DAYSTAR TECHNOLOGIES INC - FORM 10-Q

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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) - DAYSTAR TECHNOLOGIES INC	dex311.htm
EX-32.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - DAYSTAR TECHNOLOGIES INC	dex322.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) - DAYSTAR TECHNOLOGIES INC	dex312.htm
EX-32.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - DAYSTAR TECHNOLOGIES INC	dex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File No. 001-34052

DayStar Technologies, Inc.

(Exact name of registrant as specified in its charter)

Delaware

84-1390053

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1010 South Milpitas Boulevard

Milpitas, California

95035

(Address of principal executive offices)

(Zip Code)

(408) 582-7100

(Registrant’s telephone number, including area code)

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 filing requirements for the past 90 days. Yes x No ¨

Indicate by checkmark 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 ¨

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.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Title of Each Class		Outstanding at August 12, 2011
Common Stock par value $0.01 per share		9,547,033

DAYSTAR TECHNOLOGIES, INC.

Quarterly Report on Form 10-Q

Quarterly Period Ended June 30, 2011

Table of Contents


Part I – Financial Information

Item 1. Financial Statements

Balance Sheets—As of June 30, 2011 (unaudited) and December 31, 2010			3

Statements of Operations—For the Three Months and Six Months Ended June 30, 2011 and 2010 and For the Period From July 1, 2005 (Inception of the Development Stage) to June 30, 2011 (unaudited)			4

Statement of Changes in Stockholders’ Equity—For the Period From July 1, 2005 (Inception of the Development Stage) to June 30, 2011 (unaudited)			5

Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 and For the Period From July 1, 2005 (Inception of the Development Stage) to June 30, 2011 (unaudited)			7

Notes to Financial Statements (unaudited)			8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15

Item 3. Quantitative and Qualitative Disclosures About Market Risk			18

Item 4. Controls and Procedures			18

PART II – Other Information

Item 1. Legal Proceedings			19

Item 1A. Risk Factors			19

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			19

Item 3. Defaults Upon Senior Securities			19

Item 4. (Removed and Reserved)			19

Item 5. Other Information			19

Item 6. Exhibits			20

Signatures			21

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEETS


	June 30, 2011			December 31, 2010
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	4,819		$	97,058
Other current assets		135,919			294,743

Total current assets		140,738			391,801

Property and Equipment, at cost		20,738,338			23,876,208
Less accumulated depreciation and amortization		(6,460,945	)		(5,658,906	)

Net property and equipment		14,277,393			18,217,302

Other Assets:
Other assets		339,295			30,940

Total Assets	$	14,757,426		$	18,640,043

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses	$	4,866,181		$	6,943,711
Notes and capital leases payable, current portion, net of discount of $107,300 and $664,835, respectively		4,397,700			4,590,165

Total current liabilities		9,263,881			11,533,876
Long-Term Liabilities:
Conversion feature		—			3,854,272

Total long-term liabilities		—			3,854,272
Commitments and Contingencies		—			—
Stockholders’ Equity:
Preferred stock, $.01 par value; 3,000,000 shares authorized; 0 shares issued and outstanding		—			—
Common stock, $.01 par value; 120,000,000 shares authorized; 8,959,044 and 6,484,516 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively		89,590			64,845
Additional paid-in capital		156,935,215			153,272,626
Accumulated deficit		(10,145,391	)		(10,145,391	)
Deficit accumulated during the development stage		(141,385,869	)		(139,940,185	)

Total stockholders’ equity		5,493,545			3,251,895

Total Liabilities and Stockholders’ Equity	$	14,757,426		$	18,640,043

See accompanying notes to these financial statements.

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Period from July 1, 2005 (Inception of the Development Stage) to June 30,
	2011			2010			2011			2010			2011
Revenue:
Product revenue	$	—		$	—		$	—		$	—		$	3,528
Research and development contract revenue		—			—			—			—			615,000

Total revenue		—			—			—			—			618,528
Costs and Expenses:
Research and development		233,206			2,564,357			839,771			5,053,185			61,359,659
Selling, general and administrative		459,357			1,090,805			1,691,544			3,333,070			36,817,014
Restructuring		—			7,765,588			850,000			7,765,588			13,883,693
Depreciation and amortization		398,018			640,491			802,804			1,369,852			14,874,912

Total costs and expenses		1,090,581			12,061,241			4,184,119			17,521,695			126,935,278
Other Income (Expense):
Other income (expense)		—			5,000			—			14,375			2,228,332
Interest expense		(111,782	)		(105,698	)		(345,569	)		(227,924	)		(3,418,352	)
Amortization of note discount and financing costs		(106,250	)		(556,785	)		(812,062	)		(1,532,016	)		(16,954,517	)
Gain on derivative liabilities		245,898			468,886			3,896,066			875,065			14,066,154
Loss on extinguishment of debt		—			—			—			—			(10,990,736	)

Total other income (expense)		27,866			(188,597	)		2,738,435			(870,500	)		(15,069,119	)

Net Loss	$	(1,062,715	)	$	(12,249,838	)	$	(1,445,684	)	$	(18,392,195	)	$	(141,385,869	)

Weighted Average Common Shares Outstanding (Basic And Diluted)		8,904,649			4,130,926			8,368,909			3,970,282

Net Loss Per Share (Basic and Diluted)	$	(0.12	)	$	(2.97	)	$	(0.17	)	$	(4.63	)

See accompanying notes to these financial statements.

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE PERIOD FROM JULY 1, 2005 (INCEPTION OF THE DEVELOPMENT STAGE) TO JUNE 30, 2011

(Unaudited)


	Common Stock				Class B Common Stock						Additional Paid-In Capital			Deferred Equity Based Compensation			Accumulated Deficit			Deficit Accumulated During the Development Stage			Total
	Shares		Amount		Shares			Amount			Additional Paid-In Capital			Deferred Equity Based Compensation			Accumulated Deficit			Deficit Accumulated During the Development Stage			Total
BALANCES, July 1, 2005		564,806	$	5,648		3,222		$	32		$	22,488,624		$	(110,770	)	$	(10,145,391	)	$	—		$	12,238,143
Exercise of warrants and stock options, 7/05 -12/05 at $54.00—$74.00 per share		132,305		1,323		—			—			7,218,879			—			—			—			7,220,202
Conversion of Class B common stock		6,444		64		(3,222	)		(32	)		(32	)		—			—			—			—
Share-based compensation		4,306		43		—			—			412,257			(292,940	)		—			—			119,360
Net loss		—		—		—			—			—			—			—			(3,904,151	)		(3,904,151	)

BALANCES, December 31, 2005		707,861	$	7,078		—		$	—		$	30,119,728		$	(403,710	)	$	(10,145,391	)	$	(3,904,151	)	$	15,673,554
Reclassification upon adoption of SFAS 123(R)		—		—		—			—			(403,710	)		403,710			—			—			—
Exercise of warrants and stock options, 1/06, 3/06 & 9/06 at $18.54—$67.50 per share		14,757		148		—			—			671,725			—			—			—			671,873
Share-based compensation		19,674		197		—			—			1,322,523			—			—			—			1,322,720
Beneficial conversion feature on convertible note		—		—		—			—			1,223,842			—			—			—			1,223,842
Shares issued in payment of principal and interest on convertible note, 8/06 -12/06		127,004		1,270		—			—			7,376,889			—			—			—			7,378,159
Warrants issued for placement of convertible note at $48.42 per share		—		—		—			—			140,419			—			—			—			140,419
Net loss		—		—		—			—			—			—			—			(20,441,201	)		(20,441,201	)

