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| DSTI > SEC Filings for DSTI > Form 10-Q on 20-Aug-2012 | All Recent SEC Filings |
20-Aug-2012
Quarterly Report
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with our audited financial statements and related footnotes. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements, including those set forth in our Annual Report on Form 10-K filed on March 30, 2012 as well as Part II, Item 1A below.
Overview
We are 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 our inception, we have focused primarily on thin film copper indium gallium di-selenide ("CIGS") solar products. We have 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. This tool in one step completes the critical process of applying the CIGS material to the substrate and when integrated with commercially available thin film manufacturing equipment for the remaining steps, we believe it 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.
Given the changes in the economy and in the industry in recent years, we have significantly scaled back our development and manufacturing efforts and embarked on a strategy in which we are seeking strategic partnerships to advance our technology and enter new markets within the global renewal energy industry. The Company is expected to announce strategic partnerships in the near term to own and construct solar and renewable power plants.
In August 2012, the Company is intending to commence with a tender offer to the shareholders of Salamon Group, Inc. to acquire at least 50.1% of Salamon's outstanding shares of common stock. The Company intends to offer one (1) share of DayStar for each six (6) shares of common stock of the Salamon Group. The closing of any transaction would be contingent upon other things, final due diligence, continued listing of the combined company on the NASDAQ Capital Market and compliance with all applicable judicial and other regulatory requirements. This acquisition would extend the Company's presence in the energy project business solutions business, further building out its reach and functional expertise in the area of engineering, construction, and ownership of solar power generation projects in the attractive and growing Caribbean, South America, Australian and South Pacific renewable markets. Salamon Group, Inc., through its Sunlogics Power Fund Management Inc. division, is a solar energy project company specializing in the construction management and acquisition of renewable energy power projects. The management of DayStar intends, upon completion of the planned acquisition, to continue to pursue strategic opportunities that will be beneficial to the shareholders of both DayStar and Salamon Group/Sunlogics. Sunlogics Power also looks to acquire assets and other companies in the solar and renewable energy space that are a strategic fit. Sunlogics Power is also a project-acquiring partner of Sunlogics Plc and its Subsidiary as well as other third party developers.
In August 2012, the Company is intending to file a S-3 Registration Statement registering two shareholders, Mr. Peter Lacey and Mr. Michael Moretti, who are converting debt for shares from the convertible debt that is on the books as of June 30, 2012. In addition, there are two shareholders who are owed money for work performed while employed by the Company. The Company is in the process of finalizing an Employment and Separation Release of Robert Weiss and Christopher Lail for shares of Company stock as full payment for the monies owed them while employed.
In August 2012, the Company has elected to increase the number of Board Members from five to nine and has elected four new Members who along with the existing Members will have experience in helping implement the new strategy and direction of the Company.
In August 2012, the Company has offered as an inducement to new officers' a start bonus award of up to 200,000 shares of Company stock that will be paid upon commencement of employment with vesting over 12 equal installments. The Company has already issued one award to the CFO and is expected in the near term to offer three to four other awards as the Company builds to implement the new platform described earlier.
In July 2012, the Company has proposed a Debt Swap deal relating to a July 2012 resolution proposing to issue debt to Mr. Michael Matvieshen in return for him transferring a portion of his debt held in Salamon Group, Inc in the amount of $15 million per the proposed Secured Promissory Note dated July 10, 2012. This swap has been agreed to in principal but has not been finalized yet even though the Company expects this deal to be consummated in August 2012.
In March 2012, Sunlogics Power Fund Management, Inc., a subsidiary of Salamon Group, Inc., made an initial loan to DayStar. Sunlogics Power Fund Management ("Sunlogics") is a fund that provides investments to companies in the solar industry and is a project-acquiring partner of Sunlogics PLC and its subsidiary, as well as other third party project developers, specializing in the design, development and operation of solar energy solutions, including rooftop and ground mount solar power systems. Simultaneous with the initial loan, Sunlogics entered into a consulting arrangement with us to assist our management team with business development and also with exploring and evaluating strategic opportunities. We plan to pursue opportunities with Sunlogics that will be mutually beneficial in achieving the goals of both companies.
