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EX-10.1 - EXHIBIT 10.1 PDF REFERENCE - Solar Thin Films, Inc.ex101.pdf
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EX-31.2 - EXHIBIT 31.2 - Solar Thin Films, Inc.ex312.htm
EX-32.2 - EXHIBIT 32.2 - Solar Thin Films, Inc.ex322.htm
EX-10.1 - EXHIBIT 10.1 - Solar Thin Films, Inc.ex101.htm
EX-32.1 - EXHIBIT 32.1 - Solar Thin Films, Inc.ex321.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended     June 30, 2010

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

For the transition period from _________ to _________

Commission file number    001-13549

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

Delaware
95-4356228
(State or other jurisdiction of incorporation or organization)
(IRS Employee Identification No.)

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

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

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

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  o No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
   
Non-accelerated filer o
Smaller reporting company x

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

Number of outstanding shares of the registrant's par value $0.01 common stock, as of August 3, 2010: 20,493,204.
 
 
 
1

 
 
 
 
Solar Thin Films, Inc.
Quarterly Report on Form 10-Q
 
Table of Contents
 

 
 
PAGE
 
 
 
Cautionary Statement Concerning Forward-Looking Statements.
3
     
PART I
FINANCIAL INFORMATION
F-1 - F-26
 
 
 
Item 1.
Condensed Consolidated Balance Sheets at June 30, 2010 (unaudited) and December 31, 2009.
F-1
 
 
 
 
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2010 and 2009 (unaudited).
F-2
 
 
 
 
Condensed Consolidated Statement of Stockholders' Deficiency/Equity for the year ended December 31, 2009 and six months ended June 30, 2010 (unaudited).
F-3- F-4
 
 
 
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2010 and 2009.
F-5
     
 
Notes to Unaudited Condensed Consolidated Financial Statements.
F-6 - F-26
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
4
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
19
 
 
 
Item 4T.
Controls and Procedures.
19
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings.
20
 
 
 
Item 1A.
Risk Factors.
20
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
20
 
 
 
Item 3.
Defaults Upon Senior Securities.
21
 
 
 
Item 4.
(Removed and Reserved).
21
 
 
 
Item 5.
Other Information.
21
 
 
 
Item 6.
Exhibits.
21
 
 
 
 
Signatures.
22
 
 
 
 
2

 
 

 
Cautionary Statement Concerning Forward-Looking Statements

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

·  
we have a significant working capital shortage; as of the filing date of this report, we are currently in default in payment of $935,000 of indebtedness which became due in March 2009 and $268,000 of indebtedness (plus redemption penalties and accrued interest) which became due in June 2009, and may face litigation or even bankruptcy if we are unable to meet or restructure our obligations;

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

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

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

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

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

·  
we are required to raise additional capital to support our Kraft Elektronkai Zrt operating subsidiary and complete our acquisition of BudaSolar Technologies Co., Ltd. and 2Cor9, LLC;

·  
our inability to perform under significant contract(s) would have a material adverse effect on our consolidated business and prospects;

·  
we may not be able to complete our proposed acquisition of BudaSolar Technologies Co., Ltd. and 2Cor9, LLC;

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

·  
our equipment business is dependent on payments due from one customer and loss of this customer, or failure of this customer to pay, will each have a negative impact on our operations;

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

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

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

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

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

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

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

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

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

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

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

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

 
 
3

 
 
 
 
 
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

SOLAR THIN FILMS, INC
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
   
(unaudited)
       
   
June 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 19,226     $ 631,155  
Accounts receivable, net of allowance for doubtful accounts of $665,014 and $696,067, respectively
    1,140,327       1,397,593  
Accounts receivable, related party, net of allowance for doubtful accounts of $831,863
    -       -  
Inventory
    31,603       131,240  
Advances to suppliers
    97,970       622,526  
Note receivable, net of allowance for doubtful accounts of $250,000
    -       -  
Deposits and other current assets
    393,996       115,580  
Total current assets
    1,683,122       2,898,094  
                 
Property, plant and equipment, net of accumulated depreciation of $283,198 and $446,718, respectively
    138,308       256,136  
                 
Total assets
  $ 1,821,430     $ 3,154,230  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities:
               
