DAYSTAR TECHNOLOGIES INC - FORM 10-K

DAYSTAR TECHNOLOGIES INC - FORM 10-K - March 30, 2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 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.)

33556 Alvarado Niles Road Union City, California		94587
(Address of principal executive offices)		(Zip Code)

(408) 582-7100

(Registrant’s telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act:


Title of each class		Name of each exchange on which registered
Common Stock, $.01 par value per share		The NASDAQ Capital Market

Securities registered under Section 12(g) of the Exchange Act: None

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 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 x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. 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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

As of June 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $3,964,881, computed by reference to the last sale price of the common stock on that date as reported by The Nasdaq Capital Market and excludes an aggregate of 1,029,283 shares of the registrant’s common stock held by officers, directors and stockholders that the registrant has concluded are affiliates of the registrant. For purposes of determining whether a stockholder was an affiliate of the registrant at June 30, 2011, the registrant assumed that a stockholder was an affiliate of the registrant at June 30, 2011 if such stockholder (i) beneficially owned 5% or more of the registrant’s common stock, as determined based on public filings, and/or (ii) was an executive officer or director or was affiliated with an executive officer or director of the registrant at June 30, 2011. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.

As of March 28, 2012, there were 10,166,380 shares of the registrant’s common stock outstanding.

DAYSTAR TECHNOLOGIES, INC.

Annual Report on Form 10-K

Year Ended December 31, 2011

Table of Contents


		Page No.
	PART I

Item 1.	Business		4

Item 1A.	Risk Factors		10

Item 1B.	Unresolved Staff Comments		17

Item 2.	Properties		17

Item 3.	Legal Proceedings		17

Item 4.	Mine Safety Disclosures		17

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		18

Item 6.	Selected Financial Data		18

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		21

Item 8.	Financial Statements and Supplementary Data		21

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		21

Item 9A.	Controls and Procedures		21

Item 9B.	Other Information		22

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance		23

Item 11.	Executive Compensation		23

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		23

Item 13.	Certain Relationships and Related Transactions, and Director Independence		23

Item 14.	Principal Accounting Fees and Services		23

	PART IV

Item 15.	Exhibits, Financial Statement Schedules		24

	Signatures		28

	Index to Exhibits		II-1

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Any statements contained in this report that are not statements of historical fact may be forward-looking statements. When we use the words “anticipates,” “plans,” “expects,” “believes,” “should,” “could,” “may,” “will” and similar expressions, we are identifying forward-looking statements. Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. These factors include, among others, risks relating to our ability to raise additional funds in the near term to continue our operations; risks related to the development of our copper indium gallium diselenide (“CIGS”) solar photovoltaic (“PV”) products and manufacturing processes to produce such products; risks related to delivery of our products to customers, including product reliability, conversion efficiency, customer acceptance and product cost; market acceptance of CIGS; intense competition in the solar energy field; our history of losses; the historical volatility of our stock prices; general market conditions; and other factors referred to in Item 1A—“Risk Factors.”

Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this Annual Report as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements that reflect our current expectations about our future results, performance, prospects and opportunities. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.

PART I

Item 1.

Business

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, can 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 believe this proprietary deposition process, when operated at an annual capacity of approximately 100 megawatts, may 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%.

We are currently pursuing strategic partnerships and investments to attempt to commercialize our product.

Strategies

Our goal is to be a leading supplier of solar PV modules by becoming one of the lowest cost-per-watt commercial-scale solar manufacturers. We intend to pursue the following strategies to achieve this goal:

•

Address the existing solar PV market using monolithic CIGS-on-glass. DayStar’s product strategy targets high-performance, low-cost CIGS-on-glass modules to meet the demands of the large and rapidly growing PV utility market. The CIGS module design is ‘plug-and-play’ compatible with the leading thin film PV module supplier. Utilizing approximately the same form factor, current-to-voltage ratio, weight and components used in existing panels will enable rapid market acceptance by providing compatibility with mounting, wire harnessing and logistics systems currently used in the market. Because of our financial condition, we have been unable to continue any significant development activities related to our CIGS modules. We intend to partner with a manufacturer using commercially available equipment in conjunction with our proprietary deposition tool to produce CIGS-on-glass modules.

•

Pursue strategic partnerships. The financial crisis has adversely affected the ability of companies such as DayStar to raise the capital required to develop its production capabilities. DayStar has embarked on a formal process to form strategic partnerships that will allow us to use our proprietary CIGS deposition tool and related know how to partner with a manufacturing source and to commercialize our CIGS modules. We are currently in discussions with potential strategic partners to implement this strategy. There can be no assurance we will be able to reach a definitive agreement with any of those potential partners.

The Photovoltaic Industry

The worldwide demand for electricity is expected to almost double over the next two decades, from 18.0 trillion kilowatt hours in 2006 to 31.8 trillion kilowatt hours in 2030, according to the U.S. Energy Information Administration, or EIA. Additionally, the EIA expects that electricity demand in the United States will increase from 3.9 trillion kilowatt hours in 2006 to 4.8 trillion kilowatt hours in 2030. Historically, the electric power industry has relied on fossil fuels to generate electricity. However, continued reliance on fossil fuels to supply the expanding global demand for electricity creates a number of challenges, including the risks of escalating costs and uncertain supplies of fossil fuels, environmental ramifications of electricity generation from the burning of fossil fuels, escalating costs of new generation and transmission construction, aging generation plants and transmission infrastructure, regulatory impediments to electric infrastructure development and ongoing reliance on foreign sources for domestic energy. These challenges will likely result in escalating costs of wholesale and retail electricity rates.

To meet these challenges, governments, businesses and consumers often support the development of alternative energy sources, such as solar power, to generate electricity. The support programs may be in the form of quotas (including renewable portfolio standards and tendering systems), net metering systems, and feed-in tariffs (FiTs). Financial incentives may also be provided in the form of tax incentives, grants, loans, rebates and production incentives.

The near term growth of the market for on grid applications, where solar energy is used to supplement the electricity a consumer purchases, depends significantly on the availability and size of government subsidies and incentives. The growth in the industry has largely been in Germany, Spain, Japan, the United States, and Italy where the incentives are most favorable. Although public support for solar subsidies appears to remain generally positive, significant growth in solar installations has caused some governments, particularly in major European countries, to balance or reduce the cost of subsidies relative to other governmental expenditures. The expectation of policy makers is that as the industry develops, costs will decline so that

solar electricity becomes competitive with conventional electricity sources and subsidy and incentive requirements can be reduced. Achieving lower costs that are competitive with conventional sources, or ‘grid parity’, is expected to open up a much larger market opportunity.

Photovoltaic Systems

The PV effect is the term used to describe the absorption of light and its conversion to electrical power by solar cells. Most commercial solar modules are made of the semiconductor material silicon and have a top and bottom electrical contact to move the electricity out of the solar cell. The functionality of a solar cell is determined by its efficiency in converting sunlight into electricity. For every 1,000 watts of sunlight hitting a solar module, most are able to convert this into 60 to 180 watts of electricity.

Solar modules usually consist of individual solar cells connected together, an encapsulant to protect against moisture and other environmental factors, and a sheet of glass for support. The individual solar cells do not require ongoing maintenance and have proven to last over 20 years. New and emerging thin film modules use very thin layers of semiconductor material, typically deposited on glass substrates, where the individual cells are connected through a monolithically integrated process during the deposition steps instead of assembled as individual cells. Solar PV systems are arrangements of solar PV modules connected to determine the total power output of the system. Energy is converted into direct-current, or DC, electricity when sunlight hits a solar PV module. The DC electricity may be routed directly to power a DC load or charge a battery bank. In grid-tied applications, an inverter is used to convert the DC electricity from the solar PV system into alternating current, or AC electricity, which can be interconnected directly to the electric utility grid to power AC appliances. In addition, solar PV systems usually have mounting structures, cable cords to route the power, and circuit protection.

The Cost and Operating Metrics of a PV System

Solar PV module manufacturers price and sell solar PV modules per watt of rated power. Rated power is the solar PV module’s capacity to produce electricity and is measured in watts. A solar PV system producing 2 kilowatts of power for 2 hours generates 4 kilowatt hours of electricity. According to the EIA, in 2001, the average U.S. household consumed approximately 10,656 kilowatt hours of electricity per year.

Cost of a PV System

To calculate the manufacturing cost per watt of a solar PV module, the cost to produce a solar module is divided by the number of sellable watts produced by the solar PV module. The efficiency of the solar PV module in converting sunlight into electricity determines the number of sellable watts. Efficiency is usually a function of the semiconductor material used in the conversion layer, the device structure and the manufacturing process. The semiconductor material generally used in the PV industry employs crystalline silicon technology or thin film technology. Crystalline silicon modules generally have higher conversion efficiencies than thin film solar modules but use approximately 100 times more semiconductor material and are more expensive than thin film production processes. Thin film solar modules manufactured at commercial scale can have a lower manufacturing cost per watt than crystalline silicon solar modules, even though crystalline silicon solar modules have higher conversion efficiencies.

Purchasers of solar PV modules consider not only the rated power but also the quantity of electricity that can be produced and the cost of that electricity. The cost per kilowatt hour of solar electricity is determined by dividing the solar electricity generated over the life of the solar PV system into the total cost of the system. Solar PV modules are usually 50% of the cost of a total solar PV system and have a general use life of approximately 25 years. The other 50% of the cost consists of the mounting structures, equipment and electrical components, known as the balance of system. In calculating the cost per kilowatt hour of solar electricity, many customers also consider the time value of the capital required to purchase and install the system. The price of conventional energy produced by fossil fuels varies considerably by geographic area based on several factors, including the cost of producing and importing energy. The 2009 average retail price of residential electricity in the United States was 11.5 cents per kWh (Source: DOE 2009 Data). To become competitive with traditional sources of electricity, the price per kilowatt hour of solar electricity must approach the retail price of traditional electricity displaced by solar electricity in a given area. Grid parity is therefore, a common objective among competing renewable technologies, with the goal for PV cost set by the United States Department of Energy’s Solar America Initiative to achieve 8-10 cents per kWh by 2015.

Operating Metrics of a PV System

The solar PV industry uses a widely accepted set of standard procedures and conditions known as Standard Test Conditions, to measure and compare the performance of solar modules. These conditions specify a standard temperature, solar irradiance level and angle of the sun, and are used to determine the rated power and conversion efficiency of a solar module.

On a clear day, sunlight provides about 1 kilowatt of power per square meter of the Earth’s surface. Under these conditions, a solar PV module operating at a10% conversion efficiency will produce 100 watts of power per square meter. If these sunlight conditions persist for one hour, the solar module will generate 100 watt hours, or 0.1 kilowatt hour, of solar electricity. Crystalline silicon solar PV modules had average conversion efficiencies of approximately 14% in 2006. Thin film solar modules in commercial production (2 GW per year in 2009) had average conversion efficiencies that ranged from approximately 6% to approximately 11%.

Solar PV systems generally operate outside of Standard Test Conditions. The location and design of a PV system, time of day and year, temperature and angle of the sun impact the performance of a solar PV system, including conversion efficiency. Therefore to determine the amount of solar electricity any one solar PV system will generate a user must consider not only the Standard Test Conditions power rating of a solar PV module, but also the real world conditions under which the solar PV system will be operating, the design of the solar PV system, and the performance of the solar PV modules and electrical components outside of Standard Test Conditions. Due to these variations, system sizing varies by design and location, but a system with a rated power of 8 to 11 kilowatts would typically be required to produce the 11,040 kWh (Source: DOE 2008 Data) consumed annually by the average U.S. household.

Solar module manufacturers compete with one another in several product performance attributes, including reliability, module cost per watt and levelized cost of electricity (LCOE), meaning the net present value of total life cycle costs of the solar power project divided by the quantity of energy which is expected to be produced over the system’s life.

Photovoltaic Technologies

There are several different semiconductor technologies used in the solar PV industry. Crystalline silicon, or c-Si, is the dominant technology with approximately 80% market share worldwide. PV modules made with thin films of semiconductors are being increasingly commercialized for use in all market segments.

Crystalline Silicon

Silicon based modules have defined the solar PV industry for the last 30 years, and their development has benefited from significant investment in the integrated circuit industry, which also primarily uses silicon wafers. Silicon PV modules are currently the most efficient solar PV semiconductor material, but require substantial electrical energy and bulk material to manufacture.