The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosures. A summary of those accounting policies can be found in the notes to our financial statements. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial condition and results of operations and require judgments on the part of management about matters that are uncertain. We have identified the following accounting policies that are important to the presentation of our financial condition and results of operations.
Property and Equipment. Property and equipment is stated at cost. Depreciation is computed using straight-line and an accelerated method over estimated useful lives of three to ten years. Expenditures for maintenance and repairs, which do not materially extend the useful lives of property and equipment, are charged to operations as incurred. When property or equipment is retired or otherwise disposed of, the property accounts are relieved of costs and accumulated depreciation and any resulting gain or loss is recognized.
Share-Based Compensation. We follow the provisions of FASB ASC 718 Compensation-Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. Additionally, we follow the SEC's SAB No. 107, "Share-Based Payment" ("SAB 107"), as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC.
Results of Operations
Comparison of the Three Months Ended June 30, 2012 and 2011
Certain reclassifications have been made to the 2011 financial information to conform to the 2012 presentation. Such reclassifications had no impact on net loss.
Selling, general and administrative expenses. Selling, general and administrative expenses were $558,606 for the three months ended June 30, 2012 compared to $459,357 for the three months ended June 30, 2011, an increase of $99,249 or 22%. The increase was related to an accrual for consulting fees earned of $290,000 and decreases primarily related to a reduction in share based compensation as well as a decrease in certain personnel costs and professional fees.
Restructuring. There were no restructuring expenses for the three months ended June 30, 2012 and June 30, 2011.
Depreciation and amortization expense. Depreciation and amortization expense was $265,303 for the three months ended June 30, 2012 compared to $398,018 for the three months ended June 30, 2011, a decrease of $132,715 or 33%. The decrease in depreciation reflects the reduction in certain depreciable equipment.
Interest expense. Interest expense was $117,882 for the three months ended June 30, 2012 compared to $111,782 for the three months ended June 30, 2011, an increase of $6,100 or 5%. Due to the larger loan balance throughout the second quarter primarily relating to the outstanding notes issued in connection with our bridge financing in 2012, there was a slight increase in expenses from the same quarter in 2011.
Amortization of note discount and financing costs. Amortization of note discount and financing costs was $247,529 for the three months ended June 30, 2012 compared to $106,250 for the three months ended June 30, 2011, an increase of $141,279 or 133%. The convertible notes issued in connection with our debt 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 three months ended June 30, 2011 includes amortization of the discount on the original notes as well as a portion of the discount on the restructured notes. The expense for the three months ended June 30, 2012 primarily reflects amortization of the discount on the notes issued in 2012 plus the exercise of the convertible feature resulting in a one-time charge of $168,603. The majority of the notes issued in 2012 were issued toward the end of the quarter and all 2012 notes contained terms longer than the notes issued in prior years. This factor resulted in a higher discount amortization in the second quarter of 2012 as compared with the same period in 2011.
Gain on derivative liabilities. Gain on derivative liabilities was $0 for the three months ended June 30, 2012 compared to $245,898 for the three months ended June 30, 2011, a decrease of $245,898 or 100%. The conversion features on certain convertible notes issued in conjunction with our debt financing are considered derivative liabilities and are therefore required to be adjusted to fair value each quarter. A decrease in our stock price during the period results in a decrease in the liabilities and a gain on derivative liabilities. Conversely, an increase in our stock price during the period would result in an increase in the liabilities and a loss on derivative liabilities. During the three months ended June 30, 2011, our common stock price significantly decreased resulting in a significant gain on derivative liabilities for the quarter. The gain on derivative liabilities for the three months ended June 30, 2012 reflects the change in fair value of the outstanding conversion feature liability on the notes issued prior to 2012.
Comparison of the Six Months Ended June 30, 2012 and 2011
Certain reclassifications have been made to the 2011 financial information to conform to the 2012 presentation. Such reclassifications had no impact on net loss.
Selling, general and administrative expenses. Selling, general and administrative expenses were $871,149 for the six months ended June 30, 2012 compared to $1,691,544 for the six months ended June 30, 2011, a decrease of $820,395 or 48%. The decrease was primarily related to a reduction in share based compensation as well as a decrease in certain personnel costs and professional fees.