Accounts payable and accrued liabilities
  $ 2,899,613     $ 2,563,910  
Capital leases, current portion
    2,407       2,499  
Notes payable, current portion
    1,772,167       1,837,167  
Advances, related party
    17,601       -  
Deferred revenue
    765,875       2,373,067  
Total current liabilities
    5,457,663       6,776,643  
                 
Capital leases, long term
    2,544       4,981  
Dividends payable
    115,213       143,656  
Total long term debt
    117,757       148,637  
                 
Commitments and contingencies
    -       -  
                 
Stockholder's Deficit
               
Preferred stock, par value $0.01 per share; 2,700,000 shares authorized:
               
  Series A Preferred stock, par value $0.01 per share; 1,200,000 shares designated; -0- issued and outstanding at June 30, 2010 and December 31, 2009
               
Series B Preferred stock, par value $0.01 per share; 1,500,000 shares designated:
               
  Series B-1 Preferred stock, par value $0.01 per share, 1,000,000 shares designated, 228,652 issued and outstanding at June 30, 2010 and December 31, 2009
    2,286       2,286  
  Series B-3 Preferred stock, par value $0.01 per share, 232,500 shares designated, 47,497 and 47,502 issued and outstanding at June 30, 2010 and December 31, 2009, respectively
    475       475  
  Series B-4 Preferred stock, par value $0.01 per share, 100,000 shares designated, -0- issued and outstanding at June 30, 2010 and December 31, 2009
    -       -  
Common stock, par value $0.01 per share, 150,000,000 shares authorized, 20,493,204 and 18,988,893 issued and outstanding as of June 30, 2010 and 2009, respectively
    204,932       189,889  
Shares to be issued
    200,000       200,000  
Additional paid in capital
    25,339,590       24,660,277  
Treasury stock
    (80,000 )     (80,000 )
Accumulated deficit
    (30,512,564 )     (29,551,979 )
Accumulated other comprehensive income
    1,091,291       808,002  
  Total shareholders' deficit
    (3,753,990 )     (3,771,050 )
                 
Total Liabilities and Stockholders' Deficit
  $ 1,821,430     $ 3,154,230  
                 
See the accompanying notes to the unaudited condensed consolidated financial statements
 


 
F-1

 



 
SOLAR THIN FILMS, INC
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 
(unaudited)
 
                         
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
REVENUE:
                       
   
 
            -       -  
Factory sales
  $ 1,184,515     $ 4,562,284     $ 1,184,515     $ 6,221,024  
  Total revenue
    1,184,515       4,562,284       1,184,515       6,221,024  
                                 
Cost of sales
    692,624       3,297,095       692,624       4,125,771  
  Gross profit
    491,891       1,265,189       491,891       2,095,253  
                                 
OPERATING EXPENSES:
                               
General, selling and administrative expenses
    515,545       1,389,308       1,218,341       2,559,095  
Depreciation
    19,133       25,645       35,704       49,695  
  Total operating expenses
    534,678       1,414,953       1,254,045       2,608,790  
                                 
NET (LOSS) FROM OPERATIONS
    (42,787 )     (149,764 )     (762,154 )     (513,537 )
                                 
Other income/(expense):
                               
Loss on sale of equipment
    (2,862 )     -       (9,979 )     -  
Foreign currency transaction (loss):
    (136 )     (193,005 )     (1,478 )     (105,223 )
Interest expense, net
    (56,460 )     (451,026 )     (187,025 )     (719,240 )
Gain on change in fair value of reset provision liability
    -       8,867       -       21,776  
Impairment of investment
    -       (150,000 )     -       (150,000 )
Debt acquisition costs
    -       (12,045 )     -       (26,500 )
Other income
    51       4,377       51       5,645  
                                 
Net (loss) before provision for income taxes
    (102,194 )     (942,596 )     (960,585 )     (1,487,079 )
                                 
Income taxes
    -       -       -       -  
                                 
Net (Loss)
    (102,194 )     (942,596 )     (960,585 )     (1,487,079 )
                                 
Non-controlling interest
    -       (9,121 )     -       (8,771 )
                                 
NET (LOSS) ATTRIBUTABLE TO SOLAR THIN FILMS, INC.
  $ (102,194 )   $ (951,717 )   $ (960,585 )   $ (1,495,850 )
                                 