The various crystalline silicon solar panel manufacturing processes involve cutting refined, semiconductor-grade silicon ingots into solar wafers, connecting the wafers in series and packaging them into solar panels. From 2003 until 2009, growth in the market for crystalline silicon photovoltaic systems was negatively impacted by the limited availability of refined silicon, the basic feedstock used in their manufacture. High demand from the photovoltaic and microelectronics industries led to a global shortage of silicon, increasing the price of polysilicon, with the spot price of polysilicon climbing from $30 per kilogram, or kg, in 2003 to $463/kg in 2008, according to New Energy Finance. This price increase, combined with other technological factors, created challenges for crystalline silicon systems to produce electricity at a cost that is comparable to those of traditional fossil fuel sources. As manufacturers of silicon have increased factory capacity, prices for silicon have significantly decreased, though they are not back to previous lows. For example, in the second half of 2010 the weighted-average polysilicon long-term forward contract price remained at $50-$60/kg, and the spot price for polysilicon remained at $70-$80/kg, according to various industry sources.

Thin Films

Solar cells and solar modules made from certain thin films of semiconductors require less raw material to produce than silicon based PV cells. Recent advances in manufacturing and product commercialization have increased worldwide production of thin film PV to approximately 20% of overall PV production in 2010. Thin film solar PV products typically exhibit the following attributes:

•

Scalable, low cost manufacturing: Thin film solar PV cells and modules require a structural substrate to support them, such as glass, plastic or metal sheets or foils. Applying the films on these substrates creates a range

of manufacturing options that enables continuous and scalable manufacturing. As much of the equipment to process these substrates is used in other industries, the relatively lower capital expenditure required to establish large-volume thin film PV product manufacturing plants enables rapid capacity expansion and lowers the cost per watt of products.

•

Lower overall material cost: Thin film PV production uses substantially less semiconductor materials than c-Si production. The result of less raw materials combined with inexpensive substrates and scalable manufacturing techniques have resulted in some thin film technologies achieving costs less than $1.00 per watt beginning in 2008.

•

Configurable form factors: Based on the use of a variety of substrates, thin film PV modules can be configured into a number of different form factors to enable a variety of market applications. In particular, flexible thin film modules could enable a new range of products for unique building integrated photovoltaics (BIPV) applications.

•

Lower conversion efficiency: Thin film PV technologies are generally less efficient than modules made with c-Si. This attribute can potentially limit their use in area-constrained applications. However, thin film PV technologies do exhibit performance advantages in generating energy in low light level and increased temperature environments. This positions them particularly well for certain geographic applications.

•

Limited operating history: Limited operating history has inhibited market acceptance of several types of thin film products. Most thin film PV modules have not been fielded for the average warranty period of typical c-Si modules.

There are three major thin film technologies in commercial production today:

•

Amorphous Silicon, or a-Si, has been commercially produced for the longest period of time and has the lowest module conversion efficiency among the three major thin film technologies, but can be produced in a roll-to-roll flexible format, which is gaining popularity in emerging BIPV markets. Amorphous silicon modules were the first thin film module to demonstrate energy production advantages over conventional silicon modules in low or indirect light conditions.

•

Cadmium Telluride, or CdTe, has a higher conversion efficiency than a-Si and has demonstrated the lowest manufacturing costs to date, but is only produced in rigid and glass flat plate modules, which has made it most suitable for market segment applications to larger commercial and utility project market segments.

•

Copper Indium Gallium diSelenide, or CIGS, has achieved the highest conversion efficiency rates of thin film technologies, but is just now reaching commercial production. CIGS has the ability to be produced on rigid as well as flexible substrates, which enables CIGS products to be used in utility, commercial, residential and BIPV segments.

Market Segments

The solar electricity industry currently supplies modules used in solar PV systems primarily for grid-connected systems. The off-grid application of PV for remote or developing nations is often cost effective, but the market is small. Grid-connected solar PV systems can supply electricity during daylight hours to offset peak load demand or displace consumers’ annual electricity consumption from traditional utility sources. Net-metering laws, which require utilities to purchase excess electricity produced by on-grid solar systems, and solar PV system capital and energy rebates are examples of government incentives aimed at grid-connected consumers in parts of the United States, Japan, Europe and elsewhere. Many consumers are seeking to reduce their future electricity costs by purchasing solar PV systems to hedge against future price increases. Government incentives are enabling adoption of PV in advance of the lower costs from new PV technologies, manufacturing economies of scale, and improved infrastructure.

Grid-Connected Markets

Markets for grid-connected PV include large centralized utility power plants (10-100 MW), commercial building roof tops (20kW-10MW), and smaller residential roof tops (1-20 kW).

•

Centralized utility. PV modules are increasingly being used in large centralized installations with the solar generated electricity being sold directly to the local utility grid for distribution and resale, similar to other fossil fuel power plants. In these applications, the cost of the energy generated in dollars per kilowatt-hour (“$/ kW-hr”) is a more important market driver than other PV technology attributes, such as efficiency, shape, size and weight, or aesthetics.

•

Commercial rooftop. Solar PV systems are being installed on the roofs of commercial buildings to offset peak power requirements and lower electricity costs. By using otherwise vacant roof surfaces, businesses can sell their solar power during the day, coincident with typical high time-of-use utility rates. Both system economics ($/kW-hr) and system performance such as module efficiency are important solar PV product attributes in expanding this market.

•

Residential rooftop. Individual homeowners form one of the largest markets for grid-connected PV sales. In addition to system economics ($/kW-hr), the aesthetics of the products can play a role in a homeowner’s choice of product.

Products

DayStar CIGS-on-glass module

We intend to commercialize a monolithically integrated CIGS-on-glass module to meet the demands of readily available solar PV markets. Our current target is to produce monolithically integrated CIGS modules on 1.2 m by 0.6 m glass laminate substrates. They will be designed for high-voltage grid-connected utility and commercial market applications. They will be initially designed to meet industry International Electrotechnical Commission (IEC) certifications for distribution into European markets. 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% and associated peak power ratings. Other possible configurations may include UL Listing for U.S. sales and modules designed to meet the demands of large commercial rooftop applications in the U.S. market.

CIGS-on-foil for emerging market opportunities

We have suspended development of our CIGS-on-foil products. These discrete foil cells currently emulate 100 mm by 100 mm silicon wafer cells in form and function. They can be interconnected to build various module voltages depending on the needs of a particular market segment. However the packaging materials that would allow integration into flexible module form factors have not been developed so we have chosen to focus all our current efforts on the development of our CIGS-on-glass modules which we believe is the fastest path to commercialization of our products. If flexible encapsulants become available, we may re-start our development of flexible CIGS modules that could be suited to meet the needs of BIPV markets, where the module serves as a dual-use building material.

Marketing and Distribution

The sale of commercial grid-connected solar PV systems, currently the largest market for thin film PV, is subject to direct and indirect regulation by state, federal and foreign governments. These regulations include rules governing energy transmission, safety, reliability, quality and incentives aimed at reducing carbon emissions or increasing renewable sources of energy. We are not directly impacted by these regulations at this point as we are focused on the sales of CIGS-on-glass modules to commercial system integrators.

Research, Development and Engineering

Our future success depends, in part, upon our ability to innovate processing methodologies that create enhanced product characteristics. In addition to optimization of CIGS deposition, we intend to develop processes for other layers in the cell stack that may lead to higher conversion efficiency and lower manufacturing costs. Until we raise additional capital, we are unable to undertake significant new development processes.

Our manufacturing technology development roadmap focuses on reducing the cost per watt by reducing the number of steps in manufacturing the modules and by optimizing the materials and processes used in the non-CIGS layers. We have identified development programs for reducing the number of scribing steps needed in the module formation, and for an optimized buffer layer that requires lower capital and processing costs than our current methodology. Additionally, we intend to continue to scale up our proprietary deposition tool to enable production of larger modules with better material usage.

Research and development expenses were $1.3 million for the year ended December 31, 2011 and $5.5 million for the year ended December 31, 2010.

Manufacturing

Our strategy for developing the production line is to focus our development efforts on our proprietary direct deposition sputtering tool, which we believe is critical to making large quantities of CIGS at low costs. Our proprietary deposition tool is custom designed and built. We developed a process that we believe is scalable and allows for continuous processing of high volumes of modules. Most of the remaining tools required in the manufacturing line are commercially available. Our goal is to partner with a manufacturing source to commercialize our CIGS-on-glass modules.

Raw Materials and Equipment Suppliers

Our manufacturing process allows the use of several raw materials and components to build solar PV modules on commercially available processing and automation equipment. We plan to partner with a manufacturing source to have several suppliers of these materials, components and equipment. Each supplier will undergo a qualification process which may take several months depending on the particular raw material, component or equipment type.

Competition

The renewable energy, solar energy, and solar module sectors are highly competitive and continually evolving as these sector participants strive to distinguish themselves within their markets and compete within the larger electric power industry. We expect our primary sources of competition will continue to be from crystalline silicon solar module manufacturers, as well as other thin-film module manufacturers. At December 31, 2011, the global PV industry consisted of more than 150 manufacturers of solar modules and cells. Within the solar PV industry, conventional c-Si solar PV manufacturers dominate the market and ultimately create significant competition for our products. A number of companies are actively engaged in developing, manufacturing and marketing conventional silicon PV products on a commercial scale. In addition, a variety of thin film solar PV technologies are being developed and manufactured by a number of established and emerging companies. Thin film technologies include amorphous silicon, cadmium telluride and CIGS as well as advanced concepts for both bulk ingot-based and thin film crystalline silicon. These competing technologies may achieve manufacturing costs per watt lower than the cost per watt to manufacture our CIGS solar PV modules.

Certain of our existing or future competitors may be part of larger corporations that have greater financial resources and greater brand name recognition than we do and, as a result, may be better positioned to adapt to changes in the industry or the economy as a whole. Among PV module and cell manufacturers, the principal methods of competition include price per watt, production capacity, conversion efficiency, reliability, warranty terms, and payment terms.

In addition, we expect to compete with future entrants to the PV industry that offer new technological solutions. We may also face competition from semiconductor manufacturers and semiconductor equipment manufacturers or their customers, several of which have already announced their intention to start production of PV cells, solar modules, or turn-key production lines.

We also face competition from companies that currently offer or are developing other renewable energy technologies (including wind, hydropower, geothermal, biomass, and tidal technologies) and other power generation sources that burn conventional fossil fuels.

Intellectual Property

Our success depends, in part, on our ability to maintain and protect our proprietary technology and to conduct our business without infringing on the proprietary rights of others. We rely primarily on a combination of patents, trademarks, copyrights and trade secrets, as well as employee and third party confidentiality agreements to safeguard our intellectual property. Our intellectual property consists of our proprietary deposition process and our related tool set designs.

Employees

As of March 30, 2012, we had four employees, including three full-time and one part-time employee. In addition to our full and part-time employees, we utilize the services of many individuals on a contract basis. From time to time we employ individuals through employment agencies. None of our employees are covered by collective bargaining agreements with us. We believe our relations with employees are good.

Corporate Information

DayStar Technologies, Inc., a Delaware corporation, was incorporated in February 1997. We completed our initial public offering in February 2004. Our principal executive offices are located at 33556 Alvarado Niles Road, Union City, California 94587, and our telephone number is (408) 582-7100. Our website is located at www.daystartech.com. The information available on or that can be accessed through our website is not incorporated by reference into and is not a part of this Annual Report on Form 10-K and should not be considered to be part of this report.

Availability of Information

We make available through our website (http://www.daystartech.com), free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Commission.

The public may read and copy any materials we file with the Commission at the Commission’s Public Reference Room at 450 Fifth Street, NW, Washington, DC20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. DayStar files electronically with the Commission and the Commission maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission.

Item 1A.

Risk Factors

You should carefully consider the risks, uncertainties and other factors described below because they could materially and adversely affect our business, financial condition, operating results and prospects and could negatively affect the market price of our common stock. Also, you should be aware that the risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we do not yet know of, or that we currently believe are immaterial, may also impair our business operations and financial results. Our business, financial condition or results of operations could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.

