatec or Kraft were subject to recall, the image of that brand and our company could be harmed, which could have a material adverse effect on our business and the consolidated operations of Solar Thin Films.
 
19

 
Product liability claims could have a material adverse effect on our business and that of Kraft.

We and Kraft face an inherent risk of exposure to product liability claims if any of the products we sell cause injury or illness. We have obtained liability insurance for product liability claims. We cannot assure you, however, that this insurance will continue to be available at a reasonable cost, or that any insurance that we obtain will be adequate to cover product liability claims against us. We generally obtain contractual indemnification from parties supplying our products, but this form of indemnification is limited, as a practical matter, to the creditworthiness and financial resources of the indemnifying party.  If we do not have adequate insurance or contractual indemnification available, losses associated with product liability claims could have a material adverse effect on our business, operating results and financial condition.

Environmental laws and regulations may subject us to significant costs and liabilities.

We are subject to various U.S. federal, state, local and foreign laws and regulations relating to the protection of the environment, including those governing and imposing liabilities for the discharge of pollutants into the air and water, the management and on-site and off-site disposal of hazardous substances and wastes, the maintenance of a safe workplace and the investigation and cleanup of contamination at currently or formerly owned, operated or leased sites, as well as third-party owned sites that may have been impacted by our operations. In addition, some of our operations require environmental permits and controls to prevent and limit pollution of the environment. We could incur substantial costs, including cleanup costs, civil or criminal fines, penalties or sanctions and third-party claims for property damage or personal injury, as a result of violations of or liabilities under environmental laws and regulations or non-compliance with the environmental permits required at our facilities. Some environmental laws impose strict, and under certain circumstances joint and several, liability on the current, as well as former, owners and operators of contaminated sites for costs of investigation and remediation of contamination on and emanating from these sites, and also impose liability for damages to natural resources.

These laws, regulations and permits also could require the installation of costly pollution control equipment or operational changes to limit pollution emissions or decrease the likelihood of accidental releases of hazardous substances. In addition, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination at our or other sites or the imposition of new cleanup requirements could require us to incur future costs that would have a negative effect on our results of operations or cash flow.

Risks Related to Solar Thin Films Common Stock
 
Our current stockholders are expected to incur significant immediate substantial dilution.
 
As of March 22, 2010, we had 19,039,850 shares of common stock issued and outstanding.   In addition, any additional common stock, convertible securities or warrants we may issue to raise much needed capital will further significantly dilute the equity ownership of our current stockholders.
 
The proposed acquisitions of Algatec and BudaSolar will result in a further immediate and substantial dilution of the equity of our current stockholders.

We are currently negotiating a new agreement with the BudaSolar shareholders.  The proposed revised transaction contemplates that the Company will directly acquire 100% of the share capital of BudaSolar in exchange for 70,000 shares of the Company’s Series B-5 convertible voting preferred stock (the “B-5 Preferred Stock”).  The B-5 Preferred Stock has a liquidation value of $7.0 million and is convertible at any time by the holders into a minimum of 2.1 million and a maximum of 49.0 million shares of the Company’s common stock.  Consummation of this proposed transaction will therefore substantially dilute the equity of the 19,039,850 shares owned by our current common stockholders.

Our historic stock price has been volatile and the future market price for our common stock may continue to be volatile. Further, the limited market for our shares will make our price more volatile. This may make it difficult for you to sell our common stock for a positive return on your investment.
 
Our common stock is currently quoted on the OTC Bulletin Board under the symbol “SLTZ". There is a limited trading market for our common stock. Accordingly, there can be no assurance as to the liquidity of any markets that may develop for our common stock, the ability of holders of our common stock to sell our common stock, or the prices at which holders may be able to sell our common stock.
 
20

 
The public market for our common stock has historically been very volatile. Any future market price for our shares may continue to be very volatile. This price volatility may make it more difficult for you to sell shares when you want at prices you find attractive. We do not know of any one particular factor that has caused volatility in our stock price. However, the stock market in general has experienced extreme price and volume fluctuations that often are unrelated or disproportionate to the operating performance of companies. Broad market factors and the investing public's negative perception of our business may reduce our stock price, regardless of our operating performance. Market fluctuations and volatility, as well as general economic, market and political conditions, could reduce our market price. As a result, this may make it difficult or impossible for you to sell our common stock for a positive return on your investment.

A sale of a substantial number of shares of our common stock may cause the price of its common stock to decline.
 
If our stockholders sell substantial amounts of the Company’s common stock in the public market, including shares issued upon the exercise of outstanding options or warrants, the market price of its common stock could fall. These sales also may make it more difficult for the Company to sell equity or equity-related securities in the future at a time and price that the Company deems reasonable or appropriate. Stockholders who have been issued shares may be able to sell their shares pursuant to Rule 144 under the Securities Act of 1933, beginning six months after the stockholders acquired their shares.

We have not paid dividends in the past and do not expect to pay dividends in the future. Any returns on investment may be limited to the value of our common stock.

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if its stock price appreciates.
 
Our common stock is deemed to be “penny stock” with a limited trading market. 

Our common stock is currently listed for trading on the OTC Bulletin Board which is generally considered to be a less efficient market than markets such as NASDAQ or other national exchanges, and which may cause difficulty in conducting trades and difficulty in obtaining future financing. Further, our securities are subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934, as amended, or Exchange Act. The penny stock rules apply to non-NASDAQ companies whose common stock trades at less than $5.00 per share or which have tangible net worth of less than $5,000,000 ($2,000,000 if we have been operating for three or more years). Such rules require, among other things, that brokers who trade "penny stock" to persons other than "established customers" complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade "penny stock" because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. In the event that we remain subject to the "penny stock rules" for any significant period, there may develop an adverse impact on the market, if any, for our securities. Because our securities are subject to the "penny stock rules," investors will find it more difficult to dispose of our securities. Further, for companies whose securities are traded in the OTC Bulletin Board, it is more difficult: (i) to obtain accurate quotations, (ii) to obtain coverage for significant news events because major wire services, such as the Dow Jones News Service, generally do not publish press releases about such companies, and (iii) to obtain needed capital.
 
Foreign Currency and Exchange Risks and Rate Revaluation.
We will be su ject to significant foreign exchange risk. Th%re are currently no meaningful ways to hedge currency risk in Hungary. Therefore, the Company’s ability to limit its exposure to currency fluctuations is significantly restricted. The Company’s ability to obtain dividends or other distri`utions is subject to, among other things, restrictions on div)dends under applicable local laws and foreign currency exchange regulations of the jurisdictions in which its subsidiaries operate. The laws under which the Company’s operating subsidiaries are organized provide generally that dividends may be declared by the partners or shareholders out of yearly profit3 subject to the maintenance of registered capital and required reserves and a&ter the recovery of accumulated losses.
<$iv style="DISPLAY: block; TEXT-INDENT: 0pt">
Item 1B. Unresolved Staff Comments.

Not applicabl%.
 
21

 
Item 2. Properties.


Lessee
 
Address of Property
 
Primary Use
 
Sq. feet
 
Rent
Amount/Month
Lease Terms
Kraft
 
1112 Budapest,
Kőérberki út 36.
Hungary
 
General operation
Equipment manufacturing plant
stockholder relations, general executive
   
23,200
 
USD 20,800
3 years from January 1, 2008
 
Lease terminated in January 2010
Kraft
 
9900 Körmend
Hegyalja u 42.
Hungary
 
Equipment manufacturing plant
   
10,760
 
USD 1,600
Unlimited with 6 months cancellation period
 
Lease terminated in July 2009
Kraft
 
1121 Budapest,
Konkoly-T, út 29-33.
Hungary
 
General operation
Equipment manufacturing plant
Office
   
1,500
 
USD 1,310
Unlimited
period with 3 months
 notice of cancellation
Kraft
 
1121 Budapest,
Konkoly-T, út 29-33.
Hungary
 
Storage room
   
743
 
USD 360
Unlimited
period with 6 months
notice of cancellation
 
In November 2005, Kraft entered into a three year fixed term lease agreement for its corporate offices and facilities in Budapest, Hungary at a rate ranging from $4,543 to $15,433 per month as the lease has provisions for additional space for the period calendar year of 2006 and beyond. The lease agreement provides for moderate increases in rent after December 31, 2006 in accordance with the inflationary index published by the Central Statistical Office. Rental expenses charged to operations for the year ended December 31, 2009 and 2008 are $267,215 and $266,359, respectively.  In late 2007, the Company signed a modified rental agreement for the Budapest facilities and expanded its spaces as well as extended the contract for an additional three years period of time.

As set forth in the table above, in July 2009 and January 2010, Kraft terminated its lease agreements covering its corporate offices and facilities in Budapest and Körmend Hungary.  In addition, in December 2009 and January 2010, Kraft entered into new lease agreements for its corporate offices and facilities in Budapest, Hungary as set forth above.
 
The Company also has a mailing address within the United States located at 116 John Street, Suite 1120, New York, New York 10038.

We believe that our facilities are adequate to meet our current needs. Our offices are in good condition and are sufficient to conduct our operations. We do not intend to renovate, improve, or develop properties. We are not subject to competitive conditions for property and currently have no property to insure. We have no policy with respect to investments in real estate or interests in real estate and no policy with respect to investments in real estate mortgages. Further, we have no policy with respect to investments in securities of or interests in persons primarily engaged in real estate activities.
 
22

 
Item 3. Legal Proceedings.

           Grace Brothers Ltd. vs. Solar Thin Films, Inc. (Supreme Court, New York State, New York County). On March 4, 2009, Grace Brothers Ltd. brought an action against the Company in the Supreme Court of the State of New York, County of New York, seeking damages of approximately $255,000 in alleged registration delay penalties.  On July 16, 2009, the Company filed its answer to the complaint denying all of Grace’s allegations.  We are attempting to resolve the matter amicably. However, in the event litigation proceeds, it will be aggressively defended.  Management believes that the plaintiff’s suit is without merit, and further believes the ultimate outcome of this matter will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

From time to time, we are a party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not involved currently in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.

Item 4. Submission of Matters to a Vote of Security Holders.

 
23

 
PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is quoted on the Over-the-Counter Bulletin Board under the symbol "SLTZ". Effective as of July 3, 2006, the Company changed its name from American United Global, Inc. to Solar Thin Films, Inc. As a result, our quotation symbol changed from “AUGB.PK” to “SLTF.PK”. In February 2007, the Company’s symbol was changed to SLTN and in September 2009 the Company’s symbol was changed to SLTZ. The following table shows the reported high and low closing bid quotations per share for our common stock based on information provided by the Over-the-Counter Bulletin Board. Particularly since our common stock is traded infrequently, such over-the-counter market quotations reflect inter-dealer prices, without markup, markdown or commissions and may not necessarily represent actual transactions or a liquid trading market.

Year Ended December 31, 2009
 
High
   
Low
 
First Quarter ended March 31, 2009
 
$
1.45    
$
0.78  
Second Quarter ended June 30, 2009
 
$
1.05    
$
0.76  
Third Quarter ended September 30, 2009
 
$
1.75    
$
0.20  
Fourth Quarter ended December 31, 2009
 
$
1.02    
$
0.26  
 
Year Ended December 31, 2008
 
High
   
Low
 
First Quarter ended March 31, 2008
 
$
8.25
   
$
3.60
 
Second Quarter ended June 30, 2008
 
$
5.70
   
$
3.80
 
Third Quarter ended September 30, 2008
 
$
4.50
   
$
2.90
 
Fourth Quarter ended December 31, 2008
 
$
3.25
   
$
0.85
 
   
The shares quoted are subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the Exchange Act"), commonly referred to as the "penny stock" rule. Section 15(g) sets forth certain requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act.
 
The Commission generally defines penny stock to be any equity security that has a market price less than $5.0 per share, subject to certain exceptions. Rule 3a51-1 provides that any equity security is considered to be a penny stock unless that security is: registered and traded on a national securities exchange meeting specified criteria set by the Commission; authorized for quotation on The NASDAQ Stock Market; issued by a registered investment company; excluded from the definition on the basis of price (at least $5.00 per share) or the registrant's net tangible assets; or exempted from the definition by the Commission. Trading in the shares is subject to additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors, generally persons with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse.
 
For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such securities and must have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the first transaction, of a risk disclosure document relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the securities. Finally, the monthly statements must be sent disclosing recent price information for the penny stocks held in the account and information on the limited market in penny stocks. Consequently, these rules may restrict the ability of broker dealers to trade and/or maintain a market in the company’s common stock and may affect the ability of shareholders to sell their shares.

Number of Shareholders

As of March 22, 2010, there were 19,039,850 shares of our common stock issued and outstanding and 187 holders of record of our common stock. The transfer agent of our common stock is Corporate Stock Transfer, LLC, 3200 Cherry Creek Dr. South, Suite 430, Denver, CO 80209.
 
24

 
Dividends

Except for dividend payment declared by Kraft in 2001 and 2002, we have never paid cash dividends or distributions to our equity owners. We do not expect to pay cash dividends on our common stock, but instead, intend to utilize available cash to support the development and expansion of our business. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including but not limited to, future operating results, capital requirements, financial condition and the terms of any credit facility or other financing arrangements we may obtain or enter into, future prospects and in other factors our Board of Directors may deem relevant at the time such payment is considered. There is no assurance that we will be able or will desire to pay dividends in the near future or, if dividends are paid, in what amount.

Shares eligible for future sale could depress the price of our common stock, thus lowering the value of a buyer’s investment. Sales of substantial amounts of common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for shares of our common stock.

Our revenues and operating results may fluctuate significantly from quarter to quarter, which can lead to significant volatility in the price and volume of our stock. In addition, stock markets have experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons unrelated or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.

Equity Compensation Plan Information

The following table presents information as of December 31, 2009 with respect to compensation plans under which equity securities were authorized for issuance.
 
Plan category
 
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
 
Weighted average
exercise price of
outstanding options,
warrants and rights
(b)
 
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column
(a))
(c)
Equity compensation plans approved by security holders
 
  
     
  
2001 Stock Plan
 
-0-
 
 $
-0-
 
-0-
2007 Stock Plan
 
-0-
 
 $
-0-
 
5,000,000
Equity compensation plans not approved by security holders
 
-0-
 
 $
-0-
 
-0-
Total
 
-0-
 
 $
-0-
 
5,000,000
 
The equity compensation plans are discussed in Note 16 of the 2009 Consolidated Financial Statements.

Other than as set forth above, we do not have any stock option, bonus, profit sharing, pension or similar plan.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

There were no purchases or repurchases of our equity securities by the Company or any affiliated purchasers.

Unregistered Sales of Equity Securities and Use of Proceeds

During the fourth quarter of 2009, we issued (or contracting to issue) equity securities without registration under the Securities Act of 1933, as amended, as follows:

On December 7, 2009, two of the Company’s March 2006 convertible note holders settled for an aggregate of 200,000 shares of the Company’s common stock and demand notes of $169,167.  The Company intends to issue such shares during the second quarter of 2010.
 
25

 
On December 28, 2009 one of the Company’s June 2006 convertible note holders converted $350,000 of convertible notes to 940,625 shares of the Company’s common stock, representing $350,000 in principal settlement with the remainder as redemption penalty and related interest of $120,312.

All of the above offerings and sales were deemed to be exempt under rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of Solar Thin Films, Inc. or executive officers of Solar Thin Films, Inc., and transfer was restricted by Solar Thin Films, Inc. in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.

Item 6. Selected Financial Data.

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition or Results of Operations.

WE URGE YOU TO READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO BEGINNING ON PAGE F-1. THIS DISCUSSION MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING BUT NOT LIMITED TO THE RISKS AND UNCERTAINTIES DISCUSSED UNDER THE HEADING “RISK FACTORS” IN THIS FORM 10-K AND IN OUR OTHER FILINGS WITH THE SEC. IN ADDITION, SEE “CAUTIONARY   STATEMENT REGARDING FORWARD-LOOKING STATEMENTSSET FORTH IN THIS REPORT.

Overview

Solar Thin Films, Inc. (the “Company”) is a business focused on the solar energy industry.  We engage in the design, manufacture and installation of thin-film amorphous silicon (“a-Si”) photovoltaic manufacturing equipment. The equipment is used in plants that produce photovoltaic thin-film a-Si solar panels or modules. The Company operates through its wholly owned subsidiary, Kraft Elektronikai Zrt (“Kraft”). The Company expects the primary use of such photovoltaic thin film modules will be the construction of solar power plants by corporations and governments throughout the world.

On April 3, 2009, the Company and Kraft entered into a share exchange agreement with BudaSolar Technologies Co. Ltd. (“BudaSolar”) and its shareholders.  The agreement restated a prior agreement entered into in 2008.  Under the terms of the restated agreement, the BudaSolar shareholders were to have acquired a 49% equity interest in Kraft, in exchange for transferring 100% of the BudaSolar equity to Kraft.  Such agreement was subject to the satisfaction of certain closing conditions, including the Company’s repayment of all outstanding June 2006 convertible notes in order to secure the release of the shares of Kraft pledged as security to the June 2006 note holders.  Although only $268,000 of such notes are still outstanding, the Kraft shares still remain subject to the pledge agreement.  At the present time, the Company is negotiating a new agreement with the BudaSolar shareholders, the proposed terms of which are described below.

For more than the past 18 months, BudaSolar has been providing technical support to our Kraft subsidiary under a separate agreement.  In connection with these services, Kraft has paid $1,370,000 in advances to BudaSolar during the second quarter of 2009. BudaSolar has provided $747,891 worth of services in 2009 to Kraft, which left a credit balance of advances wired to BudaSolar of $622,109 as of December 31, 2009.  In addition, during 2008, BudaSolar received $750,000 in advances from the Company, which was fully repaid in the second quarter of 2009.

The Company’s Kraft subsidiary is highly dependent upon the ongoing technical expertise of the BudaSolar personnel in completing and making operational the Kraft line of a-Si solar module equipment.   In such connection, Kraft recently completed the installation of equipment for its sole customer, Grupo Unisolar SA in Spain.  The customer has resisted payment of the final €968,265 installment due under the April 8, 2008 contract allegedly due to certain maintenance and repair complaints with respect to our amorphous silicon equipment line.  Representatives of BudaSolar are assisting Kraft in attempting to resolve this problem and the Company expects to collect the payment in full. If the Company is unable to satisfy its only existing customer, its a-Si module equipment business could be materially and adversely affected.
 
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There can be no assurance that the Company will enter into the new share exchange agreement with BudaSolar and its shareholders, or if such agreement is entered into by the parties, that the Company will be able to consummate the acquisition of BudaSolar and the transactions contemplated therein.

Effective as of October 30, 2008, the Company entered into a stock exchange agreement with Algatec Solar AG and its shareholders, which expired on July 15, 2009.  Algatec produces, sells and distributes metallurgical and other types of crystalline silicon solar panels or modules.  As of the date of this report, the Company intends to acquire Algatec Equity Partners LP, a Delaware limited partnership (the “Algatec Partnership”), which, in turn, owns a 47% equity interest in the capital stock of Algatec Solar AG.  As previously disclosed, a trust established by Robert M. Rubin, the President and Chief Executive Officer of the Company, owns approximately 25% of the equity of the Algatec Partnership and is an affiliate of the general partner of the Algatec Partnership.  It is anticipated that the equity stake in Algatec will be obtained from the Algatec Partnership in exchange for approximately 43.0 million shares of the Company’s Common Stock.  However, such number of shares of Common Stock are subject to adjustment based on an independent fairness opinion to be obtained by the Company. The acquisition of the partnership and its equity in Algatec is subject to (i) execution of definitive exchange agreements, (ii) obtaining the requisite approvals and consents of the partners of the partnership, (iii) the delivery of audited financial statements of Algatec for the two fiscal years ended December 31, 2009, and (iv) receipt of the fairness opinion. The Company anticipates that the acquisition of the partnership and its 47% equity interest in Algatec will be completed within the next 90 days.  The Company is also continuing negotiations with the other shareholders of Algatec to acquire the remaining 53% interest in the capital stock of Algatec.  There can be no assurance that the conditions to complete the acquisition of the 47% equity interest in Algatec owned by the Algatec Partnership will be satisfied to enable the Company to acquire such equity, or that the Company will be able to acquire any additional equity interests in Algatec.

In the event that the Company is unable to acquire BudaSolar or any of the equity of Algatec, absent an alternative strategic acquisition or a significant increase in the current business of its Kraft subsidiary, it is unlikely that the Company will be able to achieve its expansion plans in the solar business, and may be required to cease doing business altogether.

Consummation of either or both of the BudaSolar and Algatec acquisitions, as well as all other expansion plans of the Company, are subject to its ability to solve its significant working capital shortages; make payment or other arrangements for the resolution of approximately $1.3 million of indebtedness currently in default as of the filing date of this report ($1 million of which became in default in March 2009 and $268,000 of indebtedness which became in default in June 2009 (plus redemption penalties and accrued interest)) and other accrued accounts payable, all of which are overdue.  In the event that the Company is unable to resolve these matters within the next 90 days, it may be unable to continue in business and/or may be required to seek protection from its creditors under the Federal Bankruptcy Act.

 Subject to consummation of either or both of the BudaSolar or Algatec transactions, the Company will seek to further vertically integrate itself within this industry through activities in, but not limited to, investing in and/or operating the module manufacturing plants, selling thin film photovoltaic modules, and installing and/or managing solar power plants. The Company also intends, directly and through joint ventures or strategic alliances with other companies or through governmental incentive programs, to sell equipment for and participate financially in solar power facilities using thin film a-Si solar modules or metallurgical and other crystalline solar modules as the power source to provide electricity to municipalities, businesses and consumers.

Kraft and BudaSolar are each Hungarian corporations and their headquarters are located in Budapest, Hungary.  Algatec is a German corporation and its headquarters are located in Proesen, Germany.  Solar Thin Films is a Delaware corporation and its headquarters are located at 116 John Street, Suite 1120, New York, New York 10038.  Solar Thin Films website is located at www.solarthinfilms.com.

Company History

Solar Thin Films History

The Company was initially organized as a New York corporation on June 22, 1988 under the name Alrom Corp. ("Alrom"), and completed an initial public offering of securities in August 1990. Alrom effected a statutory merger in December 1991, pursuant to which Alrom was reincorporated in the State of Delaware under the name American United Global, Inc. Prior to the acquisition of Kraft, the Company intended to focus its business strategy on acquisitions of operating businesses in various sectors. On June 14, 2006, in connection with its business strategy, the Company closed on the acquisition of 95.5% of the outstanding securities of Kraft. In addition, the Company acquired the remaining 4.5% minority interest in August 2007 and, as a result, now conducts its operations via Kraft, its wholly-owned subsidiary.
 
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Kraft History
 
Kraft was founded in 1993, shortly after the breakup of the communist economy in Hungary. Its founding members were associated with the Hungarian Central Research Institute for Physics. In 1996, Kraft was contracted to develop thin-film photovoltaic deposition equipment for production of amorphous silicon based thin-film modules, as well as complete turnkey facilities. Photovoltaics (PV) is the physical phenomenon, which allows certain semiconductor materials to directly convert sunlight into electricity.
 
In the subsequent years, Kraft has manufactured equipment for production facilities in New Jersey, Germany, Hungary, China, Taiwan, Greece and Portugal. In producing equipment for these facilities, Kraft developed substantial equipment manufacturing expertise. More recently as a supplier for a solar project in Weihai, China, Kraft developed additional process expertise required to allow it to become a manufacturer of “turnkey” plants, including the delivery of both equipment and services that produce photovoltaics modules utilizing thin-film technology. Kraft has delivered its first "turnkey" plant in Spain which is now in final acceptance testing.

BudaSolar Technologies Co. Ltd.

On April 3, 2009, the Company and Kraft entered into a restated share exchange agreement with BudaSolar and its shareholders.  Under the terms of the agreement, the BudaSolar shareholders were to have acquired a 49% equity interest in Kraft, in exchange for transferring 100% of the BudaSolar equity to Kraft.  Such agreement was subject to the satisfaction of certain closing conditions, including the Company’s repayment of all outstanding June 2006 convertible notes in order to secure the release of the shares of Kraft pledged as security to the June 2006 note holders.  Although only $268,000 of such notes remain outstanding, the Kraft shares still remain subject to the pledge agreement.

At the present time, the Company is negotiating a new agreement with the BudaSolar shareholders.  The proposed revised transaction contemplates that the Company will directly acquire 100% of the share capital of BudaSolar in exchange for 70,000 shares of the Company’s Series B-5 convertible voting preferred stock (the “B-5 Preferred Stock”).  The B-5 Preferred Stock has a liquidation value of $7.0 million and is convertible at any time by the holders into a minimum of 2.1 million and a maximum of 49.0 million shares of the Company’s common stock, $0.01 par value per share (the “Common Stock”).  The aggregate number of shares of Company Common Stock into which all if the B-5 Preferred Stock would be convertible (the “Conversion Shares”) will depend upon the audited combined pre-tax income of the Company’s Kraft and BudaSolar subsidiary corporations (the “Corporations Pre-Tax Income”) at the end of each of the five consecutive fiscal years ending December 31, 2010 through December 31, 2014 (the “Measuring Period”).  The target Corporations Pre-Tax Income and the corresponding number of Conversion Shares that can be exercised at the end of any one or more fiscal years during the Measuring Period is based on a “grid” of such Pre-Tax Income and Conversion Shares.  For example if the Corporations Pre-Tax Profits at the end of any of the five fiscal years in the Measuring Period is 0 to $2.5 million, the number of Conversion Shares would be 2.1 million; if such Pre-Tax Income is $10.0 million, then the number of Conversion Shares would be 21.0 million; and if such Pre-Tax Income is $55.0 million or more, the Conversion Shares would be 49.0 million.  On March 31, 2015, any B-5 Preferred Stock not converted into Common Stock would automatically convert based upon the Corporations Pre-Tax Income for the fiscal year ending December 31, 2014.

At the time of execution of the BudaSolar purchase agreement, the Company will provide $55,000 to BudaSolar as a working capital advance, and is obligated to provide additional working capital thereafter. In addition, we shall assume the obligations of repayment of all outstanding loans made by the BudaSolar shareholders or their affiliates to BudaSolar prior to the date of the agreement, so that, as of the closing date, BudaSolar will have either positive stockholders equity or capital of not less than US $1,000.  It is expected that such loans will be evidenced by a 5 year subordinated note of the Company, which shall (i) bear interest at an annual rate equal to LIBOR plus a margin of 3%; and (ii) will be repaid to the BudaSolar shareholders following completion of working capital contributions to BudaSolar and Kraft by the Company and thereafter only out of excess cash flow of BudaSolar and Kraft.

Under the terms of a separate agreement with BudaSolar, Kraft has contracted to purchase from BudaSolar (1) equipment assembly services on some of its equipment based on a fixed fee per equipment, and (2) installation related technical services based on hourly rates.  In connection with these services, Kraft has paid $1,370,000 in advances to BudaSolar during the second quarter of 2009. BudaSolar has provided $747,891 worth of services in 2009 to Kraft, which left a balance of advances wired to BudaSolar of $622,109 as of December 31, 2009.  During 2008, BudaSolar received $750,000 pursuant to the Stock Exchange Agreement from the Company, which was fully repaid in the second quarter of 2009.
 
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In the event that the Company consummates the BudaSolar acquisition, each of Messrs. Robert M. Rubin, Gary Maitland and Dr. Boris Goldstein (the current board members of the Company) and Istvan Krafcsik and Attila Horvath, the principal stockholders and executive officers of BudaSolar, have agreed to vote their shares of voting capital stock of the Company to elect to the board of directors of the Company and its Kraft and BudaSolar subsidiaries five persons, two of whom shall be Istvan Krafcsik and Attila Horvath, two of which would be designated by the Company and a fifth independent director acceptable to Messrs. Krafcsik and Horvath.   In addition, such parties and the Company agreed that during the five year Measuring Period, so long as the Corporations Pre-Tax Income equaled or exceeded $5.0 million, the members of the Company’s board of directors will include Messrs. Krafscik and Horvath and other persons reasonably acceptable to them.

BudaSolar currently operates its business at Kraft’s facility in Budapest, and the BudaSolar personnel and management work closely with the Kraft personnel and management.  Kraft is highly dependent upon the ongoing technical expertise of the BudaSolar personnel in executing the turn-on and related computer functions of the Kraft line of a-Si solar module equipment, and making such equipment lines operational.   In such connection, in April 2010 the Company recently completed the installation of equipment for Grupo Unisolar SA in Spain.  The customer has resisted payment of the final €968,265 installment due under the April 8, 2008 contract allegedly due to certain maintenance and repair complaints with respect to our amorphous silicon equipment line.  Representatives of BudaSolar are assisting Kraft in attempting to resolve this problem and the Company expects to collect the payment in full. If the Company is unable to satisfy its only existing customer, its a-Si module equipment business could be materially and adversely affected.