BALANCES, December 31, 2006		869,296	$	8,693		—		$	—		$	40,451,416		$	—		$	(10,145,391	)	$	(24,345,352	)	$	5,969,366
Exercise of warrants and stock options, 1/07, 3/07, 6/07, 9/07 & 11/07 at $18.00—$31.05 per share		57,578		576		—			—			3,173,741			—			—			—			3,174,317
Share-based compensation		21,826		218		—			—			4,089,826			—			—			—			4,090,044
Issuance of shares pursuant to offering, 2/07 at $18.00 per share		277,777		2,778		—			—			4,997,222			—			—			—			5,000,000
Issuance of shares pursuant to secondary offering, 10/07 at $38.25 per share, net of offering costs		1,916,668		19,166		—			—			67,875,752			—			—			—			67,894,918


	Common Stock				Class B Common Stock				Additional Paid-In Capital		Deferred Equity Based Compensation		Accumulated Deficit			Deficit Accumulated During the Development Stage			Total
	Shares		Amount		Shares		Amount		Additional Paid-In Capital		Deferred Equity Based Compensation		Accumulated Deficit			Deficit Accumulated During the Development Stage			Total
Shares issued in payment of principal and interest on convertible note, 1/07 at $13.41 per share and 2/07 at $18.00 per share		430,598		4,306		—		—		7,322,619		—		—			—			7,326,925
Loss on extinguishment due to excess of fair market value of shares issued over issuance price		—		—		—		—		5,369,278		—		—			—			5,369,278
Shares issued for placement of note and offering 3/07 at $18.00 per share		50,841		508		—		—		2,397,163		—		—			—			2,397,671
Net loss		—		—		—		—		—		—		—			(36,142,861	)		(36,142,861	)

BALANCES, December 31, 2007		3,624,584	$	36,245		—	$	—	$	135,677,017	$	—	$	(10,145,391	)	$	(60,488,213	)	$	65,079,658
Exercise of stock options, 6/08 at $28.26 per share		178		2		—		—		5,022		—		—			—			5,024
Share-based compensation		90,667		906		—		—		4,794,222		—		—			—			4,795,128
Net loss		—		—		—		—		—		—		—			(26,330,271	)		(26,330,271	)

BALANCES , December 31, 2008		3,715,429	$	37,153		—	$	—	$	140,476,261	$	—	$	(10,145,391	)	$	(86,818,484	)	$	43,549,539
Share-based compensation		51,861		519		—		—		4,133,012		—		—			—			4,133,531
Warrants issued in connection with convertible note at $4.50 per share		—		—		—		—		497,578		—		—			—			497,578
Net loss		—		—		—		—		—		—		—			(25,040,028	)		(25,040,028	)

BALANCES, December 31, 2009		3,767,290	$	37,672		—	$	—	$	145,106,851	$	—	$	(10,145,391	)	$	(111,858,512	)	$	23,140,620

Exercise of warrants, 7/10 & 10/10 at $0.90 per share		66,667		667		—		—		59,762		—		—			—			60,429
Share-based compensation		693,540		6,934		—		—		4,662,142		—		—			—			4,669,076
Warrants issued in connection with convertible note at $2.70 - $4.50 per share		—		—		—		—		704,481		—		—			—			704,481
Shares issued in settlement of liabilities at $1.54 - $1.85 per share		1,927,232		19,272		—		—		2,734,340		—		—			—			2,758,662
Reverse split adjustment		29,787		300		—		—		—		—		—			—			300
Net loss		—		—		—		—		—		—		—			(28,081,673	)		(28,081,673	)

BALANCES, December 31, 2010		6,484,516	$	64,845		—	$	—	$	153,272,626	$	—	$	(10,145,391	)	$	(139,940,185	)	$	3,251,895

Share-based compensation		312,093		3,121		—		—		1,107,247		—		—			—			1,110,368
Warrants issued in connection with notes at $1.00 - $1.55 per share		—		—		—		—		212,732		—		—			—			212,732
Conversion of notes payable and accrued interest at $0.90 per share		1,386,438		13,864		—		—		1,233,930		—		—			—			1,247,794
Shares issued in settlement of liabilities at $0.90 - $1.57 per share		775,997		7,760		—		—		1,108,680		—		—			—			1,116,440
Net loss		—		—		—		—		—		—		—			(1,445,684	)		(1,445,684	)

BALANCES, June 30, 2011		8,959,044	$	89,590		—	$	—	$	156,935,215	$	—	$	(10,145,391	)	$	(141,385,869	)	$	5,493,545

See accompanying notes to these financial statements.

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Six Months Ended June 30,						For the Period from July 1, 2005 (Inception of the Development Stage) to June 30,
	2011			2010			2011
Cash Flows from Operating Activities:
Net loss	$	(1,445,684	)	$	(18,392,195	)	$	(141,385,869	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		802,804			1,369,852			14,874,912
Share-based compensation		1,110,368			3,620,249			20,378,282
Non-cash interest		345,569			227,924			2,657,953
Amortization of note discount and non-cash financing costs		812,062			1,497,016			16,377,818
Gain on derivative liabilities		(3,896,066	)		(875,065	)		(14,066,154	)
Non-cash restructuring		850,000			7,765,588			11,881,895
Loss on sale of fixed assets		—			—			389,784
Loss on extinguishment of debt		—			—			10,990,736
Changes in operating assets and liabilities:
Other assets		143,824			133,202			(218,891	)
Accounts payable and accrued expenses		784,884			2,629,798			7,769,414
Deferred rent		—			—			1,595,239
Deferred revenue		—			—			217,618

Net cash used in operating activities		(492,239	)		(2,023,631	)		(68,537,263	)
Cash Flows from Investing Activities:
Purchase of investments		—			—			(71,957,732	)
Proceeds from sale of investments		—			—			72,662,973
Purchase of equipment and improvements		—			—			(42,570,127	)
Proceeds from sale of assets		—			—			2,035,280

Net cash used in investing activities		—			—			(39,829,606	)
Cash Flows from Financing Activities:
Proceeds from sale of stock		—			—			78,312,500
Proceeds from issuance of notes		450,000			2,030,000			29,705,000
Payments on notes and capital leases		(50,000	)		—			(11,545,310	)
Cost of financing		—			—			(6,342,379	)
Proceeds from exercise of warrants and stock options		—			—			8,870,549

Net cash provided by financing activities		400,000			2,030,000			99,000,360

Net change in cash and cash equivalents		(92,239	)		6,369			(9,366,509	)
Cash and cash equivalents, beginning of period		97,058			17,320			9,371,328

Cash and cash equivalents, end of period	$	4,819		$	23,689		$	4,819

Supplemental Cash Flow Information:
Cash paid for interest	$	—		$	—

Non-Cash Transactions:
Principal and interest payments on convertible notes, in common stock	$	1,247,794		$	—

Beneficial conversion feature on convertible note	$	41,794		$	12,720

Shares issued for settlement of liabilities	$	1,116,440		$	—

Accrued property & equipment	$	—		$	9,636,002

See accompanying notes to these financial statements.