In assessing these risks, you should also refer to the other information contained in or incorporated by reference to this Annual Report on Form 10-K, including our financial statements and the related footnotes.

In order to continue operations, we require immediate and substantial additional capital beyond our current cash on hand.

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. Though the proceeds available from the Socius transaction will provide for our immediate cash needs, in order to continue operations, including development and commercialization efforts, we will require immediate and substantial additional capital. To date, we have been unable to raise significant additional capital. Although we continue to seek strategic investors or partners, in light of our current cash position, we implemented a significant reduction in our workforce and may in the near term be forced to cease 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.

Our independent auditor’s report expresses doubt about our ability to continue as a going concern, which may make it more difficult and expensive for us to raise additional capital.

The report of our independent registered public accounting firm relating to our financial statements as of December 31, 2011 and for the year then ended, stated that there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to take advantage of raising capital through securities offerings, debt financing, or partnerships. Management is focusing on raising capital through any one or more of these options. Such opinion from our outside auditors may make it more difficult and expensive for us to raise additional capital. If we are unable to obtain such financing we may not be able to continue our operations, which would have an adverse effect on our stock price and significantly impair our prospects. There can be no assurance that any of management’s plans will be successfully implemented.

We have incurred net losses since our inception and anticipate continued net losses as we execute our commercialization plan.

Since our inception, we have incurred net losses, including net losses of $3.4 million and $28.1 million for the years ended December 31, 2011 and 2010, respectively, and have incurred negative cash flows from operations. As a result of ongoing losses, we had an accumulated deficit of approximately $153.5 million as of December 31, 2011. We expect to continue to incur significant losses as we enter commercialization and may never achieve or maintain profitability. We expect that our expenditures will increase to the extent we continue to develop strategic partnerships to commercialize our product.

As we do not expect to become profitable until after we expand capacity, if ever, we will be unable to satisfy our obligations solely from cash generated from operations. If, for any reason, we are unable to make required payments under our obligations, one or more of our creditors may take action to collect their debts. If we continue to incur substantial losses and are unable to secure additional financing, we could be forced to discontinue or further curtail our business operations; sell assets at unfavorable prices; refinance existing debt obligations on terms unfavorable to us; or merge, consolidate or combine with a company with greater financial resources in a transaction that may be unfavorable to us.

Current and future litigation against us may be costly and time consuming to defend, and the outcome of current litigation could affect our ability to operate our business.

We are sometimes subject to legal proceedings and claims that arise in the course of our business. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, overall financial condition, and operating results. In addition, legal claims that have not yet been asserted against us may be asserted in the future. See Item 3 “Legal Proceedings” of this Annual Report on Form 10-K for further information regarding pending litigation.

An increased global supply of PV modules has caused and may continue to cause structural imbalances in which global PV module supply exceeds demand, which could have a material adverse effect on our business, financial condition and results of operations

Solar manufacturers have installed production capacity that significantly exceeded global demand in 2011. We believe this structural imbalance between supply and demand (i.e., where production capacity significantly exceeds current global demand) will continue for the foreseeable future, and we expect that it will continue to put pressure on pricing. Additionally, in 2011, industry average sales prices per watt (“ASPs”) declined significantly, as competitors reduced ASPs to sell-through inventories in Europe and elsewhere. If our competitors reduce module pricing to levels near or below their manufacturing costs, or are able to operate at minimal or negative operating margins for sustained periods of time, or if demand for PV modules does not grow sufficiently to justify the current production supply, our business, financial condition and results of operations could be adversely affected.

Reduced growth in or the reduction, elimination or expiration of government subsidies, economic incentives and other support for on-grid solar electricity applications could reduce demand for our solar modules, and adversely impact our operating results.

Federal, state, and local governmental bodies in many countries have provided subsidies in the form of FiT, rebates, tax incentives, and other incentives to end-users, distributors, systems integrators, and manufacturers of PV products. Many of these jurisdictions, including the majority of U.S. states and numerous European Union countries, have adopted renewable

portfolio standards in which the government requires jurisdictions or regulated utilities to supply a portion of their total electricity from specified sources of renewable energy, such as solar, wind, and hydroelectric power. Many of these government incentives expire, phase out over time, require renewal by the applicable authority, or may be amended. To the extent these government incentives are reduced earlier than previously expected, or free-field or conversion land applications are disadvantaged, such changes could reduce demand for our solar modules or the prices at which we may be able to sell our modules.

Existing regulations and policies and changes to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of solar PV products, which may significantly reduce demand for our solar modules.

The market for electricity generation products is heavily influenced by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies have been modified in the past and may be modified again in the future. These regulations and policies could deter end-user purchases of photovoltaic products and investment in the research and development of photovoltaic technology. For example, without a mandated regulatory exception for photovoltaic systems, utility customers are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid. If these interconnection standby fees were applicable to PV systems, it is likely that they would increase the cost to our end-users of using PV systems which could make them less desirable, thereby harming our business, prospects, results of operations and financial condition. In addition, electricity generated by PV systems mostly competes with expensive peak hour electricity, rather than the less expensive average price of electricity. Modifications to the peak hour pricing policies of utilities, such as to a flat rate for all times of the day, would require PV systems to achieve lower prices in order to compete with the price of electricity from other sources.

We anticipate that our solar modules and their installation will be subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters. It is difficult to track the requirements of individual states and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to our solar modules may result in significant additional expenses to us, our resellers and their customers and, as a result, could cause a significant reduction in demand for our solar modules.

An increase in interest rates or lending rates or tightening of the supply of capital in the global financial markets could make it difficult for end-users to finance the cost of a PV system and could reduce the demand for our solar modules and/or lead to a reduction in the average selling price for photovoltaic modules.

Many potential end-users of our products depend on debt financing to fund the initial capital expenditure required to purchase and install a PV system. As a result, an increase in interest rates or lending rates could make it difficult for our end-users to secure the financing necessary to purchase and install a PV system on favorable terms, or at all and thus lower demand for our solar modules. Due to the overall economic outlook, our end-users may change their decision or change the timing of their decision to purchase and install a PV system. In addition, we believe that a significant percentage of our potential end-users install PV systems as an investment, funding the initial capital expenditure through a combination of equity and debt. An increase in interest rates and/or lending rates could lower an investor’s return on investment in a PV system, or make alternative investments more attractive relative to PV systems, and, in each case, could cause these end-users to seek alternative investments. A reduction in the supply of project debt financing or tax equity investments could reduce the number of solar projects that receive financing and thus lower demand for solar modules.

We are a development stage company, have not generated any revenue from operations and currently have no commercial products.

We have not generated any revenue from operations and currently have no commercial products. Commercializing our products depends on a number of factors, including successfully securing manufacturing and strategic partners to produce our CIGS-on-glass modules.

The completion of these tasks as necessary to commence commercialization will require significant additional funding. There may be technical barriers to the development of our products and processes. Our products will be produced with certain manufacturing processes that have not yet been constructed or tested on a commercial scale. If we fail to successfully develop sourcing relationships, we will be unable to commercialize our products. If we fail to enter into a partnership to commercialize our products, we may incur significant delays in generating revenue. This would materially and adversely affect our business and financial condition. If adequate funds are not available, we may have to delay development or commercialization of our products, license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize, or cease operations. Any of these factors could harm our business and financial condition.

Our products have never been sold on a commercial basis, and we do not know whether they will be accepted by the market.

Our products, if developed, may not achieve market acceptance. The development of a successful market for our proposed products and our ability to sell our products at a lower cost per watt than our competition may be adversely affected by a number of factors, many of which are beyond our control, including the following:

•

our failure to produce solar PV modules that compete favorably against other solar modules on the basis of price, quality, performance and warranted lifetime;

•

competition from conventional energy sources and alternative distributed generation technologies, such as wind energy;

•

our failure to develop and maintain successful relationships with distributors, system integrators and other resellers, as well as strategic partners;

•

the failure of system integrators to build projects suited for the type of solar PV modules we intend to produce;

•

our products may experience problems with product quality or performance; and

•

our ability to achieve solar PV module certification requirements.

The failure of our proposed products to gain market acceptance would materially and adversely affect our business and financial condition.

We have no experience manufacturing or sourcing CIGS solar PV products on a commercial scale.

To date, we have focused primarily on research, development and small-scale manufacturing. As a company, we have no experience manufacturing or sourcing any product on a commercial scale. In addition, all our pilot production has been limited to CIGS on foil, while our initial product sourcing arrangements will be for CIGS-on-glass modules.

We will rely on third-party suppliers for production of our CIGS-on-glass modules. The failure of our suppliers to supply product in a timely manner or on commercially reasonable terms could delay our commercialization and expansion plans and otherwise disrupt our production schedule or increase our manufacturing costs. Further, our orders with certain of our suppliers may represent a very small portion of their total business. As a result, they may not give priority to our business, leading to potential delays in or cancellation of our orders. If any single-source supplier were to fail to supply our needs on a timely basis, we would be required to locate and contract with substitute suppliers. We may have difficulty identifying a substitute supplier in a timely manner and on commercially reasonable terms. If this were to occur, our business would be harmed.

We may not reach profitability if PV technology is not suitable for widespread adoption or sufficient demand for solar PV modules does not develop or develops slower than we anticipate.

The solar energy market is at a relatively early stage of development and the extent to which solar PV modules will be widely adopted is uncertain. If our CIGS solar PV products prove unsuitable for widespread adoption or demand for our CIGS solar PV products fails to develop sufficiently, we may be unable to grow our business or generate sufficient revenue from operations to reach profitability. In addition, demand for solar modules in our targeted markets may not develop or may develop to a lesser extent than we anticipate. Many factors may affect the viability of widespread adoption of solar PV technology and demand for our CIGS solar PV products, including the following:

•

performance and reliability of solar modules and thin film technology compared with conventional and other non-solar renewable energy sources and products;

•

cost-effectiveness of solar modules compared with conventional and other non-solar renewable energy sources and products;

•

availability of government subsidies and incentives to support the development of the solar PV industry;

•

success of other renewable energy generation technologies, such as hydroelectric, wind, geothermal, solar thermal, concentrated PV and biomass;

•

fluctuations in economic and market conditions that affect the viability of conventional and non-solar renewable energy sources, such as increases or decreases in the price of oil and other fossil fuel;

•

fluctuations in capital expenditures by end-users of solar modules, which tend to decrease in slower economic environments, periods of rising interest rates, or a tightening of the supply of capital; and

•

deregulation of the electric power industry and the broader energy industry.

If we do not reach profitability if PV technology is not suitable for widespread adoption or sufficient demand for solar PV modules does not develop or develops slower than we anticipate, our financial condition and business could be materially and adversely affected.

The failure to achieve target yields, product qualities or target costs of our CIGS solar PV products could materially and adversely affect our business and financial condition.

We may not be able to achieve our desired manufacturing yields, product qualities and cost targets for our CIGS solar PV products, which could prevent us from becoming profitable. If we cannot achieve our targeted production yields and unit costs or if we experience difficulties in our manufacturing process, such as capacity constraints, quality control problems or other disruptions, we may not be able to manufacture our products at acceptable costs, which would eliminate our ability to effectively enter the market. If we cannot reduce our costs through economies of scale, improvements in manufacturing processes and engineering design, or technology maturation, our business and financial condition could be materially and adversely harmed. In addition, we will need to ensure our solar PV module products will receive certain industry certifications. Failure to receive these certifications will harm our financial condition and limit our ability to market and sell our product.

The failure to manage our anticipated growth effectively could materially and adversely affect our business and financial condition.

The commercialization of our technology would place a significant strain on our managerial, financial and personnel resources. Because of our recent financial situation, we have had to significantly reduce our workforce. To reach our goals, we must successfully recruit, train, and manage new employees; develop our manufacturing capabilities; integrate new management and employees into our overall operations; and establish improved financial and accounting systems, controls and reporting systems. We will be competing with other solar, semiconductor and display manufacturers for individuals with this expertise. If we fail to manage the expansion of our business effectively, it could materially and adversely affect our business and financial condition.

If we lose key personnel, or are unable to attract and retain necessary talent, we may be unable to develop or commercialize our products under development.