The ongoing operations of Kraft and BudaSolar will require approximately $3.2 million of working capital to sustain and expand their operations during 2010.  In addition, if the Company were to acquire Algatec, it is anticipated that a condition of such acquisition would be that the Company provide expansion financing of not less than $5.0 million for that corporation.  Accordingly, the Company’s ability to achieve it acquisition plans and expand its business will require the Company to source additional debt or equity financing from third party.  Absent receipt of the final €968,265 installment due under the April 8, 2008 contract with Group Solar AG, the Company’s operating subsidiaries may be unable to pay its obligations as they come due.

Agreements with Algatec Solar AG

On October 20, 2008, Robert M. Rubin, Chairman, Chief Executive Officer and Chief Financial Officer of Solar Thin Films, formed Algatec Equity Partners, L.P., a Delaware limited partnership (the “Partnership”), for the purpose of acquiring up to 49% of the share capital of Algatec.  Effective as October 30, 2008, Algatec and members of Algatec senior management consisting of Messrs. Rainer Ruschke, Ullrich Jank, Dr. Stefan Malik and Andre Freud (collectively, the “Algatec Management Stockholders”), and Anderkonto R. Richter, Esq., as trustee for Mr. Ruschke and another Algatec stockholder (the “Trustee”), entered into a share purchase agreement (the “Algatec Share Purchase Agreement”).  Under the terms of the Algatec Share Purchase Agreement, on November 3, 2008 (the “First Closing”) the Partnership invested an aggregate of $3,513,000, of which approximately €2,476,000 was represented by a contribution to the equity of Algatec to enable it to acquire all of the assets and equity of Trend Capital, the predecessor to Algatec.  The Partnership also purchased for €1.00 per share a total of 13,750 Algatec shares, representing 27.5% of the outstanding share capital of Algatec.

The general partner of the Partnership is Algatec Management LLP, a Delaware limited liability company owned by The Rubin Family Irrevocable Marital Trust and other persons.  Mr. Rubin and Barry Pomerantz, a business associate of Mr. Rubin, are the managers of the general partner.  Under the terms of the limited partnership agreement, the general partner agreed to invest a total of $165,000 in the Partnership in consideration for 5.0% of the assets, profits and losses of the Partnership.  The limited partners, who invested an aggregate of $3,200,000 at the First Closing and additional persons the Partnership will seek to admit as limited partners by the Second Closing, will own 95.0% of the Partnership assets, profits and losses. As part of the First Closing, The Rubin Family Irrevocable Marital Trust invested an additional $1,500,000, as a limited partner, on the same terms as other limited partners of the Partnership.

In addition to its equity investment, the Partnership has agreed under the terms of a loan agreement entered into at the same time as the Algatec Share Purchase Agreement, to lend to Algatec on or about November 30, 2008 (the “Second Closing”), an additional $2,600,000 or approximately €2,000,000.  The proceeds of the loan were to be used to assist Algatec in paying the balance of the purchase price for all of the assets and equity of the Trend Capital limited partnership.  Upon funding of the loan, the Partnership would purchase for €9,250 an additional 9,250 shares, representing 21.5% of the outstanding share capital of Algatec, thereby increasing its ownership to an aggregate of up to 49% of the outstanding share capital of Algatec.  The loan, together with interest at the rate of 6% per annum, is repayable on the earlier of December 31, 2012 or the completion of a financing providing Algatec with up to $50.0 million of proceeds for expansion (the “Algatec Financing”).  Upon the Partnership funding the entire €2,000,000 loan at the Second Closing, the Management Group would own the remaining 51% of the share capital of Algatec.  If the Partnership funds less than the full €2,000,000 loan, the additional 21.5% equity to be issued to the Partnership at the Second Closing was to have been appropriately pro-rated.  On December 29, 2008, the Partnership consummated the Second Closing with Algatec and funded a loan of €2,000,000 ($2.6 million). Ultimately, the Partnership provided total funding of approximately $5.75 million to Algatec which, after allowing for unfavorable currency conversion rates, left the Partnership with a total equity ownership in Algatec of approximately 47% of the total number of outstanding Algatec shares.
 
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Effective as of October 30, 2008, the Trustee, the Management Group and the Partnership (collectively, the “Algatec Stockholders”) and Algatec entered into a stock exchange agreement. Under the terms of the stock exchange agreement the Algatec stockholders agreed, subject to certain conditions, to exchange 100% of the share capital of Algatec for shares of shares of Company capital stock. Consummation of the Algatec acquisition is subject to certain conditions, including Algatec obtaining up to $50.0 million financing for Algatec to enable it to construct the addition to its existing manufacturing facility and purchase the necessary equipment to expand its business.  On April 10, 2009, the parties agreed to extend the anticipated closing date of the transactions contemplated by the Stock Exchange Agreement to July 15, 2009.  The requisite financing for Algatec was not obtained and the agreement expired on July 15, 2009.

Solar Thin Power

In 2007, the Company formed Solar Thin Power, Inc. under the laws of the State of Delaware.  Solar Thin Power was to engage in power projects.  It owned a 15% interest in CG Solar Company Limited, the Company’s joint venture in China (and agreed to purchase another 5%), and was in preliminary discussions with other prospective joint venture partners with respect to marketing and financing of various power projects.

In 2007 and 2008, Solar Thin Power received an aggregate of $3,498,396 of financing from ten unaffiliated investors who purchased common stock of Solar Thin Power at $0.50 per share.  Approximately $1,500,000 of the proceeds of such financing used by Solar Thin Power to acquire a 20% minority interest in CG Solar and the balance of such proceeds were loaned to Solar Thin Films for working capital.  Under the terms of the transaction, if Solar Thin Power was not a publicly traded corporation by June 2009, the investors in Solar Thin Power had the right to require Solar Thin Films to repurchase half of their portion of their minority equity in Solar Thin Power for $1,767,500. This obligation was eliminated with the merger of Solar Thin Power into Solar Thin Films effective June 30, 2009.

At the time of the merger, an aggregate of 64,403,333 shares of Solar Thin Power were issued and outstanding, of which Solar Thin Films owned 43,000,000 shares or 66.77% of Solar Thin Power common stock, and stockholders of Solar Thin Power, other than Solar Thin Films, owned an aggregate of 21,403,333 shares of the 64,403,333 outstanding shares of Solar Thin Power common stock.   The Company consummated an Agreement and Plan of Merger dated effective June 30, 2009 pursuant to which Solar Thin Power was merged with and into the Company (the “Merger”).  Following the consummation of the Merger, effective June 30, 2009, Solar Thin Power is operated as a division of the Company and will seek to facilitate power projects and joint ventures designed to provide solar electricity using thin film a-Si solar modules. 

Under the terms of the Merger:
 
·
the shareholders of Solar Thin Power, other than the Company, received an aggregate of 6,421,000 shares of the Company’s common stock, or one and one-half shares of the Company’s common stock for each share of Solar Thin Power common stock owned by them;

·
each full share of Solar Thin Power common stock that is issuable upon exercise of any Solar Thin Power warrants as at the effective time of the Merger will be converted into and exchanged for the right to purchase or receive one full share of the Company’s common stock upon exercise of such Solar Thin Power warrants; and

·
all of the 43,000,000 shares of Solar Thin Power common stock owned by the Company were cancelled.
 
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Critical Accounting Policies
 
The Company's discussion and analysis of its consolidated financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). This preparation requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumption and disclosures. The Company chooses accounting policies within US GAAP that management believes are appropriate to accurately and fairly report the Company's consolidated operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. While there are a number of significant accounting policies affecting our consolidated financial statements, we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:

·
Revenue Recognition;

·
Cost of Sales;

·
General, Selling and Administrative Expenses;

·
Allowance for doubtful accounts;

·
Research and development;

·
Derivative liability;

·
Product warranty reserve;

·
Stock Based Compensation; and

·
Use of Estimates.
 
Revenue Recognition

For revenue from Equipment sales, which include equipment and sometimes installation, the Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”). ASC 605-10 requires that four basic criteria must be met before revenue can be recognized: (1) Persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured.

Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. Deferred revenues as of December 31, 2009 and December 31, 2008 amounted to $2,373,067 and $33,452, respectively. ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arraignments (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.
 
The Company recognizes revenue when persuasive evidence of an arrangement exists, the price to the customer is fixed, collectibility is reasonable assured and title and risk of ownership is passed to the customer, which is usually upon shipment. However, certain customers traditionally have requested to take title and risk of ownership prior to shipment. Revenue for these transactions is recognized only when:

·
Title and risk of ownership have passed to the customer;
 
·
The Company has obtained a written fixed purchase commitment;

·
The customer has requested the transaction be on a bill and hold basis;
 
·
The customer has provided a delivery schedule;

·
All performance obligations related to the sale have been completed;
 
·
The product has been processed to the customer’s specifications, accepted by the customer and made ready for shipment; and

·
The product is segregated and is not available to fill other orders.

The remittance terms for these “bill and hold” transactions are consistent with all other sale by the Company. There were no bill and hold transactions at December 31, 2009 and 2008.
 
For Complete Factory sales, which include sale of equipment, installation and commissioning, the Company recognizes revenues from the product portion (pieces of equipment) on shipment and services portion (installation and commissioning process) upon completion of the installation and commissioning process.  The commissioning includes a range of consulting services necessary to successfully complete a performance test, such as training of management, engineering and production personnel, debugging and resolving problems, initial oversight or support for vendor relations and purchasing, documentation and transfer of process knowledge and potential co-management of the production line during performance testing or completion of the training process.  The Company has started its shipment of the factory sales, product portion (pieces of equipment) in December 2008, and the service portion (installation and commissioning) is expected to be completed during the fiscal year 2010.
 
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The Company has accounted for its Equipment Sales and Factory Sales arrangements as separate units of accounting as a) the shipped equipment (both Equipment Sales and Factory Sales) has value to the customer on a standalone basis, b) there is an objective and reliable evidence of the fair value of the service portion of the revenue (installation and commissioning) as such approximate the fair value that a third party would charge the Company’s customer for the installation and commissioning fees if the customer so desire not to use the Company’s services, or the customer could complete the process using the information in the owner’s manual, although it would probably take significantly longer than it would take the Company’s technicians and or a third party to perform the installation and commissioning process, and c) there is no right of return for the shipped equipment and all equipments are inspected and approved by the customer before shipment.

Cost of Sales

Cost of sales includes cost of raw materials, labor, production depreciation and amortization, subcontractor work, inbound freight charges, purchasing and receiving costs, inspection costs, internal transfer costs and absorbed indirect manufacturing cost, as well as installation related travel costs and warranty costs.

General, Selling and Administrative Expenses

General, selling and administrative expenses primarily include indirect labor costs, rental fees, accounting, legal and consulting fees.

Allowance For Doubtful Accounts

We are required to estimate the collectibility of our trade receivables. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past due balances. In order to assess the collectibility of these receivables, we perform ongoing credit evaluations of our customers' financial condition. Through these evaluations we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received. Our reserves are also based on amounts determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but are not limited to, current economic trends, historical payment and bad debt write-off experience. We are not able to predict changes in the financial condition of our customers and if circumstances related to our customers deteriorate, our estimates of the recoverability of our receivables could be materially affected and we may be required to record additional allowances. Alternatively, if we provided more allowances than are ultimately required, we may reverse a portion of such provisions in future periods based on our actual collection experience.

Research and development

Solar Thin Films accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). ASC 730-10, all research and development cost must be charged to expense as incurred. Accordingly, internal research and development cost are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred.

Derivative Liability
 
Effective January 1, 2009, Solar Thin Films adopted certain required provisions of Accounting Standards Codification subtopic 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity (“ASC 815-40”). ASC 815-40 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. ASC 815-40 is effective for fiscal years beginning after December 15, 2008. We adopted ASC 815-40 effective January 1, 2009 and the adoption resulted in our warrants with anti-dilutive provisions being classified as derivatives in accordance with Accounting Standards Codification subtopic 815-10, Derivatives and Hedging.
 
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Product Warranty Reserves

The Company provides for estimated costs to fulfill customer warranty obligations upon recognition of the related revenue in accordance with the Accounting Standards Codification subtopic Guarantees 460-10 (“ASC 460-10”) as a charge in the current period cost of goods sold. The range for the warranty coverage for the Company’s products is up to 18 to 24 months. The Company estimates the anticipated future costs of repairs under such warranties based on historical experience and any known specific product information. These estimates are reevaluated periodically by management and based on current information, are adjusted accordingly. The Company’s determination of the warranty obligation is based on estimates and as such, actual product failure rates may differ significantly from previous expectations.

The Company accrued a provision for product warranty costs of approximately $180,000 during 2007; of which approximately $85,000 was utilized during the year ended December 31, 2007. During 2008, an additional $73,000 in warranty costs were accrued and a total of $108,070 was utilized, leaving a balance of approximately $59,930 remaining as of December 31, 2008. During 2009, the Company accrued an additional $157,757 in warranty costs as a result of shipments to Grupo Unisolar, and did not incur any product warranty costs, leaving a balance of $212,687 in product warranty provision as of December 31, 2009. 

Stock Based Compensation

Effective for the year beginning January 1, 2006, the Company has adopted Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”).  The Company made no employee stock-based compensation grants before December 31, 2005 and therefore had no unrecognized stock compensation related liabilities or expense unvested or vested prior to 2006. Stock-based compensation expense recognized under ASC 718-10 for the year ended December 31, 2009 and 2008 was $680,761 and $1,085,251, respectively.

Use of Estimates

The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the disclosure of contingent assets and liabilities, if any, at the date of the financial statements. The Company analyzes its estimates, including those related to future contingencies and litigation. The Company bases its estimates on assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Commitments and Contingencies

The Company’s subsidiaries have entered into non-cancelable operational agreements for office premises.

In connection with the acquisition of Kraft, the Company entered into consulting agreements with Robert Rubin and Zoltan Kiss pursuant to which each consultant would receive an annual salary of $160,000 per annum, reimbursement for up to $5,000 in expenses associated with company activities and major medical benefits in consideration for services performed on behalf of the company. Each of these agreements was for a term of three years and has been supplanted by subsequent events. Mr. Rubin’s salary was increased to $225,000 per annum when he assumed the duties of Chief Financial Officer. In December 2007, Mr. Kiss resigned as director of the Company and subsequently agreed to waive his rights to such payments pursuant to a pending settlement agreement with the Company as described elsewhere in this report.

On June 20, 2007, Peter Lewis and the Company entered into an Employment Agreement pursuant to which Mr. Lewis has agreed to serve as the Chief Executive Officer of the Company. The Employment Agreement contains the following terms:

·
base salary of $225,000 per year;
 
·
the issuance of 37,523 shares of common stock per year;

·
a bonus paid pursuant to the Executive Officer Incentive Plan as determined by the Board of Directors;
 
·
a ten year option to purchase 600,000 shares of common stock at an exercise price of $2.665 per share on a cashless basis vesting on a pro-rata basis over a period of two years;

·
participation in all employee benefit plans and programs; and
 
·
reimbursement of reasonable expenses.

On April 7, 2009, the Company entered into an amendment to the employment agreement of Peter Lewis under which Mr. Lewis agreed to resign as the President, Chief Executive Officer and as a member of the board of directors of the Company, effective as of March 31, 2009. There was no disagreement or dispute between Mr. Lewis and the Company which led to his resignation.  Effective as of April 1, 2009, Mr. Lewis was appointed as Group Vice President and General Manager of the Thin Film Group of the Company through June 1, 2010.  The Thin Film Group shall consist of the manufacture and sale of PV Equipment.  In this capacity, Mr. Lewis will be primarily responsible for generating orders and sales of PV Equipment and he will provide general oversight of the manufacturing operations of the Kraft and BudaSolar subsidiaries of the Company, and together with Messrs. Krafcsik and Horvath, will be responsible for generating profits for the Thin Film Equipment Group.
 
33

 
For the period commencing April 1, 2009 and ending September 30, 2009, Mr. Lewis’ base salary was fixed at the rate of $225,000, payable in monthly installments of $18,750 each.  For the period commencing October 1, 2009, Mr. Lewis’ salary shall be reduced to the rate of $180,000 per annum, payable in monthly installments of $15,000 each.  On the earlier of June 30, 2009 or completion of an equity financing for the Company in excess of $3.0 million, the Company was obligated pay to Mr. Lewis in one payment all accrued and unpaid salary that is owed under the original employment agreement for all periods through and including the date of payment of such accrued and unpaid salary.  In addition, Mr. Lewis shall be entitled to receive a sales commission on all PV Equipment that is sold or on which firm orders are received by the Company during the term of employment in an amount equal to: (i) a percentage to be determined by mutual agreement on or before April 30, 2009, of the “net sales price” (defined as gross selling price, less returns, discounts and allowances) of such PV Equipment, as and when paid in cash by the customer to the Company less (ii) the amount of all other finders fees, commissions and other payments made or payable by the Company to any other person, firm or corporation who participates in or assists Mr. Lewis in the sale of such PV Equipment; or such other bonus arrangement as may be made with Kraft management.

All 2,000,000 shares of common stock of ST Power owned by Mr. Lewis immediately and irrevocably vested.  Moreover, with respect to the stock options entitling Mr. Lewis to purchase up to 720,000 shares of Company common stock (the “Option Shares”), the parties agreed as follows (i)  options for 600,000 Options Shares shall be deemed to have fully vested as of March 31, 2009 and the remaining 120,000 Option Shares that have not vested will be forfeited as of March 31, 2009; (ii) the exercise price of all stock options were reduced from $2.665 per share to $0.90 per share, representing 100% of the closing price of Company common stock as at March 27, 2009, the effective date of the amendment to the employment agreement; (iii) all stock options for vested Option Shares may be exercised on a “cashless exercise” basis; and (iv) Mr. Lewis agreed to waive any rights to receive the 37,523 shares of Company common stock previously granted to him annually under the original employment agreement.

In June 2009, the amended employment agreement with Peter Lewis was terminated by the parties. Effective as of October 1, 2009, Mr. Lewis was engaged as a non-exclusive sales and marketing consultant and representative of the Company through May 31, 2010; specifically with respect to the manufacture and sale of amorphous silicon thin film solar module manufacturing equipment and/or equipment lines (the “PV Equipment”).  As a marketing representative, Mr. Lewis will be primarily responsible for generating orders and sales of the PV Equipment. In full settlement of Mr. Lewis’ claims to accrued salary, stock options, future earnings and other benefits, he will be paid $112,500 for the period ending September 30, 2009.  For the period from October 1, 2009 through June 30, 2010, Mr. Lewis will be paid a monthly stipend of $15,000.  In addition, Mr. Lewis will be entitled to receive sales commissions pursuant to his agreement with Kraft.
 
In November 2005, the Company entered into a three year fixed term lease agreement for our corporate offices and facilities in Budapest, Hungary at a rate ranging from $4,543 to $15,433 per month as the lease has provisions for additional space for the period calendar year of 2006 and beyond. The lease agreement provides for moderate increases in rent after the first year in accordance with the inflationary index published by the Central Statistical Office. In November 2007, the Company signed the modification of lease agreement resulted a charge of $20,800 per months from January 1, 2008 for three years period of time through December 31, 2010. In July 2009 and January 2010, Kraft terminated its lease agreements covering its corporate offices and facilities in Budapest and Körmend Hungary.  In addition, in December 2009 and January 2010, Kraft entered into new lease agreements for its corporate offices and facilities in Budapest, Hungary. The minimum future cash flow for the leases at December 31, 2009 is as follows:

   
Amount:
 
Year ending December 31, 2010
 
$
249,600
 
Total
 
$
249,600
 
 
34

Results of Operations

Year ended December 31, 2009 as compared to the year ended December 31, 2008

Revenues

The following table summarizes our revenues for the years ended December 31, 2009 and 2008:

Years ended December 31,
 
2009
   
2008
 
Total Revenues
 
$
8,720,938
   
$
3,436,779
 
 
For the year ended December 31, 2009, revenues increased by 154% or $5,284,159 as compared to 2008.  The 154% increased revenue for the year ended December 31, 2009 as compared to year ended December 31, 2008 is primarily due to continued deliveries on a large Factory Sale contract to Grupo Unisolar, S.A. of Spain. Since the Company did not deliver any Equipment Sales in 2009, revenues transitioned during the year from 96% Equipment Sales in 2008 to 100% product portion of Factory Sales in 2009.   

During 2007 and 2008, the Company began to shift its marketing focus from Equipment Sales to Factory Sales (delivered on a “turnkey” basis, which by definition include a full set of equipment plus installation and training services or commissioning process). The Company signed its first deal in June of 2008 (and received the balance of its deposit in September 2008), for which it completed its first minor equipment portion of the Factory Sales delivery in December of 2008 valued at $147,262. The Company began shipping the balance of the equipment in March of 2009 and expects to deliver substantially all of the equipment for this 7.9 million euro order during fiscal year 2010. During 2010, the Company also expects that a majority of its revenue will come from Factory Sales rather than Equipment Sales, and does not expect to derive any substantial revenue from related parties. Commencing in 2008, the Company has decided to further break out its revenue into Equipment Sales and Factory Sales and to continue to do so in the future in both annual and quarterly filings.
 
While the Company is pursuing additional business opportunities - both Factory Sales and Equipment Sales, given the limited amount of historical business volume we cannot provide assurance regarding future sales. As the Company shifts primarily from Equipment Sales secured by purchase orders to Factory Sales secured by contracts, management expects that it may become easier to forecast future volume based upon long-term contracts and then established trends. In either case, the Company produces individual pieces of equipment (standard not generally custom) based on individual customer orders.  Comparison of different financial reporting periods will show significant fluctuations, primarily due to the value of outstanding and completed contracts or orders during the period. Therefore, historical figures (whether on a comparative period over period percentage analysis in a linear fashion or otherwise) may not have much meaning with respect to future changes in revenue and should not be used to make predictions about future revenue performance. For example, revenue could increase 400% period over period if the Company booked and invoiced one or more complete factory orders or it could decrease 100% or more if the Company failed to successfully deliver on a Factory Sale order or only managed to book and invoice orders for production of selected equipment, i.e. an Equipment Sale.  Therefore, management is not in the position to predict future revenue flow or make conclusions based on actual historical figures.  For example, recent increases and decreases in revenue are not dramatic as compared to our existing 7.9 million euro contract with Grupo Unisolar, which is expected to be completed during 2010 and which commenced shipping in December 2008. However, we can not provide absolute assurance that signed contracts, Grupo Unisolar or other, will be completed as expected or predicted. One complete factory may exceed $12 million in value but with unexpected financial or technical problems, production may slow down the completion of the contract.  In conclusion, revenue prediction by management is difficult as of the date of this report. 
 
35

 
Cost of sales

The following table summarizes our cost of sales for the years ended December 31, 2009 and 2008:

Years ended December 31,
 
2009
   
2008
 
Total cost of sales
 
$
6,460,524
   
$
2,403,808
 
 
For the year ended December 31, 2009, our cost of sales was $6,460,524, or 74% of revenue as compared to $2,403,808, or 70% of our revenue for the year ended December 31, 2008. The increase in cost of sales of $4,056,716 from 2008 to 2009 was primarily a result of an increase in sales of 154%. The margin reduction  was a function of i) reduced margins due to the transition from Equipment Sales to Factory Sales and offset by ii) 0.9% swings in the US dollar as compared to the Hungarian Forint. The average exchange rate for the year ended December 31, 2009 increased to 188.07 in HuF from 187.91 in HuF for each US Dollar for the year ended December 31, 2008. 
 
Our cost of revenue predominantly consists of the cost of labor, raw materials, depreciation and absorbed indirect manufacturing cost.

Selling, General and Administration Expenses

The following table summarizes our selling, general and administration expense for the years ended December 31, 2009 and 2008:

Years ended December 31,
 
2009
   
2008
 
Total selling, general and administration expense
 
$
5,014,321
   
$
7,745,174
 

For the year ended December 31, 2009, selling, general and administrative expenses were $5,014,321 as compared to $7,745,174 for the year ended December 31, 2008. The decrease in selling, general and administrative expenses is attributable to reduction in staff costs, consultants, legal and audit related incurred in 2009 as compared with in 2008.
 
Research and development

The following table summarizes our research and development expenses for the years ended December 31, 2009 and 2008:

Years ended December 31,
 
2009
   
2008
 
Research and development expenses
 
$
-0-
   
$
120,000
 

Our research and development for the year ended December 31, 2009 were $-0- compared to $120,000 for the year ended December 31, 2008. In late 2005, the Company suspended its internal research and development activity and in December 2006 signed a contract for certain research and development activities with Renewable Energy Solutions, Inc. (RESI). This contract - at a rate of $30,000 per month - remained in force through the first part of 2008. Subsequently, the Company suspended the research and development contract with RESI in anticipation of its planned acquisition of BudaSolar, a company with its own internal research and development activity. 

Depreciation and amortization

The following table summarizes our depreciation (excluding depreciation allocated to cost of sales) and amortization for the years ended December 31, 2009 and 2008:

Years ended December 31,
 
2009
   
2008
 
Depreciation and amortization
 
$
73,141
   
$
142,472
 
 
Depreciation and amortization has decreased by $69,331 in the year ended December 31, 2009 compared to 2008. The decrease is mainly due to the aging of equipment purchased in previous years, and the company’s ability to increase production incrementally with minimal capital investment.
 
36

 
Interest expense, net

The following table summarizes our interest expense, net for the years ended December 31, 2009 and 2008:

Years ended December 31,
 
2009
   
2008
 
Interest expense, net
 
$
866,749
   
$
1,178,465
 

Interest expense, net has decreased by $311,716 in the year ended December 31, 2009 compared to 2008. The decrease is mainly due to the reduction of the amortized debt discount of our debt from the 2008 year.  

Gain on extinguishment of Debt

In 1996, we issued an unsecured 8%, $1.5 million note to an unrelated party in connection with the acquisition of a software company. The note was due and payable on April 30, 1999. The note was governed by the laws of the State of New York. The New York statute of limitations for seeking to collect on a note is six years from the maturity date. The creditor has never sought to collect the note since its maturity date and in or about 2001 orally advised a representative of the Company that it had "written off the debt." Although we had previously the note as a liability on its balance sheet, it does not believe that it has any further liability under this note.  Based on the appropriate opinion of our legal counsel, we removed this item as a liability on its financial statements as at December 31, 2009 and the related accrued interest. As such, we realized a gain on extinguishment of debt of $3,310,200 as other income for the year ended December 31, 2009. The Company also recognized $15,000 of gain from settlement of one of its June 2006 notes during the year ended December 31, 2009.

Other income

In private placements in June 2006, we issued convertible promissory notes and warrants to purchase the Company’s common stock. Pursuant to the terms of a registration rights agreement, we were required to file a registration statement within 30 days from closing and have such registration statement declared effective within 90 days from closing if the registration statement is not reviewed or, in the event that the registration statement is reviewed, within 120 days from closing. If we failed to have the registration statement filed or declared effective by the required dates, it will be obligated to pay a liquidated damages equal to 2% of the aggregate financing to each investor upon any such registration failure and for each thirty days that such registration failure continues in cash.

As of December 31, 2009, we concluded that the payment of liquidated damages under these commitments were not probable since the majority of the related notes have been converted or settled as of December 31, 2009. Accordingly, we reversed the accrued expenses for the potential liquidated damages of $720,000 as other income in the statement of operations during the year ended December 31, 2009.

Liquidity and Capital Resources
 
During the year ended December 31, 2008, Solar Thin Power, Inc., a then majority owned subsidiary of the Company, acquired a 15% interest in CG Solar, formerly WeiHai Blue Star Terra Photovoltaic Co., Ltd, a Sino-Foreign Joint Venture Company organized under the laws of the People’s Republic of China for $1,500,000. The investment of $1,500,000 is carried at cost under the cost method of accounting for investment.

On September 16, 2009, the Company consummated the sale and transfer of the equity interest to Innofast Investments Limited (the “Transferee”) pursuant to an equity transfer agreement dated as of September 16, 2009 with Renewable Energy Solutions, Inc. and the Transferee under which the Company received gross proceeds of $1,350,000.  As part of the transaction, Renewable Energy Solutions, Inc. (“RESI”), another former equity owner of CG Solar, sold its equity to the Transferee and assigned its $450,000 payment to the Company in order to retire accounts payable owed by RESI to the Company’s Kraft Elektronikai Zrt subsidiary.  As a result, the Company received a total of $1,800,000 from the transaction.  Accordingly, we determined that CG Solar investment was impaired and charged to current period operations an impairment of $150,000.
 