Net (loss) per common share (basic and fully diluted)
  $ (0.01 )   $ 0.08 )   $ (0.05 )   $ (0.13 )
                                 
Weighted average shares outstanding (basic and fully diluted)
    20,101,537       11,627,223       19,560,618       11,621,811  
                                 
Comprehensive (loss):
                               
Net (loss)
  $ (102,194 )   $ (942,596 )   $ (960,585 )   $ (1,487,079 )
Foreign currency translation gain
    270,575       219,686       283,289       185,043  
                                 
Comprehensive Income (loss)
    168,381       (722,910 )     (677,296 )     (1,302,036 )
Comprehensive loss attributable to the non controlling interest
    -       (9,121 )     -       (8,771 )
Comprehensive income (loss) attributable to Solar Thin Films, Inc.
  $ 168,381     $ (732,031 )   $ (677,296 )   $ (1,310,807 )
                                 
See the accompanying notes to the unaudited condensed consolidated financial statements
 
 

 
 
F-2

 



SOLAR THIN FILMS, INC
CONSOLIDATED STATEMENT OF DEFICIENCY OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2009 AND SIX MONTHS ENDED JUNE 30, 2010
(unaudited)
 
                                             
 
Preferred Series B-1
 
Preferred Series B-3
   
Common shares
   
Shares to be issued
 
 
Shares
   
Amount
 
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
 
Balance, December 31, 2008
  228,652     $ 2,286     47,518     $ 475       11,562,120     $ 115,621       -       -  
Cumulative effect of a change in accounting principle   -adoption of EITF 07-05 effective January 1, 2009
  -       -     -       -       -       -       -       -  
Issuance of 65,000 shares of common stock in exchange for services rendered
  -       -     -       -       65,000       650       -       -  
Issuance of 102 shares of common stock in exchange for 16 Preferred Series B-3 shares
  -       -     (16 )     -       102       1       -       -  
Change in majority owned subsidiary equity
  -       -     -       -       -       -       -       -  
Fair value of vested portion of employee options issued
  -       -     -       -       -       -       -       -  
Fair value of warrants issued for services
  -       -     -       -       -       -       -       -  
Change in fair value of re priced vested employee options
  -       -     -       -       -       -       -       -  
Issuance of majority owned subsidiary common stock for services
  -       -     -       -       -       -       -       -  
Amortization of deferred compensation
  -       -     -       -       -       -       -       -  
Issuance of 6,421,000 shares of common stock in exchange for non controlling interest in majority owned subsidiary
  -       -     -       -       6,421,000       64,210       -          
Issuance of 1,140,625 shares of common stock in exchange for convertible notes payable and related interest
  -       -     -       -       940,625       9,406       -          
Common stock to be issued in settlement of convertible note
  -       -     -       -       -       -       200,000       200,000  
Rounding due to reverse split
  -       -     -       -       46       1       -          
Foreign currency translation gain
  -       -     -       -       -       -       -       -  
Net loss
  -       -     -       -       -       -       -       -  
Balance, December 31, 2009
  228,652       2,286     47,502       475       18,988,893       189,889       200,000       200,000  
Issuance of 1,242,381 shares of common stock for services rendered
  -       -     -       -       1,242,381       12,424       -       -  
Issuance of 30 shares of commons stock in exchange for 5 Preferred Series B-3 shares
  -       -     (5 )     -       30       -       -       -  
Issuance of 146,900 shares of common stock in exchange for convertible note and related interest
  -       -     -       -       146,900       1,469       -       -  
Issuance of 115,000 shares of common stock in exchange for interest
  -       -     -       -       115,000       1,150       -       -  
Fair value of vested portion of employee options issued
  -       -     -       -       -       -       -       -  
Foreign currency translation gain
  -       -     -       -       -       -       -       -  
Net loss
  -       -     -       -       -       -       -       -  
Balance, June 30, 2010
  228,652     $ 2,286     47,497     $ 475       20,493,204     $ 204,932       200,000     $ 200,000  


 
See the accompanying notes to the unaudited condensed consolidated financial statements
 
 
 
 
 
F-3

 

 
 