We are highly dependent on Mr. Robert Weiss, our Chief Technology Officer. Mr. Weiss has over 25 years of experience in thin film technology development and manufacturing. If we were to lose this key executive, we may be unable to find a suitable replacement with comparable knowledge or experience. In addition, our future success will depend, in part, upon our ability to attract and retain highly skilled employees, including management, technical and sales personnel. Competition for such skilled personnel is intense, and the loss of services of a number of key individuals, or our inability to hire new personnel with the requisite skill sets, could materially harm our business and results of operations. These issues would be magnified if any of our key personnel went to work for competitors. In addition, we may not be able to successfully assimilate these employees or hire qualified personnel to replace them.

If we are unable to adequately protect our intellectual property, our competitors and other third parties could produce products based on our intellectual property, which would substantially impair our ability to compete.

Our success and ability to compete depends in part upon our ability to maintain the proprietary nature of our technologies. We rely on a combination of patent, trade secret, copyright and trademark law and license agreements, as well as employee and third party confidentiality agreements, to protect our intellectual property. These legal means, however, afford only limited protection and may not be adequate to protect our intellectual property rights. We cannot be certain that we were the first creator of inventions covered by pending patent applications or the first to file patent applications on these inventions. In addition, we cannot be certain that any of our pending patent applications will issue. The United States Patent and Trademark Office or other foreign patent and trademark offices may deny or significantly narrow claims made under our patent applications and, even if issued, these patents may be successfully challenged, designed around, or otherwise not provide us with commercial protection. In the future, we may need to assert claims of infringement against third parties to protect our intellectual property. Regardless of the final outcome, any litigation to enforce our intellectual property rights in patents, copyrights or trademarks could be highly unpredictable and result in substantial costs and diversion of resources, which could have a material adverse effect on our business and financial condition. In the event of an adverse judgment, a court could hold that some or all of our asserted intellectual property rights are not infringed or are invalid or unenforceable and could award attorneys’ fees to the other party.

We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from selling our product offerings, require us to obtain licenses from third parties to develop non-infringing alternatives and subject us to substantial monetary damages and injunctive relief.

The solar PV industry is characterized by the existence of a large number of patents that could result in frequent litigation based on allegations of patent infringement. We are aware of numerous patents issued and patents pending to third parties that may relate to current and future generations of solar energy. The owners of these patents may assert that the manufacture, use, import, or sale of any product we develop infringes one or more claims of their patents. Moreover, because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that materially and adversely affect our business. Third parties could also assert infringement or misappropriation claims against us with respect to any of our future product offerings. Whether or not such claims are valid, we cannot be certain that we have not infringed the intellectual property rights of such third parties. Any infringement or misappropriation claim could result in significant costs, substantial damages and our inability to manufacture, market or sell any of our product offerings that are found to infringe. Even if we were to prevail in any such action, the litigation could result in substantial cost and diversion of resources that could materially and adversely affect our business. If a court determined, or if we independently discovered, that our product offerings violated third-party proprietary rights, there can be no assurance that we would be able to re-engineer our product offerings to avoid those rights or obtain a license under those rights on commercially reasonable terms, if at all. As a result, we could be prohibited from selling products that are found to infringe upon the rights of others. Even if obtaining a license were feasible, it may be costly and time-consuming. A court could also enter orders that temporarily, preliminarily or permanently enjoin us from making, using, selling, offering to sell or importing our CIGS solar PV products or other future products, if any, or could enter orders mandating that we undertake certain remedial activities. Further, a court could order us to pay compensatory damages for such infringement, plus prejudgment interest, and could in addition treble the compensatory damages and award attorneys’ fees. These damages could materially and adversely affect our business and financial condition.

The PV industry is highly competitive and subject to rapid technological change, and our success will depend on our ability to develop and market a lower cost, higher performance product.

The target markets for the products we are developing are highly competitive and subject to rapid technological change. Our success depends, in part, upon our ability to maintain a competitive position in the development of CIGS solar PV products and technologies. Our competition consists of major international energy and chemical companies, such as Q-Cells, specialized electronics firms, such as Sharp Corporation, and other thin film PV manufacturers, such as First Solar, Inc. Many of our competitors are more established, benefit from greater market recognition and have substantially greater financial, development, manufacturing and marketing resources than we do. There are competitors with thin film products, including those based on CIGS technology, that have already entered commercial production. If a commercial equipment manufacturer were to develop a sputtering tool that was competitive with our proprietary sputtering tool, it could offer this tool to our competitors which would harm our competitive position. In addition, there are a variety of competing technologies currently in the market and under development, any one of which could achieve manufacturing costs per watt lower than our manufacturing technology. Failure to get to market with the most cost-competitive product before our competitors could materially and adversely affect our business and financial condition.

Our facilities in California are located near an earthquake fault, and an earthquake or other types of natural disasters or resource shortages could disrupt our operations and adversely affect results.

Our facilities in Union City, California are located near active earthquake zones. We currently do not have a formal business continuity or disaster recovery plan. In the event of a natural disaster, such as an earthquake, drought, flood, or localized extended outages of critical utilities or transportation systems, we could experience a significant business interruption. In addition, California from time to time has experienced shortages of water, electric power and natural gas. Any such future shortages or natural disaster, such as a fire or an earthquake, could cause substantial delays in our operations, damage or destroy our manufacturing equipment or inventory and cause us to incur additional expenses. A disaster could significantly harm our business and financial condition. The insurance we maintain against fires, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case.

Environmental obligations and liabilities could have a substantial negative impact on our financial condition, cash flows and profitability.

Our operations involve the use, handling, generation, processing, storage, transportation and disposal of hazardous materials and are subject to extensive environmental laws and regulations at the national, state, local and international level. These environmental laws and regulations include those governing the discharge of pollutants into the air and water, the use, management and disposal of hazardous materials and wastes, the cleanup of contaminated sites and occupational health and safety. Compliance with current or future environmental and safety laws and regulations could restrict our ability to expand our facilities, impair our research, development or production efforts, or require us to incur significant costs and capital

expenditures. In addition, violations of, or liabilities under, environmental laws or permits may result in restrictions being imposed on our operating activities or in our being subjected to substantial fines, penalties, civil and criminal sanctions, third party property damage or personal injury claims, investigation or remediation costs or other costs. Violations of environmental laws or regulations could occur in the future as a result of the inability to obtain permits, human error, accident, equipment failure or other causes. While we believe we are currently in substantial compliance with applicable environmental requirements, future developments such as more aggressive enforcement policies, the implementation of new, more stringent laws and regulations, or the discovery of presently unknown environmental conditions may require expenditures that could have a material adverse effect on our business, results of operations and financial condition.

We face risks associated with our anticipated international business.

We expect to establish, and to expand over time, international commercial operations and activities. Such international business operations will be subject to a variety of risks associated with conducting business internationally, including the following:

•

changes in or interpretations of foreign regulations that may adversely affect our ability to sell our products, perform services or repatriate profits to the United States;

•

the imposition of tariffs;

•

economic or political instability in foreign countries;

•

imposition of limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures;

•

conducting business in places where business practices and customs are unfamiliar and unknown;

•

the imposition of restrictive trade policies;

•

the existence of inconsistent laws or regulations;

•

the imposition or increase of investment requirements and other restrictions or requirements by foreign governments;

•

uncertainties relating to foreign laws and legal proceedings;

•

fluctuations in foreign currency and exchange rates; and

•

compliance with a variety of U.S. laws, including the Foreign Corrupt Practices Act.

We do not know the impact that these regulatory, geopolitical and other factors may have on our international business in the future.

Anti-takeover defenses that we have in place could prevent or frustrate attempts by stockholders to change the direction or management of the company.

Provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third-party from acquiring control of us without the approval of our Board of Directors. These provisions:

•

set limitations on the removal of directors;

•

limit who may call a special meeting of stockholders;

•

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings;

•

prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and

•

provide our Board of Directors the ability to designate the terms of and issue new series of preferred stock without stockholder approval.

These provisions may have the effect of entrenching our management team and may deprive stockholders of the opportunity to sell their shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

Our common stock could be subject to extreme volatility.

Our common stock is currently traded on the NASDAQ Capital Market. The trading volume of our common stock each day is relatively low. Because of this limited liquidity, stockholders may be unable to sell their shares. Moreover, this means that sales or purchases of relatively small blocks of our common stock can have a significant impact on the price at which our common stock is traded. The trading price of our common stock has, from time to time, fluctuated widely and may be subject to similar fluctuations in the future. The trading price of our common stock may be affected by a number of factors, including events described in the Risk Factors set forth in this Annual Report, as well as our operating results, financial condition, public announcements by us, general conditions in the solar industry, and other events or factors. In recent years, broad stock market indices, in general, and smaller capitalization companies, in particular, have experienced substantial price fluctuations. In a volatile market, we may experience wide fluctuations in the market price of our common stock. These fluctuations may have a negative effect on the market price of our common stock.

Our stockholders may be diluted, and the prices of our securities may decrease, upon the conversion of outstanding notes, by the exercise of outstanding warrants or by future issuances of securities.

We may issue additional common stock, preferred stock, restricted stock units, or securities convertible into or exchangeable for our common stock. We have outstanding convertible notes with an aggregate principal balance of $4,930,000, convertible at a weighted average price of $0.23 per share. Furthermore, substantially all shares of common stock for which our outstanding stock options or warrants are exercisable are, once they have been purchased, eligible for immediate sale in the public market. The issuance of additional common stock, preferred stock, restricted stock units, or securities convertible into or exchangeable for our common stock, or the conversion of notes or the exercise of stock options or warrants may dilute existing investors and could adversely affect the price of our securities.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

We lease 33,000 square feet of warehouse and office space in Union City, California under a lease which expires in June 2012. This facility is the location of our corporate headquarters as well as our development and proprietary deposition equipment.

Item 3.

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 4.

Mine Safety Disclosures

None.

PART II

Item 5.

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

Market Information

Our common stock is traded on The NASDAQ Capital Market. The following table sets forth the high and low closing sale prices, per share, for our common stock as reported by the NASDAQ Capital Market for each quarter in the past two years. All amounts shown reflect our one-for-nine reverse stock split which became effective on May 11, 2010:

Common Stock “DSTI”


Fiscal Quarters	High		Low
2011
March 31, 2011	$	1.78	$	0.88
June 30, 2011	$	0.95	$	0.46
September 30, 2011	$	0.54	$	0.19
December 31, 2011	$	0.44	$	0.15
2010
March 31, 2010	$	4.50	$	2.61
June 30, 2010	$	3.33	$	1.02
September 30, 2010	$	2.74	$	0.80
December 31, 2010	$	3.00	$	1.49

Holders

As of March 30, 2012, there were approximately 50 shareholders of record of our common stock, although the number of beneficial owners is believed to be substantially higher.

Dividends

We have never declared nor paid any dividends on our capital stock and do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently expect to retain our future earnings, if any, for use in the operation and expansion of our business. Any future decision to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements and other factors our board of directors may deem relevant. There are currently no restrictions that limit our ability to pay dividends on our capital stock.

Securities Authorized for Issuance Under Equity Compensation Plans

See the disclosure under Note 4, Share Based Compensation, of the Company’s audited financial statements included herewith.

Item 6.

Selected Financial Data

None.

Item 7.

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 this Annual Report on Form 10-K.

Overview

We are currently pursuing strategic partnerships and investments to attempt to commercialize our product.

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 Years Ended December 31, 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 $1,261,435 for the year ended December 31, 2011 compared to $5,519,989 for the year ended December 31, 2010, a decrease of $4,258,554 or 77%. The decrease reflects cost savings measures which resulted in lower costs for personnel, facilities, and materials and supplies, as well as a decrease of $1,337,469 in share based compensation.

Selling, general and administrative expenses. Selling, general and administrative expenses were $2,162,148 for the year ended December 31, 2011 compared to $5,648,406 for the year ended December 31, 2010, a decrease of $3,486,258 or 62%. The decrease in selling, general and administrative expenses was primarily due to cost savings measures, including a reduction in our workforce and outside consultants and professional fees, as well as a decrease of $2,106,320 in share based compensation.