As of December 31, 2009, we had working capital deficit of $3,878,549. We generated a deficit in cash flow from operations of $634,147 for the year ended December 31, 2009. This deficit is primary attributable to our net loss of $194,089, net with depreciation and amortization, amortization of debt discount, deferred compensation and deferred financing costs of $532,135 as well as $1,159,484 fair value of vested and repriced options, common stock and warrants issued for services and settlement of interest and penalties, $50,000 of allowance for doubtful account and bad debt, impairment of investment of $150,000, $71,248 loss on deposit and sale of equipment, $(21,776) change in fair value of derivative liability, gain on extinguishment of debt of $(3,325,200) and the changes in the balances of assets and liabilities. Operating assets decreased $44,791, net with an increase in operating liabilities of $899,260.
 
37

 
Cash flow generated by investing activities for the year ended December 31, 2009 was $1,282,253, resulted from sale of investment in the amount of $1,350,000, $27,158 from sale of property and equipment, net with $94,905 property and equipment acquired.

Cash used in financing activities for the year ended December 31, 2009 was $640,000 payments on our notes payable.

Exploitation of potential revenue sources will be financed primarily through the sale of securities and convertible debt, issuance of notes payable and other debt or a combination thereof, depending upon the transaction size, market conditions and other factors.

While we have raised capital to meet our working capital and financing needs in the past, additional financing is required within the next 3 months in order to meet our current and projected cash flow deficits from operations and development.  There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.
 
By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition.

As at December 31, 2009, the Company’s consolidated current liabilities exceeded its consolidated current assets by $3,878,549.   As of the filing date of this report, the Company is currently in default in the payment of certain notes payable aggregating $1 million and $268,000 (plus redemption penalties and accrued interest) which became due in March and June 2009, respectively, and accounts payable and accrued liabilities of approximately $1.8 million are also due.  Unless the Company is able to obtain additional capital or other financing within the next 60 to 90 days, or sooner, its creditors may sue to collect on their notes and accounts.  In such event, the Company may be required to seek protection from its creditors under the Federal Bankruptcy Act.  Although the Company is actively pursuing such financing, there is no assurance that it will be obtained on commercially reasonable terms, if at all.  Even if such financing is obtainable, it may be expected that the terms thereof will significantly dilute the equity interests of existing stockholders of the Company.

During the year ended December 31, 2009, the Company repaid $640,000 to certain June 2006 investors and other noteholders.

On October 14, 2009, one of the Company’s June 2006 convertible note holders settled for a payment of $315,830 from the Company, representing $250,000 in note principal settlement with the remainder as redemption penalty and related interest.

On October 26, 2009, one of the Company’s June 2006 convertible note holders settled for a payment of $62,500 from the Company, representing $50,000 in note principal settlement with the remainder as redemption penalty and related interest.

On October 29, 2009, one of the Company’s June 2006 convertible note holders settled for a payment of $115,000 for unpaid note balance of $130,000 and accrued unpaid interest.

On December 7, 2009, two of the Company’s March 2006 convertible note holders settled for an aggregate of 200,000 shares of the Company’s common stock and demand notes of $169,167. The Company intends to issue such shares during the second quarter of 2010.

On December 27, 2009, one of the Company’s June 2006 convertible note holders settled for 940,625 shares of its Common Stock as settlement of convertible debentures of $350,000 and unpaid accrued interest.

As of the date of this report, an aggregate of $268,000 of the Company’s June 2006 convertible notes held by 2 noteholders remain unpaid and in default, and a former holder of convertible notes is suing the Company for $255,000 of alleged fees and penalties it claims is owed under the June 2006 agreements.  See Note 18, “Litigation.” The Company is in the process of negotiating settlements with such note holders.
 
38

 
There can be no assurance that the Company will enter into definitive settlement agreements to retire or reconstitute the remaining outstanding 2006 convertible notes.  If the Company is unable to enter into settlement or other agreements with the Investors, or is unable to obtain financing on terms acceptable to the Company in order to repay the outstanding debt owed to the Investors, the Investors may elect to exercise their first priority security interest in all of the assets of the Company, as well as sell, transfer or assign the Pledged Shares.  In such event, the Company may be required to cease operations and/or seek protection from its creditors under the Federal Bankruptcy Act.
 
Trends, Risks and Uncertainties

We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to our common stock.

Inflation and Foreign Currency

We maintain our books in local currency: US Dollars for the parent holding Company in the United States of America and Hungarian Forint for Kraft in Hungary.

We operate primarily outside of the United States through our wholly owned subsidiary. As a result, fluctuations in currency exchange rates may significantly affect our sales, profitability and financial position when the foreign currencies, primarily the Hungarian Forint, of its international operations are translated into U.S. dollars for financial reporting. In additional, we are also subject to currency fluctuation risk with respect to certain foreign currency denominated receivables and payables. Although we cannot predict the extent to which currency fluctuations may or will affect our business and financial position, there is a risk that such fluctuations will have an adverse impact on the sales, profits and financial position. Because differing portions of our revenues and costs are denominated in foreign currency, movements could impact our margins by, for example, decreasing our foreign revenues when the dollar strengthens and not correspondingly decreasing our expenses. The Company does not currently hedge its currency exposure. In the future, we may engage in hedging transactions to mitigate foreign exchange risk. 

The translation of the Company’s subsidiaries forint denominated balance sheets into U.S. dollars, as of December 31, 2009, has been affected by the U.S. dollar against the Hungarian forint due to recent strengthening of the U.S. dollar. The currency has changed from 187.91 as of December 31, 2008 to 188.07 as of December 31, 2009, approximate 0.9% depreciation in value. The average Hungarian forint/U.S. dollar exchange rates used for the translation of the subsidiaries forint denominated statements of operations into U.S. dollars for the years ended December 31, 2009 and 2008 were 202.26 and 171.80, respectively, an approximate 17.7% depreciation in value.
 
New Accounting Pronouncements
 
With the exception of those stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2009, as compared to the recent accounting pronouncements described in the 2008 Annual Report that are of material significance, or have potential material significance, to the Company.

In February 2010 the FASB issued Update No. 2010-09 “Subsequent Events (Topic 855)” (“2010-09”). 2010-09 clarifies the interaction of Accounting Standards Codification 855 “Subsequent Events” (“Topic 855”) with guidance issued by the Securities and Exchange Commission (the “SEC”) as well as the intended breadth of the reissuance disclosure provision related to subsequent events found in paragraph 855-10-50-4 in Topic 855. This update is effective for annual or interim periods ending after June 15, 2010. Management is currently evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.

In February 2010 the FASB issued Update No. 2010-08 “Technical Corrections to Various Topics” (“2010-08”). 2010-08 represents technical corrections to SEC paragraphs within various sections of the Codification. Management is currently evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.

In January 2010 the FASB issued Update No. 2010-06 “Fair Value Measurements and Disclosures—Improving Disclosures about Fair Value Measurements” (“2010-06”). 2010-06 requires new disclosures regarding significant transfers between Level 1 and Level 2 fair value measurements, and disclosures regarding purchases, sales, issuances and settlements, on a gross basis, for Level 3 fair value measurements. 2010-06 also calls for further disaggregation of all assets and liabilities based on line items shown in the statement of financial position. This amendment is effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years. The Company is currently evaluating whether adoption of this standard will have a material impact on its financial position, results of operations or cash flows.
 
39

 
In January 2010 the FASB issued Update No. 2010-05 “Compensation—Stock Compensation—Escrowed Share Arrangements and Presumption of Compensation” (“2010-05”). 2010-05 re-asserts that the Staff of the Securities Exchange Commission (the “SEC Staff”) has stated the presumption that for certain shareholders escrowed share represent a compensatory arrangement. 2010-05 further clarifies the criteria required to be met to establish a position different from the SEC Staff’s position. The Company does not believe this pronouncement will have any material impact on its financial position, results of operations or cash flows.

In January 2010 the FASB issued Update No. 2010-04 “Accounting for Various Topics—Technical Corrections to SEC Paragraphs” (“2010-04”). 2010-04 represents technical corrections to SEC paragraphs within various sections of the Codification. Management is currently evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.

In January 2010 the FASB issued Update No. 2010-02 “Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope Clarification” (“2010-02”) an update of ASC 810 “Consolidation.” 2010-02 clarifies the scope of ASC 810 with respect to decreases in ownership in a subsidiary to those of a: subsidiary or group of assets that are a business or nonprofit, a subsidiary that is transferred to an equity method investee or joint venture, and an exchange of a group of assets that constitutes a business or nonprofit activity to a non-controlling interest including an equity method investee or a joint venture. Management, does not expect adoption of this standard to have any material impact on its financial position, results of operations or operating cash flows. Management does not intend to decrease its ownership in any of its wholly-owned subsidiaries.

In January 2010 the FASB issued Update No. 2010-01 “Accounting for Distributions to Shareholders with Components of Stock and Cash—a consensus of the FASB Emerging Issues Task Force” (“2010-03”) an update of ASC 505 “Equity.” 2010-03 clarifies the treatment of stock distributions as dividends to shareholders and their affect on the computation of earnings per shares. Management does not expect adoption of this standard to have any material impact on its financial position, results of operations or operating cash flows.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

40


 
SOLAR THIN FILMS, INC.
 
Index to Financial Statements
 
   
Page No.
Report of Independent Registered Public Accounting Firm
 
F-1
Consolidated Balance Sheets at December 31, 2009 and 2008
 
F-2
    Consolidated Statements of Operations and Comprehensive Loss for the years ended December  31, 2009 and 2008
 
F-3
    Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2009 and 2008
 
F-4 to F-5
    Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
 
F-6
Notes to Consolidated Financial Statements
 
F-7 to F-41
 
41


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Solar Thin Films, Inc.
New York, New York

We have audited the consolidated balance sheets of Solar Thin Films, Inc. and Subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related statements of operations and comprehensive income (loss), stockholders' deficit and cash flows for each of the two years in the period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Solar Thin Films, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
/s/ RBSM LLP
 
RBSM LLP
 
Certified Public Accountants

New York, New York
April 15, 2010

F-1

 
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
 
   
2009
   
2008
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 631,155     $ 619,257  
Accounts receivable, net of allowance for doubtful accounts of $696,067
    1,397,593       194,341  
Accounts receivable, related party, net of allowance for doubtful accounts of $831,863
    -       500,000  
Inventory
    131,240       207,041  
Advances to suppliers
    622,526       931,370  
Note receivable, net of allowance for doubtful accounts of $250,000
    -       -  
Deposits and other current assets
    115,580       378,331  
Total current assets
    2,898,094       2,830,340  
                 
Property, plant and equipment, net of accumulated depreciation of $446,718 and $439,998, respectively
    256,136       413,241  
                 
Other assets:
               
Deferred financing costs, net of accumulated amortization of $607,500 and $581,000, respectively
    -       26,500  
Investments into CG Solar, at cost
    -       1,500,000  
Deposits
    -       38,072  
Other assets
    -       3,893  
Total other assets
    -       1,568,465  
                 
Total assets
  $ 3,154,230     $ 4,812,046  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities:
               
Accounts payable and accrued liabilities
  $ 2,563,910     $ 4,028,115  
Capital leases, current portion
    2,499       -  
Notes payable, current portion
    1,837,167       2,560,997  
Advances received from customers
    -       1,969,390  
Deferred revenue
    2,373,067       33,452  
Note payable-other
    -       1,500,000  
Total current liabilities
    6,776,643       10,091,954  
                 
Capital leases, long term
    4,981       -  
Dividends payable
    143,656       143,778  
Total long term debt
    148,637       143,778  
                 
Total liabilities
    6,925,280       10,235,732  
                 
Commitments and contingencies
               
                 
Stockholder's Deficit
               
Preferred stock, par value $0.01 per share; 2,700,000 shares authorized:
               
Series A Preferred stock, par value $0.01 per share; 1,200,000 shares designated; -0- issued and outstanding at December 31, 2009 and 2008
               
Series B Preferred stock, par value $0.01 per share; 1,500,000 shares designated:
               
Series B-1 Preferred stock, par value $0.01 per share, 1,000,000 shares designated, 228,652 issued and outstanding at December 31, 2009 and 2008
    2,286       2,286  
Series B-3 Preferred stock, par value $0.01 per share, 232,500 shares designated, 47,502 and 47,518 issued and outstanding at December 31, 2009 and 2008, respectively
    475       475  
Series B-4 Preferred stock, par value $0.01 per share, 100,000 shares designated, -0- issued and outstanding at December 31, 2009 and 2008
    -       -  
Common stock, par value $0.01 per share, 150,000,000 shares authorized, 18,988,893 and 11,562,120 issued and outstanding as of December 31, 2009 and 2008, respectively
    189,889       115,621  
Shares to be issued
    200,000       -  
Additional paid in capital
    24,660,277       25,300,488  
Treasury stock
    (80,000 )     (80,000 )
Deferred compensation
    -       (26,250 )
Accumulated deficit
    (29,551,979 )     (32,549,564 )
Accumulated other comprehensive income
    808,002       666,670  
Total Solar Thin Film's shareholders' deficit
    (3,771,050 )     (6,570,274 )
Noncontrolling interest
    -       1,146,588  
Total shareholders' deficit
    (3,771,050 )     (5,423,686 )
                 
Total Liabilities and Stockholders' Deficit
  $ 3,154,230     $ 4,812,046  
 
The accompanying notes are an integral part of these the consolidated financial statements

F-2


CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 
   
Years ended December 31,
 
   
2009
   
2008
 
REVENUE:
           
Equipment sales
  $ -     $ 3,289,517  
Factory Sales
    8,720,938       147,262  
Total revenue
    8,720,938       3,436,779  
                 
Cost of sales
    6,460,524       2,403,808  
Gross profit
    2,260,414       1,032,971  
                 
OPERATING EXPENSES:
               
General, selling and administrative expenses
    5,014,321       7,745,174  
Research and development
    -       120,000  
Depreciation and amortization expense
    73,141       142,472  
Total operating expenses
    5,087,462       8,007,646  
                 
NET (LOSS) FROM OPERATIONS
    (2,827,048 )     (6,974,675 )
                 
Other income/(expense):
               
Gain from extinguishment of debt
    3,325,200       -  
Loss on settlement of real estate deposit
    -       (260,746 )
Loss on sale and write off of equipment
    (40,513 )     -  
Foreign exchange (expense):
    (356,841 )     (56,061 )
Interest expense, net
    (866,749 )     (1,178,465 )
Gain on change in fair value of reset provision liability
    21,776       -  
Impairment on investment
    (150,000 )     -  
Debt acquisition costs
    (26,500 )     (74,204 )
Other income
    726,586       2,237  
Total other income (expenses)
    2,632,959       (1,567,239 )
                 
Net loss before provision for income taxes
    (194,089 )     (8,541,914 )
                 
Income taxes
    -       -  
                 
Net loss
    (194,089 )     (8,541,914 )
                 
Noncontrolling interest
    (8,771 )     67,904  
                 
NET LOSS ATTRIBUTABLE TO SOLAR THIN FILMS, INC.
  $ (202,860 )   $ (8,474,010 )
                 
Net loss per common share (basic)
  $ (0.01 )   $ (0.73 )
                 
Net loss per common share (fully diluted)
  $ (0.01 )   $ (0.73 )
                 
Weighted average shares used in los per share calculation:
               
Basic
    14,366,619       11,532,990  
Diluted
    14,366,619       11,532,900  
                 
Comprehensive loss:
               
Net loss
  $ (194,089 )   $ (8,541,914 )
Foreign currency translation gain
    141,332       225,626  
Comprehensive loss
    (52,757 )     (8,316,288 )
Comprehensive loss (income) attributable to the non controlling interest
    (8,771 )     67,904  
Comprehensive loss attributable to Solar Thin Films, Inc.
  $ (61,528 )   $ (8,248,384 )
 
The accompanying notes are an integral part of these consolidated financial statements

F-3

 
SOLAR THIN FILMS, INC
 CONSOLIDATED STATEMENTS OF DEFICIENCY OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
   
SOLAR THIN FILMS, INC.
 
   
Preferred
Series B-1
   
Preferred
Series B-3
   
Common
shares
   
Shares to
be issued
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
 
Balance, December 31, 2007 (Note 12)
    228,652     $ 2,286       47,518     $ 475       11,402,520     $ 114,025       -     $ -  
Issuance of 119,000 shares of common stock in exchange for convertible notes payable (Note 12)
    -       -       -       -       119,000       1,190       -       -  
Fair value of vested portion of employee options issued
    -       -       -       -       -       -       -       -  
Sale of majority owned subsidiary common stock by subsidiary
    -       -       -       -       -       -       -       -  
Reduction in ownership of majority owned subsidiary
    -       -       -       -       -       -       -       -  
Issuance of 39,800 shares of common stock in exchange for convertible notes payable (Note 12)
    -       -       -       -       39,800       398       -       -  
Issuance of 800 shares of common stock in exchange for convertible notes payable (Note 12)
    -       -       -       -       800       8       -       -  
Amortization of deferred compensation
    -       -       -       -       -       -       -       -  
Foreign currency translation gain
    -       -       -       -       -       -       -       -  
Net loss
    -       -       -       -       -       -       -       -  
Balance, December 31, 2008
    228,652       2,286       47,518       475       11,562,120       115,621       -       -  
Cumulative effect of a change in accounting principle-adoption of EITF 07-05 effective January 1, 2009
    -       -       -       -       -       -       -       -  
Issuance of 65,000 shares of common stock in exchange for services rendered (Note 12)
    -       -       -       -       65,000       650       -       -  
Issuance of 102 shares of common stock in exchange for 16 Preferred Series B-3 shares (Note 12)
    -       -       (16 )     -       102       1       -       -  
Change in majority owned subsidiary equity
    -       -       -       -       -       -       -       -  
Warrants issued in exchange for services
    -       -       -       -       -       -       -       -  
Fair value of vested portion of employee options issued
    -       -       -       -       -       -       -       -  
Change in fair value of re priced vested employee options
    -       -       -       -       -       -       -       -  
Issuance of majority owned subsidiary common stock for services
    -       -       -       -       -       -       -       -  
Amortization of deferred compensation
    -       -       -       -       -       -       -       -  
Issuance of 6,421,000 shares of common stock in exchange for non controlling interest in majority owned subsidiary (Note 12)
    -       -       -       -       6,421,000       64,210       -          
Issuance of 940,625 shares of common stock in exchange for convertible notes payable and related interest
    -       -       -       -       940,625       9,406       -          
Common stock to be issued in settlement of convertible note and interest expenses
    -       -       -       -       -       -       200,000       200,000  
Rounding due to reverse split (Note 12)
    -       -       -       -       46       1       -          
Foreign currency translation gain
    -       -       -       -       -       -       -       -  
Net loss
    -       -       -       -       -       -       -       -  
Balance at December 31, 2009
    228,652     $ 2,286       47,502     $ 475       18,988,893     $ 189,889       200,000     $ 200,000  

The accompanying notes are an integral part of these consolidated financial statements

F-4


SOLAR THIN FILMS, INC
 CONSOLIDATED STATEMENT OF DEFICIENCY OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
   
SOLAR THIN FILMS, INC.
             
   
Additional
               
Other
         
Non
   
Total
 
   
Paid
   
Deferred
   
Treasury
   
Comprehensive
   
Accumulated
   
 controlling
   
Stockholders'
 
   
in Capital
   
Compensation
   
Stock
   
Income (loss)
   
Deficit
   
Interest
   
Deficiency
 
Balance, December 31, 2007 (Note 12)
  $ 23,313,843     $ (79,750 )   $ (80,000 )   $ 441,044     $ (24,075,554 )   $ 999,496     $ 635,865  
Issuance of 119,000 shares of common stock in exchange for convertible notes payable (Note 12)
    593,810       -       -       -       -               595,000  
Fair value of vested portion of employee options
    1,085,016       -       -       -       -               1,085,016  
Sale of majority owned subsidiary common stock by subsidiary
    105,225       -       -       -       -       44,775       150,000  
Reduction in ownership of majority owned subsidiary
    -       -       -       -       -       170,221       170,221  
Issuance of 199,000 shares of common stock in exchange for convertible notes payable (Note 12)
    198,602       -       -       -       -       -       199,000  
Issuance of 800 shares of common stock in exchange for convertible notes payable (Note 12)
    3,992       -       -       -       -       -       4,000  
Amortization of deferred compensation
    -       53,500       -       -       -       -       53,500  
Foreign currency translation gain
    -       -       -       225,626       -       -       225,626  
Net loss
    -       -       -       -       (8,474,010 )     (67,904 )     (8,541,914 )
Balance, December 31, 2008
    25,300,488       (26,250 )     (80,000 )     666,670       (32,549,564 )     1,146,588       (5,423,686 )
Cumulative effect of a change in accounting principle-adoption of EITF 07-05 effective January 1, 2009
    (3,222,222 )     -       -       -       3,200,445       -       (21,777 )
Issuance of 65,000 shares of common stock in exchange for services rendered (Note 12)
    77,350       -       -       -       -       -       78,000  
Issuance of 102 shares of common stock in exchange for 16 Preferred Series B-3 shares (Note 12)
    (1 )     -       -       -       -       -       -  
Change in majority owned subsidiary equity
    (9,156 )     -       -       -       -       9,156       -  
Fair value of vested portion of employee options issued
    635,268       -       -       -       -       -       635,268  
Change in fair value of re priced vested employee options
    45,493       -       -       -       -       -       45,493  
Warrants issued in exchange for services
    222,706       -       -       -       -       -       222,706  
Issuance of majority owned subsidiary common stock for services
    -       -       -       -       -       49,141       49,141  
Amortization of deferred compensation
    -       26,250       -       -       -       -       26,250  
Issuance of 6,421,000 shares of common stock in exchange for non controlling interest in majority owned subsidiary (Note 12)
    1,149,446       -       -       -       -       (1,213,656 )     -  
Issuance of 940,625 shares of common stock in exchange for convertible notes payable and related interest
    460,906       -       -       -       -       -       470,312  
Common stock to be issued in settlement of convertible note and interest expenses
    -       -       -       -       -       -       200,000  
Rounding due to reverse split
    (1 )     -       -       -       -       -       -  
Foreign currency translation gain (Note 12)
    -       -       -       141,332       -               141,332  
Net loss
    -       -       -       -       (202,860 )     8,771       (194,089 )
Balance at December 31, 2009
  $ 24,660,277     $ -     $ (80,000 )   $ 808,002     $ (29,551,979 )     -     $ (3,771,050 )
 
The accompanying notes are an integral part of these consolidated financial statements
 
F-5

 
SOLAR THIN FILMS, INC
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (194,089 )   $ (8,541,914 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization expense
    117,382       190,025  
Allowance for doubtful accounts and bad debt
    50,000       1,605,797  
Loss on sale and write off of equipment
    40,513       -  
Impairment of investment
    150,000       -  
Amortization of deferred financing costs
    26,500       74,204  
Amortization of debt discounts
    362,003       1,085,251  
Amortization of deferred and prepaid compensation
    63,648       53,500  
Warrants issued in exchange for services
    222,706       -  
Stock based compensation
    680,761       1,085,016  
Common stock issued and to be issued in settlement of interest and redemption penalties
    169,479       -  
Change in fair value of reset liability
    (21,776 )     -  
Gain on extinguishment of debt
    (3,325,200 )     -  
Common stock of majority owned subsidiary issued for services
    49,140       170,220  
Loss on settlement of deposits
    30,735       260,746  
Changes in operating assets and liability:
               
Accounts receivable
    (1,118,989 )     (512,164 )
Accounts receivable, related party
    493,646       113,628  
Inventory
    70,320       (33,836 )
Note receivable
    -       -  
Advances and other current assets
    599,814       (1,106,030 )
Other assets
    -       (366,179 )
Accounts payable and accrued liabilities
    548,839       1,144,115  
Advances received from customers
    (1,829,661 )     2,154,063  
Deferred revenue
    2,180,082       33,452  
Net cash used in operations
    (634,147 )     (2,590,106 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Sale (purchase) of investments
    1,350,000       (1,500,000 )
Sale of property, plant and equipment
    27,158       -  
Acquisition of property, plant and equipment
    (94,905 )     (44,181 )
Net cash provided by (used in) investing activities:
    1,282,253       (1,544,181 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
(Payments) proceeds from notes payable
    (640,000 )     500,000  
Proceeds from sale of common stock by majority owned subsidiary
    -       150,000  
Net cash (used in) provided by financing activities:
    (640,000 )     650,000  
                 
Effect of currency rate change on cash
    3,792       (53,932 )
                 
Net increase (decrease) in cash and cash equivalents
    11,898       (3,538,219 )
Cash and cash equivalents at beginning of period
    619,257       4,157,476  
Cash and cash equivalents at end of period
  $ 631,155     $ 619,257  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid during the period for interest
  $ 2,772     $ 3,572  
Cash paid during the period for taxes
    -       -  
                 
NON CASH INVESTING AND FINANCING ACTIVITIES:
               
Common stock issued for deferred compensation
  $ 78,000     $ -  

The accompanying notes are an integral part of these consolidated financial statements
 
F-6

 
SOLAR THIN FILMS, INC.
DECEMBER 31, 2009 and 2008
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the presentation of the accompanying consolidated financial statements are as follows:

Business and Basis of Presentation

The Company is incorporated under the laws of the State of Delaware, and is in the business of designing, manufacturing and marketing “turnkey” systems and equipment for the manufacture of low cost thin film solar modules and building integrated photovoltaic tags on a world-wide basis.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Superior Ventures Corp. , Kraft Elektronikai Zrt. (“Kraft”) and Solar Thin Power, Inc. (“Solar Thin Power”). All significant intercompany balances and transactions have been eliminated in consolidation.
  
The Company consummated an Agreement and Plan of Merger dated June 30, 2009 (the “Agreement”) with Solar Thin Power and its shareholders, pursuant to which Solar Thin Power was merged with and into the Company (the “Merger”).  Following the Merger, effective on June 30 2009, Solar Thin Power is operated as a division of the Company (see Note 14). 

Accounts Receivable

The Company assesses the realization of its receivables by performing ongoing credit evaluations of its customers' financial condition. Through these evaluations, the Company may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The Company’s reserve requirements are based on the best facts available to the Company and are reevaluated and adjusted as additional information is received. The Company’s reserves are also based on amounts determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. Allowance for doubtful accounts for accounts and notes receivable was $1,777,930 as of December 31, 2009 and 2008. As of December 31, 2008, the Company determined accounts receivable, related party of $831,863, trade receivables of $696,067 and a note receivable of $250,000 were impaired and accordingly recorded an allowance for doubtful accounts. During the year December 31, 2009, the Company collected accounts receivable, related party, in the amount of $450,000 pursuant to an Equity Transfer Agreement the Company executed in September 2009 and the remaining uncollectible receivable of $50,000 was charged to operations during the year ended December 31, 2009.

Revenue Recognition

For revenue from Equipment sales, which include equipment and sometimes installation, the Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”). ASC 605-10 requires that four basic criteria must be met before revenue can be recognized: (1) Persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured.

 
F-7

 

SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. Deferred revenues as of December 31, 2009 and 2008 amounted to $2,373,067 and $33,452, respectively. ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arraignments (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.

The Company recognizes revenue when persuasive evidence of an arrangement exists, the price to the customer is fixed, collectibility is reasonable assured and title and risk of ownership is passed to the customer, which is usually upon shipment. However, certain customers traditionally have requested to take title and risk of ownership prior to shipment. Revenue for these transactions is recognized only when:

 
1.
Title and risk of ownership have passed to the customer;
 
 
2.
The Company has obtained a written fixed purchase commitment;
 
 
3.
The customer has requested the transaction be on a bill and hold basis;
 
 
4.
The customer has provided a delivery schedule;
     
 
5.
All performance obligations related to the sale have been completed;

 
6.
The product has been processed to the customer’s specifications, accepted by the customer and made ready for shipment; and
     
 
7.
The product is segregated and is not available to fill other orders.

The remittance terms for these “bill and hold” transactions are consistent with all other sale by the Company. There were no bill and hold transactions at December 31, 2009 and 2008.

For Complete Factory sales, which include sale of equipment, installation, and commissioning, the Company recognizes revenues from the product portion (pieces of equipment) on shipment and services portion (installation and commissioning process) upon completion of the installation and commissioning process.  The commissioning includes a range of consulting services necessary to successfully complete a performance test, such as training of management, engineering and production personnel, debugging and resolving problems, initial oversight or support for vendor relations and purchasing, documentation and transfer of process knowledge and potential co-management of the production line during performance testing or completion of the training process.

F-8

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The Company has accounted for its Equipment Sales and Factory Sales arrangements as separate units of accounting as a) the shipped equipment (both Equipment Sales and Factory Sales) has value to the customer on a standalone basis, b) there is an objective and reliable evidence of the fair value of the service portion of the revenue (installation and commissioning) approximated by the fair value that a third party would charge the Company’s customer for the installation and commissioning fees if the customer so desired not to use the Company’s services (or the customer could complete the process using the information in the owner’s manual, although it would probably take significantly longer than it would take the Company’s technicians and or a third party to perform the installation and commissioning process), and c) there is no right of return for the shipped equipment and all equipments are inspected and approved by the customer before shipment.