 
SOLAR THIN FILMS, INC
 
CONSOLIDATED STATEMENT OF DEFICIENCY OF STOCKHOLDERS' EQUITY
 
YEAR ENDED DECEMBER 31, 2009 AND SIX MONTHS ENDED JUNE 30, 2010
 
(unaudited)
 
                     
Other
               
Total
 
   
Additional
   
Deferred
   
Treasury
   
Comprehensive
   
Accumulated
   
Non controlling
   
Stockholders'
 
   
Paid in Capital
   
Compensation
   
Stock
   
Income (loss)
   
Deficit
   
Interest
   
Deficiency
 
Balance, December 31, 2008
  $ 25,300,488     $ (26,250 )   $ (80,000 )   $ 666,670     $ (32,549,564 )   $ 1,146,588     $ (5,423,686 )
Cumulative effect of a change in accounting principle  -adoption of EITF 07-05 effective January 1, 2009
    (3,222,222 )     -       -       -       3,200,445       -       (21,777 )
Issuance of 65,000 shares of common stock in exchange for services rendered
    77,350       -       -       -       -       -       78,000  
Issuance of 102 shares of common stock in exchange for 16 Preferred Series B-3 shares
    (1 )     -       -       -       -       -       -  
Change in majority owned subsidiary equity
    (9,156 )     -       -       -       -       9,156       -  
Fair value of warrants issued for services
    222,706       -       -       -       -       -       222,706  
Fair value of vested portion of employee options issued
    635,268       -       -       -       -       -       635,268  
Change in fair value of re priced vested employee options
    45,493       -       -       -       -       -       45,493  
Issuance of majority owned subsidiary common stock for services
    -       -       -       -       -       49,141       49,141  
Amortization of deferred compensation
    -       26,250       -       -       -       -       26,250  
Issuance of 6,421,000 shares of common stock in exchange for non controlling interest in majority owned subsidiary
    1,149,446       -       -       -       -       (1,213,656 )     -  
Issuance of 1,040,625 shares of common stock in exchange for convertible notes payable and related interest
    460,906       -       -       -       -       -       470,312  
Common stock to be issued in settlement of convertible note
    -       -       -       -       -       -       200,000  
Rounding due to reverse split
    (1 )     -       -       -       -       -       -  
Foreign currency translation gain
    -       -       -       141,332       -               141,332  
Net loss
    -       -       -       -       (202,860 )     8,771       (194,089 )
Balance, December 31, 2009
    24,660,277       -       (80,000 )     808,002       (29,551,979 )     -       (3,771,050 )
Issuance of 1,242,381 shares of common stock for services rendered
    504,837       -       -       -       -       -       517,261  
Issuance of 30 shares of commons stock in exchange for 5 Preferred Series B-3 shares
    -       -       -       -       -       -       -  
Issuance of 146,900 shares of common stock in exchange for convertible note and related interest
    71,981       -       -       -       -       -       73,450  
Issuance of 115,000 shares of common stock in exchange for interest
    60,550       -       -       -       -       -       61,700  
Fair value of vested portion of employee options issued
    41,945       -       -       -       -       -       41,945  
Foreign currency translation gain
    -       -       -       283,289       -       -       283,289  
Net loss
    -       -       -       -       (960,585 )     -       (960,585 )
Balance, June 30, 2010
  $ 25,339,590     $ 0     $ (80,000 )   $ 1,091,291     $ (30,512,564 )   $ 0     $ (3,753,990 )

See the accompanying notes to the unaudited condensed consolidated financial statements

 
 
F-4

 
 
 
 
SOLAR THIN FILMS, INC
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited)
 
             
   
Six months ended June 30,
 
   
2010
   
2009
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ (960,585 )   $ (1,495,850 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization expense
    35,704       70,769  
Bad debt
    -       50,000  
Impairment of investment
            150,000  
Loss on sale of equipment
    9,979       -  
Loss attributable to non controlling interest, net of tax
    -       8,771  
Amortization of deferred financing costs
    -       26,500  
Amortization of debt discounts
    -       362,003  
Amortization of deferred compensation costs
    282,148       26,250  
Stock based compensation
    114,206       643,104  
Common stock issued in settlement of interest
    61,700       -  
Change in fair value of reset liability
    -       (21,776 )
Common stock of then majority owned subsidiary issued for services
    -       49,141  
(Increase) decrease in:
               