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Nature of Operations

DayStar Technologies, Inc. (the “Company”) is a development stage enterprise that was formed in 1997 for the purpose of developing, manufacturing and marketing innovative products to the solar photovoltaic (“PV”) industry. From its inception, the Company has focused primarily on thin film copper indium gallium di-selenide (“CIGS”) solar products. The Company has developed a proprietary one-step sputter deposition process and manufactured a commercial scale deposition tool to apply high efficiency CIGS material over large area glass substrates in a continuous fashion. The Company intends to integrate this tool with commercially available thin film manufacturing equipment which will provide a critically differentiated manufacturing process to produce low-cost monolithically integrated, CIGS-on-glass modules that address the grid-tied, ground-based PV market. The Company is pursuing a strategy to manufacture its CIGS modules offshore and is in discussions with potential partners to implement this strategy.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from these condensed unaudited financial statements. These condensed unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The condensed balance sheet as of December 31, 2010 has been derived from audited financial statements. The results of operations for the six months ended June 30, 2011 and 2010 are not necessarily indicative of the operating results for the full year.

In the opinion of management, all adjustments, consisting only of normal recurring accruals, have been made to present fairly the Company’s financial position at June 30, 2011 and the results of its operations and its cash flows for the three months and six months ended June 30, 2011 and 2010 and for the period from July 1, 2005 (Inception of the Development Stage) to June 30, 2011.

Reverse Stock Split — On April 23, 2010, the Company’s shareholders approved a reverse stock split of its issued and outstanding common shares in the range of one-for-five to one-for-nine, with the final ratio to be selected by the Company’s Board of Directors. The total authorized shares of common stock remained unchanged at 120,000,000. The Board of Directors selected a ratio of one-for-nine and the reverse stock split was effective on May 11, 2010. Trading of the Company’s common stock on the NASDAQ Capital Market on a split-adjusted basis began at the open of trading on May 12, 2010. The reverse stock split affected all shares of the Company’s common stock, as well as options to purchase the Company’s common stock and other equity incentive awards, as well as convertible debt instruments and warrants that were outstanding immediately prior to the effective date of the reverse stock split. All references to common shares and per-share data for prior periods have been retroactively restated to reflect the reverse stock split as if it had occurred at the beginning of the earliest period presented.

2. Liquidity and Future Operations

The Company’s financial statements for the year ended December 31, 2010 and for the six months ended June 30, 2011 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company is in the development stage, and as such, has historically reported net losses, including a net loss of $1.4 million for the six months ended June 30, 2011. The Company anticipates it will continue to incur losses in the future as it commercializes its product. As noted herein, as a result of the Company’s current liquidity, there is substantial doubt as to its ability to continue as a going concern. In order to continue operations, pursue offshore manufacturing partners and commence commercial shipments of its product, the Company requires immediate and substantial additional capital beyond its current cash on hand.

In order to address its current financial requirements on February 2, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Socius CG II, Ltd. (the “Investor” or “Socius”). Pursuant to the terms of the Purchase Agreement, the Company has the right over a term of two years, subject to certain conditions, to demand through separate tranche notices that the Investor purchase up to a total of $5.0 million of Series B preferred stock.

The Company is pursuing a strategy to manufacture its CIGS modules offshore and is in discussions with potential partners to commercialize its product through long-term strategic investments and partnerships. Those potential partnerships, if consummated, could include joint ventures, licensing agreements, contract manufacturing agreements, a merger with or an acquisition of DayStar. Although the Company continues to seek strategic investors or partners, in light of its current cash position, the Company may in the near term be forced to cease operations. The Company has implemented cost savings measures to limit its cash outflows while pursuing strategic investments and partnerships.

An inability to raise additional funding in the very near term may cause the Company to file a voluntary petition for reorganization under the United States Bankruptcy Code, liquidate assets, and/or pursue other such actions that could adversely affect future operations. Given current market conditions and available opportunities, there is substantial doubt as to the Company’s ability to complete a financing in the time frame required to remain in operation. A wide variety of factors relating to the Company and external conditions could adversely affect its ability to secure additional funding and the terms of any funding that it secures.

3. Significant Accounting Policies

Cash Equivalents—The Company considers all highly liquid debt securities purchased with an original maturity of three months or less to be cash equivalents. The Company’s cash and cash equivalents are maintained with major financial institutions within the United States and at times the balances with these institutions exceed the amount of federal insurance coverage on such deposits.

Property and Equipment—Property and equipment is stated at cost. Depreciation is computed using straight-line and an accelerated method over estimated useful lives of 3 to 10 years. Expenditures for maintenance and repairs, which do not materially extend the useful lives of property and equipment, are charged to operations as incurred. When property or equipment is retired or otherwise disposed of, the property accounts are relieved of costs and accumulated depreciation and any resulting gain or loss is recognized.

Revenue Recognition—The Company recognizes revenue in accordance with the FASB ASC 605 Revenue Recognition and Securities and Exchange Commission (the “SEC”)’s Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”) which require that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectability is reasonably assured. Since inception of the development stage on July 1, 2005, the Company has earned minimal amounts of product revenue.

Since inception of the development stage on July 1, 2005, the principal source of revenue for the Company has been from government funded research and development contracts and grants. Grant revenue is recognized when the Company fulfills obligations as set forth under the grant. Terms of the grant reflected in the accompanying financial statements require the Company to maintain specified employment criteria over a five year period. If the Company fails to meet the specified criteria, it must repay the unearned portion of the grant. As a result, the Company reported a liability of $520,000 and $420,000 at June 30, 2011 and December 31, 2010, respectively.

Research and development contract revenue is recognized as the Company meets milestones as set forth under the contract. The Company recognized no revenue for the six months ended June 30, 2011 and 2010, respectively.

Research and Development Costs—Research and development costs are expensed as incurred. Funds obtained from government agencies that represent a cost reimbursement activity are reflected as reductions of Research and Development expenses.

Use of Estimates—The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires the Company’s management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Significant estimates include the useful lives of the Company’s property and equipment, the life and realization of the Company’s capitalized costs associated with its patents and the Company’s valuation allowance associated with its deferred tax asset. Actual results could differ from those estimates.

Share-Based Compensation—The Company follows the provisions of FASB ASC 718 Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. Additionally, the Company follows the SEC’s Staff Accounting Bulletin No. 107 “Share-Based Payment” (“SAB 107”), as amended by Staff Accounting Bulletin No. 110 (“SAB 110”), which provides supplemental application guidance based on the views of the SEC. The Company estimates the expected term, which represents the period of time from the grant date that the Company expects its stock options to remain outstanding, using the simplified method as permitted by SAB 107 and SAB 110. Under this method, the expected term is estimated as the mid-point between the time the options vest and their contractual terms. The Company continues to apply the simplified method because it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected terms due to the limited period of time its equity shares have been publicly traded and the limited number of its options which have so far vested and become eligible for exercise.