Cost of sales

Cost of sales includes cost of raw materials, labor, production related depreciation and amortization, subcontractor work, inbound freight charges, purchasing and receiving costs, inspection costs, internal transfer costs and absorbed indirect manufacturing cost, as well as installation related travel costs and warranty costs.

General, selling and administrative expenses

General, selling and administrative expenses primarily include indirect labor costs, rental fees, accounting, legal and consulting fees.

Investments

As part of the Company’s business strategy to take a minority interest in its customer base and to secure module supply for planned power projects to improve the chances of securing contracts, during the year ended December 31, 2008, the Company acquired a 15% interest in CG Solar, formerly WeiHai Blue Star Terra Photovoltaic Co., Ltd, a Sino-Foreign Joint Venture Company organized under the laws of the People’s Republic of China.  The investment of $1,500,000 represented 15% of total committed capital of $10,000,000 and is carried at cost under the cost method of accounting for investment.  Blue Star Glass and China Singyes own the remaining 85% of CG Solar.

The Company supplied equipment to Renewable Energy Solutions, Inc. (“RESI”) that was utilized in the construction of CG Solar's first a-Si production line. The investment was accomplished by purchasing a 10% interest from Terrasolar for $1 million (representing 10% of the committed capital) in March 2008 and a 5% interest from RESI for $500,000 (representing 5% of the committed capital) in January 2008. The balance of the committed capital was invested by CG Solar's parent, Blue Star Glass, and by a strategic partner, China Singyes.
 
During the year ended December 31, 2009, the Company executed an Equity Transfer Agreement pursuant to which the Company transferred its investment in CG Solar to a third party in exchange for considerations of $1,350,000. Accordingly, the Company recorded an impairment charge to current period operations of $150,000.
 
F-9


SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Segment information

Accounting Standards Codification subtopic Segment Reporting 280-10 (“ASC 280-10”) which establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders.  ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The Company applies the management approach to the identification of our reportable operating segment as provided in accordance with ASC 280-10. The information disclosed herein materially represents all of the financial information related to the Company’s principal operating segment
 
Product Warranty costs

The Company provides for estimated costs to fulfill customer warranty obligations upon recognition of the related revenue in accordance with the Accounting Standards Codification subtopic Guarantees 460-10 (“ASC 460-10”) as a charge in the current period cost of goods sold. The range for the warranty coverage for the Company’s products is up to 18 to 24 months. The Company estimates the anticipated future costs of repairs under such warranties based on historical experience and any known specific product information. These estimates are reevaluated periodically by management and based on current information, are adjusted accordingly. The Company’s determination of the warranty obligation is based on estimates and as such, actual product failure rates may differ significantly from previous expectations.

The Company had accrued provision for product warranty costs of approximately $95,000 at January 1, 2008. During 2008 an additional $73,000 in warranty costs were accrued and a total of $108,070 was utilized, leaving a balance of approximately $59,930 remaining as of December 31, 2008. During the year ended December 31, 2009 the Company accrued an additional $152,757 in warranty costs as a result of shipments to Grupo Unisolar, and did not incur any product warranty costs, leaving a balance of $212,687 in product warranty provision as of December 31, 2009. 

Research and Development

The Company accounts for research and development costs in accordance with Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”).  Under ASC 730-10, all research and development cost must be charged to expense as incurred. Accordingly, internal research and developments cost is expensed as incurred.

Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to products are expensed in the period incurred. The Company incurred expenditures of $-0- and $120,000 for the years ended December 31, 2009 and 2008, respectively.
 
F-10

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Reclassification

Certain reclassifications have been made to prior periods’ data to conform to the current year’s presentation. These reclassifications had no effect on reported income or losses.

Fair Value of Financial Instruments
 
Effective January 1, 2008, the Company adopted the provisions of FASB ASC 820-10 (the “Fair Value Topic”) which provides a framework for measuring fair value under GAAP for assets and liabilities that are recognized using fair values on a recurring basis. The Fair Value Topic defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. It also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels.
 
There are three general valuation techniques that may be used to measure fair value, as described below:
 
A) Market approach—Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Prices may be indicated by pricing guides, sale transactions, market trades, or other sources;
 
B) Cost approach—Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost); and
 
C) Income approach—Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (includes present value techniques, and option-pricing models). Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate.
 
The Company had no assets and liabilities that were measured on a recurring basis at fair value for the year ended December 31, 2009 using the market and income approaches.
 
Property, plant and equipment
 
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets.
 
The estimated useful lives of property, plant and equipment are as follows:

Buildings
 
50 years
Leasehold improvements
 
3 to 7 years
Furniture and fixtures
 
3 to 7 years
Machinery, plant and equipment
 
3 to 7 years
 
We evaluate the carrying value of items of property, plant and equipment to be held and used whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying value of an item of property, plant and equipment is considered impaired when the projected undiscounted future cash flows related to the asset are less than its carrying value. We measure impairment based on the amount by which the carrying value of the respective asset exceeds its fair value. Fair value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved.
 
F-11

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock Based Compensation

Effective for the year beginning January 1, 2006, the Company has adopted Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”). The Company made no employee stock-based compensation grants before December 31, 2005 and therefore has no unrecognized stock compensation related liabilities or expense unvested or vested prior to 2006. Stock-based compensation expense recognized under ASC 718-10 for the years ended December 31, 2009 and 2008 was $680,761 and $1,085,016, respectively.

Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Comprehensive Income (Loss)

The Company adopted Accounting Standards Codification subtopic 220-10, Comprehensive Income (“ASC 220-10”) which establishes standards for the reporting and displaying of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owners sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. ASC 220-10 requires other comprehensive income (loss) to include foreign currency translation adjustments and unrealized gains and losses on available for sale securities.
 
Foreign Currency Translation

The Company translates the foreign currency financial statements into US Dollars using the year or reporting period end or average exchange rates in accordance with the requirements of Accounting Standards Codification subtopic 830-10, Foreign Currency Matters (“ASC 830-10”). Assets and liabilities of these subsidiaries were translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average rates in effect for the periods presented. The cumulative translation adjustment is included in the accumulated other comprehensive gain (loss) within shareholders’ equity (deficit). Foreign currency transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations.

Net income (loss) per share

The Company accounts for net (loss) income per share in accordance with Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”), which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the statement of operations for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS.

F-12

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding during each period.  It excludes the dilutive effects of potentially issuable common shares such as those related to our convertible notes, warrants and stock options.  Diluted net (loss) income per share is calculated by including potentially dilutive share issuances in the denominator.  However, diluted net (loss) per share for the years ended December 31, 2009 and 2008 do not reflect the effects of 306,702and 306,805 shares potentially issuable upon conversion of our convertible preferred shares as of December 31, 2009 and 2008, respectively; 370,433 and 484,600 shares potentially issuable upon the conversion of convertible debt as of December 31, 2009 and December 31, 2008, respectively;  and -0- shares potentially issuable upon the exercise of the Company's stock options and warrants (calculated using the treasury stock method) as of December 31, 2009 and December 31, 2008. These potentially issuable shares would have an anti-dilutive effect on our net (loss) per share.
 
Recent Accounting Pronouncements
 
In February 2010 the FASB issued Update No. 2010-09 “Subsequent Events (Topic 855)” (“2010-09”). 2010-09 clarifies the interaction of Accounting Standards Codification 855 “Subsequent Events” (“Topic 855”) with guidance issued by the Securities and Exchange Commission (the “SEC”) as well as the intended breadth of the reissuance disclosure provision related to subsequent events found in paragraph 855-10-50-4 in Topic 855. This update is effective for annual or interim periods ending after June 15, 2010. Management is currently evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.
 
In February 2010 the FASB issued Update No. 2010-08 “Technical Corrections to Various Topics” (“2010-08”). 2010-08 represents technical corrections to SEC paragraphs within various sections of the Codification. Management is currently evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.
 
In January 2010 the FASB issued Update No. 2010-06 “Fair Value Measurements and Disclosures—Improving Disclosures about Fair Value Measurements” (“2010-06”). 2010-06 requires new disclosures regarding significant transfers between Level 1 and Level 2 fair value measurements, and disclosures regarding purchases, sales, issuances and settlements, on a gross basis, for Level 3 fair value measurements. 2010-06 also calls for further disaggregation of all assets and liabilities based on line items shown in the statement of financial position. This amendment is effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years. The Company is currently evaluating whether adoption of this standard will have a material impact on its financial position, results of operations or cash flows.
 
In January 2010 the FASB issued Update No. 2010-05 “Compensation—Stock Compensation—Escrowed Share Arrangements and Presumption of Compensation” (“2010-05”). 2010-05 re-asserts that the Staff of the Securities Exchange Commission (the “SEC Staff”) has stated the presumption that for certain shareholders escrowed share represent a compensatory arrangement. 2010-05 further clarifies the criteria required to be met to establish a position different from the SEC Staff’s position. The Company does not believe this pronouncement will have any material impact on its financial position, results of operations or cash flows.
 
In January 2010 the FASB issued Update No. 2010-04 “Accounting for Various Topics—Technical Corrections to SEC Paragraphs” (“2010-04”). 2010-04 represents technical corrections to SEC paragraphs within various sections of the Codification. Management is currently evaluating whether these changes will have any material impact on its financial position, results of operations or cash flows.
 
F-13


SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Recent Accounting Pronouncements (continued)
 
In January 2010 the FASB issued Update No. 2010-02 “Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope Clarification” (“2010-02”) an update of ASC 810 “Consolidation.” 2010-02 clarifies the scope of ASC 810 with respect to decreases in ownership in a subsidiary to those of a subsidiary or group of assets that are a business or nonprofit, a subsidiary that is transferred to an equity method investee or joint venture, and an exchange of a group of assets that constitutes a business or nonprofit activity to a non-controlling interest including an equity method investee or a joint venture. Management, does not expect adoption of this standard to have any material impact on its financial position, results of operations or operating cash flows. Management does not intend to decrease its ownership in any of its wholly-owned subsidiaries.
 
In January 2010 the FASB issued Update No. 2010-01 “Accounting for Distributions to Shareholders with Components of Stock and Cash—a consensus of the FASB Emerging Issues Task Force” (“2010-03”) an update of ASC 505 “Equity.” 2010-03 clarifies the treatment of stock distributions as dividends to shareholders and their affect on the computation of earnings per shares. Management does not expect adoption of this standard to have any material impact on its financial position, results of operations or operating cash flows.

NOTE 2 - GOING CONCERN MATTERS

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company incurred a loss from operations of $2,827,048 and $6,974,675 for the years ended December 31, 2009 and 2008, respectively. Additionally, the Company has negative working capital of $3,878,549 as of December 31, 2009. The Company is currently in default in the payment of certain notes payable.  These factors among others raised substantial doubt about the Company’s ability to continue as a going concern.
 
The Company has undertaken further steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond to address its lack of liquidity by raising additional funds, either in the form of debt or equity or some combination thereof.  However, there can be no assurance that the Company can successfully accomplish these steps and or business plans, and it is uncertain that the Company will achieve a profitable level of operations and be able to obtain additional financing.

The Company’s continued existence is dependent upon management’s ability to develop profitable operations and resolve its liquidity problems. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all.  In the event that the Company is unable to continue as a going concern, it may elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy. To date, management has not considered this alternative, nor does management view it as a likely occurrence.
 
F-14

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
 
NOTE 3 - INVENTORIES

Inventories are stated at the lower of cost or market determined by the first-in, first-out (FIFO) method. Components of inventories as of December 31, 2009 and 2008 consist of the following.

  
  
2009
  
  
2008
  
Work in Progress
 
103,831
   
$
103,919
 
Raw Materials
   
27,409
     
103,122
 
   
$
131,240
   
$
207,041
 

NOTE 4 - NOTE RECEIVABLE

Note receivable as of December 31, 2009 and 2008 consists of the following:

   
2009
   
2008
 
Note receivable, 7% per annum, secured and due June 10, 2009
 
$
250,000
   
$
250,000
 
Less: allowance for doubtful accounts
   
(250,000
)
   
(250,000
Net
 
$
-
   
$
-
 
 
The Company’s note receivable along with accrued interest was due on June 10, 2009 and can be prepaid at any time without penalty or premium. The note is secured by the Solar Thin Films, Inc’s common stock held by certain shareholders. At December 31, 2008, management determined the collectibility may be impaired and accordingly recorded an allowance for doubtful accounts with a current period charge to the Company’s operations.  There was no change in allowance for doubtful accounts at December 31, 2009.
 
NOTE 5 – DEPOSITS AND OTHER CURRENT ASSETS

Deposits and other current assets as of December 31, 2009 and 2008 are comprised of the following:

  
  
2009
  
  
2008
  
Real estate deposits, net of liquidated damages (see below)
 
$
-
   
$
194,254
 
Common stock issued for services to be rendered
   
40,603
     
-
 
Tax receivable
   
60,980
     
176,601
 
Other
   
13,997
     
7,476
 
Total
 
$
115,580
   
$
378,331
 

F-15


SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 5 – DEPOSITS AND OTHER CURRENT ASSETS (continued)

On August 20, 2008, the Company entered into an agreement to purchase certain property, plant and equipment, including all buildings and improvements, all fixtures and equipment attached to the property and certain equipment for a purchase price of $4,550,000.  In conjunction with the purchase, the Company made a wire transfer of a $30,000 non-refundable initial down payment upon signing of the agreement to an escrow account.  In addition, the Company made a $425,000 second down payment, which was subject to an environmental testing result.  The initial closing was scheduled on September 26, 2008.  The closing date was then adjourned in order to complete the Phase I environmental assessment and to address any issues identified.  Subsequently the Company had identified an environmental condition, which it believed might lead to contamination, and determined not to purchase the property.

The Company then negotiated a refund in the amount of $194,254 and accounted for the liquidated damages of $260,746 as loss on settlement of real estate deposits in the Company’s other expenses for the year ended December 31, 2008. The Company received the refund of $194,254 during the second quarter for the year ended December 31, 2009.
 
In January 2009, the Company issued 65,000 shares of its Common Stock in exchange for services to be rendered through January 2011 (Note 12). The shares of Common Stock were valued at $78,000, which was estimated to be approximate the fair value of the Company's common shares during the period covered by the consulting agreement. The Company amortized and charged to operations a stock-based compensation expense of $37,397 during the year ended December 31, 2009.

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

The Company's property and equipment at December 31, 2009 and 2008 consist of the following:
 
   
2009
   
2008
 
Land and buildings
 
$
135,604
   
$
223,132
 
Furniture and fixture
   
85,629
     
78,644
 
Machinery, plant and equipment
   
481,621
     
551,463
 
Total
   
702,854
     
853,239
 
                 
Accumulated depreciation
   
(446,718
)
   
(439,998
)
Property and equipment
 
$
256,136
   
$
413,241
 

Property and equipment are recorded on the basis of cost. For financial statement purposes, property, plant and equipment are depreciated using the straight-line method over their estimated useful lives.

During the year ended December 31, 2009, the Company disposed of vehicles for $27,158 with a book value of $37,279 resulting in a loss to current period operations of $9,266.  In addition, the Company charged $31,247 to operations assets scrapped during the year ended December 31, 2009. The Company also wrote off certain fully-depreciated assets resulted in no gain or losses.

Depreciation expense was $117,382 and $190,025 for the year ended December 31, 2009 and 2008, respectively, of which $44,241 and $47,553 was included as part of cost of sales.
 
F-16

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at December 31, 2009 and 2008 were as follows:

  
  
2009
  
  
2008
  
Accounts payable
 
$
435,393
   
$
149,324
 
    Other accrued expenses, including a penalty in the amount of  $720,000 in connection with liquidating charges as of December 31, 2008 (see below)
   
1,174,315
     
  2,068,591
 
Redemption penalty relating to convertible debentures, see Note 10 below
   
67,000
     
-
 
Accrued interest, see Note 8 and Note 10 below
   
124,934
     
1,810,200
 
   
$
1,801,642
   
$
4,028,115
 

As described on Note 17 below, the Company entered into a stock exchange agreement.  As such, the Company recorded estimated legal and other related costs of $500,000 as other accrued expenses for service rendered during the year ended December 31, 2008. The expenses were paid in 2009 with no remaining accrual at December 31, 2009.

Registration Rights Liquidated Damages
 
In private placements in June 2006, the Company issued convertible promissory notes and warrants to purchase the Company’s common stock. Pursuant to the terms of a registration rights agreement, the Company was required to file a registration statement within 30 days from closing and have such registration statement declared effective within 90 days from closing if the registration statement is not reviewed or, in the event that the registration statement is reviewed, within 120 days from closing. If the Company fails to have the registration statement filed or declared effective by the required dates, it will be obligated to pay a liquidated damages equal to 2% of the aggregate financing to each investor upon any such registration failure and for each thirty days that such registration failure continues in cash.

As of December 31, 2009, the Company concluded that the payment of liquidated damages under these commitments were not probable since the majority of the related notes have been converted or settled as of December 31, 2009 (see Note 10). Accordingly, the Company reversed the accrued expenses for the potential liquidated damages of $720,000 as other income in the statement of operations during the year ended December 31, 2009.

NOTE 8 - NOTES PAYABLE OTHER

A summary of notes payable other at December 31, 2009 and 2008 consists of the following:
 
   
2009
   
2008
 
Demand note payable: interest payable at 8.0% per annum (default rate of 10% per annum); unsecured
 
$
-
   
$
1,500,000
 
   
$
-
   
$
1,500,000
 
 
F-17

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 8 - NOTES PAYABLE OTHER (continued)

In 1996, the Company issued an unsecured 8%, $1.5 million note to an unrelated party in connection with the Company's acquisition of a software company. The note was due and payable on April 30, 1999. The note was governed by the laws of the State of New York. The New York statute of limitations for seeking to collect on a note is six years from the maturity date. The creditor has never sought to collect the note since its maturity date and in or about 2001 orally advised a representative of the Company that it had "written off the debt." Although the Company has previously listed the note as a liability on its balance sheet, it does not believe that it has any further liability under this note.  Based on the appropriate opinion of its legal counsel, the Company removed this item as a liability on its financial statements as at December 31, 2009 and the related accrued interest. As such, the Company realized a gain on extinguishment of debt of $3,310,200 as other income for the year ended December 31, 2009.

NOTE 9- DIVIDENDS PAYABLE

In 2000 and 2001, the Company’s wholly owned subsidiary declared a dividend to its shareholders. However based on the Company’s limited financial resources it has been unable to pay it. The shareholders have conceded the deferment of this dividend until the Company financially can afford paying it. At December 31, 2009 and 2008, the outstanding balance was $143,656 and $143,778, respectively. The underlying liability is in the local currency. Changes in the recorded amounts are related to the changes in the currency exchange rates.

NOTE 10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND NOTE PAYABLE

A summary of convertible notes payable at December 31, 2009 and 2008 are as follows:

 
  
2009
  
  
2008
  
Convertible notes payable (“March 2006”) non-interest bearing; secured and due March 2009. The Company is currently in default under the terms of this note agreement.
  $
1,000,000
    $
1,250,000
 
Debt Discount, net of accumulated amortization of $1,250,000 and $1,165,525, respectively
   
( -
)
   
(84,475
)
Net
   
1,000,000
     
1,165,525
 
Convertible notes payable (“June 2006”), non- interest bearing; secured and due June 2009; Noteholder has the option to convert unpaid note principal to the Company’s common stock at a rate of $5.00 per share. The Company is currently in default under the terms of this agreement
   
  268,000
     
1,173,000
 
Debt Discount, net of accumulated amortization of $1,048,000 and $895,472, respectively
   
 ( -
)
   
(277,528
)
Net
   
268,000
     
895,472
 
Note payable, non interest bearing, due March 4, 2009. The Company was in default under the terms of the note agreement.  Interest accrued at 8% per annum upon the default. The Company subsequently extended this note payable on October 25, 2009 with a new promissory note payable (see Note 20).
   
400,000
     
500,000
 
Notes payable, demand, 12% per annum, unsecured
   
169,167
     
-
 
Total
   
1,837,167
     
2,560,997
 
Less Current Maturities
   
(1,837,167
)
   
( 2,560,997
)
Convertible notes payable – long-term portion
 
$
-
   
$
-
 
 
F-18

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND NOTE PAYABLE (continued)

March 2006 Financing

In connection with the merger and corporate restructure on June 14, 2006, the Company assumed a financing arrangement dated March 16, 2006, subsequently amended on May 18, 2006, with several investors (the "March Investors") for the sale of (i) $1,250,000 in notes (the "Notes"), (ii) 125,000 shares of common stock of the Company (the "Shares") (Note 11) and (iii) common stock purchase warrants to purchase 125,000 shares of common stock at $5.00 price per share for a period of five years (the "Warrants").

The March 2006 Notes are interest free and mature on the earlier of (i) March 16, 2009 or (ii) the Company closing on a financing in the aggregate amount of $12,000,000. The Company granted the March 2006 Investors piggyback registration rights with respect to the Shares and the shares of common stock underlying the Warrants. Further, Robert M. Rubin, CEO and a Director of the Company, has personally guaranteed payment of the March 2006 Notes. The March 2006 Investors contractually agreed to restrict their ability to convert the March 2006 Notes and exercise the March 2006 Warrants and receive shares of the Company’s common stock such that the number of shares of the Company’s common stock held by them and their affiliates after such conversion does not exceed 4.99% of the Company’s then issued and outstanding shares of common stock.

The sale of the Notes was completed on March 16, 2006. As of December 31, 2009, the Company was obligated on $1,000,000 in face amount of Notes issued to the March investors.

In accordance with Accounting Standards Codification subtopic 470-20, Debt, Debt With Conversions and Other Options), the Company allocated, on a relative fair value basis, the net proceeds amongst the common stock, warrants and the convertible notes issued to the investors. The accounting predecessor recognized and measured $519,491 of the proceeds, which equals to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the March 2006 Notes.

In accordance with Accounting Standards Codification subtopic 470-10, Debt (“ASC 470-10”), the Company recognized the relative value attributable to the warrants in the amount of $231,797 to additional paid in capital and a discount against the March 2006 Notes. The Company valued the warrants in accordance with ASC 470-10 using the Black-Scholes pricing model and the following assumptions: (1) dividend yield of 0%; 2) expected volatility of 93.03%, (3) risk-free interest rate of 5.08% to 5.10%, and (4) expected life of 5 years. The Company also recognized the relative value attributable to the common stock issued in the amount of $498,712 to additional paid in capital and a discount against the March 2006 Notes. Total debt discount to the March 2006 Notes amounted $1,250,000. The note discount was being amortized over the maturity period of the Notes, being thirty-four (34) months.

The Company amortized the Convertible Notes’ debt discount and recorded non-cash interest expense of $84,475 and $372,163 for the years ended December 31, 2009 and 2008, respectively.

On November 5, 2009, the Company settled $250,000 of the March 2006 convertible notes and related accrued interest with a commitment to issue an aggregate of 200,000 shares of its common stock and a demand notes payable totally $169,167.

F-19

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
 
NOTE 10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND NOTE PAYABLE (continued)

June 2006 Financing

In connection with the merger and corporate restructure on June 14, 2006, the Company entered into a financing arrangement with several investors (the “June 2006 Investors”) pursuant to which it sold various securities in consideration of an aggregate purchase price of $6,000,000 consisting of the following securities:

 
·
$6,000,000 in senior secured convertible notes (“June 2006 Notes”);

 
·
600,000 shares of the Company’s common stock;

 
·
Series A Common Stock Purchase Warrants to purchase 600,000 shares of common stock at $10.00 per share for a period of three years (“Series A Warrants”);

 
·
Series B Common Stock Purchase Warrants to purchase 600,000 shares of common stock at $11.00 per share for a period of four years (“Series B Warrants”);

 
·
Series C Common Stock Purchase Warrants to purchase 600,000 shares of common stock at $15.00 per share for a period of three years (“Series C Warrants”); and

 
·
Series D Common Stock Purchase Warrants to purchase 600,000 shares of common stock at $16.50 per share for a period of four years (“Series D Warrants”).

The warrants and warrant agreement provide for certain anti-dilution rights (see Note 11).

The Series B Warrants and the Series D Warrants are exercisable only following the exercise of the Series A Warrants and the Series C Warrants, respectively, on a share by share basis.

The June 2006 Notes are interest free and matured in June 2009 and are convertible into the Company’s common stock, at the June 2006 Investors’ option, at a conversion price equal to $5.00 per share (Note 11).
 
The Company granted the June 2006 Investors registration rights with respect to the June 2006 Shares, and the shares of common stock underlying the June 2006 Notes, Series A Warrants, Series B Warrants, the Series C Warrants and Series D Warrants. The Company is required to file a registration statement within 30 days from closing and have such registration statement declared effective within 90 days from closing if the registration statement is not reviewed or, in the event that the registration statement is reviewed, within 120 days from closing. If the Company fails to have the registration statement filed or declared effective by the required dates, it will be obligated to pay a liquidated damages equal to 2% of the aggregate financing to each investor upon any such registration failure and for each thirty days that such registration failure continues in cash.

 As of December 31, 2009, the Company concluded that the payment of liquidated damages under these commitments were not probable. Accordingly, the Company reversed the accrued expenses for the potential liquidated damages of $720,000 as other income in the statement of operations during the year ended December 31, 2009.

F-20

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
 
NOTE 10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND NOTE PAYABLE (continued)

June 2006 Financing (continued)

The June 2006 Investors have contractually agreed to restrict their ability to convert the June 2006 Notes, Series A Warrants, Series B Warrants, Series C Warrants and Series D Warrants and receive shares of the Company’s common stock such that the number of shares of the Company’s common stock held by them and their affiliates after such conversion does not exceed 4.99% of the Company’s then issued and outstanding shares of common stock.

In accordance with Accounting Standards Codification subtopic 470-10, Debt (“ASC 470-10”), the Company allocated, on a relative fair value basis, the net proceeds amongst the common stock and Convertible Notes issued to the investors. As of December 31, 2006, the Company recognized $2,777,778 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid-in capital and a discount against the Convertible Note. The debt discount attributed to the beneficial conversion feature is amortized over the Convertible Notes’ maturity period, being three (3) years, as interest expense. In accordance with ASC 470-10, the Company also recognized the relative value attributable to the common stock issued in the amount of $3,222,222 to additional paid in capital and a discount against the June 2006 Notes. Total debt discount to the June 2006 Notes amounted $6,000,000. The note discount is amortized over the maturity period of the notes, being (3) years.

The Company amortized and wrote off the Convertible Notes’ debt discount and recorded a non-cash interest expense of $277,528 and $1,153,980 for the years ended December 31, 2009 and 2008, respectively.

In conjunction with raising capital through the issuance of $6,000,000 Notes, the Company has issued warrants that have registration rights for the underlying shares.  As the contract must be settled by the delivery of registered shares and the delivery of the registered shares is not controlled by the Company, pursuant to ASC 470-10, the warrants were recorded as a derivative liability and valued at fair market value until the Company meets the criteria under ASC 470-10 for permanent equity. The net value of the warrants at the date of issuance was recorded as a warrant liability on the balance sheet in the amount of $10,821,900 and charged to operations as interest expense.  Upon the registration statement being declared effective, the fair value of the warrant on that date will be reclassified to equity. The Company initially valued the warrants using the Black-Scholes pricing model with the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 93.03%, (3) risk-free interest rate of 5.08% to 5.10%, and (4) expected life of 5 years.
 
In connection with the merger and corporate restructure on June 14, 2006, the Company assumed as liability the fair value of $10,821,900 representing the warrants issued and outstanding as described above. At December 31, 2006, the Company revalued the warrants using the Black-Scholes option pricing model with the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 51.21%, (3) risk-free interest rate of 4.62% to 4.82% to 5.10%, and (4) expected life of 2.45 to 3.44 years. And 5) a deemed fair value of common stock of $0.99. The decrease of $9,356,400 in the fair value of the warrants at December 31, 2006 has been recorded as a gain on revaluation of warrant liability for the year ended December 31, 2006.  Warrant liability at December 31, 2006 amounted to $1,465,500. On February 13, 2007, upon the registration statement being declared effective, the assumed liability of $10,821,900 was adjusted to additional paid in capital.

F-21

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
 
NOTE 10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND NOTE PAYABLE (continued)

June 2006 Financing (continued)

The Company granted the Investors of the June 2006 Financing a first priority security interest in all of its assets. In addition, the Company pledged 100% of the shares (the “Pledged Shares”) held in its wholly owned subsidiary, Kraft Elektronikai Zrt (“Kraft”), as collateral to the Investors. The Company did not repay the note at its maturity in June 2009. As a result of the default, the Investors may seek a redemption premium equal to 125% of the outstanding principal amount.  At December 31, 2009, the Company had accrued redemption penalty in an aggregate amount of $67,000, which represents the redemption premium in excess of the outstanding notes principal of $268,000 that was included in the Company’s current liabilities.