Accounts receivable
    (22,218 )     (673,187 )
Accounts receivable, related party
    458,127       -  
Inventory
    84,126       (478,911 )
Advances and other current assets
    (103,566 )     615,620  
Other assets
    1,448       153,899  
Increase (decrease) in:
               
Accounts payable and accrued liabilities
    524,158       818,654  
Advances received from customers
    1       (1,480,464 )
Deferred revenue
    (1,137,833 )     1,555,029  
Net cash (used in) provided by operations
    (652,605 )     379,552  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Sale of property plant and equipment
    30,975       -  
Acquisition of property, plant and equipment
    -       (41,015 )
Net cash provided by (used in) investing activities:
    30,975       (41,015 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from advances-related party
    5,000       -  
(Payments) proceeds from notes payable
    23,862       -  
Net cash provided by financing activities:
    28,862       -  
                 
Effect of currency rate change on cash
    (19,160 )     37,322  
                 
Net (decrease) increase in cash and cash equivalents
    (611,928 )     375,859  
Cash and cash equivalents at beginning of period
    631,154       619,257  
Cash and cash equivalents at end of period
  $ 19,226     $ 995,116  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid during the period for interest
  $ 154     $ 978  
Cash paid during the period for taxes
    -       -  
                 
NON CASH INVESTING AND FINANCING ACTIVITIES:
               
Common stock issued as deferred compensation
  $ -     $ 78,000  
Stock based compensation
  $ 114,206     $ 792,397  
                 
See the accompanying notes to these unaudited condensed consolidated financial statements
 




 
 
F-5

 

SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

General

The accompanying unaudited condensed consolidated financial statements of Solar Thin Film, Inc., (“Solar” or the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Accordingly, the results from operations for the six-month period ended June 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.  The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2009 financial statements and footnotes thereto included in the Company's Form 10-K filed with the SEC on April 15, 2010.

The consolidated financial statements as December 31, 2009 have been derived from the audited consolidated financial statements at that date but do not include all disclosures required by the accounting principles generally accepted in the United States of America.

Business and Basis of Presentation

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

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



 
 
F-6

 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition

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

Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. Deferred revenues as of June 30, 2010 and December 31, 2009 amounted to $765,875 and $2,373,067, respectively.   ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arraignments (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.

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

 
1.
Title and risk of ownership have passed to the customer;
 
 
2.
The Company has obtained a written fixed purchase commitment;
 
 
3.
The customer has requested the transaction be on a bill and hold basis;
  
 
4.
The customer has provided a delivery schedule;
     
 
5.
All performance obligations related to the sale have been completed;
     
 
6.
The product has been processed to the customer’s specifications, accepted by the customer and made ready for shipment; and
     
 
7.
The product is segregated and is not available to fill other orders.

The remittance terms for these “bill and hold” transactions are consistent with all other sale by the Company. There were no bill and hold transactions at June 30, 2010 and December 31, 2009.



 
 
F-7

 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition (Continued)

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

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

Segment information

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

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




 
 
F-8

 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock Based Compensation

Effective for the year beginning January 1, 2006, the Company has adopted Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”). The Company made no employee stock-based compensation grants before December 31, 2005 and therefore has no unrecognized stock compensation related liabilities or expense unvested or vested prior to 2006.

The Company has 826,000 options outstanding as of June 30, 2010. During the six months ended June 30, 2010, there were no options granted or forfeited. During this period, 138,889 options vested and as of this date all options have been vested.  The weighted average life of these options is 6.62 years. The weighted average exercise price of these options are 1.55 per option. There is no intrinsic value to these options.

Stock-based compensation expense in connection with stock options granted, vested and re-priced in the aggregate amount of $41,945 and $643,105 was charged to operations for the six-month period ended June 30, 2010 and 2009, respectively. There was no grant of stock based compensations during the quarter ended June 30, 2010.

The Company has 1,737,000 warrants outstanding as of June 30, 2010. During the six months ended June 30, 2010, there were no warrants granted or forfeited. The weighted average life of these warrants is 1.41 years. The weighted average strike price of these warrants is 12.93 per warrant. There is no intrinsic value to these warrants.