Restructuring. Restructuring expenses were $743,643 for the year ended December 31, 2011 compared to $9,753,642 for the year ended December 31, 2010, a decrease of $9,009,999 or 92%. 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 of $850,000 which were paid in shares of our common stock were recorded as restructuring expense during the year ended December 31, 2011. These expenses were partially offset by the write-off of certain liabilities during the year. During the year ended December 31, 2010, we recorded restructuring charges of $3,509,763 from the impairment of leasehold improvements and the write-off of non-cash deferred rent, upon closing our Newark, California manufacturing facility. Additionally, we recorded impairment charges of $6,235,644 on certain equipment during the year ended December 31, 2010.

Depreciation and amortization expense. Depreciation and amortization expense was $1,480,790 for the year ended December 31, 2011 compared to $2,154,882 for the year ended December 31, 2010, a decrease of $674,092 or 31%. The decrease in depreciation reflects the reduction in leasehold improvements and certain equipment as we closed our Newark, California manufacturing facility in 2010.

Interest expense. Interest expense was $700,256 for the year ended December 31, 2011 compared to $542,167 for the year ended December 31, 2010, an increase of $158,089 or 29%. 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 December 31, 2011.

Amortization of note discount and financing costs. Amortization of note discount and financing costs was $1,000,945 for the year ended December 31, 2011 compared to $6,122,181 for the year ended December 31, 2010, a decrease of $5,121,236 or 84%. 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. In the third quarter of 2010, we restructured all of our existing convertible notes which resulted in the recording of new notes and corresponding discounts. The expense for the year ended December 31, 2010 includes amortization of the discount on the original notes as well as a significant portion of the discount on the restructured notes. The expense for the year ended December 31, 2011 reflects amortization of the discount on the notes issued in 2011, as well as the remainder of the discount on the notes restructured in 2010. The majority of the discount on the notes restructured in 2010 was amortized to expense during the latter half of 2010.

Gain on derivative liabilities. Gain on derivative liabilities was $3,872,352 for the year ended December 31, 2011 compared to $6,593,648 for the year ended December 31, 2010, a decrease of $2,721,296 or 41%. 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 years ended December 31, 2011 and 2010, our common stock price decreased which caused a decrease in the fair value of the conversion features and a gain on derivative liabilities. Additionally, in the third quarter of 2010 we restructured all of the then outstanding convertible notes which resulted in an increase in gain on derivative liabilities during the year ended December 31, 2010.

Loss on extinguishment of debt. There was no loss on extinguishment of debt during the year ended December 31, 2011. Loss on extinguishment of debt was $4,899,267 for the year ended December 31, 2010. During the year ended December 31, 2010, we restructured all of our existing convertible notes which resulted in the extinguishment of the original notes on our balance sheet and the recording of new notes and corresponding conversion features. The fair value of the conversion features for the restructured notes exceeded the principal amount of the notes and the excess of the fair value of the conversion features over the principal amount of the notes was charged to loss on extinguishment of debt.

Liquidity and Capital Resources

At December 31, 2011, our cash and cash equivalents totaled $4,000 compared to $97,000 at December 31, 2010. Subsequent to December 31, 2011 and through March 30, 2012, we have received additional bridge financing of $600,000 to fund our operations.

We are in the development stage, and as such, have historically reported net losses, including a net loss of $3.4 million for the year ended December 31, 2011. We anticipate incurring losses in the future, as we seek strategic partnerships and investments to commercialize our technology, and incur associated administrative and operating costs. Our financial statements for the years ended December 31, 2011 and 2010 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. We are currently seeking strategic partnerships and investments to attempt to commercialize our CIGS technology utilizing our proprietary deposition equipment. 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 $6.7 million and also issued warrants exercisable for shares of our common stock. Currently, $5.4 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.

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 of this 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 December 31, 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.

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.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

None.

Item 8.

Financial Statements and Supplementary Data

The information required by this Item is incorporated herein by reference to the financial statements beginning on page F-1.

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

There has been no change of accountants nor any disagreement with accountants on any matter of accounting principles or practices or financial statement disclosure or auditing scope or procedure required to be reported under this Item.

Item 9A.

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 December 31, 2011.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. 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 of compliance with the policies or procedures may deteriorate.

To evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management conducted an assessment, including testing, using the criteria in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on their assessment, management concluded that we maintained effective internal control over financial reporting as of December 31, 2011.

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.

Item 9B.

Other Information

None.

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

The information required by this Item is incorporated herein by reference to the Company’s Proxy Statement for the 2012 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the Company’s year ended December 31, 2011 (the “Proxy Statement”).

Item 11.

Executive Compensation.

The information required by this Item is incorporated by reference from the Proxy Statement.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this Item is incorporated by reference from the Proxy Statement.

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item is incorporated by reference from the Proxy Statement.

Item 14.

Principal Accountant Fees and Services.

The information required by this Item is incorporated by reference from the Proxy Statement.

PART IV

Item 15.

Exhibits, Financial Statement Schedules

a. The following financial statements are included herein:

Report of Independent Registered Public Accounting Firm

Balance Sheets—December 31, 2011 and December 31, 2010

Statements of Operations—For the Years Ended December 31, 2011 and 2010 and For the Period From July 1, 2005 (Inception of the Development Stage) to December 31, 2011

Statements of Changes in Stockholders’ Equity—For the Period From July 1, 2005 (Inception of the Development Stage) to December 31, 2011

Statements of Cash Flows—For the Years Ended December 31, 2011 and 2010 and For the Period From July 1, 2005 (Inception of the Development Stage) to December 31, 2011

Notes to Financial Statements

b. The following exhibits are filed as part of this report:


Exhibit Number		Exhibit Title

3.1(22)		Amended and Restated Certificate of Incorporation.

3.2(23)		Certificate of Amendment of Amended and Restated Certificate of Incorporation.

3.3(24)		Amended and Restated Bylaws.

3.4(25)		Certificate of Designation of Series A.

3.5(20)		Certificate of Designations of Preferences, Right and Limitations of Series B Preferred Stock dated February 2, 2011.

4.1(1)		Form of Common Stock Certificate.

10.1(1)*		Form of Employee Notice of Stock Option Grant related to 2003 Equity Incentive Plan.

10.2(1)*		Form of Employee Restricted Stock Issuance Agreement related to 2003 Equity Incentive Plan.

10.3(1)*		2003 Equity Incentive Plan.

10.4(1)		Form of Indemnification Agreement by and between the Company and its directors.

10.5(1)		Form of Indemnification Agreement by and between the Company and its officers.

10.6(1)		Form of Employee Notice of Stock Option Grant related to 2003 Equity Incentive Plan.

10.7(1)		Form of Employee Restricted Stock Issuance Agreement related to 2003 Equity Incentive Plan.

10.8(2)		Agreement by and between the Company and New York State Energy Research and Development Authority, dated December 2, 2004.

10.9(2)		Agreement by and between the Company and New York State Energy Research and Development Authority, dated December 2, 2004.

10.10(4)		Employment Agreement by and between the Company and Robert Weiss dated April 3, 2006.


Exhibit Number		Exhibit Title

10.11(5)		Registration Rights Agreement by and among the Company, Millennium Partners, L.P., Phoenix Partners, LP, Phoenix Partners II, LP, Phaeton International (BVI), Ltd. and PreX Capital Partners, LLC, dated January 19, 2007. Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 25, 2007.

10.12(7)		First Amendment to the Registration Rights Agreement by and among the Company, Millenium Partners L.P., Phoenix Partners, LP, Phaeton International (BVI), Ltd. and PreX Capital Partners, LLC, dated May 29, 2007.

10.13(8)		Second Amendment to the Registration Rights Agreement by and among the Company, Millenium Partners L.P., Phoenix Partners, LP, Phaeton International (BVI), Ltd. and PreX Capital Partners, LLC, dated August 3, 2007.

10.14(9)		Amended and Restated 2006 Equity Incentive Plan.

10.15(10)*		Amended and Restated Employment Agreement by and between the Company and Robert E. Weiss, dated December 4, 2008.

10.16(11)*		Form of Employee Stock Option Agreement related to Amended and Restated 2006 Equity Incentive Plan.

10.17(11)*		Form of Employee Restricted Stock Issuance Agreement related to Amended and Restated 2006 Equity Incentive Plan.

10.18(11)*		Form of Employee Restricted Stock Unit Issuance Agreement related to Amended and Restated 2006 Equity Incentive Plan.

10.19(9)*		Amended and Restated 2006 Equity Incentive Plan.

10.20(10)*		Amended and Restated Employment Agreement by and between the Company and Robert E. Weiss, dated December 4, 2008.

10.21(12)		Form of Restricted Stock Unit Agreement for Employees and Consultants.

10.22(12)		Form of Restricted Stock Unit Agreement for Non-Employee Directors.

10.23(13)		Registration Rights Agreement by and between the Company and TD Waterhouse RRSP Account 240832S, in trust for Peter Alan Lacey, dated September 21, 2009. Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 24, 2009.

10.24(12)		Form of Restricted Stock Unit Agreement for Non-Employee Directors.

10.25(13)		Registration Rights Agreement by and between the Company and TD Waterhouse RRSP Account 240832S, in trust for Peter Alan Lacey, dated September 21, 2009.

10.26(11)		Form of Employee Stock Option Agreement related to Amended and Restated 2006 Equity Incentive Plan.

10.27(11)		Form of Employee Restricted Stock Issuance Agreement related to Amended and Restated 2006 Equity Incentive Plan.

10.28(11)		Form of Employee Restricted Stock Unit Issuance Agreement related to Amended and Restated 2006 Equity Incentive Plan.


Exhibit Number		Exhibit Title

10.29(12)		Form of Restricted Stock Unit Agreement for Employees and Consultants.

10.30(15)		Registration Rights Agreement by and between the Company and Mike Moretti, dated January 6, 2010.

10.31(16)		Schedule of Material Details.

10.32(16)		Form of Purchase Agreement.

10.33(16)		Form of Secured Convertible Promissory Note.

10.34(16)		Form of Registration Rights Agreement.

10.35(16)		Form of Warrant.

10.36(16)		Form of Intercreditor Agreement.

10.37(16)		Form of Amendment of Notes and Warrants.

10.38(17)		Warrant to Purchase Shares of Common Stock dated October 12, 2010 issued to TD Waterhouse RRSP Account 230832S, in trust for Peter Alan Lacey as beneficiary.

10.39(17)		Warrant to Purchase Shares of Common Stock dated October 12, 2010 issued to Tejas Securities Group, Inc. 401K Plan and trust FBO John J. Gorman, John J. Gorman TTEE.

10.40(17)		Warrant to Purchase Shares of Common Stock dated October 12, 2010 issued to Michael Moretti.

10.41(18)		Amendment to Note between DayStar Technologies, Inc. and Dynamic Worldwide Solar Energy, LLC. Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 21, 2011.

10.42(18)		Amendment to Note between DayStar Technologies, Inc. and the Bridge Lenders.

10.43(19)		Purchase Agreement, dated as of January 24, 2011, between DayStar Technologies, Inc. and Michael Moretti.

10.44(19)		Secured Convertible Promissory Note, dated as of January 24, 2011, in favor of Michael Moretti.

10.45(19)		Warrant, dated as of January 24, 2011, issued to Michael Moretti.

10.46(19)		Registration Rights Agreement, dated as of January 24, 2011, between DayStar Technologies, Inc. and Michael Moretti.

10.47(20)		Securities Purchase Agreement dated February 2, 2011.

10.48(20)		Securities Purchase Agreement, dated as of February 2, 2011, by and between DayStar Technologies, Inc. and Socius CG II, Ltd.

10.49(21)		Separation Agreement dated as of February 26, 2011, by and between DayStar Technologies, Inc. and Magnus Ryde.

10.50		Amendment to Securities Purchase Agreement dated as of March 30, 2011, by and between DayStar Technologies, Inc. and Socius CG II, Ltd.

23.1		Consent of Hein & Associates LLP.

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


Exhibit Number		Exhibit Title

31.2		Certification of the 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.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*	Management contract or compensatory plan or arrangement

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

(2)	Incorporated by reference to our Annual Report on Form 10-KSB filed with the SEC on March 18, 2005.

(3)	Incorporated by reference to our Quarterly Report on Form 10-QSB filed with the SEC on May 15, 2007.

(4)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 7, 2006.

(5)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 25, 2007.

(6)	Incorporated by reference to our Registration Statement on Form SB-2 filed with the SEC on February 20, 2007.

(7)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on June 4, 2007.