In the year ended December 31, 2007, certain June 2006 investors converted $4,029,000 of convertible notes to 805,800 shares of the Company’s common stock.

In the year ended December 31, 2008, certain June 2006 investors converted $798,000 of convertible notes to 159,600 shares of the Company’s common stock.

During the year ended December 31, 2009, the Company settled an aggregate of $905,000 of convertible notes, related interest and redemption penalties by issuing (or committed to issue) 1,140,625 shares common stock, promissory notes of $169,167 and cash of $640,000 to certain June 2006 investors. One of the notes was settled less than its unpaid outstanding balance, the Company recognized $15,000 of gain from settlement of debt during the year ended December 31, 2009 related to this note.

There can be no assurance that the Company will enter into definitive settlement agreements to retire or reconstitute the remaining outstanding 2006 convertible notes.  If the Company is unable to enter into settlement or other agreements with the Investors, or is unable to obtain financing on terms acceptable to the Company in order to repay the outstanding debt owed to the Investors, the Investors may elect to exercise their first priority security interest in all of the assets of the Company, as well as sell, transfer or assign the Pledged Shares. In such event, the Company may be required to cease operations and /or seek protection from its creditors under the Federal Bankruptcy Act. 

Note payable

During the year ended December 31, 2008, the Company issued a $500,000 non interest bearing note, which was due on March 4, 2009 and is currently in default. During the year ended December 31, 2009, the Company paid $100,000 towards the note, leaving the balance of the note in the amount of $400,000 at December 31, 2009.

On October 25, 2009, the Company issued a note for the remaining unpaid balance of $400,000 due on January 4, 2011 with interest of 8% per annum accrued starting at the date of default, due at maturity.  

NOTE 10- PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND NOTE PAYABLE (continued)

Notes payable, demand
 
On November 5, 2009, in conjunction with the settlement of  $250,000  March 2006 convertible notes and related accrued interest, the Company issued unsecured demand notes in the aggregate amount of $169,167 at accrued interest 12% per annum with these two note March 2006 note holders.
 
F-22

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008
 
NOTE 11 – DERIVATIVE LIABILITY

The Company issued convertible debentures and related warrants with certain reset exercise price provisions (see Note 10).  If the Company issues or sells shares of its common stock (other than certain “Excluded Securities” as defined in the June 2006 Senior Secured Convertible Note Agreement) after the June 2006 Financing for an amount less than the original price per share, the conversion price of the warrants is reduced to equal the new issuance price of those shares.
 
 Upon the Company’s adoption of Accounting Standards Codification subtopic 815-40, Derivatives and Hedging (“ASC 815-40”) effective January 1, 2009, the Company determined that the warrants did not qualify for a scope exception under Accounting Standards Codification subtopic 815-10, Derivatives and Hedging (“ASC 815-10”) as they were determined to not be indexed to the Company’s stock as prescribed by ASC 815-40.  On January 1, 2009, the warrants, under ASC 815-40, were reclassified from equity to derivative liability for the then relative fair market value of $3,222,222 and marked to market.  The Company determined the fair value of these reset provisions at January 1, 2009 was $21,777 as the initial fair value at the adoption date of ASC 815-40.  The value of the warrants decreased by $3,200,445 from the warrants issuance date to the adoption date of ASC 815-40.  As of January 1, 2009, the cumulative effect in adopting ASC 815-40 was a reduction to additional paid in capital of $3,222,222 to reclassify the warrants from equity to derivative liability and a decrease in accumulated deficit of $3,200,446 as a cumulative effect of a change in accounting principle to reflect the change in the value of the warrants between their issuance date and January 1, 2009.  At March 31, 2009, the warrant liability was marked to market and the Company recorded a gain of $12,909 due to the decrease in the fair value related to these instruments during the first quarter of fiscal 2009.  Under ASC 815-40, the warrants will be carried at fair value and adjusted at each reporting period. In June 2009, the warrants expired and the related warrant liability adjusted to $-0-.

The fair value of the warrants at the adoption date of ASC 815-40 was determined using the Black Scholes Option Pricing Model based on the following assumptions:  dividend yield: -0-%; volatility: 97.17%, risk free rate: 0.27% to 0.37%, expected term: 0.43 to 1.43 years.

NOTE 12- CAPITAL STOCK

Preferred Stock

The Company has authorized 2,700,000 total shares of preferred stock.

The Board of Directors designated 1,200,000 shares as Series A 12.5% cumulative preferred stock (“Series A Preferred Stock”), with a par value of $0.01 per share. The preferred stock is entitled to preference upon liquidation of $0.63 per share for any unconverted shares. As of December 31, 2009 and December 31, 2008, there were no shares of Series A Preferred Stock issued and outstanding.

The Board of Directors has designated a total of 1,500,000 shares of Series B Preferred Stock:

 
·
The Board of Directors has designated 1,000,000 shares of its preferred stock as Series B-1 Preferred Stock (“B-1 Preferred”). Each share of Series B-1 Preferred Stock is entitled to preference upon liquidation of $2.19 per share for any unconverted shares. Each shares of the Series B-1 Preferred shall be entitled to one (1) vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock as a single class. Eighty five (85) Series B-1 Preferred shares may be converted to one (1) share of the Company’s common stock. As of December 31 2009 and 2008 there were 228,652 shares of Series B-1 Preferred issued and outstanding.
 
F-23

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 12- CAPITAL STOCK (continued)

   
·
The Board of Directors has designated 232,500 shares of its preferred stock as Series B-3 Preferred Stock (“B-3 Preferred”). Each share of the Series B-3 Preferred shall be entitled to six and four tenths (6.4) votes on all matters submitted to the stockholders for a vote together with the holders of the Common Stock as a single class. Each Series B-3 Preferred share may be converted to six and four tenths (6.4) shares of the Company’s common stock. As of December 31, 2009 and 2008, there were 47,502 and 47,518 shares of Series B-3 Preferred issued and outstanding, respectively.

 
·
In June 2006 the Board of Directors designated 100,000 shares of its preferred stock as Series B-4 Preferred Stock (“B-4 Preferred”).  Upon the filing of an amendment which increased the number of authorized common shares such that there was an adequate amount of authorized common stock per issuance upon conversion of the Series B-4 Preferred, the Series B-4 Preferred shares automatically converted to shares of the Company's common stock at a rate of seventy (70) common shares for each share of Series B-4 Preferred. During the year ended December 31, 2007, 95,500 shares of Series B-4 Preferred were converted into 6,685,000 shares of the Company’s common stock. As of December 31, 2009 and 2008, there were no shares of Series B-4 Preferred issued and outstanding.

Common Stock

On September 3, 2009, the Company affected a one-for-five (1 to 5) reverse stock split of its issued and outstanding shares of common stock, $0.01 par value. All references in the consolidated financial statements and the notes to consolidated financial statements, number of shares, and share amounts have been retroactively restated to reflect the reverse split. The Company has restated from 57,810,601 to 11,562,120 shares of common stock issued and outstanding as of December 31, 2008 to reflect the reverse split.  Due to the reverse split, previously reported loss per share of $0.15 increased to $0.73 per share for the year ended December 31, 2008.

On September 3, 2009, the Company is authorized to issue 150,000,000 shares of common stock with a par value of $0.01 per share. As of December 31, 2009 and 2008, there were 18,988,893 and 11,562,120 shares of common stock issued and outstanding, respectively.

In February 2007, the Company amended its Certificate of Incorporation increasing its authorized shares of common stock to issue 150,000,000 shares of common stock with a par value of $0.01 per share.

In January 2008, the Company issued 80,000 shares of its Common stock in exchange for convertible debentures of $400,000.

In March 2008, the Company issued 39,000 shares of its Common stock in exchange for convertible debentures of $195,000.

In April 2008, the Company issued 200 shares of its Common stock in exchange for convertible debentures of $1,000.

In June 2008, the Company issued 35,000 shares of its Common stock in exchange for convertible debentures of $175,000.

In September 2008, the Company issued 4,600 shares of its Common stock in exchange for convertible debentures of $23,000.
 
F-24

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 12- CAPITAL STOCK (continued)

In October 2008, the Company issued 800 shares of its Common Stock in exchange for convertible debentures of $4,000.

In January 2009, the Company issued 65,000 shares of its Common Stock in exchange for services to be rendered through January 2011. The shares of Common Stock were valued at $78,000, which was estimated to be approximate the fair value of the Company’s common shares during the period covered by the consulting agreement. The Company amortized and charged to operations a stock-based compensation expense of $37,397 during the year ended December 31, 2009.

In February 2009, the Company issued 102 shares of its Common Stock in conversion of 16 shares of Series B-3 Preferred Stock.

Pursuant to the Agreement and Plan of Merger dated and effective on June 30, 2009 (the “Agreement”) with Solar Thin Power, Inc. and its shareholders, the shareholders of Solar Thin Power, other than the Company, received an aggregate of 6,421,000 shares of the Company’s common stock (see Note 14).

In December 2009, the Company issued 940,625 shares of its Common Stock as settlement of convertible debentures of $350,000 and related accrued or additional interest and redemption penalties in an aggregate amount of $120,312. The Company also committed to issue 200,000 shares of its common stock and issued a demand note of $169,167 as settlement for $250,000 of its June 2006 notes and related interest expenses in an aggregate amount of $119,167.
 
NOTE 13- RELATED PARTY NOTES PAYABLE AND TRANSACTIONS
 
A significant majority of sales during 2008 were Equipment Sales rather than Factory Sales. In some cases the equipment was supplied directly to an end user, as in the case of EPV Solar; in other cases the equipment was supplied to a general contractor who subsequently delivered a complete factory, as in the case of equipment supplied in collaboration with RESI and Terrasolar on behalf of CG Solar (previously Blue Star Terra Corporation). During late 2007, the main strategic partner for the Company on such sales had been Renewable Energy Solutions, Inc. (“RESI”). Prior to RESI assuming the role of general contractor on the CG Solar project the primary partner was Terra Solar Global, Inc. (“Terra Solar”).
 
Terra Solar, Inc. (“TSI”) owns approximately 49% of the outstanding securities of Terra Solar. Zoltan Kiss, a shareholder and former director of the Company, was also a shareholder of TSI. Zoltan Kiss, a shareholder and former director of the Company, is also the Chairman and majority owner of RESI. Mr. Kiss resigned as Chairman and a Director of the Company effective December 20, 2007.
 
The Company had related party trade receivables of $1,197,548 from RESI as of December 31, 2008 from the Blue Star Contract and $134,315 from another project. Renewable Energy Solutions, Inc (“RESI”) assumed the trade payable from Terrasolar upon assumption of the Blue Star contract in April 2007 and made several payments during 2007. The Company has decided to reserve $831,863 out of the total balance of $1,331,863 related party trade receivable based on management’s evaluation of the related party’s current financial condition as of December 31, 2008. During the year ended December 31, 2009, the Company collected $450,000 pursuant to an Equity Transfer Agreement the Company executed in September 2009 and the remaining uncollectible receivable of $50,000 was charged to operations during the year ended December 31, 2009.
 
The Company signed a cooperative Research and Development Contract, and a Marketing and Manufacturing Facility Turn On Function Contract with RESI on December 20, 2006 and January 30, 2007, respectively. Zoltan Kiss, the Company’s former Chairman of the Board, is Chairman and majority shareholder of RESI. Payments made to RESI under the Research and Development Contract were $-0- and $120,000 for the years ended December 31, 2009 and 2008, respectively.

During 2008, the Company also entered into a Settlement Agreement with Zoltan Kiss, replacing both the Research and Development Contract and the Marketing Contract.

There were no related party sales and/or cost of sales for the years ended December 31, 2009 and 2008.

The Company has a dividend payment obligation due to the former shareholders valued at $143,656 and $143,778 as of December 31, 2009 and December 31, 2008, respectively.

F-25

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 14 – NON CONTROLLING INTEREST
 
Formation and Merger of Subsidiary

On October 18, 2007, the Company organized a wholly owned subsidiary, Solar Thin Power, Inc. (“Solar Thin Power”) under the laws of the state of Nevada. On October 24, 2007, Solar Thin Power issued 50,000,000 shares of its common stock in exchange for services rendered to the Company and 14,500,000 common shares for services to be performed.  On December 19, 2007 and January 23, 2008, Solar Thin Power completed the sale of 7,070,000 shares of its common stock at a net sales price of $0.4948 per share.  In conjunction with the sale of the common stock of Solar Thin Power, the Company issued 737,000 warrants to purchase shares in the Company’s common stock at $16.50 per share for five years (Notes 12 and 16).
 
On June 30, 2009, pursuant to the Company’s Agreement and Plan of Merger (the “Agreement”) with Solar Thin Power and its shareholders, Solar Thin Power was merged with and into the Company (the “Merger”).  Following the Merger effective on June 30, 2009, Solar Thin Power is operated as a division of the Company and will seek to facilitate power projects and joint ventures designed to provide solar electricity using thin film a-Si solar modules.

Under the terms of the Merger:

 
·
the shareholders of Solar Thin Power, other than the Company, received an aggregate of 6,421,000 shares of the Company’s common stock, or one and one-half shares of Company common stock for each share of Solar Thin Power common stock owned by them;

 
·
each full share of Solar Thin Power common stock that is issuable upon exercise of any Solar Thin Power warrants as at the effective time of the Merger will be converted into and exchanged for the right to purchase or receive one full share of the Company’s common stock upon exercise of such Solar Thin Power warrants; and

 
·
all of the 43,000,000 shares of Solar Thin Power common stock owned by the Company were cancelled.

For the period from October 18, 2007 (date of incorporation) to the date of the Merger, Solar Thin Power, Inc. did not generate any revenue, had net income of $24,624 from January 1, 2009 to June 30, 2009 (date of Merger), mainly attributable to accrued interest receivable, net loss of $240,881 for the year ended December 31, 2008, and a total accumulated deficit of $273,507 as of June 30, 2009, date of Merger.  Prior to the Merger, the Company owned a 63.64% interest in Solar Thin Power. During the year ended December 31, 2009, the Company issued 6,421,000 shares of its commons stock to shareholders of Solar Thin Power, Inc. pursuant to the Agreement and Plan of Merger, and the Company had eliminated the non controlling interests on its consolidated balance sheets upon the Merger effective on June 30, 2009; and the consolidated results of operations and cash flows reflected an elimination of 36.36% of Solar Thin Power financial results for the period prior to the Merger that pertain to the non controlling interest shareholders of Solar Thin Power.
 
F-26


SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 14 – NON CONTROLLING INTEREST (continued)
 
The following table summarizes the changes in Non Controlling Interest from January 1, 2008 to June 30, 2009 (date of Merger):

Balance as of January 1, 2008
 
$
999,496
 
Period loss applicable to non controlling interest for 2008
   
(67,904
)
Dilution of ownership interest from 70.15% ownership to 65.12% through issuance of Solar Power’s common stock by the Company for services rendered
   
214,996
 
Balance as of December 31, 2008
   
1,146,588
 
Period income applicable to non controlling interest for the six months ended June 30, 2009
   
8,771
 
Dilution of ownership interest related to change in equity of non controlling interest
   
9,156
 
Dilution of ownership interest from 65.12% to 63.64% through issuance of Solar Power’s common stock by Company for services rendered
   
49,141
 
Common stock to be issued in exchange for the outstanding non controlling interest
   
(1,213,656
)
Balance as of June 30, 2009 (date of Merger)
 
$
-
 
 
In conjunction with the sale of the common stock of Solar Thin Power, Inc. at December 19, 2007; the Company agreed to complete a Registration Statement with the Securities Exchange Commission and use its best efforts to have the Registration Statement declared effective within eighteen months (“Effective Date”) of closing.  In the event that Solar Thin Power, Inc. is not a public reporting company by the Effective Date, the Company has agreed to re-acquire, at the option of the shareholders, half of the common stock issued at the aggregate purchase price (“Put Option”).  The Company follows the Accounting Standards Codification subtopic 450-10, Contingencies (“ASC 450-10”) in accounting for this put liability, which provides that loss contingencies should be recognized as liabilities if they are probable and reasonably estimable. At December 31, 2008, the Company believed that its obligations under the put option are not probable due to the fact that it was anticipated that Solar Thin Power will enter into an agreement with the Company to merge with and into the Company prior to the Effective Date.  Upon the execution of the Agreement and Plan of Merger (the “Agreement”) with Solar Thin Power, Inc. and its shareholders, and the closing of the acquisition effective June 30, 2009, the put liability had been eliminated at June 30, 2009 (date of Merger).

NOTE 15- ECONOMIC DEPENDENCY
 
During the year ended December 31, 2009, $8,720,938 or 100% of the total revenues were derived from one customer; for the year ended December 31, 2008; $3,289,517 or 96% were derived from another customer. For the years ended December 31, 2009 and 2008, these customers accounted for 99% and 85.6% of accounts receivable, respectively.

The Company has no supplier that accounts for greater than 10% of the Company’s costs of sales during the years ended December 31, 2009 and 2008.

F-27

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 16 – STOCK OPTIONS AND WARRANTS

Warrants

The following table summarizes the changes in warrants outstanding and related prices for the shares of the Company’s common stock at December 31, 2009:
 
Exercise Price
  
Number
Outstanding
  
Warrants
Outstanding
Weighted
Average
Remaining
Contractual Life
(years)
  
  
Weighted
Average
Exercise price
  
  
Number
Exercisable
  
  
Warrants
Exercisable
Weighted
Average
Exercise Price
 
$
1.00
 
400,000
   
2.25
   
$
1.00
     
400,000
   
$
1.00
 
 
5.00
 
66,667
   
0.47
     
5.00
     
66,667
     
5.00
 
 
11.00
 
600,000
   
0.46
     
11.00
     
     
-
 
 
16.50
 
1,337,000
   
1.81
     
16.50
     
1,337,000
     
16.50
 
Total
 
2,403,667
   
1.51
   
$
12.23
     
1,803,667
   
$
12.64
 
 
Transactions involving the Company’s warrant issuance are summarized as follows:
 
   
Number of
Shares
   
Weighted Average
Price Per Share
 
Outstanding at December 31, 2007
   
3,268,667
   
$
13.40
 
Granted
   
60,000
     
16.50
 
Exercised
   
     
 
Canceled or expired
   
     
 
Outstanding at December 31, 2008
   
3,328,667
     
13.45
 
Granted
   
400,000
     
1.00
 
Exercised
               
Canceled or expired
   
(1,325,000
)
   
(11.90
)
Outstanding at December 31, 2009
   
2,403,667
   
$
12.23
 

In conjunction with the sale of the common stock of the Company’s then majority owned subsidiary, Solar Thin Power, Inc., the Company issued 60,000 warrants during the year ended December 31, 2008 to purchase the Company’s common stock at $16.50 per share exercisable until five years from the date of issuance. During the year ended December 31, 2009, 125,000 warrants issued to a placement agent and 1,200,000 warrants issued to Investors in connection with June 2006 financing during the year ended December 31, 2006 (Note 10) expired.
 
 
F-28

 

SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 16 – STOCK OPTIONS AND WARRANTS (continued)

Warrants (continued)

During the year ended December 31, 2009, the Company issued to a consultant 400,000 warrants to purchase Solar Thin Power common stock at $1.00 per share exercisable over three years. The warrants vested immediately and were issued for services rendered. Effective June 30, 2009, in conjunction with the merger of Solar Thin Power (See Note 14), the Company exchanged the issued warrants to warrants to purchase the Company’s common stock with the same terms and conditions. The fair value of the issued warrants of $222,706 was charged to operations during the year ended December 31, 2009. The fair value of the warrants was determined using the Black Scholes Option Pricing Model based on the following assumptions:

Significant assumptions (weighted-average):
     
Risk-free interest rate at grant date
   
1.16
%
Expected stock price volatility
   
103.89
%
Expected dividend payout
   
 
Expected option life-years (a)
   
3
 
 
(a)
The expected warrant life is based on contractual expiration dates.

Stock options

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company's common stock issued to employees and directors of the Company at December 31, 2009:

   
Options Outstanding
  
 
  
Options Exercisable
  
Exercise Prices
  
Number
Outstanding
 
Weighted
Average
Remaining
Contractual Life
(Years)
  
Weighted
Average
Exercise Price
  
Number
Exercisable
  
Weighted
Average
Exercise Price
 
$
0.90
 
600,000
 
7.47
 
$
0.90
 
600,000
 
$
0.90
 
$
2.10
 
100,000
 
3.82
 
$
2.10
 
38,889
 
$
2.10
 
$
3.75
 
126,000
 
8.25
 
$
3.75
 
126,000
 
$
3.75
 
Total
 
826,000
 
7.12
 
1.55
 
764,889
 
1.46
 
 
F-29

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 16 – STOCK OPTIONS AND WARRANTS (continued)

Stock options (continued)

Transactions involving stock options issued to employees are summarized as follows:
 
         
Weighted
Average
 
   
Number of
   
Price
 
   
Shares
   
Per Share
 
Outstanding at December 31, 2007:
   
603,125
   
$
2.75
 
Granted
   
354,000
     
3.30
 
Exercised
   
     
 
Canceled or expired
   
(8,000
)
   
(10.90
)
Outstanding at December 31, 2008:
   
949,125
   
$
2.95
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Canceled or expired
   
(123,125
   
(4.17
Outstanding at December 31, 2009:
   
826,000
   
$
1.55
 

During the year ended December 31, 2008, the Company granted an aggregate of 346,000 stock options (net of cancellations, see stock option table per above) to officers, employees and consultants with an exercise prices from $2.10 to $4.00 per share expiring five to ten years from issuance with cliff vesting or graded vesting over eighteen to thirty six months. Compensation cost is recognized over the requisite service period in a manner consistent with the option vesting provisions.  

The weighted-average fair value of stock options granted to officers and employees during the year ended December 31, 2008 and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing model are as follows:
 
Significant assumptions (weighted-average):
     
Risk-free interest rate at grant date
   
2.67% to 3.75
%
Expected stock price volatility
   
92.20% to 94.93
%
Expected dividend payout
   
 
Expected option life-years (a)
   
5 to 10
 
 
(a)
The expected option life is based on contractual expiration dates.

During the year ended December 31, 2009, a total of 3,125 stock options expired. Additionally, the Company canceled 120,000 unvested stock options and re-priced certain employee options initially with exercise price of $2.67 to $0.90 per share with other terms remaining the same.  The re-priced stock options were originally granted and fair valued in June 2007, and the original fair value was amortized over the vesting period of two years.  The Company had amortized and charged to operations the entire original value of the options as of the second quarter of fiscal 2009.  In addition, upon the modification of the exercise price of these options during the year ended December 31, 2009, the Company calculated the fair value of the fully vested re-priced options based on the modified terms, and additional compensation of $45,494 was charged to current period operations.
 
F-30

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 16 – STOCK OPTIONS AND WARRANTS (continued)

Stock options (continued)

The fair values of the fully vested re-priced employee options were determined using the Black Scholes option pricing model with the following assumptions:
 
Dividend yield:
   
-0-
%
Volatility
   
103.89
%
Risk free rate:
   
2.25
%
Expected option life-years (a)
   
8.17
 
 
(a)
The expected option life is based on contractual expiration dates.

Stock-based compensation expense in connection with stock options granted, vested and re-priced in the aggregate amount of $680,761 and $1,085,016 was charged to operating results in connection with the stock options grant for the year ended December 31, 2009 and 2008, respectively.

On September 4, 2009, the Company's board of directors authorized warrants to purchase up to 2,500,000 shares of common stock of the Company.  The Company intends to issue these warrants to potential investors and other persons who have rendered or may render services on behalf of the Company, including certain of its officers, directors, consultants and other affiliates. The warrants will, if and when issued, entitle the holder to purchase, at any time on or before the earlier to occur of five years from the date of issuance or December 31, 2014, common stock at an exercise price of $1.00 per share, representing the average closing bid price of the Company’s common stock for the 20 trading days after the Company’s one-for-five reverse stock split consummated on September 3, 2009.  The warrants may be exercised on a cashless basis.  To the extent that the Company issues these warrants to persons, other than its officers and directors, such warrants may be issued at any time by the board of directors and will be immediately exercisable.  If and to the extent that warrants are issued to the Company’s officers and directors, they may only be exercised if and when the Company achieves net profits for two or more consecutive fiscal quarters, and the other terms and conditions of such warrants have been reviewed and are deemed to be fair and reasonable to the Company by an independent investment banking firm.  In addition, such warrants, if exercisable, would automatically terminate if such person ceases for any reason (other than death or disability) to be an officer or director of the Company prior to their exercise.  

The Company’s board of directors will consider registering the shares of common stock underlying the warrants for resale under the Securities Act of 1933, as amended.

NOTE 17 – INCOME TAXES

The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant.

F-31

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 17 – INCOME TAXES (continued)

At December 31, 2009, the Company has available for federal income tax purposes a net operating loss carryforward of approximately $29,900,000, expiring in the year 2023 through the year 2029, subject to limitations of Sections 382 of the Internal Revenue Code, as amended that may be used to offset future taxable income.  The deferred tax asset relating to the net operating loss carryforward is approximately $10,465,000. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company; it is more likely than not that the benefits will not be realized. Due to possible significant changes in the Company's ownership, the future use of its existing net operating losses may be limited. Income tax expense for the year ended December 31, 2009 is comprised of State taxes which primarily are not based on earnings.  No other income taxes were recorded on the earnings in 2009 as a result of the utilization of the carry forwards.  All or portion of the remaining valuation allowance may be reduced in future years based on an assessment of earnings sufficient to fully utilize these potential tax benefits.
 
For income tax reporting purposes, the Company has available for Hungary unused net operating loss carry forward of approximately $2,129,000 with no expiration, subject to limitations of Hungary income tax rules.  The deferred tax asset related to the carrying forward is approximately $400,390.  The Company has provided a valuation reserve against the full amount of Hungary unused net operating loss benefit, since in the opinion of management based upon the earnings history of the Company; it is more likely than not that the benefits will not be realized.
 
Due to significant changes in the Company's ownership, the future use of its existing net operating losses may be limited. Components of deferred tax assets as of December 31, 2009 are as follows:

Deferred tax assets – non current:
     
Net operating loss carryforward
 
$
10,465,000
 
Valuation allowance
   
(10,465,000
)
Net deferred tax asset
 
$
 
 
The provision for income taxes differ from the amount of income tax determined by applying the applicable U.S statutory rate to losses before income tax expense for the years ended December 31, 2009 and 2008 as follows:
 
   
December 31,
   
2009
   
2008
Statutory federal income tax rate
   
35
%
   
35
%
Statutory state and local income tax rate (0%), net of federal benefit
   
-
     
-
 
Net operating losses and other tax benefits for which no current benefit is being realized
   
(35
%)
   
(35
%)
Effective tax rate
   
0.00
%
   
0.00
%
 
An income tax provision for the years ended December 31, 2009 and 2008 consists of the following:

   
2009
   
2008
 
Provision for income taxes
 
$
-0-
   
$
-0-
 
 
The Company paid local filing fees which are not deemed to be income taxes and have been included in general, selling and administrative expenses for the years ended December 31, 2009 and 2008.
 
F-32

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 18 - COMMITMENTS AND CONTINGENCIES

Lease agreement

In November 2005, the Company entered into a three year fixed term lease agreement for our corporate offices and facilities in Budapest, Hungary at a rate ranging from $4,543 to $15,433 per month as the lease has provisions for additional space for the period calendar year of 2006 and beyond. The lease agreement provides for moderate increases in rent after the first year in accordance with the inflationary index published by the Central Statistical Office. In November 2007, the terms of the lease agreement were modified effectively increasing the monthly rent to $20,800 per month starting on January 1, 2008 for the next three years through December 31, 2010. The Company also has other month to month leases for its offices and facilities. The minimum future cash flow for the leases at December 31, 2009 is as follows:

   
Amount:
 
Year ending December 31, 2010
 
$
249,600
 
  
During the year ended December 31, 2009, the Company abandoned their facilities in Budapest, Hungary.  As such the Company accrued $250,000 for potential lease cancellation penalties.  Settlement is currently under negotiations.

Rent expense amounted to $267,215 and $266,359 for the year ended December 31, 2009 and 2008, respectively.
 
Litigation

Grace Brothers Ltd. vs. Solar Thin Films, Inc. (Supreme Court, New York State, New York County). On March 4, 2009, Grace Brothers Ltd. brought an action against the Company in the Supreme Court of the State of New York, County of New York, seeking damages of approximately $255,000 in alleged registration delay penalties.  On July 16, 2009, the Company filed its answer to the complaint denying all of Grace’s allegations.  The Company is attempting to resolve the matter amicably. However, in the event litigation proceeds, it will be aggressively defended.  Management believes that the plaintiff’s suit is without merit, and further believes the ultimate outcome of this matter will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
 
From time to time, the Company is a party to litigation or other legal proceedings that the Company considers to be a part of the ordinary course of its business. The Company is not involved currently in legal proceedings that could reasonably be expected to have a material adverse effect on its business, prospects, consolidated financial condition or results of operations. The Company may become involved in material legal proceedings in the future.
 