Share-based compensation expense for the three months and six months ended June 30, 2011 and 2010 was as follows:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2011		2010		2011		2010
Share-based compensation:
Selling, general and administrative	$	128,686	$	465,511	$	766,107	$	1,744,447
Research and development		48,929		1,016,096		344,261		1,875,802

Total share-based compensation	$	177,615	$	1,481,607	$	1,110,368	$	3,620,249

During the six months ended June 30, 2011, the Company granted options to purchase 335,000 shares of common stock at an exercise price of $1.55 - $1.71 per share, all with a contractual life of ten years. Options to purchase 225,185 shares of common stock were forfeited during the six months ended June 30, 2011. During the six months ended June 30, 2011 there were restricted stock units granted to purchase 365,000 shares of common stock and there were no restricted stock units forfeited.

Subsequent to June 30, 2011 and through the date of this filing, no options or restricted stock units were granted or forfeited.

Reclassifications —Certain reclassifications have been made to the 2010 financial statements to conform to the 2011 presentation. Such reclassifications had no impact on net loss.

Impact of Recently Issued Accounting Pronouncements—

In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU amends current fair value measurement and disclosure guidance to include increased transparency around valuation input and investment categorization. ASU 2011-04 is effective for fiscal years and interim periods beginning after December 15, 2011, with early adoption not permitted. The Company does not believe that the adoption of ASU 2011-04 in the first quarter of 2012 will have an impact its financial position, results of operations, or cash flows.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. ASU 2011-05 is effective for fiscal years and interim periods beginning after December 15, 2011 and must be applied retrospectively. The Company does not believe that the adoption of ASU 2011-05 will have an impact on its financial position, results of operations, or cash flows.

4. Secured Convertible Promissory Notes and Warrants

Beginning in September 2009, the Company has entered into a series of agreements with various lenders (the “Lenders”) to provide bridge financing to the Company in exchange for notes and warrants. With the exception of the traditional loans indicated in the table below, these notes (the “Notes”) are convertible into shares of the Company’s common stock and each contain terms of six months, are secured by all assets of the Company, and accrue interest at rates of between 8 – 10% per annum. The Lenders may, at their option at any time prior to payment in full of the Notes, elect to convert all or any part of the entire outstanding principal amount of the Notes plus the accrued interest on the then outstanding balance into shares of the Company’s common stock at the conversion price specified in each of the Notes (subject to adjustment in the event of any stock splits, stock dividends or other recapitalization of common stock subsequent to the date of such sale or issuance). If between the date of the Notes and such conversion, the Company issues or sells any shares of capital stock, other than certain excluded securities (a “Future Issuance”), at a per share price below the original conversion price specified in the Notes, then the conversion price of the Notes will be reduced to the price of such Future Issuance. As of June 30, 2011, the aggregate principal balance of all outstanding Notes was $4,505,000 and the Notes were convertible into 4,711,114 shares of common stock.

The Notes’ conversion features were determined to be embedded derivative liabilities and therefore were bifurcated from the Notes and recorded as a discount to the Notes at their fair value at issuance and are required to be adjusted to fair value at the end of each reporting period. The change in fair value of the conversion features, calculated using the Black Scholes model, is recorded as a gain or loss on derivative liabilities. The conversion feature fair values at June 30, 2011 and December 31, 2010 were $0 and $3,854,272, respectively. The change in fair value of the conversion features during the three months ended June 30, 2011 and 2010 resulted in a gain on derivative liabilities of $245,898 and $411,421, respectively. The change in fair value of the conversion features during the six months ended June 30, 2011 and 2010 resulted in a gain on derivative liabilities of $3,896,066 and $755,493, respectively.

The proceeds remaining, if any, after allocation to the conversion features are allocated on a relative fair value basis between the Notes and the warrants and the amounts allocated to the warrants, calculated using the Black Scholes model, are recorded as additional note discount. The discount attributable to the issuance date aggregate fair value of the conversion features and warrants, is being amortized using the effective interest method over the terms of the Notes. During the three months ended June 30, 2011 and 2010, $106,250 and $521,785, respectively, of this discount was amortized to expense. During the six months ended June 30, 2011 and 2010, $812,062 and $1,497,016, respectively, of this discount was amortized to expense.

The warrants issued in connection with these Notes are exercisable upon issuance (with the exception of the warrants issued to Dynamic Worldwide Solar Energy, LLC) and entitle the Lenders to purchase up to 6,028,740 shares of common stock at exercise prices ranging from $1.00 – $1.70 per share, as adjusted for standard anti-dilution provisions and are exercisable for a period of 2 – 7 years from their respective issuance dates.

The following table summarizes the pertinent details of the outstanding notes and warrants as of June 30, 2011.


Lender	Principal Amount		Discount		Note Payable (net of discount)		Note Conversion Shares Issuable		Conversion Price		Warrants		Warrant Exercise Price
Peter Lacey(1)	$	3,075,000	$	—	$	3,075,000		3,416,668	$	0.90		724,074	$	1.25
Peter Lacey(1)												2,692,594	$	1.70
Peter Lacey(1)		125,000		46,310		78,690		N/A		N/A		250,000	$	1.00
Michael Moretti		750,000		—		750,000		833,335	$	0.90		833,335	$	1.25
Michael Moretti		150,000		14,680		135,320		150,000	$	1.00		193,550	$	1.55
Michael Moretti		125,000		46,310		78,690		N/A		N/A		250,000	$	1.00
John Gorman		100,000		—		100,000		111,111	$	0.90		666,667	$	1.25
Richard Schottenfeld		100,000		—		100,000		111,111	$	0.90		111,111	$	1.25
William Steckel(2)		30,000		—		30,000		33,333	$	0.90		11,112	$	1.25
Robert Weiss(3)		50,000		—		50,000		55,556	$	0.90		55,556	$	1.25
Dynamic Worldwide Solar Energy, LLC.		—		—		—		—		—		240,741	$	1.25
	$	4,505,000	$	107,300	$	4,397,700		4,711,114				6,028,740

The following table summarizes the pertinent details of the outstanding notes and warrants as of December 31, 2010.


Lender	Principal Amount		Discount		Note Payable (net of discount)		Note Conversion Shares Issuable		Conversion Price		Warrants		Warrant Exercise Price
Peter Lacey(1)	$	3,075,000	$	365,676	$	2,709,324		3,416,668	$	0.90		724,074	$	1.25
												2,692,594	$	1.70
Michael Moretti		750,000		89,189		660,811		833,335	$	0.90		833,335	$	1.25
John Gorman		700,000		83,243		616,757		777,778	$	0.90		777,778	$	1.25
William Steckel(2)		30,000		3,568		26,432		33,333	$	0.90		11,112	$	1.25
Robert Weiss(3)		50,000		5,946		44,054		55,556	$	0.90		55,556	$	1.25
Dynamic Worldwide Solar Energy, LLC.		650,000		117,213		532,787		722,222	$	0.90		240,741	$	1.25
	$	5,255,000	$	664,835	$	4,590,165		5,838,892				5,335,190

(1)	Mr. Lacey is Chairman of the Board of Directors for the Company and currently serving as the Company’s Interim President and Chief Executive Officer.