Net income (loss) per share

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

Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding during each period.  It excludes the dilutive effects of potentially issuable common shares such as those related to our convertible notes, warrants and stock options.  Diluted net (loss) income per share is calculated by including potentially dilutive share issuances in the denominator.  However, diluted net (loss) per share for the six month periods ended June 30, 2010 and 2009 does not reflect the effects of 306,697 and 306,805 shares potentially issuable upon conversion of our convertible preferred shares as of June 30, 2010 and 2009, respectively; 240,600 and 484,600 shares potentially issuable upon the conversion of convertible debt as of June 30, 2010 and 2009, respectively;  and 2,563,000 shares potentially issuable upon the exercise of the Company's stock options and warrants  as of June 30, 2010 and  2009. (See above) These potentially issuable shares would have an anti-dilutive effect on our net (loss) per share.
 
Recent Accounting Pronouncements

In March 2010, the FASB issued new accounting guidance, under ASC Topic 605 on Revenue Recognition.  This standard provides that the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved.  Determining whether a milestone is substantive requires judgment that should be made at the inception of the arrangement.  To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement.  No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement.  The standard is effective for interim and annual periods beginning on or after June 15, 2010.  The Company is currently evaluating the impact the adoption of this guidance will have on its financial statements.
 
 
 
F-9

 
 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements (Continued)

In May 2010, the FASB issued Accounting Standards Update No. 2010-19, “Foreign Currency Issues: Multiple Foreign Currency Exchange Rates.” The guidance provides clarification of accounting treatment when reported balances in an entity’s financial statements differ from their underlying U.S. dollar denominated values due to different rates being used for remeasurement and translation. The guidance indicates that upon adopting highly inflationary accounting for Venezuela, since the U.S. dollar is now the functional currency of a Venezuelan subsidiary, there should no longer be any differences between the amounts reported for financial reporting purposes and the amount of any underlying U.S. dollar denominated value held by the subsidiary. Therefore, any differences between these should either be recognized in the income statement or as a cumulative translation adjustment, if the difference was previously recognized as a cumulative translation adjustment. The adoption of this standard did not have any impact on the Company’s consolidated financial position and results of operations.

In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-13, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades” (“ASU 2010-13”). ASU 2010-13 addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. FASB Accounting Standards Codification (“ASC”) Topic 718 was amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade shall not be considered to contain a market, performance or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies for equity classification. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010, with early application permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

The Company has evaluated and included subsequent events through the filing date of this form 10-Q.

 NOTE 2 - GOING CONCERN MATTERS

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company incurred a loss of $960,585 and $1,495,850 for the six-month periods ended June 30, 2010 and 2009, respectively. Additionally, the Company has current liabilities in excess of current assets in the amount of $3,774,541 as of June 30, 2010. The Company is currently in default in the payment of certain notes payable.  These factors among others raised substantial doubt about the Company’s ability to continue as a going concern.

The Company has undertaken further steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond to address its lack of liquidity by raising additional funds, either in the form of debt or equity or some combination thereof.  However, there can be no assurance that the Company can successfully accomplish these steps and or business plans, and it is uncertain that the Company will achieve a profitable level of operations and be able to obtain additional financing.

The Company’s continued existence is dependent upon management’s ability to develop profitable operations and resolve its liquidity problems. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. (See Footnote 4)

 
 
F-10

 
 
 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 2 - GOING CONCERN MATTERS (continued)

There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all.  In the event that the Company is unable to continue as a going concern, it may elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy. To date, management has not considered this alternative, nor does management view it as a likely occurrence.
 
NOTE 3 – PREPAID AND OTHER CURRENT ASSETS

Prepaid and other current assets as of June 30, 2010 and December 31, 2009 are comprised of the following:

  
  
June 30, 2010
  
  
December 31, 2009
  
Common stock issued for services to be rendered
 
$
244,249
   
$
40,603
 
Tax receivable
   
141,720
     
60,980
 
Other
   
8,027
     
13,997
 
Total
 
$
393,996
   
$
115,580
 

In January 2009, the Company issued 65,000 shares of its Common Stock in exchange for services to be rendered through January 2011. The shares of Common Stock were valued at $78,000, which was the fair value of the Company's common shares during the period covered by the consulting agreement.