Contingent Obligation

The Company remains contingently liable for certain capital lease obligations assumed by EGLOBE, Inc. ("EGLOBE") as part of the Connectsoft Communications Corp. asset sale which was consummated in June 1999. The lessor filed for bankruptcy in 2000 and the leases were acquired by another leasing organization which subsequently also filed for bankruptcy in 2001. In addition, EGLOBE filed for bankruptcy in 2001. The Company has been unable to obtain any further information about the parties but believes that in the normal course of the proceedings that another company most likely acquired the assets and related leases and that a mutually acceptable financial arrangement was reached to accomplish such a transfer.

F-33

 
SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 18 - COMMITMENTS AND CONTINGENCIES (continued)

To date, the Company has not been contacted and has not been notified of any delinquency in payments due under these leases. The original leases were entered into during early to mid 1997 each of which was for a five-year term. Extensions of an additional 20 months were negotiated with the original lessor in 1998 and 1999 moving the ending date to approximately mid 2004. The balance due under the leases in June 1999 upon transfer and sale to EGLOBE was approximately $2,800,000 including accrued interest and the monthly payments were approximately $55,000. The balance that is currently due under the leases is unknown and there would most likely have been negotiated reductions of amounts due during the bankruptcy proceedings.

In 1996, the Company issued an unsecured 8% $1.5 million note to an unrelated party in connection with the Company's acquisition of a software company. The note was due and payable on April 30, 1999. The note was governed by the laws of the State of New York. The New York statute of limitations for seeking to collect on a note is six years from the maturity date. The creditor has never sought to collect the note since its maturity date and in or about 2001 orally advised a representative of the Company that it had "written off the debt." Although the Company has previously and currently listed the note as a liability on its balance sheet, it does not believe that it has any further liability under this note (see Note 8). Based on the appropriate opinion of the Company’s legal counsel, the Company removed this item as a liability on its financial statements as at December 31, 2009 and the related accrued interest. As such, the Company realized a gain on extinguishment of debt of $3,310,200 as other income for the year ended December 31, 2009.

Product Warranty Obligation

The Company provides for estimated costs to fulfill customer warranty obligations upon recognition of the related revenue in accordance with ASC 460-10. The range for the warranty coverage for the Company’s products is up to 18 to 24 months. The Company estimates the anticipated future costs of repairs under such warranties based on historical experience and any known specific product information. These estimates are reevaluated periodically by management and based on current information, are adjusted accordingly. The Company’s determination of the warranty obligation is based on estimates and as such, actual product failure rates may differ significantly from previous expectations. Accrued provision for product warranty was approximately $212,687 and $59,930 as of December 31, 2009 and 2008, respectively.

Employment and Consulting Agreements

The Company has consulting agreements with its key officers. In addition to compensation and benefit provisions, the agreements include non-disclosure and confidentiality provisions for the protection of the Company's proprietary information.

In connection with the merger with Kraft, the Company entered into consulting agreements with Zoltan Kiss and Robert M. Rubin pursuant to which each would receive annual compensation of $160,000 per annum and major medical benefits in consideration for services performed on behalf of the Company. Each of these agreements had a term of three years. The agreement with Mr. Kiss was terminated as part of the agreement with Mr. Kiss as further described below. Mr. Rubin’s agreement was modified upon his appointment as the Company’s Chief Financial Officer in August 2007.
 
The Company has consulting agreements with outside contractors to provide marketing and financial advisory services. The Agreements are generally for a term of 12 months from the inception and renewable automatically from year to year unless either the Company or consultant terminates such engagement by written notice.

 
F-34

 
 SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 18 - COMMITMENTS AND CONTINGENCIES (continued)

Share exchange agreement

On April 3, 2009, the Company and Kraft entered into a restated share exchange agreement with BudaSolar and its shareholders.  Under the terms of the agreement, the BudaSolar shareholders were to have acquired a 49% equity interest in Kraft, in exchange for transferring 100% of the BudaSolar equity to Kraft.  Such agreement was subject to the satisfaction of certain closing conditions, including the Company’s repayment of all outstanding June 2006 convertible notes in order to secure the release of the shares of Kraft pledged as security to the June 2006 note holders.  Although only $283,000 of such notes remain outstanding, the Kraft shares still remain subject to the pledge agreement.

At the present time, the Company is negotiating a new agreement with the BudaSolar shareholders.  The proposed revised transaction contemplates that the Company will directly acquire 100% of the share capital of BudaSolar in exchange for 70,000 shares of the Company’s Series B-5 convertible voting preferred stock (the “B-5 Preferred Stock”).  The B-5 Preferred Stock has a liquidation value of $7.0 million and is convertible at any time by the holders into a minimum of 2.1 million and a maximum of 49.0 million shares of the Company’s common stock, $0.01 par value per share (the “Common Stock”).  The aggregate number of shares of Company Common Stock into which all if the B-5 Preferred Stock would be convertible (the “Conversion Shares”) will depend upon the audited combined pre-tax income of the Company’s Kraft and BudaSolar subsidiary corporations (the “Corporations Pre-Tax Income”) at the end of each of the five consecutive fiscal years ending December 31, 2010 through December 31, 2014 (the “Measuring Period”).  The target Corporations Pre-Tax Income and the corresponding number of Conversion Shares that can be exercised at the end of any one or more fiscal years during the Measuring Period is based on a “grid” of such Pre-Tax Income and Conversion Shares.  For example if the Corporations Pre-Tax Profits at the end of any of the five fiscal years in the Measuring Period is 0 to $2.5 million, the number of Conversion Shares would be 2.1 million; if such Pre-Tax Income is $10.0 million, then the number of Conversion Shares would be 21.0 million; and if such Pre-Tax Income is $55.0 million or more, the Conversion Shares would be 49.0 million.  On March 31, 2015, any B-5 Preferred Stock not converted into Common Stock would automatically convert based upon the Corporations Pre-Tax Income for the fiscal year ending December 31, 2014.

Under the terms of a separate agreement with BudaSolar, Kraft has contracted to purchase from BudaSolar (1) equipment assembly services on some of its equipment based on a fixed fee per equipment, and (2) installation related technical services based on hourly rates.  In connection with these services, Kraft has paid $1,370,000 in advances to BudaSolar during the second quarter of 2009. BudaSolar has provided $747,891 worth of services in 2009 to Kraft, which left a balance of advances wired to BudaSolar of $622,109 as of December 31, 2009.  During 2008, BudaSolar received $750,000 pursuant to the Stock Exchange Agreement from the Company, which was fully repaid in the second quarter of 2009.
 
Agreement with Mr. Kiss and other Stockholders

On August 12, 2008, the Company entered into a stock purchase agreement (the “Purchase Agreement”) with Zoltan Kiss (“Z. Kiss”), Gregory Joseph Kiss (“G. Kiss”), Maria Gabriella Kiss (“M. Kiss”), and Steven H. Gifis (“Gifis”). Under the terms of the Purchase Agreement, the Company has agreed to arrange for the sale, and each of Z. Kiss, G. Kiss and M. Kiss (the “Selling Stockholders”) have agreed to sell, an aggregate of 3.6 million shares of common stock of the Company owned by the Selling Stockholders. The purchase price for the 3.6 million shares is $2.07 per share, or a total of $7,450,200 for all of the shares. At August 12, 2008, the closing price of the Company’s common stock, as traded on the OTC Bulletin Board, was $4.0 per share.
 
 
F-35

 

 SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 18 - COMMITMENTS AND CONTINGENCIES (continued)

Agreement with Mr. Kiss and other Stockholders (continued)

Z. Kiss, a former director and executive officer of the Company, is selling 2.0 million of the 3.6 million shares, representing his entire share holdings in the Company. In addition, Mr. Kiss has agreed to apply up to $831,863 of the proceeds from the sale of his 2.0 million shares to pay a portion of the $1,331,863 of indebtedness owed by his affiliate Renewable Energy Solutions Inc. (“RESI”), to the Company. G. Kiss and M. Kiss, the children of Z. Kiss, are each selling 800,000 shares in the transaction, and, after the sale, such persons will retain 10,000 and 200,000 shares of the Company’s common stock, respectively. Mr. Gifis is acting as agent for each of the Selling Stockholders (the “Sellers’ Agent”).
 
The Company intends to finance the purchase price for the 3.6 million shares being sold by the Selling Stockholders by arranging for a sale of the shares, either through a registered public offering for the account of the Selling Stockholders, or a private purchase.

The closing of the transactions under the Purchase Agreement was to occur on or about November 30, 2008, subject to extension to January 31, 2009, by mutual agreement of the Company and Mr. Gifis; provided, that if such Sellers’ Agent shall receive reasonable assurances from the investment banking firm underwriting securities on behalf of the Company and the Selling Stockholders that the financing to pay the purchase price for the shares being sold, will, in their judgment, be consummated, the Sellers’ Agent shall extend the closing date to January 31, 2009.

On December 22, 2008, the Company and Kraft entered into an Amendment to the Master Settlement Agreement and Stock Purchase Agreement (the “Amendment”) with Amelio, RESI and the Selling Stockholders under which, among other things, the Outside Closing Date as defined in the Settlement Agreement was revised to May 31, 2009.  In addition, the definition of “RESI Debt” owed to the Company as defined in the Settlement Agreement was revised to the net amount of indebtedness, net of fees payable under the existing agreements to the closing date, and not to exceed $831,863 owed by RESI to the Company or its affiliates as of the closing date; provided , that if the Transferred CG Solar Equity (as defined below) is not delivered to the Company by December 31, 2008, the RESI Debt shall be an amount not to exceed $1,331,863.  Moreover, “RESI Debt Settlement Payment and Deliverables” as set forth in the Settlement Agreement was amended to state that the RESI Debt shall be paid to the Company as follows:

·
on or before December 31, 2008, Z. Kiss shall cause RESI to transfer to the Company an aggregate of shares of CG Solar, formerly known as Weihai Blue Star Terra Photovoltaic Company (“CG Solar”), representing 5% of the issued and outstanding capital shares of CG Solar, and having an agreed upon value of $500,000 (the “Transferred CG Solar Equity”) – In July 2009, the parties negotiated the sale back of the 5% interest in CG Solar for $450,000. In September 2009, the Company collected the $450,000 and charged the remaining uncollectible amount of $50,000 to current period operations.
  
·
the $831,863 balance of the RESI Debt (the “RESI Debt Balance”) shall be paid on or following the closing date as follows:

·
to the extent not previously paid in full, out of the net proceeds received by him from the public or private sale of all or a portion of his 2,000,000 subject shares under the Purchase Agreement, Z. Kiss shall pay to the Company a total of up to $434,315 of the RESI Debt Balance, such amount to be appropriately pro-rated based upon $0.22 to be paid for each such 2,000,000 subject shares sold; and
 
 
F-36

 

 SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 18 - COMMITMENTS AND CONTINGENCIES (continued)

Agreement with Mr. Kiss and other Stockholders (continued)

·
unless a portion of the RESI Debt Balance has been paid by Z. Kiss in accordance with the above, the entire RESI Debt Balance(or any unpaid portion thereof) will be paid to the Company by Amelio on the earlier to occur of (i) receipt of net proceeds of a financing by Amelio (the “Amelio Financing”) of not less than $2,000,000, or (ii) receipt of payment by RESI or Amelio from CG Solar, the customer from whom the a-Si equipment giving rise to the RESI Debt was shipped.  To the extent that the RESI Debt Balance is paid in whole or in part by Z. Kiss, then Amelio shall issue to Z. Kiss a promissory note due and payable to the earlier to occur of the consummation of the Amelio Financing or one year from the closing date.
 
·
Amelio agreed to guaranty payment of the RESI Debt Balance to the Company.

The Settlement Agreement was further amended to state that Robert M. Rubin and The Rubin Irrevocable Stock Trust (the “Trust”) agree that all indebtedness owed to Mr. Rubin and the Trust by Nanergy Solar, Inc. (“Nanergy”), an affiliate of Z. Kiss, will be deemed fully paid and satisfied, and Mr. Rubin and the Trust agree to relinquish all capital stock or stock certificates in Nanergy.  To the extent that Mr. Rubin and/or the Trust received notes or stock certificates of Nanergy, the same will be returned to Nanergy on or before December 31, 2008.

Under the Amendment, the Purchase Agreement was revised to state that in the event that any time prior to the Outside Closing Date, any of the Selling Stockholders receive a bona fide written offer (the “Offer”) from any financially credible individual or institutional purchaser(s) to purchase as a principal in a private transaction, all or any portion of the subject shares, then the Selling Stockholders shall give written notice to the Company (the “Notice”).  The Company shall have the right, within 30 days from receipt of the Notice, to purchase that number of subject shares proposed to be purchases in the Offer at the same price per share and payment terms as set forth in the Offer.

On December 4, 2009, the Company and Kraft Elektronikai Zrt, the Company’s wholly owned subsidiary, entered into a Second Amendment (the “Second Amendment”) to the Master Settlement Agreement (the “Settlement Agreement”) with Zoltan Kiss, Amelio Solar, Inc. (“Amelio Solar”) and Renewable Energy Solutions, Inc. (“RESI”), and a Second Amendment to the Stock Purchase Agreement (the “Purchase Agreement”) with Zoltan Kiss, Maria Gabriella Kiss and Gregory Joseph Kiss (collectively, the “Sellers”).

Under the Second Amendment, the outside closing date of the transactions contemplated pursuant to the Settlement Agreement was extended to December 4, 2009 (the “Closing Date”). In addition, the definition of “RESI Debt” was amended to include the net amount of indebtedness, not to exceed $831,863, owed by RESI to the Company or its affiliates as of the Closing Date together with accrued interest thereon.

Section 2.4 of the Settlement Agreement, entitled “RESI Debt Settlement Payment and Deliverables”, was amended so that the RESI Debt will be fully and finally satisfied as follows:

(a)  Z. Kiss will surrender all of his 2,000,000 shares of Company common stock to the Company;
 
 
F-37

 

 SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 18 - COMMITMENTS AND CONTINGENCIES (continued)

Agreement with Mr. Kiss and other Stockholders (continued)

(b)       an option (the “Option”) is granted to the Company or its designees to purchase all of the shares of Company common stock owned by both M. Kiss (1,018,400 shares) and G. Kiss (810,000 shares) until December 4, 2010.  For a period of nine months following the execution of the Second Amendment, the Option will be fixed at a price of $0.30 per share and any shares not purchased by the Company or its designees during such nine-month period may be purchased at the higher of (i) $0.30 per share, or (ii) 75% of the trading price of the Company’s common stock on the trading day prior to the Company’s payment of the exercise price; and

(c)        any unexercised rights, options and/or warrants to purchase Company common stock owned by the Sellers as of the Closing Date, whether vested, unvested, exercisable or otherwise, are cancelled and rendered null and void.

The definition of “RESI Debt Settlement Deliverables” was also revised to mean the documents specified in Section 2.4 of the Settlement Agreement to be delivered by Amelio Solar and the Sellers to the Company on or prior to December 31, 2009.

Pursuant to the Second Amendment, the parties agreed to terminate the Purchase Agreement, except for the terms of the Purchase Agreement cancelling all indebtedness owed to Robert M. Rubin and The Rubin Family Irrevocable Marital Trust by Nanergy Solar, Inc. and the surrender of any and all equity interests of Nanergy Solar, Inc. owned by The Rubin Family Irrevocable Marital Trust.

Moreover, under the Second Amendment, the parties agreed to terminate the Strategic Alliance and Cross License Agreement dated as of August 12, 2008.  All prior agreements among the parties, including, but not limited to, the Cooperative R&D Agreement dated as of December 19, 2006 between RESI and the Company, the Marketing and Turn-on Agreement between RESI and the Company dated as of January 30, 2007 and the Consulting Agreement between Z. Kiss and the Company have either expired or are terminated as of December 4, 2009.

On December 4, 2009, Z. Kiss surrendered his shares of Company common stock to the Company, which shares were cancelled by the Company in April 2010.

Proposed Acquisition of Algatec

On October 20, 2008, Robert M. Rubin, Chairman, Chief Executive Officer and Chief Financial Officer of Solar Thin Films, formed Algatec Equity Partners, L.P., a Delaware limited partnership (the “Partnership”), for the purpose of acquiring up to 49% of the share capital of Algatec.  Effective as October 30, 2008, Algatec and members of Algatec senior management consisting of Messrs. Rainer Ruschke, Ullrich Jank, Dr. Stefan Malik and Andre Freud (collectively, the “Algatec Management Stockholders”), and Anderkonto R. Richter, Esq., as trustee for Mr. Ruschke and another Algatec stockholder (the “Trustee”), entered into a share purchase agreement (the “Algatec Share Purchase Agreement”).  Under the terms of the Algatec Share Purchase Agreement, on November 3, 2008 (the “First Closing”) the Partnership invested an aggregate of $3,513,000, of which approximately €2,476,000 was represented by a contribution to the equity of Algatec to enable it to acquire all of the assets and equity of Trend Capital, the predecessor to Algatec.  The Partnership also purchased for €1.00 per share a total of 13,750 Algatec shares, representing 27.5% of the outstanding share capital of Algatec.
 
 
F-38

 

 SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 18 - COMMITMENTS AND CONTINGENCIES (continued)

Proposed Acquisition of Algatec (continued)

The general partner of the Partnership is Algatec Management LLP, a Delaware limited liability company owned by The Rubin Family Irrevocable Marital Trust and other persons.  Mr. Rubin and Barry Pomerantz, a business associate of Mr. Rubin, are the managers of the general partner.  Under the terms of the limited partnership agreement, the general partner agreed to invest a total of $165,000 in the Partnership in consideration for 5.0% of the assets, profits and losses of the Partnership.  The limited partners, who invested an aggregate of $3,200,000 at the First Closing and additional persons the Partnership will seek to admit as limited partners by the Second Closing, will own 95.0% of the Partnership assets, profits and losses. As part of the First Closing, The Rubin Family Irrevocable Marital Trust invested an additional $1,500,000, as a limited partner, on the same terms as other limited partners of the Partnership.

In addition to its equity investment, the Partnership has agreed under the terms of a loan agreement entered into at the same time as the Algatec Share Purchase Agreement, to lend to Algatec on or about November 30, 2008 (the “Second Closing”), an additional $2,600,000 or approximately €2,000,000.  The proceeds of the loan were to be used to assist Algatec in paying the balance of the purchase price for all of the assets and equity of the Trend Capital limited partnership.  Upon funding of the loan, the Partnership would purchase for €9,250 an additional 9,250 shares, representing 21.5% of the outstanding share capital of Algatec, thereby increasing its ownership to an aggregate of up to 49% of the outstanding share capital of Algatec.  The loan, together with interest at the rate of 6% per annum, is repayable on the earlier of December 31, 2012 or the completion of a financing providing Algatec with up to $50.0 million of proceeds for expansion (the “Algatec Financing”).  Upon the Partnership funding the entire €2,000,000 loan at the Second Closing, the Management Group would own the remaining 51% of the share capital of Algatec.  If the Partnership funds less than the full €2,000,000 loan, the additional 21.5% equity to be issued to the Partnership at the Second Closing was to have been appropriately pro-rated.  On December 29, 2008, the Partnership consummated the Second Closing with Algatec and funded a loan of €2,000,000 ($2.6 million). Ultimately, the Partnership provided total funding of approximately $5.75 million to Algatec which, after allowing for unfavorable currency conversion rates, left the Partnership with a total equity ownership in Algatec of approximately 47% of the total number of outstanding Algatec shares.

Effective as of October 30, 2008, the Trustee, the Management Group and the Partnership (collectively, the “Algatec Stockholders”) and Algatec entered into a stock exchange agreement. Under the terms of the stock exchange agreement the Algatec stockholders agreed, subject to certain conditions, to exchange 100% of the share capital of Algatec for shares of shares of Company capital stock. Consummation of the Algatec acquisition is subject to certain conditions, including Algatec obtaining up to $50.0 million financing for Algatec to enable it to construct the addition to its existing manufacturing facility and purchase the necessary equipment to expand its business.  On April 10, 2009, the parties agreed to extend the anticipated closing date of the transactions contemplated by the Stock Exchange Agreement to July 15, 2009.  The requisite financing for Algatec was not obtained and the agreement expired on July 15, 2009.
 
 
F-39

 

 SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 19 – SEGMENT INFORMATION

The Company's operations fall into one single product segment, photovoltaic thin film modules: producing and/or installing and commissioning factory equipment that produces photovoltaic thin film modules. The Company manages its operations, and accordingly determines its operating segments, on a geographic basis. Consequently, the Company has one operating geographic location, Hungary. The performance of geographic operating segments is monitored based on net income or loss (after income taxes, interest, and foreign exchange gains/losses). The accounting policies of the segments are the same as those described in the summary of accounting policies in Note 1. There are no intersegment sales revenues. The following tables summarize financial information by geographic segment for the year ended December 31, 2009 and 2008:

Geographic information for the year ended December 31, 2009:

   
Hungary
   
(Corporate)
   
Total
 
Total Revenues
 
$
8,720,938
   
$
-
   
$
8,720,938
 
                         
Depreciation and amortization expense
   
117,382
     
-
     
117,382
 
                         
Interest Income
   
26,907
     
-
     
26,907
 
Interest expense
   
-
     
(893,656
)
   
(893,656
)
Net interest income (expense)
   
26,907
     
(893,656
)
   
(866,749
)
                         
Debt acquisition cost
   
-
     
(26,500
)
   
(26,500
)
Research and development
   
-
     
-
     
-
 
Net income (loss) attributable to Solar Thin Films, Inc.
   
(1,269,153
)
   
1,066,293
     
(202,860
)
                         
Fixed assets, net
   
256,136
     
-
     
256,136
 
Fixed asset additions
 
 $
94,905
   
 $
-
   
 $
94,905
 
 
Geographic information for year ended December 31, 2008:

   
Hungary
   
(Corporate)
   
Total
 
Total Revenues
 
$
3,436,779
   
$
-
   
$
3,436,779
 
                         
Depreciation and amortization expense
   
190,025
     
-
     
190,025
 
                         
Interest Income
   
5,164
     
46,929
     
52,093
 
Interest expense
   
(3,572
)
   
(1,226,986
)
   
(1,230,558
)
Net interest income (expense)
   
1,592
     
(1,180,057
)
   
(1,178,465
)
                         
Debt acquisition cost
   
-
     
(74,204
)
   
(74,204
)
Research and development
   
-
     
(120,000
)
   
(120,000
)
Net loss attributable to Solar Thin Films, Inc.
   
(2,582,591
)
   
(5,891,419
)
   
(8,474,010
)
                         
Fixed assets, net
   
413,241
     
-
     
413,241
 
Fixed asset additions
 
 $
44,181
   
 $
-
   
 $
44,181
 
 
 
F-40

 

 SOLAR THIN FILMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 and 2008

NOTE 19 – SEGMENT INFORMATION (continued)

Geographic information of revenues by customers’ locations/countries for years ended December 31, 2009 and 2008:
 
Customer Countries:
 
December 31,
2009
   
December 31,
 2008
 
Spain
 
$
8,720,938
   
$
-
 
Hungary
           
147,262
 
U.S.
   
-
     
3,289,517
 
Total
 
$
8,720,938
   
$
3,436,779
 

NOTE 20 – SUBSEQUENT EVENTS
 
In accordance with the provisions of ASC 855, Subsequent Events Topic, the Company has adopted the requirements of ASC 855 and has evaluated for disclosure subsequent events that have occurred up through April 15, 2010, the date of issuance of these financial statements. As of April 15, 2010, there were no subsequent events which required recognition or disclosure.
 
 
F-41

 
 

We have had no disagreements with our independent registered public accountants with respect to accounting practices or procedures or financial disclosure.

Item 9A.   Controls and Procedures.


We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer (principal financial officer) as appropriate, to allow timely decisions regarding required disclosure. During the quarter ended December 31, 2009 we carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the 1934 Act. Based on this evaluation, because of the Company’s limited resources and limited number of employees, management concluded that our disclosure controls and procedures were ineffective as of December 31, 2009.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of the financial statements of the Company in accordance with U.S. generally accepted accounting principles, or GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
  
With the participation of our Chief Executive Officer and Chief Financial Officer (principal financial officer), our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our evaluation and the material weaknesses described below, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2009 based on the COSO framework criteria. Management has identified control deficiencies regarding the lack of segregation of duties and the need for a stronger internal control environment. Management of the Company believes that these material weaknesses are due to the small size of the Company’s accounting staff.  The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation.  

To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.

These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our consolidated financial statements may not be prevented or detected on a timely basis. Accordingly, we have determined that these control deficiencies as described above together constitute a material weakness.

In light of this material weakness, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the year ended December 31, 2009 included in this Annual Report on Form 10-K were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weaknesses, our consolidated financial statements for the year ended December 31, 2009 are fairly stated, in all material respects, in accordance with US GAAP.
 
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
 
42


Limitations on Effectiveness of Controls and Procedures
 
Our management, including our Chief Executive Officer and Chief Financial Officer (principal financial officer), does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
Changes in Internal Controls

During the fiscal quarter ended December 31, 2009, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

Item 9B. Other Information.

We do not have any information required to be disclosed in a report on Form 8-K during the fourth quarter of 2009 that was not reported.

 
43

 
 
PART III

Item 10.   Directors, Executive Officers and Corporate Governance.

Executive Officers and Directors

                     The following table sets forth the name, age and position of each of the members of our board of directors and executive officers as of the date of this report:

Name
 
Age
 
Position(s)
Robert M. Rubin
 
70
 
Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors
Gary Maitland, Esq.
 
56
 
Vice President, General Counsel and Director
Dr. Boris Goldstein
 
46
 
Director

Robert M. Rubin.   Mr. Rubin has served as a director of Solar Thin Films since May 1991, and was its Chief Executive Officer from May 1991 to January 1, 1994. Mr. Rubin has served as Solar Thin Films’ Chief Financial Officer since August 2007. Mr. Rubin was again appointed as our Chief Executive Officer on April 1, 2009.  Between October 1990 and January 1, 1994, Mr. Rubin served as the Chairman of the Board and Chief Executive Officer of Solar Thin Films and its subsidiaries; from January 1, 1994 to January 19, 1996, he served only as Chairman of the Board.  From January 19, 1996 until June 2006, Mr. Rubin served as Chairman of the Board, President and Chief Executive Officer. Mr. Rubin resigned as Chairman in June 2006 and as an executive officer in October 2006.  Mr. Rubin was the founder, President, Chief Executive Officer and a Director of Superior Care, Inc. ("SCI") from its inception in 1976 until May 1986, when Mr. Rubin resigned as an executive officer. Mr. Rubin continued as a director of SCI until the latter part of 1987. In 1993, SCI was sold to Olsten Corporation (NYSE).
 
Boris Goldstein.  Boris Goldstein became a member of the board of directors of Solar Thin Films in October 2008.  From 2005 to the present, Dr. Goldstein has served as the Chief Executive Officer of Trans Global Ventures Group and Managing Director of Pacific Venture Fund. From 1991 to 1997, Dr. Goldstein served on the board of directors and advisory boards of E-Trade Eurasia, IVS, Pacific Petroleum Technologies, E*Forex; CBSF Capital Management, CBSF International Fund, CBSF, Sakaru, Daldaris, FRB, RBK and others.  In 1989, Dr. Goldstein founded Software House HT, a startup technology company which he developed into a worldwide corporation with over 40 offices in 17 countries. Dr. Goldstein has substantial experience in building high-tech companies in Silicon Valley. Dr. Goldstein received a degree in Applied Mathematics and Ph. D. in Real Time Systems from Latvian Technical University in 1985 and 1993, respectively.

Gary Maitland.  Gary Maitland, Esq. was appointed as our Vice President and General Counsel in August 2009 and he became a member of the board of directors of Solar Thin Films in October 2008.  From 1987 to the present, Mr. Maitland has served as Managing Partner of Kreisberg & Maitland, LLP, a law firm based in New York City. He currently serves on the faculty of the Benjamin N. Cardozo School of Law’s Intensive Trial Advocacy Program. From 1978 to 1981, Mr. Maitland served as an Assistant District Attorney in Kings County, New York (Brooklyn). Mr. Maitland earned a Bachelor of Arts degree from Vassar College in 1975. In addition, he earned a Juris Doctor degree from the Boston University School of Law in 1978. Mr. Maitland is a licensed attorney admitted to practice in the State of New York and admitted to practice before the United States Supreme Court, the Second Circuit Court of Appeals, and the Federal District Courts for the Eastern and Southern Districts of New York.