(2)	Mr. Steckel is a Director of the Company and the former Chief Executive Officer and Chief Financial Officer.

(3)	Mr. Weiss is the Company’s Chief Technology Officer.

In January 2011, Dynamic Worldwide Solar Energy, LLC converted its entire outstanding principal balance of $650,000 as well as the accrued interest thereon into shares of the Company’s common stock, and John Gorman converted $500,000 of his outstanding principal balance as well as the accrued interest thereon into shares of the Company’s common stock. Additionally, John Gorman transferred $100,000 of his remaining balance to Richard Schottenfeld.

5. Derivative Liabilities

As described in Note 4 Secured Convertible Promissory Notes and Warrants, the Company is accounting for the conversion features in its secured convertible notes as embedded derivative liabilities. The Company currently does not use hedging contracts to manage the risk of its overall exposure to interest rate and foreign currency changes. The conversion features are not considered hedging instruments.

The conversion feature liability on the balance sheet at June 30, 2011 and 2010, and the change in the liability for the six months ended June 30, 2011 and 2010 is summarized as follows:


	Conversion Feature Liability
Balance, December 31, 2009	$	251,618
New debt issuances		516,595
Change in fair value		(755,493	)

Balance, June 30, 2010	$	12,720

Balance, December 31, 2010	$	3,854,272
New debt issuances		41,794
Change in fair value		(3,896,066	)

Balance, June 30, 2011	$	—

In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for its financial liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010. There were no financial assets subject to the provisions of ASC 820 as of June 30, 2011 and December 31, 2010:


	Level 1		Level 2		Level 3		Total
Financial liabilities at June 30, 2011:
Conversion feature	$	—	$	—	$	—	$	—

	$	—	$	—	$	—	$	—

Financial liabilities at December 31, 2010:
Conversion feature	$	—	$	—	$	3,854,272	$	3,854,272

	$	—	$	—	$	3,854,272	$	3,854,272

6. Funding Commitment

On February 2, 2011 the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Socius CG II, Ltd. (the “Investor” or “Socius”). Pursuant to the terms of the Purchase Agreement, the Company has the right over a term of two years, subject to certain conditions, to demand through separate tranche notices that the Investor purchase up to a total of $5.0 million of Series B preferred stock.

Under the Purchase Agreement, in connection with each tranche, Socius will receive the right (the “Investment Right”) to purchase an amount of shares of our common stock equal in value to the amount of the tranche at a per share price equal to the closing bid price of the common stock on the date preceding our delivery of the tranche notice (the “Investment Price”). The Investment Right will be automatically exercised for shares of common stock at the time of each tranche. In addition, in connection with each tranche notice, a portion of a warrant issued to Socius under the Purchase Agreement with an aggregate exercise price equal to 35% of the amount of the tranche will vest and immediately be exercised at a per share price equal to the Investment Price.

Socius may pay for the shares it elects to purchase under the investment right at its option, in cash or a secured promissory note. Socius may pay for the shares it elects to purchase under the warrant at its option, in cash or a secured promissory note. Any such promissory note will bear interest at 2.0% per year and be secured by securities owned by Socius with a fair market value equal to the principal amount of the promissory note. The entire principal balance and interest on the promissory note is due and payable on the fourth anniversary of the date of the promissory note, and may be applied by the Company toward the redemption of shares of Series B preferred stock held by Socius.

Holders of Series B Preferred Stock will be entitled to receive dividends, which will accrue in shares of Series B Preferred Stock on an annual basis at a rate equal to 10% per annum from the issuance date. Accrued dividends will be payable upon redemption of the Series B Preferred Stock or upon the liquidation, dissolution or winding up of the Company. The Series B Preferred Stock ranks, with respect to dividend right and upon liquidation:

•

Senior to the Company’s common stock and any other series or class of preferred stock other than a class or series of preferred stock intended to be listed for trading; and

•

Junior to all existing and future indebtedness of the company and any class or series of preferred stock intended to be listed for trading.

The Series B Preferred Stock has a liquidation preference per share equal to the original price per share thereof plus all accrued dividends thereon (the “Liquidation Value”), and is subject to repurchase by the Company following the consummation of certain fundamental transactions by the Company. Upon or after the fourth anniversary of the applicable issuance date, the Company has the right, at its option, to redeem all or a portion of the shares of Series B Preferred Stock at the Liquidation Value. The Company also has the right, at its option, to redeem all or a portion of the shares of Series B Preferred Stock, at a price per share equal to: (i) 136% of the Liquidation Value if redeemed on or after the applicable issuance date but prior to the first anniversary of the applicable issuance date, (ii) 127% of the Liquidation Value if redeemed on or after the first anniversary but prior to the second anniversary of the applicable issuance date, (iii) 118% of the Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary of the applicable issuance date, and (iv) 109% of the Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary of the applicable issuance date.

Under the terms of the Purchase Agreement, the Company was obligated to pay Socius a commitment fee for committing to purchase the Series B Preferred Stock in the form of shares of common stock or cash, at the Company’s option. The amount of the commitment fee was the number of shares determined by dividing $294,120 by the closing bid price of the Company’s common stock on the trading day immediately preceding the date on which the commitment fee is paid, or $250,000 in cash. If not earlier paid, the commitment fee was payable in full on the six-month anniversary of the effective date of the Purchase Agreement. On August 2, 2011, the Company transferred ownership of 744,607 shares of its common stock, including 587,989 newly issued shares in full payment of the commitment fee.

The Company’s ability to submit a tranche notice is subject to certain conditions including, among others, that: (1) a registration statement covering our sale of shares of common stock issuable upon exercise of the additional investment right contained in the Purchase Agreement or upon exercise of the warrants issued to Socius in connection with the tranche is effective and (2) the issuance of such shares (together with all other shares beneficially owned) would not result in Socius and its affiliates beneficially owning more than 9.99% of the Company’s common stock.

7. Liability Settlements

On January 26, 2011 the Company issued 254,777 shares of common stock to Grenzebach Corporation (“Grenzebach”) and on February 2, 2011 the Company issued 290,323 shares of common stock to Reis GmbH & Co. KG Maschinenfabrik (“Reis”). These shares were issued in settlement of outstanding liabilities on the Company’s balance sheet of $3,137,870 and related to the purchase of certain pieces of equipment. The settlement of these obligations and issuance of common stock resulted in $850,000 in restructuring expenses during the six months ended June 30, 2011.

8. Subsequent Events

Bridge Financing

On July 19, 2011 the Company, Michael Moretti and Peter A. Lacey, entered into Purchase Agreements (each a “Purchase Agreement”, collectively, the “Purchase Agreements”). Pursuant to the Purchase Agreement, each of Mr. Moretti and Mr. Lacey agreed to loan the Company $150,000 (the “Loan”) to fund operating capital and general corporate purposes. On July 19, 2011, the Company issued Mr. Moretti and Mr. Lacey (a) a Secured Convertible Promissory Note (the “Notes”) and (b) a warrant to purchase 288,462 shares of the Company’s common stock (subject to adjustment for certain dilutive transactions) (the “Warrants”). The Notes carry an interest rate of 10% per annum and are convertible into shares of the Company’s common stock based on a $0.52 conversion price (subject to adjustment for certain dilutive transactions). The Notes, to the extent that any part of the outstanding principal amount is not converted into shares of common stock, mature on the 180th day after the date of the Notes and are secured by all the assets of the Company. The Warrants are immediately exercisable, expire on July 18, 2013, and have an exercise price of $0.52 per share. As a result of this issuance, the conversion price of outstanding bridge notes was adjusted to reflect the purchase price implied by this issuance.