(8)	Incorporated by reference to our Quarterly Report on Form 10-QSB filed with the SEC on August 3, 2007.

(9)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 26, 2008.

(10)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 10, 2008.

(11)	Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on March 16, 2009.

(12)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 2, 2009.

(13)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 24, 2009.

(14)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on February 18, 2010.

(15)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 12, 2010.

(16)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 28, 2010.

(17)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 13, 2010.

(18)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 21, 2011.

(19)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 27, 2011.

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

(21)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on February 28, 2011.

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

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

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

(25)	Incorporated by reference to our Registration Statement on Form 8-A filed with the SEC on May 8, 2008.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 30, 2012.


DAYSTAR TECHNOLOGIES, INC.

By:		/S/ PETER A. LACEY
		Peter A. Lacey Interim Chief Executive Officer (Principal Executive Officer)

By:		/S/ CHRISTOPHER T. LAIL
		Christopher T. Lail Chief Financial Officer (Principal Financial and Accounting Officer)

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Christopher T. Lail as his true and lawful attorney-in-fact and agent, with the full power of substitution for him, and in his name and in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on March 30, 2012.


Signature	Capacities	Date

/S/ PETER A. LACEY Peter A. Lacey	Chairman and Interim Chief Executive Officer	March 30, 2012

/S/ JONATHAN W. FITZGERALD Jonathan W. Fitzgerald	Director	March 30, 2012

/S/ DANIEL GERMAIN Daniel Germain	Director	March 30, 2012

/S/ WILLIAM S. STECKEL William S. Steckel	Director	March 30, 2012

/S/ KANG SUN Kang Sun	Director	March 30, 2012

FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS


	PAGE

Report of Independent Registered Public Accounting Firm		F-2

Balance Sheets—December 31, 2011 and December 31, 2010		F-3

Statements of Operations—For the Years Ended December 31, 2011 and 2010 and For the Period From July 1, 2005 (Inception of the Development Stage) to December 31, 2011		F-4

Statements of Changes in Stockholders’ Equity—For the Period From July 1, 2005 (Inception of the Development Stage) to December 31, 2011		F-5

Statements of Cash Flows—For the Years Ended December 31, 2011 and 2010 and For the Period From July 1, 2005 (Inception of the Development Stage) to December 31, 2011		F-6

Notes to Financial Statements		F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

DayStar Technologies, Inc.

We have audited the accompanying balance sheets of DayStar Technologies, Inc. as of December 31, 2011 and 2010, and the related statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2011 and 2010 and for the period from July 1, 2005 (inception of the development stage) to December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 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 audit 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 financial statements referred to above present fairly, in all material respects, the financial position of DayStar Technologies, Inc. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years ended December 31, 2011 and 2010 and for the period from July 1, 2005 (inception of the development stage) to December 31, 2011, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 the Company will require substantial funds beyond its current cash on hand to fully continue its development efforts, build-out its initial manufacturing line and commence commercial shipments. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ HEIN & ASSOCIATES LLP

Irvine, California

March 30, 2012

F-2

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEETS


	December 31, 2011			December 31, 2010
ASSETS
Current Assets:
Cash and cash equivalents	$	4,199		$	97,058
Other current assets		222,770			294,743

Total current assets		226,969			391,801

Property and Equipment, at cost		20,691,046			23,876,208
Less accumulated depreciation and amortization		(7,138,167	)		(5,658,906	)

Net property and equipment		13,552,879			18,217,302
Other Assets:
Other assets		324,080			30,940

Total Assets	$	14,103,928		$	18,640,043

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses	$	5,162,228		$	6,943,711
Notes and capital leases payable, current portion, net of discount of $9,338 and $664,835, respectively		4,920,662			4,590,165

Total current liabilities		10,082,890			11,533,876
Long-Term Liabilities:
Conversion feature		33,541			3,854,272

Total long-term liabilities		33,541			3,854,272
Commitments and Contingencies (Note 6)		—			—
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; 9,662,747 and 6,484,516 shares issued and outstanding at December 31, 2011 and December 31, 2010, respectively		96,627			64,845
Additional paid-in capital		157,418,311			153,272,626
Accumulated deficit		(10,145,391	)		(10,145,391	)
Deficit accumulated during the development stage		(143,382,050	)		(139,940,185	)

Total stockholders’ equity		3,987,497			3,251,895

Total Liabilities and Stockholders’ Equity	$	14,103,928		$	18,640,043

See accompanying notes to these financial statements.

F-3

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF OPERATIONS


	For the Years Ended December 31,						For the Period from July 1, 2005 (Inception of the Development Stage) to December 31, 2011
	2011			2010
Revenue:
Product revenue	$	—		$	—		$	3,528
Research and development contract revenue		—			—			615,000

Total revenue		—			—			618,528
Costs and Expenses:
Research and development		1,261,435			5,519,989			61,781,323
Selling, general and administrative		2,162,148			5,648,406			37,287,618
Restructuring		743,643			9,753,642			13,777,336
Depreciation and amortization		1,480,790			2,154,882			15,552,898

Total costs and expenses		5,648,016			23,076,919			128,399,175
Other Income (Expense):
Other income (expense)		35,000			(34,787	)		2,263,332
Interest expense		(700,256	)		(542,167	)		(3,773,039	)
Amortization of note discount and financing costs		(1,000,945	)		(6,122,181	)		(17,143,400	)
Gain on derivative liabilities		3,872,352			6,593,648			14,042,440
Loss on extinguishment of debt		—			(4,899,267	)		(10,990,736	)

Total other income (expense)		2,206,151			(5,004,754	)		(15,601,403	)

Net Loss	$	(3,441,865	)	$	(28,081,673	)	$	(143,382,050	)

Weighted Average Common Shares Outstanding (Basic And Diluted)		8,926,163			4,398,911

Net Loss Per Share (Basic and Diluted)	$	(0.39	)	$	(6.38	)

See accompanying notes to these financial statements.

F-4

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 DECEMBER 31, 2011


	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
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

Cashless exercise of warrants, 11/11 at $0.23 per share		115,714		1,157		—			—			(1,157	)		—			—			—			—
Share-based compensation		312,093		3,121		—			—			1,222,166			—			—			—			1,225,287
Warrants issued in connection with notes at $0.52 - $1.55 per share		—		—		—			—			293,826			—			—			—			293,826
Shares issued in settlement of liabilities at $0.90 - $1.57 per share		775,997		7,760		—			—			1,108,680			—			—			—			1,116,440
Conversion of notes payable and accrued interest at $0.90 per share		1,386,438		13,864		—			—			1,233,930			—			—			—			1,247,794
Financing Costs		587,989		5,880		—			—			288,240			—			—			—			294,120
Net loss		—		—		—			—			—			—			—			(3,441,865	)		(3,441,865	)

BALANCES, December 31, 2011		9,662,747	$	96,627		—		$	—		$	157,418,311		$	—		$	(10,145,391	)	$	(143,382,050	)	$	3,987,497

See accompanying notes to these financial statements.

F-5

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS


	For the Years Ended December 31,						For the Period from July 1, 2005 (Inception of the Development Stage) to December 31, 2011
	2011			2010
Cash Flows from Operating Activities:
Net loss	$	(3,441,865	)	$	(28,081,673	)	$	(143,382,050	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		1,480,790			2,154,882			15,552,898
Share-based compensation		1,225,287			4,669,076			20,493,201
Non-cash interest		700,256			542,167			3,012,640
Amortization of note discount and non-cash financing costs		1,000,945			6,087,181			16,566,701
Gain on derivative liabilities		(3,872,352	)		(6,593,648	)		(14,042,440	)
Non-cash restructuring		743,643			9,753,642			11,775,538
Loss on sale of fixed assets		—			49,162			389,784
Loss on extinguishment of debt		—			4,899,267			10,990,736
Changes in operating assets and liabilities:
Other assets		71,423			208,076			(291,292	)
Accounts payable and accrued expenses		1,174,014			3,394,017			8,158,544
Deferred rent		—			—			1,595,239
Deferred revenue		—			—			217,618

Net cash used in operating activities		(917,859	)		(2,917,851	)		(68,962,883	)
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		—			107,160			2,035,280

Net cash provided by (used in) investing activities		—			107,160			(39,829,606	)
Cash Flows from Financing Activities:
Proceeds from sale of stock		—			—			78,312,500
Proceeds from issuance of notes		875,000			2,830,000			30,130,000
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		—			60,429			8,870,549

Net cash provided by financing activities		825,000			2,890,429			99,425,360

Net change in cash and cash equivalents		(92,859	)		79,738			(9,367,129	)
Cash and cash equivalents, beginning of period		97,058			17,320			9,371,328

Cash and cash equivalents, end of period	$	4,199		$	97,058		$	4,199

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

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

Accrued property and equipment	$	—		$	3,137,870

Beneficial conversion feature on convertible note	$	51,622		$	11,000,838

Shares issued for settlement of liabilities	$	1,116,440		$	2,758,662

Financing Costs	$	294,120		$	—

See accompanying notes to these financial statements.

F-6

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

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 currently pursuing strategic partnerships and investments to attempt to commercialize its product.

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, 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 $3.4 million for the year ended December 31, 2011. The net loss for the year ended December 31, 2011 includes non-cash expenses of $1.3 million. 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.

Commercialization efforts require significant additional capital expenditures as well as associated continued development and administrative costs. In order to continue operations and pursue strategic partnerships, 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 long-term strategic partnerships and investments to attempt to commercialize its product and grow its business. 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.

F-7

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.

Patent Costs—Costs for patents purchased from third parties, including legal fees, are capitalized and amortized over 15 years. The Company recorded patent-related amortization expense of $1,530 during each of the years ended December 31, 2011 and 2010, respectively.

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 required the Company to maintain specified employment criteria over a five year period. If the Company failed 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 December 31, 2011 and 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 year ended December 31, 2011 and December 31, 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.

Income Taxes—The Company follows FASB ASC 740 Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense (benefit) is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

FASB ASC 740 also addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. During the years ended December 31, 2011 and 2010, the Company did not recognize any tax liabilities related to uncertain tax positions and does not have a balance for such liabilities as of December 31, 2011.

The Company recognizes accrued interest and penalties, if any, associated with uncertain tax positions as part of the income tax provision. There was no accrued interest or penalties associated with uncertain tax positions recognized in the Company’s balance sheets as of December 31, 2011 and 2010.

F-8

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 years ended December 31, 2011 and 2010 was as follows:


	For the Year Ended December 31,
	2011		2010
Share-based compensation:
Selling, general and administrative	$	840,163	$	2,946,483
Research and development		385,124		1,722,593

Total share-based compensation	$	1,225,287	$	4,669,076

Loss Per Share—Loss per share is presented in accordance with the provisions of FASB ASC 260 Earnings Per Share. Basic Earnings Per Share (EPS) is calculated by dividing the income or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Such common stock equivalents, including 893,643 options, 161,112 restricted stock units and 6,605,664 warrants have been omitted from loss per share because they are anti-dilutive. Basic and diluted loss per share was the same in each of the years ended December 31, 2011 and 2010.

Fair Value of Financial Instruments—The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of receivables, investments, accounts payable and accrued liabilities approximate fair value because of the short-term maturities of these instruments. The carrying amounts of notes payable and capital lease obligations approximate fair value due to their proximity to the inception date.

Impairment of Long-Lived Assets—In the event that facts and circumstances indicate that the cost of assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to market value or discounted cash flow value is required.

Restructuring —Restructuring expenses were $743,643 and $9,753,642 for the years ended December 31, 2011 and 2010, respectively. In June 2010, the Company was unable to cure all alleged defaults under the lease for its Newark facility and on July 15, 2010, it was notified by its landlord that the lease for the facility was forfeited and terminated, and that the landlord has received a judgment for possession of the premises. Therefore, the Company 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. The Company also recorded impairment charges on certain equipment during the years ended December 31, 2011 and 2010 as it cancelled orders for such equipment and settled the outstanding obligations with the vendors.

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.

F-9

Impact of Recently Issued Accounting Pronouncements—

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. This ASU specifies that if a public company presents comparative financial statements, the entity should only disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The adoption of ASU 2010-29 did not impact the Company’s financial position, results of operations, or cash flows.