Board of Directors

All directors will hold office until the next annual meeting of shareholders and until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of the Board of Directors.

Role of the Board of Directors

Pursuant to Delaware law, our business, property and affairs are managed under the direction of the Company’s board of directors. The board has responsibility for establishing broad corporate policies and for the overall performance and direction of Solar Thin Films, Inc, but is not involved in day-to-day operations. Members of the board keep informed of the Company’s business by participating in board and committee meetings, by reviewing analyses and reports sent to them regularly, and through discussions with its executive officers.
 
44


Compensation of the Board of Directors

Directors who are also our employees do not receive additional compensation for serving on the Board or its committees. Non-employee directors are not paid any annual cash fee. In addition, directors are entitled to receive options under our stock option plans. All directors are reimbursed for their reasonable expenses incurred in attending Board meetings. We have procured director’s and officer’s liability insurance.

Board Committees

We have not established an audit committee, compensation committee, nominating committee or other committee of our board of directors.
 
Advisory Board 
 
We do not currently have an advisory board.
 
Director Independence 
 
We believe that Dr. Boris Goldstein is considered an independent director as defined by any national securities exchange registered pursuant to Section 6(a) of the Securities Exchange Act of 1934.

Family Relationships 
 
There are no family relationships among our executive officers and directors.
 
Involvement in Certain Legal Proceedings.  

None of our officers or directors have, during the last five years: (i) been convicted in or is currently subject to a pending a criminal proceeding; (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to any federal or state securities or banking laws including, without limitation, in any way limiting involvement in any business activity, or finding any violation with respect to such law, nor (iii) has any bankruptcy petition been filed by or against the business of which such person was an executive officer or a general partner, whether at the time of the bankruptcy of for the two years prior thereto.
 
Compliance with Section 16(a) of the Exchange Act  

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers, and shareholders holding more than 10% of our outstanding common stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in beneficial ownership of our common stock. Executive officers, directors and greater-than-10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. To our knowledge, based solely on review of the copies of such reports furnished to us for the year ended December 31, 2009, the Section 16(a) reports required to be filed by our executive officers, directors and greater-than-10% shareholders were filed on a timely basis.


The Company adopted a Code of Ethics and Business Conduct for Officers, Directors and Employees that applies to all of the officers, directors and employees of the Company. A copy of our code of ethics may be found as Exhibit 14.3 to the Annual Report filed on Form 10-K with the Securities and Exchange Commission on July 16, 2004.
 
45


Item 11.   Executive Compensation.

Summary Compensation Table


Name &
Principal Position  
 
 Year
 
 Salary
($)
 
 Bonus
($)
 
Stock
Awards
($)
 
 Option
Awards
($)
 
Non-Equity
Incentive Plan
Compensation
($)
 
Change in
Pension Value
and Non-
Qualified
Deferred
Compensation
Earnings
($)
 
All Other
Compensation
($)
 
 Total ($)
 
Peter Lewis 
   
2009
 
$
131,250
   
 
$
 
$
45,494
(5)
 
   
   
 
$
176,744
 
Former Group
Vice President and General Manager and Former Chief Executive Officer and Director (1)
   
2008
 
$
225,000
       
$
50,765
(2)
$
857,935
(3)
                 
$
1,133,700
 
                                                         
Robert Rubin  
   
2009
 
$
231,250
   
 
$
 
$
   
   
   
 
$
231,250
 
Chief Executive Officer, Chief Financial Officer and Director (4)   
   
2008
 
$
225,000
   
  —
   
   
   
   
   
 
$
225,000
 
 

(1)
Mr. Lewis was appointed as Chief Executive Officer of our company on June 20, 2007 and resigned as President, Chief Executive Officer and as a director on March 31, 2009. Mr. Lewis was appointed as Group Vice President and General Manager of the Thin Film Group of our company on April 1, 2009.

(2)
In accordance with Mr. Lewis’ employment agreement, Mr. Lewis was entitled to receive 37,523 shares of common stock per year. The shares are valued at the stated value in the employment agreement of $2.665 per share, which was the average closing bid price for the 20 trading days immediately prior to the date of the employment agreement.

Under Mr. Lewis’ amended employment agreement, for the period commencing April 1, 2009 and ending September 30, 2009, Mr. Lewis’ base salary was fixed at the rate of $225,000, payable in monthly installments of $18,750 each.  For the period commencing October 1, 2009, Mr. Lewis’ salary shall be reduced to the rate of $180,000 per annum, payable in monthly installments of $15,000 each.  On the earlier of June 30, 2009 or completion of an equity financing for the Company in excess of $3.0 million, the Company was obligated pay to Mr. Lewis in one payment all accrued and unpaid salary that is owed under the original employment agreement for all periods through and including the date of payment of such accrued and unpaid salary.  In addition, Mr. Lewis shall be entitled to receive a sales commission on all PV Equipment that is sold or on which firm orders are received by the Company during the term of employment in an amount equal to: (i) a percentage to be determined by mutual agreement on or before April 30, 2009, of the “net sales price” (defined as gross selling price, less returns, discounts and allowances) of such PV Equipment, as and when paid in cash by the customer to the Company less (ii) the amount of all other finders fees, commissions and other payments made or payable by the Company to any other person, firm or corporation who participates in or assists Mr. Lewis in the sale of such PV Equipment; or such other bonus arrangement as may be made with Kraft management.

All 2,000,000 shares of common stock of ST Power owned by Mr. Lewis immediately and irrevocably vested.  Moreover, with respect to the stock options entitling Mr. Lewis to purchase up to 720,000 shares of Company common stock (the “Option Shares”), the parties agreed as follows (i)  options for 600,000 Options Shares shall be deemed to have fully vested as of March 31, 2009 and the remaining 120,000 Option Shares that have not vested will be forfeited as of March 31, 2009; (ii) the exercise price of all stock options were reduced from $2.665 per share to $0.90 per share, representing 100% of the closing price of Company common stock as at March 27, 2009, the effective date of the amendment to the employment agreement; (iii) all stock options for vested Option Shares may be exercised on a “cashless exercise” basis; and (iv) Mr. Lewis agreed to waive any rights to receive the 37,523 shares of Company common stock previously granted to him annually under the original employment agreement.

In June 2009, the amended employment agreement with Peter Lewis was terminated by the parties and Mr. Lewis was engaged as a marketing representative of the Company.
 
(3)
In 2007, Mr. Lewis was granted a ten year option to purchase 600,000 shares of common stock at an exercise price of $2.673 per share on a cashless basis vesting on a pro-rata basis over a period of two years. The option was valued using the Black-Scholes option pricing model assuming a ten year life, no expected dividend payments a volatility of 82.53% and a risk free rate of 5.14%. In addition, in 2008, Mr. Lewis was granted a ten year option to purchase 120,000 shares of common stock at an exercise price of $4.00 per share vesting at a rate of 100,000 shares per month beginning June 1, 2009.  The option was valued using the Black-Scholes option pricing model assuming a ten year life, no expected dividend payments, a volatility of 94.93% and a risk free rate of 3.75%.
 
46

 
(4)
In June 2006, Mr. Rubin was appointed as a director and consultant. Mr. Rubin was appointed Chief Financial Officer of the Company in August 2007 and as Chief Executive Officer of the Company on April 1, 2009. In addition to the compensation noted above, Mr. Rubin’ wife, an employee of the Company receives a salary of $1,250 per month for administrative services.

(5)
In April 2009, 600,000 options granted to Mr. Lewis as described in (3) above were re-priced from an exercise price of $2.67 to $0.90.  The change in fair value was determined using the Black-Scholes option pricing model assuming a remaining live of 8.17 years, no expected dividend payments, a volatility of 103.89% and a risk free rate of 2.25%.

Outstanding Equity Awards at Fiscal Year-End Table
 
The following table sets forth information with respect to stock awards and grants of options to purchase our common stock to the named executive officers during the fiscal year ended December 31, 2009.
 
 
Stock Awards
 
Name
 
Number of 
Securities 
Underlying 
Unexercised 
Options 
(#) 
Exercisable
 
Number of 
Securities 
Underlying 
Unexercised 
Options 
(#) 
Unexercisable
 
Equity Incentive 
Plan Awards: 
Number of 
Securities Underlying 
Unexercised 
Unearned 
Options 
(#)
 
Option 
Exercise 
Price 
($)
 
Option 
Expiration 
Date
 
Number 
of Shares 
or Units 
of Stock 
That Have 
Not 
Vested 
(#)
 
Market
Value of 
Shares or 
Units of 
Stock 
That Have 
Not 
Vested 
($)
 
Equity Incentive 
Plan Awards: Number 
of  Unearned 
Shares, Units or  Other Rights 
That Have Not 
Vested
(#)
 
Equity Incentive 
Plan Awards: 
Market or Payout Value 
of Unearned 
Shares, Units or 
Other Rights 
That Have 
Not Vested 
($)
 
Peter Lewis (1)  
   
600,000
(2) 
 
 
$
0.90
 
 06/20/2017
 
--
 
$
-
 
   
 
 

(1)
Mr. Lewis was appointed as Chief Executive Officer of our company on June 20, 2007 and resigned as President, Chief Executive Officer and as a director on March 31, 2009. Mr. Lewis was appointed as Group Vice President and General Manager of the Thin Film Group of our company on April 1, 2009.  In June 2009, the amended employment agreement with Peter Lewis was terminated by the parties and Mr. Lewis was engaged as a marketing representative of the Company.
 
(2)
Mr. Lewis received a ten year option to purchase 600,000 shares of common stock at an exercise price of $2.665 per share on a cashless basis vesting on a pro-rata basis over a period of two years.  Subsequent to issuance, the options were repriced to $0.90 per share.

Except as set forth above, no other named executive officer has received an equity award.
 
47


Director Compensation

The following table sets forth with respect to the named director, compensation information inclusive of equity awards and payments made in the year end December 31, 2009.

   
Fees
Earned
or Paid
in Cash
($)
 
 Stock Awards
($)
 
Option
Awards
($)
 
 Non-Equity Incentive Plan Compensation
($)
 
Change in Pension Value and Nonqualified Deferred Compensation Earnings
 
 All Other Compensation
($)
 
Total
($)
 
Robert Rubin
   
(1)
   
 
   
 
   
 
Peter Lewis
   
(1)
   
 
   
 
   
 
Dr. Boris Goldstein
   
(2)
 
$
50,471
 
   
 
 
$
50,471
 
Gary Maitland, Esq.
   
(2)
 
$
50,471
 
   
 
 
$
50,471
 


(1)
All compensation earned by Messrs. Rubin and Lewis is fully reflected in the Summary Compensation Table above.

(2)
On October 27, 2008, the Company issued 5 year options to purchase an aggregate of 100,000 shares of common stock at an exercise price equal to $2.10 per share to Mr. Gary Maitland and Dr. Boris Goldstein as compensation for services to be performed by them in their capacities as directors of the Company. Such options vest in accordance with the following schedule: (i) options to purchase 16,666 shares of common stock vested on October 27, 2009; (ii) options to purchase 16,667 shares of common stock vest on October 27, 2010; and (iii) options to purchase 16,667 shares of common stock vest on October 27, 2011.

Stock Option Plans

2001 Stock Option Plan

General

The 2001 Stock Option Plan (“Plan”, “Incentive Plan”) was adopted by the Board of Directors. The Board of Directors has initially reserved 7,500,000 shares of Common Stock for issuance under the 2001 Stock Option Plan. Under the Plan, options may be granted which are intended to qualify as Incentive Stock Options ("ISOs") under Section 422 of the Internal Revenue Code of 1986 (the "Code") or which are not ("Non-ISOs") intended to qualify as Incentive Stock Options thereunder.

The 2001 Incentive Plan and the right of participants to make purchases thereunder are intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The 2001 Incentive Plan is not a qualified deferred compensation plan under Section 401(a) of the Internal Revenue Code and is not subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA").
 
Purpose

The primary purpose of the 2001 Incentive Plan is to attract and retain the best available personnel for the Company in order to promote the success of the Company's business and to facilitate the ownership of the Company's stock by employees.

Administration

The 2001 Incentive Plan is administered by the Board of Directors of the Company (the "Board of Directors") or a committee appointed by the Board of Directors. If, at any time, there are less than two members of the Committee, the Board of Directors shall appoint one or more other members of the Board of Directors to serve on the Committee. All Committee members shall serve, and may be removed by the Board of Directors.

A majority of the members of the Committee (but not less than two) shall constitute a quorum, and any action taken by a majority of such members present at any meeting at which a quorum is present, or acts approved in writing by all such members shall be the acts of the Committee.

Subject to the other provisions of the Plan, the Committee shall have full authority to decide the date or dates on which options (the "Options") to acquire shares of Common Stock will be granted under the Plan to determine whether the Options to be granted shall be Incentive Options or Non qualified Options, or a combination of both, to select the persons to whom the Options will be granted and to determine the number of shares of Common Stock to be covered by each Option, the price at which such shares may be purchased upon the exercise of such option (the "Option Exercise Price"), and other terms and conditions of the Options. In making those determinations, the Committee shall solicit the recommendations of the President and Chairman of the Board of the Company and may take into account the proposed optionee's present and potential contributions to the Company's business and any other factors which the Committee may deem relevant. Subject to the other provisions of the Plan, the Committee shall also have full authority to interpret the Plan and any stock option agreements evidencing Options granted hereunder, to issue rules for administering the Plan, to change, alter, amend or rescind such rules, and to make all other determinations necessary or appropriate for the administration of the Plan. All determinations, interpretations and constructions made by the Committee pursuant to this Section 3 shall be final and conclusive. No member of the Board of Directors or the Committee shall be liable for any action, determination or omission taken or made in good faith with respect to this Plan or any Option granted hereunder
 
48


Members of the Board of Directors who are eligible employees are permitted to participate in the 2001 Incentive Plan, provided that any such eligible member may not vote on any matter affecting the administration of the 2001 Incentive Plan or the grant of any option pursuant to it, or serve on a committee appointed to administer the 2001 Incentive Plan. In the event that any member of the Board of Directors is at any time not a "disinterested person", as defined in Rule 16b-3(c)(3)(i) promulgated pursuant to the Securities Exchange Act of 1934, the Plan shall not be administered by the Board of Directors, and may only by administered by a Committee, all the members of which are disinterested persons, as so defined.

Eligibility

Under the 2001 Incentive Plan, options may be granted to key employees, officers, directors or consultants of the Company, as provided in the 2001 Incentive Plan.

Terms of Options

The term of each Option granted under the Plan shall be contained in a stock option agreement between the Optionee and the Company and such terms shall be determined by the Committee consistent with the provisions of the Plan, including the following:

(a) PURCHASE PRICE. The purchase price of the Common Shares subject to each ISO shall not be less than the fair market value (as set forth in the 2001 Incentive Plan), or in the case of the grant of an ISO to a Principal Stockholder. The purchase price of the Common Shares subject to each Non-ISO shall be determined at the time such Option is granted, but in no case less than 85% of the fair market value of such Common Shares at the time such Option is granted.

(b) VESTING. The dates on which each Option (or portion thereof) shall be exercisable and the conditions precedent to such exercise, if any, shall be fixed by the Board of Directors, in its discretion, at the time such Option is granted.

 (c) EXPIRATION. The expiration of each Option shall be fixed by the Committee, in its discretion, at the time such Option is granted; however, unless otherwise determined by the Committee at the time such Option is granted, an Option shall be exercisable for ten(10) years after the date on which it was granted (the "Grant Date"). Each Option shall be subject to earlier termination as expressly provided in the 2001 Incentive Plan or as determined by the Board of Directors, in its discretion, at the time such Option is granted.

(d) TRANSFERABILITY. No Option shall be transferable, except by will or the laws of descent and distribution, and any Option may be exercised during the lifetime of the Optionee only by him. No Option granted under the Plan shall be subject to execution, attachment or other process.

(e) OPTION ADJUSTMENTS. The aggregate number and class of shares as to which Options may be granted under the Plan, the number and class shares covered by each outstanding Option and the exercise price per share thereof (but not the total price), and all such Options, shall each be proportionately adjusted for any increase decrease in the number of issued Common Shares resulting from split-up spin-off or consolidation of shares or any like Capital adjustment or the payment of any stock dividend.

Except as otherwise provided in the 2001 Incentive Plan, any Option granted hereunder shall terminate in the event of a merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation of the Company. However, the Optionee shall have the right immediately prior to any such transaction to exercise his Option in whole or in part notwithstanding any otherwise applicable vesting requirements.

(f) TERMINATION, MODIFICATION AND AMENDMENT. The 2001 Incentive Plan (but not Options previously granted under the Plan) shall terminate ten (10) years from the earlier of the date of its adoption by the Board of Directors or the date on which the Plan is approved by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon, and no Option shall be granted after termination of the Plan. Subject to certain restrictions, the Plan may at any time be terminated and from time to time be modified or amended by the affirmative vote of the holders of a majority of the outstanding shares of the capital stock of the Company present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the State of Delaware.
 
49



General

The 2007 Stock Option Plan (“Plan”, “Incentive Plan”) was adopted by the Board of Directors in October 2007. The Board of Directors has initially reserved 5,000,000 shares of Common Stock for issuance under the 2007 Stock Option Plan. Under the Plan, options may be granted which are intended to qualify as Incentive Stock Options ("ISOs") under Section 422 of the Internal Revenue Code of 1986 (the "Code") or which are not ("Non-ISOs") intended to qualify as Incentive Stock Options thereunder.

The 2007 Incentive Plan and the right of participants to make purchases thereunder are intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The 2007 Incentive Plan is not a qualified deferred compensation plan under Section 401(a) of the Internal Revenue Code and is not subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA").

Purpose

The primary purpose of the 2007 Incentive Plan is to attract and retain the best available personnel for the Company in order to promote the success of the Company's business and to facilitate the ownership of the Company's stock by employees.

Administration

The 2007 Incentive Plan is administered by the Board of Directors or a committee (the "Committee") consisting of not less than two members of the Board of Directors of the Company (the "Board of Directors"), who are selected by the Board of Directors. If, at any time, there are less than two members of the Committee, the Board of Directors shall appoint one or more other members of the Board of Directors to serve on the Committee. All Committee members shall serve, and may be removed by the Board of Directors.
 
A majority of the members of the Committee (but not less than two) shall constitute a quorum, and any action taken by a majority of such members present at any meeting at which a quorum is present, or acts approved in writing by all such members shall be the acts of the Committee.

Subject to the other provisions of the Plan, the Committee shall have full authority to decide the date or dates on which options (the "Options") to acquire shares of Common Stock will be granted under the Plan to determine whether the Options to be granted shall be Incentive Options or Non qualified Options, or a combination of both, to select the persons to whom the Options will be granted and to determine the number of shares of Common Stock to be covered by each Option, the price at which such shares may be purchased upon the exercise of such option (the "Option Exercise Price"), and other terms and conditions of the Options. In making those determinations, the Committee shall solicit the recommendations of the President and Chairman of the Board of the Company and may take into account the proposed optionee's present and potential contributions to the Company's business and any other factors which the Committee may deem relevant. Subject to the other provisions of the Plan, the Committee shall also have full authority to interpret the Plan and any stock option agreements evidencing Options granted hereunder, to issue rules for administering the Plan, to change, alter, amend or rescind such rules, and to make all other determinations necessary or appropriate for the administration of the Plan. All determinations, interpretations and constructions made by the Committee pursuant to this Section 3 shall be final and conclusive. No member of the Board of Directors or the Committee shall be liable for any action, determination or omission taken or made in good faith with respect to this Plan or any Option granted hereunder

Members of the Board of Directors who are eligible employees are permitted to participate in the 2007 Incentive Plan, provided that any such eligible member may not vote on any matter affecting the administration of the 2007 Incentive Plan or the grant of any option pursuant to it, or serve on a committee appointed to administer the 2007 Incentive Plan. In the event that any member of the Board of Directors is at any time not a "disinterested person", as defined in Rule 16b-3(c)(3)(i) promulgated pursuant to the Securities Exchange Act of 1934, the Plan shall not be administered by the Board of Directors, and may only by administered by a Committee, all the members of which are disinterested persons, as so defined.

Eligibility

Under the 2007 Incentive Plan, options may be granted to key employees, officers, directors or consultants of the Company, as provided in the 2007 Incentive Plan.
 
50


Terms of Options

The term of each Option granted under the Plan shall be contained in a stock option agreement between the Optionee and the Company and such terms shall be determined by the Committee consistent with the provisions of the Plan, including the following:

(a) PURCHASE PRICE. The purchase price of the Common Shares subject to each ISO shall not be less than the fair market value (as set forth in the 2007 Incentive Plan), or in the case of the grant of an ISO to a Principal Stockholder. The purchase price of the Common Shares subject to each Non-ISO shall be determined at the time such Option is granted, but in no case less than 85% of the fair market value of such Common Shares at the time such Option is granted.
 
(b) VESTING. The dates on which each Option (or portion thereof) shall be exercisable and the conditions precedent to such exercise, if any, shall be fixed by the Board of Directors, in its discretion, at the time such Option is granted.

(c) EXPIRATION. The expiration of each Option shall be fixed by the Committee, in its discretion, at the time such Option is granted; however, unless otherwise determined by the Committee at the time such Option is granted, an Option shall be exercisable for ten (10) years after the date on which it was granted (the "Grant Date"). Each Option shall be subject to earlier termination as expressly provided in the 2007 Incentive Plan or as determined by the Board of Directors, in its discretion, at the time such Option is granted.

(d) TRANSFERABILITY. No Option shall be transferable, except by will or the laws of descent and distribution, and any Option may be exercised during the lifetime of the Optionee only by him. No Option granted under the Plan shall be subject to execution, attachment or other process.

(e) OPTION ADJUSTMENTS. The aggregate number and class of shares as to which Options may be granted under the Plan, the number and class shares covered by each outstanding Option and the exercise price per share thereof (but not the total price), and all such Options, shall each be proportionately adjusted for any increase decrease in the number of issued Common Shares resulting from split-up spin-off or consolidation of shares or any like Capital adjustment or the payment of any stock dividend.
 
Except as otherwise provided in the 2007 Incentive Plan, any Option granted hereunder shall terminate in the event of a merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation of the Company. However, the Optionee shall have the right immediately prior to any such transaction to exercise his Option in whole or in part notwithstanding any otherwise applicable vesting requirements.

(f) TERMINATION, MODIFICATION AND AMENDMENT. The 2007 Incentive Plan (but not Options previously granted under the Plan) shall terminate ten (10) years from the earlier of the date of its adoption by the Board of Directors or the date on which the Plan is approved by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon, and no Option shall be granted after termination of the Plan. Subject to certain restrictions, the Plan may at any time be terminated and from time to time be modified or amended by the affirmative vote of the holders of a majority of the outstanding shares of the capital stock of the Company present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the State of Delaware.

Employment and Other Agreements

On June 20, 2007, Peter Lewis and the Company entered into an Employment Agreement pursuant to which Mr. Lewis has agreed to serve as the Chief Executive Officer of the Company. The Employment Agreement contains the following terms:

·
base salary of $225,000 per year;
 
·
 the issuance of 37,523 shares of common stock per year;
 
·
 a bonus paid pursuant to the Executive Officer Incentive Plan as determined by the Board of Directors;
 
·
 a ten year option to purchase 600,000 shares of common stock at an exercise price of $2.665 per share on a cashless basis vesting on a pro-rata basis over a period of two years;
 
·
 participation in all employee benefit plans and programs; and
 
·
 reimbursement of reasonable expenses.

On April 7, 2009, the Company entered into an amendment to the employment agreement of Peter Lewis under which Mr. Lewis agreed to resign as the President, Chief Executive Officer and as a member of the board of directors of the Company, effective as of March 31, 2009. There was no disagreement or dispute between Mr. Lewis and the Company which led to his resignation.  Effective as of April 1, 2009, Mr. Lewis was appointed as Group Vice President and General Manager of the Thin Film Group of the Company through June 1, 2010.  The Thin Film Group shall consist of the manufacture and sale of PV Equipment.  In this capacity, Mr. Lewis will be primarily responsible for generating orders and sales of PV Equipment and he will provide general oversight of the manufacturing operations of the Kraft and BudaSolar subsidiaries of the Company, and together with Messrs. Krafcsik and Horvath, will be responsible for generating profits for the Thin Film Equipment Group.
 
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For the period commencing April 1, 2009 and ending September 30, 2009, Mr. Lewis’ base salary was fixed at the rate of $225,000, payable in monthly installments of $18,750 each.  For the period commencing October 1, 2009, Mr. Lewis’ salary shall be reduced to the rate of $180,000 per annum, payable in monthly installments of $15,000 each.  On the earlier of June 30, 2009 or completion of an equity financing for the Company in excess of $3.0 million, the Company was obligated pay to Mr. Lewis in one payment all accrued and unpaid salary that is owed under the original employment agreement for all periods through and including the date of payment of such accrued and unpaid salary.  In addition, Mr. Lewis shall be entitled to receive a sales commission on all PV Equipment that is sold or on which firm orders are received by the Company during the term of employment in an amount equal to: (i) a percentage to be determined by mutual agreement on or before April 30, 2009, of the “net sales price” (defined as gross selling price, less returns, discounts and allowances) of such PV Equipment, as and when paid in cash by the customer to the Company less (ii) the amount of all other finders fees, commissions and other payments made or payable by the Company to any other person, firm or corporation who participates in or assists Mr. Lewis in the sale of such PV Equipment; or such other bonus arrangement as may be made with Kraft management.

All 2,000,000 shares of common stock of ST Power owned by Mr. Lewis immediately and irrevocably vested.  Moreover, with respect to the stock options entitling Mr. Lewis to purchase up to 720,000 shares of Company common stock (the “Option Shares”), the parties agreed as follows (i)  options for 600,000 Options Shares shall be deemed to have fully vested as of March 31, 2009 and the remaining 120,000 Option Shares that have not vested will be forfeited as of March 31, 2009; (ii) the exercise price of all stock options were reduced from $2.665 per share to $0.90 per share, representing 100% of the closing price of Company common stock as at March 27, 2009, the effective date of the amendment to the employment agreement; (iii) all stock options for vested Option Shares may be exercised on a “cashless exercise” basis; and (iv) Mr. Lewis agreed to waive any rights to receive the 37,523 shares of Company common stock previously granted to him annually under the original employment agreement.

In June 2009, the amended employment agreement with Peter Lewis was terminated by the parties. Effective as of October 1, 2009, Mr. Lewis was engaged as a non-exclusive sales and marketing consultant and representative of the Company through May 31, 2010; specifically with respect to the manufacture and sale of amorphous silicon thin film solar module manufacturing equipment and/or equipment lines (the “PV Equipment”).  As a marketing representative, Mr. Lewis will be primarily responsible for generating orders and sales of the PV Equipment. In full settlement of Mr. Lewis’ claims to accrued salary, stock options, future earnings and other benefits, he will be paid $112,500 for the period ending September 30, 2009.  For the period from October 1, 2009 through June 30, 2010, Mr. Lewis will be paid a monthly stipend of $15,000.  In addition, Mr. Lewis will be entitled to receive sales commissions pursuant to his agreement with Kraft.

In connection with the acquisition of Kraft, the Company entered into consulting agreements with Robert Rubin and Zoltan Kiss pursuant to which each consultant would receive an annual salary of $160,000 per annum, reimbursement for up to $5,000 in expenses associated with company activities and major medical benefits in consideration for services performed on behalf of the company. Each of these agreements was for a term of three years and has been supplanted by subsequent events. Mr. Rubin’s salary was increased to $225,000 per annum when he assumed the duties of Chief Financial Officer. In December 2007, Mr. Kiss resigned as director of the Company and subsequently agreed to waive his rights to such payments pursuant to a pending settlement agreement with the Company as described below.

On August 12, 2008, the Company entered into a stock purchase agreement (the “Purchase Agreement”) with Zoltan Kiss (“Z. Kiss”), Gregory Joseph Kiss (“G. Kiss”), Maria Gabriella Kiss (“M. Kiss”), and Steven H. Gifis (“Gifis”). Under the terms of the Purchase Agreement, the Company has agreed to arrange for the sale, and each of Z. Kiss, G. Kiss and M. Kiss (the “Selling Stockholders”) have agreed to sell, an aggregate of 3.6 million shares of common stock of the Company owned by the Selling Stockholders. The purchase price for the 3.6 million shares is $2.07 per share, or a total of $7,450,200 for all of the shares. At August 12, 2008, the closing price of the Company’s common stock, as traded on the OTC Bulletin Board, was $4.0 per share.