The following table summarizes the pertinent details of the outstanding notes and warrants after the July 19, 2011 bridge loan.


Lender	Maturity Date			Principal Amount		Note Conversion Shares Issuable		Conversion Price		Warrants		Warrant Exercise Price
Peter Lacey		10/22/2011		$	3,075,000		5,913,462	$	0.52		724,074	$	1.25
Peter Lacey											2,692,594	$	1.70
Peter Lacey		10/27/2011			125,000		N/A		N/A		250,000	$	1.00
Peter Lacey		1/19/2012			150,000		288,462	$	0.52		288,462	$	0.52
Michael Moretti		10/22/2011			750,000		1,442,308	$	0.52		833,335	$	1.25
Michael Moretti		10/22/2011			150,000		288,462	$	0.52		193,550	$	1.55
Michael Moretti		10/27/2011			125,000		N/A		N/A		250,000	$	1.00
Michael Moretti		1/19/2012			150,000		288,462	$	0.52		288,462	$	0.52
John Gorman		7/22/2011	(1)		100,000		192,308	$	0.52		666,667	$	1.25
Richard Schottenfeld		7/22/2011	(1)		100,000		192,308	$	0.52		111,111	$	1.25
William Steckel		10/22/2011			30,000		57,692	$	0.52		11,112	$	1.25
Robert Weiss		9/1/2011			50,000		96,154	$	0.52		55,556	$	1.25
Dynamic Worldwide Solar Energy, LLC.					—		—		—		240,741	$	1.25
				$	4,805,000		8,759,618				6,605,664

(1)	The Company is currently in discussions with Messrs. Gorman and Schottenfeld regarding an extension of the maturity date of their notes.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with our audited financial statements and related footnotes. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements, including those set forth in our Annual Report on Form 10-K filed on March 31, 2011 as well as Part II, Item 1A below.

Overview

We have developed a proprietary thin film deposition technology for solar photovoltaic (“PV”) products. We utilize a proprietary one-step sputter deposition process and have manufactured a commercial scale deposition tool to apply high-efficiency copper indium gallium diselenide (“CIGS”) material over large area glass substrates in a continuous fashion. We believe this proprietary tool, when combined with commercially available thin film manufacturing equipment, will provide a critically differentiated manufacturing process to produce low-cost monolithically integrated, CIGS-on-glass modules that address the grid-tied, ground-based PV market. We are pursuing a strategy to produce our CIGS-on-glass modules utilizing offshore manufacturing.

We believe this proprietary deposition process, when operated at an annual capacity of approximately 100 megawatts, will achieve a total module manufacturing cost of less than $1.00 per watt. This cost would be competitive with the lowest in the solar PV industry. Using this approach, we have achieved greater than 15% cell efficiencies over large areas on CIGS PV devices, and we believe that this approach will enable module efficiencies greater than 13%.

In October 2007, we completed a follow-on public offering in which we sold 17,250,000 shares of our common stock. Our net proceeds from the offering were approximately $68 million. We have used these proceeds to develop our proprietary deposition process, to build our prototype and commercial scale deposition tools. In the near term, we will require substantial funds beyond our current cash on hand in order to pursue a strategic partnership (or partnerships) to commercialize the CIGS modules, to pursue offshore manufacturing, to fund future operations, and to expand our capacity.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosures. A summary of those accounting policies can be found in the notes to our financial statements. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial condition and results of operations and require judgments on the part of management about matters that are uncertain. We have identified the following accounting policies that are important to the presentation of our financial condition and results of operations.

Property and Equipment. Property and equipment is stated at cost. Depreciation is computed using straight-line and an accelerated method over estimated useful lives of three to ten years. Expenditures for maintenance and repairs, which do not materially extend the useful lives of property and equipment, are charged to operations as incurred. When property or equipment is retired or otherwise disposed of, the property accounts are relieved of costs and accumulated depreciation and any resulting gain or loss is recognized.

Share-Based Compensation. We follow the provisions of FASB ASC 718 Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. Additionally, we follow the SEC’s SAB No. 107, “Share-Based Payment” (“SAB 107”), as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC.

Results of Operations

Comparison of the Three Months Ended June 30, 2011 and 2010

Certain reclassifications have been made to the 2010 financial information to conform to the 2011 presentation. Such reclassifications had no impact on net loss.

Research and development expenses. Research and development expenses were $233,206 for the three months ended June 30, 2011 compared to $2,564,357 for the three months ended June 30, 2010, a decrease of $2,331,151 or 91%. The decrease is primarily due to the cost savings measures implemented including a reduction in our workforce, the consolidation of our facilities into one location in California and a reduction in expenditures for materials, supplies and consultants, as well as a decrease of $967,167 in share based compensation.

Selling, general and administrative expenses. Selling, general and administrative expenses were $459,357 for the three months ended June 30, 2011 compared to $1,090,805 for the three months ended June 30, 2010, a decrease of $631,448 or 58%. The decrease in selling, general and administrative expenses was primarily due to cost savings measures implemented, including a reduction in our workforce and outside consultants and professional fees, as well as a decrease of $336,825 in share based compensation.

Restructuring. There were no restructuring expenses for the three months ended June 30, 2011. Restructuring expenses were $7,765,588 for the three months ended June 30, 2010. In June 2010, we were unable to cure all alleged defaults under the lease for our Newark, California facility and on July 15, 2010, we were notified by our landlord that the lease for the facility was forfeited and terminated, and that the landlord had received a judgment for possession of the premises. Therefore, we recorded an impairment charge for the book value of the leasehold improvements for this facility and the write-off of any non-cash deferred rent, in the amount of $3,509,763. Additionally, we recorded impairment charges of $4,255,825 on certain equipment during the second quarter of 2010.

Depreciation and amortization expense. Depreciation and amortization expense was $398,018 for the three months ended June 30, 2011 compared to $640,491 for the three months ended June 30, 2010, a decrease of $242,473 or 38%. During the second quarter of 2010, we consolidated our California facilities and recorded impairment charges on leasehold improvements and certain equipment which resulted in a decrease in depreciation expense.

Interest expense. Interest expense was $111,782 for the three months ended June 30, 2011 compared to $105,698 for the three months ended June 30, 2010, an increase of $6,084 or 6%. The increase in interest expense was due to the increase in our outstanding notes issued in connection with our bridge financing, as well as interest expense on certain outstanding payables at June 30, 2011.