In April 2010, the Company issued an aggregate of 1,100,000 shares of its Common Stock in exchange for services to be rendered through January 2011. The shares of Common Stock were valued at $445,000, which was the fair value of the Company's common shares during the period covered by the consulting agreement.

The Company amortized and charged to operations  stock-based compensation expense of $282,148 and $26,250 during the six month periods ended June 30, 2010 and 2009, respectively.



 
 
F-11

 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 4- PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND NOTE PAYABLE

A summary of convertible notes payable at June 30, 2010 and December 31, 2009 are as follows:

 
  
June 30,
 2010
  
  
December 31, 2009
  
       Convertible notes payable (“March 2006”) non-interest bearing; secured and due March 2009. The Company is currently in default under the terms of this note agreement. The debt discount in connection with this note has been amortized in full upon the maturity of the note in March 2009.
 
$
935,000
   
$
1,000,000
 
       Convertible notes payable (“June 2006”), non- interest bearing; secured and due June 2009; Noteholder has the option to convert unpaid note principal to the Company’s common stock at a rate of $5.00 per share. The Company is currently in default under the terms of this agreement. The debt discount in connection with this note has been amortized in full upon the maturity of the note in June 2009.
   
  268,000
     
268,000
 
        Note payable, non interest bearing, due March 4, 2009. The Company was in default under the terms of the note agreement.  Interest accrued at 8% per annum upon the default. The Company subsequently extended this note payable on January 31, 2011.
   
400,000
     
400,000
 
    Notes payable, demand, 12% per annum, unsecured
   
169,167
     
169,167
 
Total Current Notes Payable
   
1,772,167
     
1,837,167
 
                 
 
The Company granted the Investors of the June 2006 Convertible debentures a first priority security interest in all of its assets. In addition, the Company pledged 100% of the shares (the “Pledged Shares”) held in its wholly owned subsidiary, Kraft Elektronikai Zrt (“Kraft”), as collateral to the Investors. The Company did not repay the note at its maturity in June 2009. As a result of the default, the Investors may seek a redemption premium equal to 125% of the outstanding principal amount.  At June 30, 2010 and December 31, 2009, the Company had accrued redemption penalty in an aggregate amount of $67,000, which represents the redemption premium in excess of the outstanding notes principal of $268,000 that was included in the Company’s current liabilities.

During the year ended December 31, 2009 and 2008, the majority of June 2006 convertible debenture noteholders have converted the notes in exchange for the Company’s common stock. However, there can be no assurance that the Company will enter into definitive settlement agreements to retire or reconstitute the remaining outstanding 2006 convertible notes.  If the Company is unable to enter into settlement or other agreements with the Investors, or is unable to obtain financing on terms acceptable to the Company in order to repay the outstanding debt owed to the Investors, the Investors may elect to exercise their first priority security interest in all of the assets of the Company, as well as sell, transfer or assign the Pledged Shares. In such event, the Company may be required to cease operations and/or seek protection from its creditors under the Federal Bankruptcy Act. (See Footnote 2)
 
On February 1, 2010, the Company issued a forbearance agreement of $400,000 whereby the Company agreed to issue 75,000 shares of common stock, accrue interest at 18% per annum from March 4, 2009 through February 4, 2010, 8% per annum thereafter with the note due January 31, 2011.  In addition, the Company agreed to issue 10,000 shares of its common stock for each month delay past January 1, 2010 until the note is paid.  A total of 115,000 common shares were issued during the three-month period ended June 30, 2010 pursuant to the terms of this forbearance agreement, which covers the 75,000 shares of common stock and 10,000 shares per month from January through April 2010. The Company has accrued and charged to operations the value of all common shares required to be issued as of June 30, 2010.
 
 
 
F-12

 
 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 5- CAPITAL STOCK

Preferred Stock

The Company has authorized 2,700,000 total shares of preferred stock. The Board of Directors designated 1,200,000 shares as Series A 12.5% cumulative preferred stock (“Series A Preferred Stock”), with a par value of $0.01 per share. The preferred stock is entitled to preference upon liquidation of $0.63 per share for any unconverted shares. As of June 30, 2010 and December 31, 2009, there were no shares of Series A Preferred Stock issued and outstanding.