Z. Kiss, a former director and executive officer of the Company, is selling 2.0 million of the 3.6 million shares, representing his entire share holdings in the Company. In addition, Mr. Kiss has agreed to apply up to $831,863 of the proceeds from the sale of his 2.0 million shares to pay a portion of the $1,331,863 of indebtedness owed by his affiliate Renewable Energy Solutions Inc. (“RESI”), to the Company. G. Kiss and M. Kiss, the children of Z. Kiss, are each selling 800,000 shares in the transaction, and, after the sale, such persons will retain 10,000 and 200,000 shares of the Company’s common stock, respectively. Mr. Gifis is acting as agent for each of the Selling Stockholders (the “Sellers’ Agent”).
 
52

 
The Company intends to finance the purchase price for the 3.6 million shares being sold by the Selling Stockholders by arranging for a sale of the shares, either through a registered public offering for the account of the Selling Stockholders, or a private purchase.

The closing of the transactions under the Purchase Agreement was to occur on or about November 30, 2008, subject to extension to January 31, 2009, by mutual agreement of the Company and Mr. Gifis; provided, that if such Sellers’ Agent shall receive reasonable assurances from the investment banking firm underwriting securities on behalf of the Company and the Selling Stockholders that the financing to pay the purchase price for the shares being sold, will, in their judgment, be consummated, the Sellers’ Agent shall extend the closing date to January 31, 2009.

On December 22, 2008, the Company and Kraft entered into an Amendment to the Master Settlement Agreement and Stock Purchase Agreement (the “Amendment”) with Amelio, RESI and the Selling Stockholders under which, among other things, the Outside Closing Date as defined in the Settlement Agreement was revised to May 31, 2009.  In addition, the definition of “RESI Debt” owed to the Company as defined in the Settlement Agreement was revised to the net amount of indebtedness, net of fees payable under the existing agreements to the closing date, and not to exceed $831,863 owed by RESI to the Company or its affiliates as of the closing date; provided, that if the Transferred CG Solar Equity (as defined below) is not delivered to the Company by December 31, 2008, the RESI Debt shall be an amount not to exceed $1,331,863.  Moreover, “RESI Debt Settlement Payment and Deliverables” as set forth in the Settlement Agreement was amended to state that the RESI Debt shall be paid to the Company as follows:

·
on or before December 31, 2008, Z. Kiss shall cause RESI to transfer to the Company an aggregate of shares of CG Solar, formerly known as Weihai Blue Star Terra Photovoltaic Company (“CG Solar”), representing 5% of the issued and outstanding capital shares of CG Solar, and having an agreed upon value of $500,000 (the “Transferred CG Solar Equity”) – In July 2009, the parties negotiated the sale back of the 5% interest in CG Solar for $450,000. In September 2009, the Company collected the $450,000 and charged the remaining uncollectible amount of $50,000 to current period operations.
 
·
the $831,863 balance of the RESI Debt (the “RESI Debt Balance”) shall be paid on or following the closing date as follows:

·
to the extent not previously paid in full, out of the net proceeds received by him from the public or private sale of all or a portion of his 2,000,000 subject shares under the Purchase Agreement, Z. Kiss shall pay to the Company a total of up to $434,315 of the RESI Debt Balance, such amount to be appropriately pro-rated based upon $0.22 to be paid for each such 2,000,000 subject shares sold; and

·
unless a portion of the RESI Debt Balance has been paid by Z. Kiss in accordance with the above, the entire RESI Debt Balance(or any unpaid portion thereof) will be paid to the Company by Amelio on the earlier to occur of (i) receipt of net proceeds of a financing by Amelio (the “Amelio Financing”) of not less than $2,000,000, or (ii) receipt of payment by RESI or Amelio from CG Solar, the customer from whom the a-Si equipment giving rise to the RESI Debt was shipped.  To the extent that the RESI Debt Balance is paid in whole or in part by Z. Kiss, then Amelio shall issue to Z. Kiss a promissory note due and payable to the earlier to occur of the consummation of the Amelio Financing or one year from the closing date.
 
·
Amelio agreed to guaranty payment of the RESI Debt Balance to the Company.

The Settlement Agreement was further amended to state that Robert M. Rubin and The Rubin Family Irrevocable Marital Trust (the “Trust”) agree that all indebtedness owed to Mr. Rubin and the Trust by Nanergy Solar, Inc. (“Nanergy”), an affiliate of Z. Kiss, will be deemed fully paid and satisfied, and Mr. Rubin and the Trust agree to relinquish all capital stock or stock certificates in Nanergy.  To the extent that Mr. Rubin and/or the Trust received notes or stock certificates of Nanergy, the same will be returned to Nanergy on or before December 31, 2008.

Under the Amendment, the Purchase Agreement was revised to state that in the event that any time prior to the Outside Closing Date, any of the Selling Stockholders receive a bona fide written offer (the “Offer”) from any financially credible individual or institutional purchaser(s) to purchase as a principal in a private transaction, all or any portion of the subject shares, then the Selling Stockholders shall give written notice to the Company (the “Notice”).  The Company shall have the right, within 30 days from receipt of the Notice, to purchase that number of subject shares proposed to be purchases in the Offer at the same price per share and payment terms as set forth in the Offer.

On December 4, 2009, the Company and Kraft Elektronikai Zrt, the Company’s wholly owned subsidiary, entered into a Second Amendment (the “Second Amendment”) to the Master Settlement Agreement (the “Settlement Agreement”) with Zoltan Kiss, Amelio Solar, Inc. (“Amelio Solar”) and Renewable Energy Solutions, Inc. (“RESI”), and a Second Amendment to the Stock Purchase Agreement (the “Purchase Agreement”) with Zoltan Kiss, Maria Gabriella Kiss and Gregory Joseph Kiss (collectively, the “Sellers”).
 

 
53

Under the Second Amendment, the outside closing date of the transactions contemplated pursuant to the Settlement Agreement was extended to December 4, 2009 (the “Closing Date”). In addition, the definition of “RESI Debt” was amended to include the net amount of indebtedness, not to exceed $831,863, owed by RESI to the Company or its affiliates as of the Closing Date together with accrued interest thereon.

Section 2.4 of the Settlement Agreement, entitled “RESI Debt Settlement Payment and Deliverables”, was amended so that the RESI Debt will be fully and finally satisfied as follows:

(a)        Z. Kiss will surrender all of his 2,000,000 shares of Company common stock to the Company;

(b)       an option (the “Option”) is granted to the Company or its designees to purchase all of the shares of Company common stock owned by both M. Kiss (1,018,400 shares) and G. Kiss (810,000 shares) until December 4, 2010.  For a period of nine months following the execution of the Second Amendment, the Option will be fixed at a price of $0.30 per share and any shares not purchased by the Company or its designees during such nine-month period may be purchased at the higher of (i) $0.30 per share, or (ii) 75% of the trading price of the Company’s common stock on the trading day prior to the Company’s payment of the exercise price; and

(c)        any unexercised rights, options and/or warrants to purchase Company common stock owned by the Sellers as of the Closing Date, whether vested, unvested, exercisable or otherwise, are cancelled and rendered null and void.

The definition of “RESI Debt Settlement Deliverables” was also revised to mean the documents specified in Section 2.4 of the Settlement Agreement to be delivered by Amelio Solar and the Sellers to the Company on or prior to December 31, 2009.

Pursuant to the Second Amendment, the parties agreed to terminate the Purchase Agreement, except for the terms of the Purchase Agreement cancelling all indebtedness owed to Robert M. Rubin and The Rubin Family Irrevocable Marital Trust by Nanergy Solar, Inc. and the surrender of any and all equity interests of Nanergy Solar, Inc. owned by The Rubin Family Irrevocable Marital Trust.

Moreover, under the Second Amendment, the parties agreed to terminate the Strategic Alliance and Cross License Agreement dated as of August 12, 2008.  All prior agreements among the parties, including, but not limited to, the Cooperative R&D Agreement dated as of December 19, 2006 between RESI and the Company, the Marketing and Turn-on Agreement between RESI and the Company dated as of January 30, 2007 and the Consulting Agreement between Z. Kiss and the Company have either expired or are terminated as of December 4, 2009.

On December 4, 2009, Z. Kiss surrendered his shares of Company common stock to the Company, which shares were cancelled by the Company in April 2010.

Limitation of Liability and Indemnification

The Company's directors and executive officers are indemnified as provided by the Delaware General Corporation Law and the Company's Bylaws. Limitation on Liability and Indemnification of Directors and Officers under Delaware General Corporation Law a director or officer is generally not individually liable to the corporation or its shareholders for any damages as a result of any act or failure to act in his capacity as a director or officer, unless it is proven that:
 
1. his act or failure to act constituted a breach of his fiduciary duties as a director or officer; and
 
2. his breach of those duties involved intentional misconduct, fraud or a knowing violation of law.
 
This provision is intended to afford directors and officers protection against and to limit their potential liability for monetary damages resulting from suits alleging a breach of the duty of care by a director or officer. As a consequence of this provision, stockholders of ours will be unable to recover monetary damages against directors or officers for action taken by them that may constitute negligence or gross negligence in performance of their duties unless such conduct falls within one of the foregoing exceptions. The provision, however, does not alter the applicable standards governing a director's or officer's fiduciary duty and does not eliminate or limit our right or any stockholder to obtain an injunction or any other type of non-monetary relief in the event of a breach of fiduciary duty.
 
54

 
As permitted by Delaware law, our By-Laws include a provision which provides for indemnification of a director or officer by us against expenses, judgments, fines and amounts paid in settlement of claims against the director or officer arising from the fact that he was an officer or director, provided that the director or officer acted in good faith and in a manner he or she believed to be in or not opposed to our best interests. We have purchased insurance under a policy that insures both our company and our officers and directors against exposure and liability normally insured against under such policies, including exposure on the indemnities described above.
 
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.



· 
 each person known by us to own beneficially more than 5% of the Company’s outstanding Common Stock;
 
· 
 each of the Company’s directors;
 
· 
  each named executive officer; and
 
· 
 all of the Company’s directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power over securities. The table below includes the number of shares underlying options and warrants that are currently exercisable or exercisable within 60 days of March 22, 2010. It is therefore based on 19,039,850 shares of common stock outstanding as of March 22, 2010. Shares of Common Stock subject to options and warrants that are currently exercisable or exercisable within 60 days of March 22, 2010 are considered outstanding and beneficially owned by the person holding the options or warrants for the purposes of computing beneficial ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person’s name. Except as otherwise indicated, the address of each of the persons in this table is as follows: c/o Solar Thin Films, Inc., 116 John Street, Suite 1120, New York, New York 10038.

 
Number of
Shares
 
Percentage of
Shares
Beneficially
 Owned
 
Robert Rubin (1)
   
0
 
---
 
Dr. Boris Goldstein (1)
   
50,000
(2) 
*
 
Gary Maitland, Esq. (1)
   
50,000
(2) 
*
 
Rubin Family Irrevocable Marital Trust
   
1,765,620
(3) 
9.3
%
J. Lee Barton
   
1,900,000
 
10.0
%
All Directors and Executive Officers as a group (3 persons)
   
50,000
 
*
 
 

*
Less than 1%

(1)
Officer and/or Director of the Company.

(2)
On October 27, 2008, the Company issued 5 year options to purchase an aggregate of 50,000 shares of common stock at an exercise price equal to $2.10 per share to Mr. Gary Maitland and Dr. Boris Goldstein as compensation for services to be performed by them in their capacities as directors of the Company. Such options vest in accordance with the following schedule: (i) options to purchase 16,666 shares of common stock vested on October 27, 2009; (ii) options to purchase 16,667 shares of common stock vest on October 27, 2010; and (iii) options to purchase 16,667 shares of common stock vest on October 27, 2011.
 
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(3)
The Rubin Family Irrevocable Marital Trust (the "Trust") was created by Robert M. Rubin, a director, for the benefit of his wife Margery Rubin and their children. Mr. Rubin disclaims beneficial interest in all securities of our company held by the Trust.  

Item 13.  Certain Relationships and Related Transactions, and Director Independence.  

The Company had related party trade receivables of $1,197,548 from Renewable Energy Solutions, Inc. (“RESI”) as of December 31, 2008 from the Blue Star Contract and $134,315 from another project. RESI assumed the trade payable from Terrasolar upon assumption of the Blue Star contract in April 2007 and made several payments during 2007. The Company has decided to reserve $831,863 out of the total balance of $1,331,863 related party trade receivable based on management’s evaluation of the related party’s current financial condition as of December 31, 2008. During the year ended December 31, 2009, the Company collected $450,000 pursuant to an Equity Transfer Agreement the Company executed in September 2009 and the remaining uncollectible receivable of $50,000 was charged to operations during the year ended December 31, 2009.
 
The Company signed a cooperative Research and Development Contract, and a Marketing and Manufacturing Facility Turn On Function Contract with RESI on December 20, 2006 and January 30, 2007, respectively. Zoltan Kiss, the Company’s former Chairman of the Board, is Chairman and majority shareholder of RESI. Payments made to RESI under the Research and Development Contract were $-0- and $120,000 for the year ended December 31, 2009 and 2008, respectively.

During 2008 and 2009, the Company also entered into a Settlement Agreements with Zoltan Kiss, replacing both the Research and Development Contract and the Marketing Contract.

There were no related party sales and/or cost of sales for the years ended December 31, 2009 and 2008.

The Company has a dividend payment obligation due to the former shareholders valued at $143,656 and $143,778 as of December 31, 2009 and December 31, 2008, respectively.

We believe that all these transactions were entered into on terms as favorable as could have been obtained from unrelated third parties because, based upon its experience in the industry, we believe we would have had to pay independent third parties more for comparable assets or services.

Other than the above transactions, we have not entered into any material transactions with any director, executive officer, and nominee for director, beneficial owner of five percent or more of our common stock, or family members of such persons. Also, other than the above transactions, we have not had any transactions with any promoter.

Review, Approval and Ratification of Related Party Transactions
 
The board of directors has responsibility for establishing and maintaining guidelines relating to any related party transactions between the Company and any of its officers or directors. Under the Company’s Code of Ethics, any conflict of interest between a director or officer and the Company must be referred to the non-interested directors for approval. The Company intends to adopt written guidelines for the board of directors which will set forth the requirements for review and approval of any related party transactions.

Director Independence
 
The Company periodically reviews the independence of each director. Pursuant to this review, the directors and officers of the Company, on an annual basis, are required to complete and forward to the Corporate Secretary a detailed questionnaire to determine if there are any transactions or relationships between any of the directors or officers (including immediate family and affiliates) and the Company. If any transactions or relationships exist, the Company then considers whether such transactions or relationships are inconsistent with a determination that the director is independent. Pursuant to this process, the Board of Directors has determined that Dr. Goldstein qualifies as an independent director.

Conflicts of Interest  
 
Certain potential conflicts of interest are inherent in the relationships between our officers and directors of and us.

 
56

 
Conflicts of Interest  
 
Certain potential conflicts of interest are inherent in the relationships between our officers and directors of and us.
 
Conflicts Relating to Officers and Directors  
 
To date, we do not believe that there are any conflicts of interest involving our officers or directors.
 
With respect to transactions involving real or apparent conflicts of interest, we have adopted policies and procedures which require that: (i) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval, (ii) the transaction be approved by a majority of our disinterested outside directors, and (iii) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.

Item 14. Principal Accountant Fees and Services.

The following is a summary of the fees billed to the Company by RBSM LLP for professional services rendered for the fiscal years ended December 31, 2009 and 2008:

Fee Category
 
Fiscal 2009
Fees
   
Fiscal 2008
Fees
 
Audit Fees
 
$
198,604
   
$
163,348
 
Audit-Related Fees
   
24,400
     
13,800
 
Tax Fees
   
1,625
     
5,537
 
All Other Fees
   
     
 
Total Fees
 
$
224,629
   
$
182,685
 
 
Audit Fees consist of fees billed for professional services rendered for the audit of Solar thin Films, Inc’s consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by RBSM LLP in connection with statutory and regulatory filings or engagements.
 
Audit Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of Solar thin Films, Inc’s consolidated financial statements and are not reported under "Audit Fees".
 
Tax Fees consist of fees billed for professional services for tax compliance, tax advice and tax planning.  
 
All Other Fees consist of fees for products and services other than the services reported above. There were no management consulting services provided in fiscal 2009 or 2008.
 
Pre-Approval Policies and Procedures
 
The Company currently does not have a designated Audit Committee, and accordingly, the Company's Board of Directors' policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Company's Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.
 
The Board of Directors has considered whether the provision of non-audit services is compatible with maintaining the principal accountant's independence.
 
57

 
PART IV


(a) Financial Statements and Schedules

1. Financial Statements

The following financial statements are filed as part of this report under Item 8 of Part II “Financial Statements and Supplementary Data:
 
A.
Consolidated Balance Sheets at December 31, 2009 and 2008.
 
B.
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2009 and 2008.
 
C.
Consolidated Statement of Stockholders’ Deficit for the years ended December 31, 2009 and 2008.
 
D.
Consolidated Statements of Cash Flows for the years ended of December 31, 2009 and 2008.

2. Financial Statement Schedules

Financial statement schedules not included herein have been omitted because they are either not required, not applicable, or the information is otherwise included herein.

(b) Exhibits.

 
Exhibit
No.
 
Description
2.1
 
 
Agreement and Plan of Merger dated as of June 30, 2009 by and among Solar Thin Films, Inc., Solar Thin Power, Inc. and the shareholders of Solar Thin Power, Inc. (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2009).
     
3.1
 
Certificate of Incorporation of the Company (incorporated by reference to the Registration Statement filed on Form S-1 with the Securities and Exchange Commission on January 4, 2002). 
     
3.2
 
Bylaws of the Company (incorporated by reference to the Registration Statement filed on Form S-1 with the Securities and Exchange Commission on January 4, 2002).
     
3.3 
 
Certificate of Amendment to the Certificate of Incorporation of Solar Thin Films, Inc. (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 8, 2009).
     
10.1
 
Securities Purchase Agreement dated June 14, 2006 by and among the Company and the June 2006 Investors (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
     
10.2
 
Registration Rights Agreement dated June 14, 2006 by and among the Company and the June 2006 Investors (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
     
10.3
 
Form of Senior Secured Convertible Note dated June 14, 2006 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
     
10.4
 
Form of Series A Common Stock Purchase Warrant dated June 14, 2006 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
     
10.5
 
Form of Series B Common Stock Purchase Warrant dated June 14, 2006 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
 
58

 
10.6
 
Form of Series C Common Stock Purchase Warrant dated June 14, 2006 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
     
10.7
 
Form of Series D Common Stock Purchase Warrant dated June 14, 2006 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
     
10.8
 
Security Agreement dated June 14, 2006 by and between the Company and Smithfield Fiduciary LLC as Collateral Agent (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
     
10.9
 
Guaranty dated as of June 14, 2006 by and between Kraft Rt. and Smithfield Fiduciary LLC as Collateral Agent (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
     
10.10
 
Pledge Agreement dated as of June 14, 2006 by and between the Company and Smithfield Fiduciary LLC as Collateral Agent (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
     
10.11
 
Account Receivables Lien Agreement entered by and between Kraft Rt. and the Investors dated June 12, 2006 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
     
10.12
 
Mortgage Agreement entered by and between Kraft Rt. and the Investors dated June 12, 2006 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
     
 
Security Agreement entered by and between Kraft Rt. and the Investors dated June 12, 2006 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
     
10.14
 
Securities Purchase Agreement dated September 22, 2005 by and among the Company and Iroquois Master Fund Ltd., Smithfield Fiduciary LLC and Lilac Ventures Master Fund (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2005).
     
10.15
 
Form of Senior Secured Convertible Note September 23, 2005 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2005).
     
10.16
 
Security Agreement dated September 22, 2005 by and among the Company and Iroquois Master Fund Ltd., Smithfield Fiduciary LLC and Lilac Ventures Master Fund (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2005).
     
10.17
 
Guaranty of Payment (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2005).
     
10.18
 
Form of Amended and Restated Note issued on due March 20, 2007 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 17, 2006).
     
10.19
 
Form of Warrant issued on March 16, 2006 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 17, 2006).
     
10.20
 
Securities Purchase Agreement dated March 16, 2006 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 17, 2006).
     
10.21
 
Amendment No. 1 to the Securities Purchase Agreement dated May 18, 2006 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 17, 2006).
     
10.22
 
Amendment No. 1 to the Senior Secured Convertible Note (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 17, 2006).
 
10.23
 
Amendment No. 1 to the Subscription Agreement for the purchase of shares of common stock (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 17, 2006).
 
59

 
10.24
 
Form of Subscription Agreement - Solar Thin Power Offering (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 28, 2007).
     
10.25
 
Form of Series E Warrant (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 28, 2007).
     
10.26
 
Securities Purchase Agreement dated March 16, 2006 by and between the Company, Kraft Rt., Zoltan Kiss and Dr. Laszlo Farkas (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 17, 2006).
     
10.27
 
Securities Purchase Agreement dated March 20, 2006 by and between the Company, Kraft Rt., Nagyezsda Kiss, Joseph Gregory Kiss, Maria Gabriella Kiss and Gyula Winkler (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 17, 2006).
     
10.28
 
Securities Purchase Agreement dated May 20, 2006 by and between the Company, Kraft Rt., Joel Spival and Jacqueline Spivak (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2006).
     
10.29
 
Secured Promissory Note made by Kraft Rt. dated September 28, 2005 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2005).
     
10.30
 
Security Interest and Pledge Agreement entered by and between American United Global, Inc., Kraft Rt. and Zoltan Kiss (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2005).
     
10.31
 
Agreement of Settlement entered on September 27, 2005 by and among American United Global, Inc., North Sound Legacy International Ltd. and North Sound Legacy Institutional Fund LLC (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2005).
     
 
Supplemental Agreement entered on September 22, 2005 by and among Altitude Group, LLC, Birch Associates, Inc., and D.C. Capital LLC and American United Group, Inc. (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2005).
     
10.33
 
Amendment No. 1 to the Share Purchase Agreement dated December 29, 2005 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2005).
     
10.34
 
Letter Agreement by and between the Company and Kraft Rt. (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2005).
     
10.35
 
Cooperative R&D Contract Between Renewable Energy Solutions Inc. and Solar Thin Films Inc. dated December 19, 2006 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2006).
     
10.36
 
Secured Term Note dated February 11, 2008 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 17, 2008).
     
10.37
 
Exclusive Project Management Design and Marketing Agreement dated February 11, 2008 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 17, 2008).
     
10.38
 
Security Agreement dated February 11, 2008 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 17, 2008).
     
10.39
 
Stock Purchase Agreement dated as of August 12, 2008 by and among Solar Thin Films, Inc., Zoltan Kiss, Gregory Joseph Kiss, Maria Gabriella Kiss and Steven Gifis, as sellers’ agent (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 18, 2008).
 
60

 
10.40
 
Master Settlement Agreement dated as of August 12, 2008 by and among Solar Thin Films, Inc., Kraft Elektronikai Zrt, Zoltan Kiss, Amelio Solar, Inc. and Renewable Energy Solutions, Inc. (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 18, 2008).
     
10.41
 
Strategic Alliance and Cross License Agreement dated as of August 12, 2008 by and among Solar Thin Films, Inc., Kraft Elektronikai Zrt and Amelio Solar, Inc. (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 18, 2008).
     
10.42
 
Stock Exchange Agreement dated as of September 29, 2008 by and among Solar Thin Films, Inc., Kraft Electronikai Zrt, BudaSolar Technologies Co. Ltd., New Palace Investments Ltd., Istvan Krafcsik and Attila Horvath (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 2008).
     
10.43
 
Cooperation Agreement dated as of September 29, 2008 by and among Solar Thin Films, Inc., Kraft Electronikai Zrt, BudaSolar Technologies Co. Ltd., Istvan Krafcsik and Attila Horvath (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 2008).
     
10.44
 
Form of Shareholders Agreement by and among Kraft and the shareholders of Kraft listed on the signatures pages thereto (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 2008).
 
10.45
 
Form of Employment Agreement between Kraft and Istvan Krafcsik (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 2008).
     
10.46
 
Form of Employment Agreement between Kraft and Attila Horvath (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 2008).
     
10.47
 
Stock Exchange Agreement dated as of October 30, 2008 by and among Solar Thin Films, Inc., Algatec Equity Partners, L.P., Rainer Ruschke, Ullrich Jank, Dr. Stefan Malik, Andre Freud, Anderkonto R. Richter, as Trustee and Algatec Solar AG (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2008).
     
10.48
 
Share Purchase Agreement dated as of October 30, 2008 by and among Algatec Equity Partners, L.P., Rainer Ruschke, Ullrich Jank, Dr. Stefan Malik, Andre Freud, Anderkonto R. Richter, as Trustee, and Algatec Solar AG (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2008).
     
10.49
 
Loan Agreement, dated as of October 30, 2008 by and between Algatec Equity Partners, L.P. and Algatec Solar AG (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2008).
     
 
Agreement of Limited Partnership of Algatec Equity Partners, L.P. (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 6, 2008).
     
10.51
 
Amendment to Master Settlement Agreement by and among Solar Thin Films, Inc., Kraft Elektronikai Zrt, Zoltan Kiss, Amelio Solar, Inc. and Renewable Energy Solutions, Inc. and Amendment to Stock Purchase Agreement by and among Solar Thin Films, Inc., Zoltan Kiss, Gregory Joseph Kiss and Maria Gabriella Kiss dated as of December 22, 2008 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 2008).
     
10.52
 
Amended and Restated Stock Exchange Agreement dated as of April 2, 2009 by and among Solar Thin Films, Inc., Kraft Electronikai Zrt, BudaSolar Technologies Co. Ltd., New Palace Investments Ltd., Istvan Krafcsik and Attila Horvath (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2009).
     
10.53
 
Shareholders Agreement dated as of April 2, 2009 by and among Kraft Electronikai Zrt and the shareholders of Kraft Electronikai Zrt listed on the signatures pages thereto (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2009).
 
61

 
10.54
 
Employment Agreement by and between Kraft Electronikai Zrt and Istvan Krafcsik, effective as of April 15, 2009 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2009).
     
10.55
 
Employment Agreement by and between Kraft Electronikai Zrt and Attila Horvath, effective as of April 15, 2009 (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2009).
     
10.56
 
Side Letter Bonus Agreement to the Share Exchange Agreement dated as of April 2, 2009 by and among Solar Thin Films, Inc., Kraft Electronikai Zrt, New Palace Investments Ltd., Istvan Krafcsik and Attila Horvath (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2009).
     
10.57
 
Inter-Company Services Agreement dated as of April 2, 2009 by and among Solar Thin Power, Inc., Kraft Electronikai Zrt and BudaSolar Limited (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2009).
     
10.58
 
Amendment to Employment Agreement dated as of April 7, 2009 by and between Solar Thin Films, Inc. and Peter Lewis (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2009).
     
10.59
 
Equity Transfer Agreement dated as of September 16, 2009 by and among Solar Thin Films, Inc., Renewable Energy Solutions, Inc. and Innofast Investments Limited (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 22, 2009).
     
10.60
 
Second Amendment to the Master Settlement Agreement dated as of December 4, 2009 by and among Solar Thin Films, Inc., Kraft Elektronikai Zrt, Zoltan Kiss, Amelio Solar, Inc. and Renewable Energy Solutions, Inc., and Second Amendment to the Stock Purchase Agreement by and among Solar Thin Films, Inc., Zoltan Kiss, Maria Gabriella Kiss and Gregory Joseph Kiss, and Termination of the Strategic Alliance and Cross License Agreement by and among Solar Thin Films, Inc., Kraft Elektronikai Zrt and Amelio Solar, Inc. (incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 8, 2009).
     
14.1
 
Code of Ethics (incorporated by reference to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on July 16, 2004).
     
21.1
 
List of Subsidiaries of the Company (incorporated by reference to the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on July 25, 2006).
     
31.1
 
Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302.*
     
31.2
 
Certification by Chief Financial Officer pursuant to Sarbanes Oxley Section 302.*
     
32.1
 
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*
     
32.2
 
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*
 

*
Filed herewith.

62

 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this Form 10-K Annual Report to be signed on its behalf by the undersigned on April 15, 2010, thereunto duly authorized.
 
  SOLAR THIN FILMS, INC.
   
/s/ Robert M. Rubin
 
Robert M. Rubin
 
Chief Executive Officer (Principal Executive Officer)
 
and Chief Financial Officer
(Principal Accounting and Financial Officer)
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K Annual Report has been signed by the following persons in the capacities and on the dates indicated.

Signature
 
Position
 
Date
         
/s/ Robert M. Rubin
 
Chief Executive Officer, Chief Financial Officer and
 
April 15, 2010
Robert M. Rubin
 
Chairman of the Board of Directors
   
         
/s/ Gary Maitland
 
Vice President, General Counsel and Director
 
April 15, 2010
Gary Maitland, Esq.
       
         
/s/ Dr. Boris Goldstein
 
Director
 
April 15, 2010
Dr. Boris Goldstein
       
 
63