Amortization of note discount and financing costs. Amortization of note discount and financing costs was $106,250 for the three months ended June 30, 2011 compared to $556,785 for the three months ended June 30, 2010, a decrease of $450,535 or 81%. The convertible notes issued in connection with our bridge financing contain conversion features as well as warrants which result in discounts to the principal amount of the notes payable reflected on our balance sheet, based on the fair value of the warrants and conversion features. The discounts on the convertible notes are amortized using the effective interest method over the terms of the notes. During the second quarter of 2010, a significant portion of the discount on the then outstanding notes was amortized whereas in the second quarter of 2011, the discount related to a relatively smaller amount of notes issued in 2011, was amortized to expense.

Gain on derivative liabilities. Gain on derivative liabilities was $245,898 for the three months ended June 30, 2011 compared to $468,886 for the three months ended June 30, 2010. The conversion features on the convertible notes issued in conjunction with our bridge financing are considered derivative liabilities and are therefore required to be adjusted to fair value each quarter. A decrease in our stock price during the period results in a decrease in the liabilities and a gain on derivative liabilities. Conversely, an increase in our stock price during the period would result in an increase in the liabilities and a loss on derivative liabilities. During the three months ended June 30, 2011, our common stock price as well as the remaining term of the outstanding convertible notes decreased which caused the fair value of the conversion features to be reduced to zero and the remainder of the conversion feature liability was written off at June 30, 2011. The reduction in the fair value of the conversion features was recorded as gain on derivative liabilities.

Comparison of the Six Months Ended June 30, 2011 and 2010

Certain reclassifications have been made to the 2010 financial information to conform to the 2011 presentation. Such reclassifications had no impact on net loss.

Research and development expenses. Research and development expenses were $839,771 for the six months ended June 30, 2011 compared to $5,053,185 for the six months ended June 30, 2010, a decrease of $4,213,414 or 83%. The decrease is primarily due to the cost savings measures implemented including a reduction in our workforce, the consolidation of our facilities into one location in California and a reduction in expenditures for materials, supplies and consultants, as well as a decrease of $1,531,541 in share based compensation.

Selling, general and administrative expenses. Selling, general and administrative expenses were $1,691,544 for the six months ended June 30, 2011 compared to $3,333,070 for the six months ended June 30, 2010, a decrease of $1,641,526 or 49%. The decrease in selling, general and administrative expenses was primarily due to cost savings measures implemented, including a reduction in our workforce and outside consultants and professional fees, as well as a decrease of $978,340 in share based compensation.

Restructuring. Restructuring expenses were $850,000 for the six months ended June 30, 2011 compared to $7,765,588 for the six months ended June 30, 2010. The restructuring expenses in 2011 resulted from impairment charges on certain equipment, as we have cancelled orders for such equipment and settled the outstanding obligations with the vendors. The settlement amounts which were paid in shares of our common stock were recorded as restructuring expense during the six months ended June 30, 2011. In June 2010, we were unable to cure all alleged defaults under the lease for our Newark, California facility and on July 15, 2010, we were notified by our landlord that the lease for the facility was forfeited and terminated, and that the landlord had received a judgment for possession of the premises. Therefore, we recorded an impairment charge for the book value of the leasehold improvements for this facility and the write-off of any non-cash deferred rent, in the amount of $3,509,763 during the second quarter of 2010. Additionally, we recorded impairment charges of $4,255,825 on certain equipment during the second quarter of 2010.

Depreciation and amortization expense. Depreciation and amortization expense was $802,804 for the six months ended June 30, 2011 compared to $1,369,852 for the six months ended June 30, 2010, a decrease of $567,048 or 41%. During the second quarter of 2010, we consolidated our California facilities and recorded impairment charges on leasehold improvements and certain equipment which resulted in a decrease in depreciation expense.

Interest expense. Interest expense was $345,569 for the six months ended June 30, 2011 compared to $227,924 for the six months ended June 30, 2010, an increase of $117,645 or 52%. The increase in interest expense was due to the increase in our outstanding notes issued in connection with our bridge financing, as well as interest expense on certain outstanding payables at June 30, 2011.

Amortization of note discount and financing costs. Amortization of note discount and financing costs was $812,062 for the six months ended June 30, 2011 compared to $1,532,016 for the six months ended June 30, 2010, a decrease of $719,954 or 47%. The convertible notes issued in connection with our bridge financing contain conversion features as well as warrants which result in discounts to the principal amount of the notes payable reflected on our balance sheet, based on the fair value of the warrants and conversion features. The discounts on the convertible notes are amortized using the effective interest method over the terms of the notes. During the six months ended June 30, 2010, a significant portion of the discount on the then outstanding notes was amortized whereas during the six months ended June 30, 2011, the discount related to a relatively smaller amount of notes issued in 2011, was amortized to expense.

Gain on derivative liabilities. Gain on derivative liabilities was $3,896,066 for the six months ended June 30, 2011 compared to $875,065 for the six months ended June 30, 2010. The conversion features on the convertible notes issued in conjunction with our bridge financing are considered derivative liabilities and are therefore required to be adjusted to fair value each quarter. A decrease in our stock price during the period results in a decrease in the liabilities and a gain on derivative liabilities. Conversely, an increase in our stock price during the period would result in an increase in the liabilities and a loss on derivative liabilities. During the six months ended June 30, 2011, our common stock price as well as the remaining term of the outstanding convertible notes decreased which caused the fair value of the conversion features to be reduced to zero and the remainder of the conversion feature liability was written off at June 30, 2011. The reduction in the fair value of the conversion features was recorded as gain on derivative liabilities.

Liquidity and Capital Resources

At June 30, 2011, our cash and cash equivalents totaled $5,000 compared to $97,000 at December 31, 2010. Subsequent to June 30, 2011 and through August 15, 2011, we have received additional bridge financing of $300,000 to fund our operations.

We are in the development stage, and as such, have historically reported net losses, including a net loss of $1.4 million for the six months ended June 30, 2011. We anticipate incurring losses in the future, as we complete the commercialization of our products, invest in research and development, and incur associated administrative and operating costs. Our financial statements for the year ended December 31, 2010 and the six months ended June 30, 2011 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As noted herein, as a result of our current liquidity, there is substantial doubt as to our ability to continue as a going concern.

We have historically financed our operations primarily from proceeds of the sale of equity securities and the issuance of convertible notes. We presently do not have any bank lines of credit that provide us with an additional source of debt financing. In order to fund the costs associated with our continued development and commercialization efforts, we completed a registered public offering during the fourth quarter of 2007 in which we sold 1,916,667 shares of our common stock at $38.25 per share and generated net proceeds of approximately $68 million after deducting underwriting discounts and the fees and expenses of the offering. Upon receipt of the proceeds from the offering, we re-paid in full $9.2 million of existing indebtedness. We have used these proceeds to develop our proprietary deposition process and to build our prototype and commercial scale deposition tools. We are pursuing a strategy to manufacture and commercialize our CIGS modules offshore and are in discussions with potential partners to implement this strategy. Commercialization efforts, including continued development and administrative costs will require significant additional capital.

Beginning in September 2009, we have funded our operations through a series of bridge financing transactions in which we have issued convertible and traditional notes with an aggregate principal amount of $5.9 million and also issued warrants exercisable for shares of our common stock. Currently, $4.8 million of these notes remains outstanding.