Restructuring. There were no restructuring expenses for the six months ended June 30, 2012. Restructuring expenses were $850,000 for the six months ended June 30, 2011. The restructuring expenses in 2011 resulted from impairment charges on certain equipment, as we 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 six months ended June 30, 2011.
Depreciation and amortization expense. Depreciation and amortization expense was $564,968 for the six months ended June 30, 2012 compared to $802,804 for the six months ended June 30, 2011, a decrease of $237,836 or 30%. The decrease in depreciation reflects the reduction in certain depreciable equipment.
Interest expense. Interest expense was $235,365 for the six months ended June 30, 2012 compared to $345,569 for the six months ended June 30, 2011, a decrease of $110,204 or 32%. Interest expense relates primarily to the outstanding notes issued in connection with our bridge financing. During the first quarter of 2011, we recorded interest on certain outstanding payables which resulted in a larger expense in the first quarter of 2011 as compared to the same period in 2012.
Amortization of note discount and financing costs. Amortization of note discount and financing costs was $288,146 for the six months ended June 30, 2012 compared to $812,062 for the six months ended June 30, 2011, a decrease of $523,916 or 65%. The convertible notes issued in connection with our debt 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 six months ended June 30, 2011 includes amortization of the discount on the original notes as well as a portion of the discount on the restructured notes. The expense for the six months ended June 30, 2012 primarily reflects amortization of the discount on the notes issued in 2012. The majority of the notes issued in 2012 were issued toward the end of the quarter and all 2012 notes contained terms longer than the notes issued in prior years. These factors resulted in a lower discount amortization in the first quarter of 2012 as compared with the same period in 2011.
Gain on derivative liabilities. Gain on derivative liabilities was $33,541 for the six months ended June 30, 2012 compared to $3,896,066 for the six months ended June 30, 2011, a decrease of $3,862,525 or 99%. The conversion features on certain convertible notes issued in conjunction with our debt financing are considered derivative liabilities and are therefore required to be adjusted to fair value each quarter. A decrease in our stock price during the period results in a decrease in the liabilities and a gain on derivative liabilities. Conversely, an increase in our stock price during the period would result in an increase in the liabilities and a loss on derivative liabilities. During the six months ended June 30, 2011, our common stock price significantly decreased resulting in a significant gain on derivative liabilities for the quarter. The gain on derivative liabilities for the six months ended June 30, 2012 reflects the change in fair value of the outstanding conversion feature liability on the notes issued prior to 2012.
Liquidity and Capital Resources
At June 30, 2012, our cash and cash equivalents totaled $42,063 compared to $4,199 at December 31, 2011.
We are in the development stage, and as such, have historically reported net losses, including a net loss of $2.3 million for the six months ended June 30, 2012. We anticipate incurring losses in the future, as we seek long-term strategic partnerships and investments to advance our technology and enter new markets within the global renewal energy industry.
Our financial statements for the year ended December 31, 2011 and the six months ended June 30, 2012 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.
Beginning in September 2009, we have funded our operations through a series of debt 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, $4.8 million of these notes remains outstanding.
Also, in order to help address our 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, we will require additional capital beyond these funding sources in order to implement our business plans.
We have implemented cost savings measures to limit our cash outflows and 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 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 our Annual Report on Form 10-K, as well as external conditions, could adversely affect our ability to secure additional funding necessary to continue operations and the terms of any funding that we secure.
Commitments. At June 30, 2012, we had no outstanding purchase orders for equipment and improvements. Other commitments include rental payments under operating leases for office space and equipment, and commitments under employment contracts with our executive officers. These commitments are discussed further in the Commitments and Contingencies footnote to our financial statements in our Annual Report on Form 10-K.
Off-Balance Sheet Arrangements. The only off-balance sheet obligations are for operating leases and certain other commitments entered into in the ordinary course of business.
We lease 33,000 square feet of warehouse and office space in Union City, California under a lease which expires in December 2012. This facility is the location of our corporate headquarters as well as our development and proprietary deposition equipment.
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