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 on 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.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities, which requires companies to disclose information about financial instruments that have been offset and related arrangements to enable users of their financial statements to understand the effect of those arrangements on their financial position. Companies will be required to provide both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company is evaluating the effect the adoption of ASU 2011-11 in the first quarter of 2013 may have on its financial position, results of operations, or cash flows.

4.	Share-Based Compensation

Equity Incentive Plan—On June 19, 2006, the Company adopted an Equity Incentive Plan (the “2006 Plan”) to enable employees, outside directors and consultants to acquire an equity interest in the Company. In September 2008 and December 2010, stockholders approved the Amended and Restated 2006 Equity Incentive Plan (the “2006 Amended and Restated Plan”). The 2006 Amended and Restated Plan provides for the grant of incentive and non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other stock awards to employees, directors, and consultants. The 2006 Amended and Restated Plan reserves 2,700,000 of the Company’s authorized shares of common stock for issuance for these purposes. Under the 2006 Amended and Restated Plan, the term of stock options shall not exceed ten years and stock options shall not be granted with an exercise price of less than 100% of the fair market value of the common stock, measured at the time of grant.

Grants of incentive and non-qualified stock options, and restricted stock prior to June 19, 2006 were made from the Company’s original Equity Incentive Plan adopted in 2003 (the “2003 Plan”). The 2003 Plan reserves 116,667 of the Company’s authorized shares of common stock for issuance for these purposes.

F-10

Share-based compensation expense associated with options for the years ended December 31, 2011 and 2010 was as follows:


	For the Year Ended December 31,
	2011		2010
Share-based compensation associated with options:
Selling, general and administrative	$	379,258	$	1,784,909
Research and development		186,291		284,514

Total share-based compensation associated with options	$	565,549	$	2,069,423

These expenses increased basic and diluted loss per share by $0.06 and $0.47 for the years ended December 31, 2011 and 2010, respectively.

The Black-Scholes option-pricing model was used to estimate the option fair values. This option-pricing model requires a number of assumptions, of which the most significant are, expected stock price volatility, the expected pre-vesting forfeiture rate and the expected option term (the amount of time from the grant date until the options are exercised or expire). Expected volatility was calculated based upon actual historical stock price movements over the period from the Company’s initial public offering through December 31, 2011, and further reviewed against industry comparables. Expected pre-vesting forfeitures were estimated based on actual historical pre-vesting forfeitures over the period from the Company’s initial public offering through December 31, 2011. The expected option term was calculated using the “simplified” method permitted by SAB 107, as amended by SAB 110.

The weighted average per share fair value of stock options granted during the years ended December 31, 2011 and 2010 was $1.24 and $2.77, respectively. The fair value was estimated as of the grant date using the Black-Scholes option pricing model with the following assumptions:


	December 31,
	2011			2010
Expected volatility		112	%		104 – 105	%
Risk-free interest rate		2.2	%		2.4	%
Expected dividends	$	—		$	—
Expected terms (in years)		5			5

The following table summarizes stock options outstanding and activity as of and for the years ended December 31, 2011 and 2010:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at January 1, 2010		286,227		$	36.00
Granted		622,228		$	3.60
Forfeited		(117,588	)	$	36.00
Exercised		—		$	—

Outstanding at December 31, 2010		790,867		$	10.11		9.22	$	—

Exercisable at December 31, 2010		547,346		$	12.23		8.46	$	—

Outstanding at January 1, 2011		790,867		$	10.11
Granted		335,000		$	1.55
Forfeited		(232,224	)	$	4.18
Exercised		—		$	—

Outstanding at December 31, 2011		893,643		$	8.44		8.11	$	—

Exercisable at December 31, 2011		843,643		$	8.85		8.06	$	—

The Company did not have any stock option exercises in 2011 or 2010 nor did it realize any tax deductions related to the exercise of stock options during the years ended December 31, 2011 and 2010, respectively. The Company would record any such deductions to additional paid in capital when realized.

F-11

Total unrecognized share-based compensation expense from unvested stock options as of December 31, 2011 and 2010 was $61,995 and $123,130, respectively, which is expected to be recognized over a weighted average period of approximately 0.5 and 1.0 years for December 31, 2011 and 2010.

In addition to the stock options discussed above, the Company recognized share-based compensation expense related to restricted stock award and restricted stock unit grants, of $659,738 and $2,599,653 for the years ended December 31, 2011 and 2010, respectively. The following table summarizes Non-vested Restricted Stock grants and Restricted Stock Unit grants and their related activity as of and for the years ended December 31, 2011 and 2010:


	Restricted Stock Awards			Weighted Average Grant-Date Fair-Value		Restricted Stock Units			Weighted Average Grant-Date Fair-Value
Non-vested at January 1, 2010		30,508		$	35.37		163,778		$	7.47
Granted		233,667		$	2.18		384,167		$	3.60
Vested		(258,619	)	$	2.18		(359,722	)	$	3.60
Forfeited		—		$	—		(24,445	)	$	3.60

Non-vested at December 31, 2010		5,556		$	31.86		—		$	—

Granted		—		$	—		365,000		$	1.51
Vested		(5,556	)	$	31.86		(315,000	)	$	1.51
Forfeited		—		$	—		—		$	—

Non-vested at December 31, 2011		—		$	—		50,000		$	1.55

Total unrecognized share-based compensation expense from unvested restricted stock units as of December 31, 2011, was $77,500 which is expected to be recognized over a weighted average period of approximately 6 months. There was no unrecognized share-based compensation expense from unvested restricted stock awards as of December 31, 2011. Total unrecognized share-based compensation expense from unvested restricted stock awards as of December 31, 2010, was $44,250 which was expected to be recognized over a weighted average period of approximately 3 months. There was no unrecognized share-based compensation expense from unvested restricted stock units as of December 31, 2010.

Subsequent to December 31, 2011 and through the date of this filing, there were 400,000 restricted stock units granted and no restricted stock units were forfeited. There were no grants or forfeitures of options or restricted stock awards subsequent to December 31, 2011 and through the date of this filing.

5.	Property and Equipment

Property and equipment is summarized as follows:


	December 31, 2011			December 31, 2010
Machinery and equipment	$	9,920,434		$	9,920,434
Office furniture, equipment and software		1,058,463			1,058,463
Construction in progress		9,712,149			12,897,311

		20,691,046			23,876,208
Less accumulated depreciation and amortization		(7,138,167	)		(5,658,906	)

Property and equipment, net	$	13,552,879		$	18,217,302

Depreciation and amortization expense of property and equipment for the years ended December 31, 2011 and 2010 was $1,479,260 and $2,153,352, respectively.

6.	Commitments and Contingencies

Leases Payable

Rent expense for all operating leases for the years ended December 31, 2011 and 2010 was $153,300 and $1,657,697, respectively. There were no material non-cancelable operating leases as of December 31, 2011.

F-12

Litigation

In the ordinary conduct of business, the Company is subject to periodic lawsuits, investigations and claims, including routine employment matters. The following is a summary of legal proceedings which the Company is a party to 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 the Company. This action stems from the Grant Disbursement Award the Company entered into with ESDC when it relocated its 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.

7.	Notes Payable 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 December 31, 2011, the aggregate principal balance of all outstanding Notes was $4,930,000 and the Notes were convertible into 19,804,349 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 December 31, 2011 and 2010 were $33,541 and $3,854,272, respectively. The change in fair value of the conversion features during the years ended December 31, 2011 and 2010 resulted in a gain on derivative liabilities of $3,872,352 and $6,593,648, 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 years ended December 31, 2011 and 2010, $1,000,945 and $6,087,181, 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 6,605,664 shares of common stock at exercise prices ranging from $0.52 – $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.

F-13

The following table summarizes the pertinent details of the outstanding notes and warrants as of December 31, 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		13,369,565	$	0.23		724,074	$1.25
Peter Lacey(1)													2,692,594	$1.70
Peter Lacey(1)		125,000	*		—		125,000		N/A		N/A		250,000	$1.00
Peter Lacey(1)		150,000	*		4,669		145,331		652,174	$	0.23		288,462	$0.52
Michael Moretti		750,000	*		—		750,000		3,260,870	$	0.23		833,335	$1.25
Michael Moretti		150,000	*		—		150,000		652,174	$	0.23		193,550	$1.55
Michael Moretti		125,000	*		—		125,000		N/A		N/A		250,000	$1.00
Michael Moretti		150,000	*		4,669		145,331		652,174	$	0.23		288,462	$0.52
Michael Moretti		125,000			—		125,000		N/A		N/A		N/A	N/A
John Gorman		100,000	*		—		100,000		434,783	$	0.23		666,667	$1.25
Richard Schottenfeld		100,000	*		—		100,000		434,783	$	0.23		111,111	$1.25
William Steckel(2)		30,000	*		—		30,000		130,435	$	0.23		11,112	$1.25
Robert Weiss(3)		50,000	*		—		50,000		217,391	$	0.23		55,556	$1.25
Dynamic Worldwide Solar Energy, LLC.		—			—		—		—		—		240,741	$1.25
	$	4,930,000		$	9,338	$	4,920,662		19,804,349				6,605,664

*	As of the date of filing of this annual report, these notes have matured and the Company is in the process of finalizing an extension with the Lenders.

In February 2012, John Gorman converted his entire outstanding principal balance of $100,000 as well as the accrued interest thereon into shares of the Company’s common stock. In March 2012, Richard Schottenfeld converted his entire outstanding principal balance of $100,000 as well as the accrued interest thereon into shares of the Company’s common stock.

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.

F-14

8.	Derivative Liabilities

As described in Note 7 Notes Payable 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 and the conversion features on the Notes are not considered a hedging instrument. The conversion feature liability on the balance sheet at December 31, 2011 and 2010, and the change in the liability for the years ended December 31, 2011 and 2010 is summarized as follows:


	Conversion Feature Liability
Balance, December 31, 2009	$	251,618
New debt issuances		11,000,838
Change in fair value		(7,398,184	)

Balance, December 31, 2010	$	3,854,272

Balance, December 31, 2010	$	3,854,272
New debt issuances		51,621
Change in fair value		(3,872,352	)

Balance, December 31, 2011	$	33,541

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 December 31, 2011 and 2010. There were no financial assets subject to the provisions of ASC 820 as of December 31, 2011 and 2010:


	Level 1		Level 2		Level 3		Total
Financial liabilities at December 31, 2011:
Conversion feature	$	—	$	—	$	33,541	$	33,541

	$	—	$	—	$	33,541	$	33,541

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

	$	—	$	—	$	3,854,272	$	3,854,272

9.	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.

F-15

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.

As of December 31, 2011, the Company has not executed a tranche under this facility.

10.

Stockholders’ Equity

Preferred Stock—The Company has authorized 3,000,000 shares of undesignated preferred stock. As of December 31, 2011 and 2010, no shares have been designated or issued. The preferred stock may be issued in series with such preferences as determined by the board of directors.

Common Stock—The Company has authorized 120,000,000 shares of common stock. As of December 31, 2011 and 2010, respectively, 9,662,747 and 6,484,516 shares have been issued and were outstanding.

Bridge loan warrants—As of December 31, 2011, there were bridge loan warrants outstanding to purchase 6,605,664 shares of the Company’s common stock. Beginning in September 2009, the Company has entered into a series of agreements with the Lenders to provide bridge financing to the Company in exchange for convertible notes and warrants. 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) at exercise prices between $0.52—$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 (See Note 7 Notes Payable and Warrants).

11.

Employee Benefit Plans

The Company offers a savings and retirement plan under section 401(k) of the Internal Revenue Code to eligible employees meeting certain age and service requirements. The plan permits employees to contribute up to 85% of their salary up to the maximum allowable under Internal Revenue Service regulations. Participants are immediately vested in their voluntary contributions and actual earnings thereon. The plan did not require the Company to make matching contributions for the years ended December 31, 2011 and 2010.

F-16

12.

Income Taxes

Deferred tax assets related to the Company’s operations are comprised of the following at December 31, 2011 and 2010:


	2011			2010
Deferred tax assets:
Current—
Salary related accruals	$	90,000		$	99,000
Non-Current—
Equity-based compensation		2,335,000			2,184,000
Tax effect of net operating loss carryforward		45,370,000			43,094,000
Tax effect of federal and state tax credit carryforwards		4,790,000			4,737,000
Long-lived assets		30,000			(24,000	)

Total deferred tax assets		52,615,000			50,090,000
Less valuation allowance		(52,615,000	)		(50,090,000	)

Net deferred tax assets	$	—		$	—

The valuation allowance increased by $2,525,000 and $8,330,000 for the years ended December 31, 2011 and December 31, 2010, respectively.