In order to address our immediate capital requirements, in February 2011, we entered into a Securities Purchase Agreement with Socius CG II, Ltd. (the “Investor” or “Socius”). Pursuant to the terms of the Purchase Agreement, we have the right over a term of two years, subject to certain conditions, to demand through separate tranche notices that the Investor purchase up to a total of $5.0 million of Series B preferred stock. However, in order to continue operations, including development and commercialization efforts, we will require substantial additional capital beyond our current cash on hand and any funds received from the Socius transaction. We are

seeking long-term strategic investments and partnerships to manufacture and commercialize our product. To date, we have been unable to raise substantial additional capital or complete an agreement with a strategic partner. Although we continue to seek strategic investors or partners, in light of our current cash position, we may in the near term be forced to cease or further curtail operations.

An inability to raise additional funding in the very near term may cause us to file a voluntary petition for reorganization under the United States Bankruptcy Code, liquidate assets, and/or pursue other such actions that could adversely affect future operations. A wide variety of factors relating to the Company including those described in the section entitled “Risk Factors” in Part I Item 1A in our Annual Report on Form 10-K, as well as external conditions, could adversely affect our ability to secure additional funding necessary to continue operations and the terms of any funding that we secure.

Commitments. At June 30, 2011, we had no outstanding purchase orders for equipment and improvements. Other commitments include rental payments under operating leases for office space and equipment, and commitments under employment contracts with our executive officers. These commitments are discussed further in the Commitments and Contingencies footnote to our financial statements in our Annual Report on Form 10-K.

Off-Balance Sheet Arrangements. The only off-balance sheet obligations are for operating leases and certain other commitments entered into in the ordinary course of business.

We lease 32,000 square feet of factory and office space in Milpitas, California under a lease which expires in August 2011. This facility is the location of our corporate headquarters as well as the development of our products and proprietary deposition equipment.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk for a change in interest rates relates primarily to interest earned on our cash and cash equivalents balance. We maintain our portfolio in high credit quality cash deposits and money market funds that invest in Treasury instruments with carrying values that approximate market value. Due to the short duration of our investment portfolio, we do not expect that a 10% change in interest rates would have a material effect on the fair market value of our cash and cash equivalents.

We also have market risk arising from changes in foreign currency exchange rates related to expenses and/or equipment we purchase from foreign businesses. Our payments related to these purchases may be denominated in foreign currency. We believe that such exposure does not present a significant risk due to the limited number of transactions and/or accounts payable denominated in foreign currency. Consequently, we do not believe that a 10% change in foreign currency exchange rates would have a significant effect on our future net income or cash flows.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and utilized, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating disclosure controls and procedures.

As required by Rule 13a-15(b) or Rule 15d-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2011.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including routine employment matters. The following is a summary of legal proceedings to which we are a party at this time.

On January 6, 2010, New York State Urban Development, d/b/a/ Empire State Development Corporation (“ESDC”), filed a breach of contract action against us. This action stems from the Grant Disbursement Award we entered into with ESDC when we relocated our headquarters to New York in 2004. ESDC has been awarded a judgment of approximately $520,000 and is currently in the process of enforcing its judgment to recover such damages.

Item 1A.

Risk Factors

Item 1A (“Risk Factors”) of our annual report on Form 10-K for our fiscal year ended December 31, 2010 (“Annual Report”) sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition or operating results. The risks and uncertainties described in our Annual Report do not constitute all the risk factors that pertain to our business but we do believe that they reflect the more important ones. Accordingly, you should review and consider such Risk Factors in making any investment decision with respect to our securities. An investment in our securities continues to involve a high degree of risk. There has been no material changes in the Risk Factors contained in our Annual Report.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

On April 27, 2011, we entered into Purchase Agreements (the “Purchase Agreements”) with Peter Lacey and Michael Moretti. Pursuant to the Purchase Agreements, Messrs. Lacey and Moretti each agreed to loan us the amount of $125,000 (the “Loan”) for working capital. In connection with the Loan, we issued Messrs. Lacey and Moretti each (a) a Secured Promissory Note (the “Note”) and (b) a warrant to purchase 250,000 shares of our common stock (subject to adjustment for certain dilutive transactions) (the “Warrant”). The Note carries an interest rate of 10% per annum and is not convertible into common stock. The Note matures on October 27, 2011, is secured by all of our assets, and includes customary provisions concerning events of default. The Warrant is immediately exercisable, has a term of five years, and has an exercise price of $1.00 per share.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

(Removed and Reserved).

None.

Item 5.

Other Information.

(a) None.

(b) None.

Item 6.

Exhibits

(a) The following exhibits are filed as part of this report:


Exhibit No.		Description

3.1(1)		Amended and Restated Certificate of Incorporation.

3.2(2)		Certificate of Amendment of Amended and Restated Certificate of Incorporation.

3.3(3)		Amended and Restated Bylaws.

3.4(4)		Text of Amendment of Amended and Restated Bylaws

3.5(5)		Certificate of Designations, Preferences and Rights of a Series of Preferred Stock classifying and designating the Series B Preferred Stock.

4.1(6)		Form of Common Stock Certificate.

4.2(6)		Form of Class A Public Warrant.

4.3(6)		Form of Class B Public Warrant.

4.4(6)		Form of Unit Certificate.

4.5(6)		Form of Warrant Agent Agreement.

4.6(6)		Form of Representative’s Warrant.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	Incorporated by reference to our Quarterly Report on Form 10-QSB filed with the SEC on August 11, 2006.

(2)	Incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on November 14, 2008.

(3)	Incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on August 7, 2008.

(4)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 25, 2010.

(5)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on February 3, 2011.

(6)	Incorporated by reference to our Registration Statement on Form SB-2 filed with the SEC on November 7, 2003.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	DAYSTAR TECHNOLOGIES, INC.

Date: August 15, 2011	By:	/S/ PETER A. LACEY
		Peter A. Lacey
		Interim Chief Executive Officer (Principal Executive Officer)

Date: August 15, 2011	By:	/S/ CHRISTOPHER T. LAIL
		Christopher T. Lail
		Chief Financial Officer (Principal Financial & Accounting Officer)

EXHIBIT INDEX


Exhibit No.		Description

3.1(1)		Amended and Restated Certificate of Incorporation.

3.2(2)		Certificate of Amendment of Amended and Restated Certificate of Incorporation.

3.3(3)		Amended and Restated Bylaws.

3.4(4)		Text of Amendment of Amended and Restated Bylaws

3.5(5)		Certificate of Designations, Preferences and Rights of a Series of Preferred Stock classifying and designating the Series B Preferred Stock.

4.1(6)		Form of Common Stock Certificate.

4.2(6)		Form of Class A Public Warrant.

4.3(6)		Form of Class B Public Warrant.

4.4(6)		Form of Unit Certificate.

4.5(6)		Form of Warrant Agent Agreement.

4.6(6)		Form of Representative’s Warrant.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	Incorporated by reference to our Quarterly Report on Form 10-QSB filed with the SEC on August 11, 2006.

(2)	Incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on November 14, 2008.

(3)	Incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on August 7, 2008.

(4)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 25, 2010.

(5)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on February 3, 2011.

(6)	Incorporated by reference to our Registration Statement on Form SB-2 filed with the SEC on November 7, 2003.

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