At December 31, 2011, the Company had a net operating loss carryforward of approximately $186,000,000 for federal and state combined. The net operating loss carryforward, if not utilized to reduce taxable income in future periods, will begin to expire in 2013. At December 31, 2011, the Company had federal and state tax credit carryforwards of approximately $4,790,000. Federal tax credits of approximately $2,640,000, if not utilized, will begin to expire in 2024. Under the Internal Revenue Code, the future utilization of net operating losses may be limited in certain circumstances where there is a significant ownership change. As a result of the initial public offering and certain subsequent equity transactions, a significant ownership change may have occurred.

Total income tax expense for the years ended December 31, 2011 and 2010 differed from the amounts computed by applying the U.S. Federal statutory tax rates to pre-tax income as follows:


	2011			2010
Statutory rate		(34.0	)%		(34.0	)%
State income taxes, net of Federal income tax benefit		(10.0	)		(5.0	)
Permanent tax differences		(27.0	)		6.0
Tax credits		1.0			(1.0	)
Increase in valuation allowance		73.0			29.0
Other		1.0			5.0

		—	%		—	%

F-17

13.

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 year ended December 31, 2011.

14.

Subsequent Events

Bridge Financing

On January 25, 2012, the Company and Michael Moretti entered into a securities purchase agreement. Pursuant to the securities purchase agreement, Mr. Moretti agreed to loan the Company $225,000 to fund operating capital and general corporate purposes. On January 25, 2012, the Company issued Mr. Moretti (a) a secured convertible promissory note and (b) a warrant to purchase 1,350,000 shares of the Company’s common stock (subject to adjustment for certain corporate transactions). The note carries an interest rate of 10% per annum and is convertible into shares of the Company’s common stock based on a $0.25 conversion price (subject to adjustment for certain corporate transactions). The note, to the extent that any part of the outstanding principal amount is not converted into shares of common stock, matures on the second anniversary of the date of the note, is secured by all the assets of the Company, and includes customary provisions concerning events of default. The warrant is immediately exercisable, expires on January 24, 2014, and has an exercise price of $0.40 per share if exercised prior to July 25, 2012, $0.45 if exercised during the period July 25, 2012 through January 24, 2013, and $0.50 if exercised after January 24, 2013 and through the expiration of the warrant. Additionally, the securities purchase agreement contains a provision that if and only if, the Company consummates a fundamental transaction that results in a change in control, the Company will use its commercially reasonable best efforts to cause the Company or other parties to the fundamental transaction to issue securities (be it Common Stock, other securities of the Company, or securities of another party to the fundamental transaction) equal to the original principal amount of the note divided by $0.25.

On March 14, 2012, the Company and Sunlogics Power Fund Management Inc. entered into a securities purchase agreement. Pursuant to the purchase agreement, Sunlogics Power Fund Management agreed to loan the Company $500,000 for payment of outstanding liabilities and other working capital purposes. On March 14, 2012, and March 16, 2012, the Company issued Sunlogics Power Fund Management two senior convertible promissory notes, representing the Company’s Senior Debt, in the principal amounts of $400,000 and $100,000, respectively. The notes carry an interest rate of 6% per annum and each note is convertible into shares of the Company’s common stock at a conversion price equal to the consolidated closing bid price of the Company’s common stock on the last business day prior to the issuance of the note (subject to adjustment for certain corporate transactions). Each of the notes, to the extent that any part of the outstanding principal amount is not converted into shares of common stock, matures on the first anniversary of the date of the issuance of the note, and includes customary provisions concerning events of default.

The agreements for each of the transactions described above provide that in no event will the Company issue any Common Stock or securities convertible into Common Stock in connection with the conversion of the notes or exercise of the warrant without first obtaining stockholder approval if such issuance would result in the Company breaching its obligations under the applicable listing rules of The Nasdaq Stock Market.

Reverse Split

On March 27, 2012, the Company’s shareholders approved a 1-for-7 reverse stock split of its issued and outstanding common shares with the total authorized shares of common stock remaining unchanged at 120,000,000. Upon completion of all required notices and regulatory approvals, the Company intends to file with the State of Delaware an amendment to its Certificate of Incorporation to effect the reverse split. Once the reverse split is effective, trading of the Company’s common stock on the NASDAQ Capital Market will begin on a split-adjusted basis. The reverse stock split will affect 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 are outstanding immediately prior to the effective date of the reverse stock split.

F-18

Item 27.

Exhibits

The following exhibits are filed as part of this report:


Exhibit Number		Exhibit Title

3.1(22)		Amended and Restated Certificate of Incorporation.

3.2(23)		Certificate of Amendment of Amended and Restated Certificate of Incorporation.

3.3(24)		Amended and Restated Bylaws.

3.4(25)		Certificate of Designation of Series A.

3.5(20)		Certificate of Designations of Preferences, Right and Limitations of Series B Preferred Stock dated February 2, 2011.

4.1(1)		Form of Common Stock Certificate.

10.1(1)*		Form of Employee Notice of Stock Option Grant related to 2003 Equity Incentive Plan.

10.2(1)*		Form of Employee Restricted Stock Issuance Agreement related to 2003 Equity Incentive Plan.

10.3(1)*		2003 Equity Incentive Plan.

10.4(1)		Form of Indemnification Agreement by and between the Company and its directors.

10.5(1)		Form of Indemnification Agreement by and between the Company and its officers.

10.6(1)		Form of Employee Notice of Stock Option Grant related to 2003 Equity Incentive Plan.

10.7(1)		Form of Employee Restricted Stock Issuance Agreement related to 2003 Equity Incentive Plan.

10.8(2)		Agreement by and between the Company and New York State Energy Research and Development Authority, dated December 2, 2004.

10.9(2)		Agreement by and between the Company and New York State Energy Research and Development Authority, dated December 2, 2004.

10.10(4)		Employment Agreement by and between the Company and Robert Weiss dated April 3, 2006.

10.11(5)		Registration Rights Agreement by and among the Company, Millennium Partners, L.P., Phoenix Partners, LP, Phoenix Partners II, LP, Phaeton International (BVI), Ltd. and PreX Capital Partners, LLC, dated January 19, 2007. Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 25, 2007.

10.12(7)		First Amendment to the Registration Rights Agreement by and among the Company, Millenium Partners L.P., Phoenix Partners, LP, Phaeton International (BVI), Ltd. and PreX Capital Partners, LLC, dated May 29, 2007.

10.13(8)		Second Amendment to the Registration Rights Agreement by and among the Company, Millenium Partners L.P., Phoenix Partners, LP, Phaeton International (BVI), Ltd. and PreX Capital Partners, LLC, dated August 3, 2007.

II-1


Exhibit Number		Exhibit Title

10.14(9)		Amended and Restated 2006 Equity Incentive Plan.

10.15(10)*		Amended and Restated Employment Agreement by and between the Company and Robert E. Weiss, dated December 4, 2008.

10.16(11)*		Form of Employee Stock Option Agreement related to Amended and Restated 2006 Equity Incentive Plan.

10.17(11)*		Form of Employee Restricted Stock Issuance Agreement related to Amended and Restated 2006 Equity Incentive Plan.

10.18(11)*		Form of Employee Restricted Stock Unit Issuance Agreement related to Amended and Restated 2006 Equity Incentive Plan.

10.19(9)*		Amended and Restated 2006 Equity Incentive Plan

10.20(10)*		Amended and Restated Employment Agreement by and between the Company and Robert E. Weiss, dated December 4, 2008.

10.21(12)		Form of Restricted Stock Unit Agreement for Employees and Consultants.

10.22(12)		Form of Restricted Stock Unit Agreement for Non-Employee Directors.

10.23(13)		Registration Rights Agreement by and between the Company and TD Waterhouse RRSP Account 240832S, in trust for Peter Alan Lacey, dated September 21, 2009. Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 24, 2009.

10.24(12)		Form of Restricted Stock Unit Agreement for Non-Employee Directors.

10.25(13)		Registration Rights Agreement by and between the Company and TD Waterhouse RRSP Account 240832S, in trust for Peter Alan Lacey, dated September 21, 2009.

10.26(11)		Form of Employee Stock Option Agreement related to Amended and Restated 2006 Equity Incentive Plan.

10.27(11)		Form of Employee Restricted Stock Issuance Agreement related to Amended and Restated 2006 Equity Incentive Plan.

10.28(11)		Form of Employee Restricted Stock Unit Issuance Agreement related to Amended and Restated 2006 Equity Incentive Plan.

10.29(12)		Form of Restricted Stock Unit Agreement for Employees and Consultants.

10.30(15)		Registration Rights Agreement by and between the Company and Mike Moretti, dated January 6, 2010.

10.31(16)		Schedule of Material Details.

10.32(16)		Form of Purchase Agreement.

10.33(16)		Form of Secured Convertible Promissory Note.

10.34(16)		Form of Registration Rights Agreement.

10.35(16)		Form of Warrant.

10.36(16)		Form of Intercreditor Agreement.

II-2


Exhibit Number		Exhibit Title

10.37(16)		Form of Amendment of Notes and Warrants.

10.38(17)		Warrant to Purchase Shares of Common Stock dated October 12, 2010 issued to TD Waterhouse RRSP Account 230832S, in trust for Peter Alan Lacey as beneficiary.

10.39(17)		Warrant to Purchase Shares of Common Stock dated October 12, 2010 issued to Tejas Securities Group, Inc. 401K Plan and trust FBO John J. Gorman, John J. Gorman TTEE.

10.40(17)		Warrant to Purchase Shares of Common Stock dated October 12, 2010 issued to Michael Moretti.

10.41(18)		Amendment to Note between DayStar Technologies, Inc. and Dynamic Worldwide Solar Energy, LLC. Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 21, 2011.

10.42(18)		Amendment to Note between DayStar Technologies, Inc. and the Bridge Lenders.

10.43(19)		Purchase Agreement, dated as of January 24, 2011, between DayStar Technologies, Inc. and Michael Moretti.

10.44(19)		Secured Convertible Promissory Note, dated as of January 24, 2011, in favor of Michael Moretti.

10.45(19)		Warrant, dated as of January 24, 2011, issued to Michael Moretti.

10.46(19)		Registration Rights Agreement, dated as of January 24, 2011, between DayStar Technologies, Inc. and Michael Moretti.

10.47(20)		Securities Purchase Agreement dated February 2, 2011.

10.48(20)		Securities Purchase Agreement, dated as of February 2, 2011, by and between DayStar Technologies, Inc. and Socius CG II, Ltd.

10.49(21)		Separation Agreement dated as of February 26, 2011, by and between DayStar Technologies, Inc. and Magnus Ryde.

10.50		Amendment to Securities Purchase Agreement dated as of March 30, 2011, by and between DayStar Technologies, Inc. and Socius CG II, Ltd.

23.1		Consent of Hein & Associates LLP.

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

31.2		Certification of the 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.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*	Management contract or compensatory plan or arrangement

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

II-3

(2)	Incorporated by reference to our Annual Report on Form 10-KSB filed with the SEC on March 18, 2005.

(3)	Incorporated by reference to our Quarterly Report on Form 10-QSB filed with the SEC on May 15, 2007.

(4)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 7, 2006.

(5)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 25, 2007.

(6)	Incorporated by reference to our Registration Statement on Form SB-2 filed with the SEC on February 20, 2007.

(7)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on June 4, 2007.

(8)	Incorporated by reference to our Quarterly Report on Form 10-QSB filed with the SEC on August 3, 2007.

(9)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 26, 2008.

(10)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 10, 2008.

(11)	Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on March 16, 2009.

(12)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 2, 2009.

(13)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 24, 2009.

(14)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on February 18, 2010.

(15)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 12, 2010.

(16)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 28, 2010

(17)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 13, 2010.

(18)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 21, 2011.

(19)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 27, 2011.

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

(21)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on February 28, 2011.

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

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

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

(25)	Incorporated by reference to our Registration Statement on Form 8-A filed with the SEC on May 8, 2008.

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