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

 
·
The Board of Directors has designated 1,000,000 shares of its preferred stock as Series B-1 Preferred Stock (“B-1 Preferred”). Each share of Series B-1 Preferred Stock is entitled to preference upon liquidation of $2.19 per share for any unconverted shares. Each shares of the Series B-1 Preferred shall be entitled to one (1) vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock as a single class. Eighty five (85) Series B-1 Preferred shares may be converted to one (1) share of the Company’s common stock. As of June 30, 2010 and December 31 2009, there were 228,652 shares of Series B-1 Preferred issued and outstanding.

   
·
The Board of Directors has designated 232,500 shares of its preferred stock as Series B-3 Preferred Stock (“B-3 Preferred”). Each share of the Series B-3 Preferred shall be entitled to six and four tenths (6.4) votes on all matters submitted to the stockholders for a vote together with the holders of the Common Stock as a single class. Each Series B-3 Preferred share may be converted to six and four tenths (6.4) shares of the Company’s common stock. As of June 30, 2010 and December 31, 2009, there were 47,497 and 47,502 shares of Series B-3 Preferred issued and outstanding, respectively.

 
·
In June 2006 the Board of Directors designated 100,000 shares of its preferred stock as Series B-4 Preferred Stock (“B-4 Preferred”).  Upon the filing of an amendment which increased the number of authorized common shares such that there was an adequate amount of authorized common stock per issuance upon conversion of the Series B-4 Preferred, the Series B-4 Preferred shares automatically converted to shares of the Company's common stock at a rate of seventy (70) common shares for each share of Series B-4 Preferred. During the year ended December 31, 2007, 95,500 shares of Series B-4 Preferred were converted into 6,685,000 shares of the Company’s common stock. As of June 30, 2010 and December 31, 2009, there were no shares of Series B-4 Preferred issued and outstanding.

Common Stock

On September 3, 2009, the Company affected a one-for-five (1 to 5) reverse stock split of its issued and outstanding shares of common stock, $0.01 par value. All references in the consolidated financial statements and the notes to consolidated financial statements, number of shares, and share amounts have been retroactively restated to reflect the reverse split.

On September 3, 2009, the Company is authorized to issue 150,000,000 shares of common stock with a par value of $0.01 per share. As of June 30, 2010 and December 31, 2009, there were 20,493,204 and 18,988,893 shares of common stock issued and outstanding, respectively.

 
 
F-13

 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 5- CAPITAL STOCK (Continued)

During the six months ended June 30, 2010, the Company issued an aggregate of 1,242,381 shares of common stock, valued at $517,261, in exchange for services and operating expenses paid by shareholders.

During the six months ended June 30, 2010, the Company issued 115,000 shares of common stock, valued at $61,700, in exchange for interest due on forbearance agreement (see Note 3 above).

NOTE 6- RELATED PARTY NOTES PAYABLE AND TRANSACTIONS
 
There were no related party sales and/or cost of sales for the six month period ended June 30, 2010 and 2009.

During the six month period ended June 30, 2010, the Company received an advance of $20,827 from Isvan Krafcsik, an owner of BudaSolar (see Note 9 below).  Advance is non interest bearing and is due upon demand.
 
During the six month period ended June 30, 2010, the Company issued an aggregate of 142,381 shares of common stock for operating expenses paid by shareholders (Note 4).
 
The Company has a dividend payment obligation due to the former shareholders valued at $115,213 and $143,656 as of June 30, 2010 and December 31, 2009, respectively. Changes in the recorded amounts are related to the changes in the currency exchange rates.

NOTE 7 – NON CONTROLLING INTEREST
 
On June 30, 2009, pursuant to the Company’s Agreement and Plan of Merger (the “Agreement”) with Solar Thin Power and its shareholders, Solar Thin Power was merged with and into the Company (the “Merger”).  Following the Merger effective on June 30, 2009, Solar Thin Power is operated as a division of the Company and will seek to facilitate power projects and joint ventures designed to provide solar electricity using thin film a-Si solar modules.

NOTE 8- ECONOMIC DEPENDENCY
 
During the six month period June 30, 2010, $1,184,515 or 100% of the total revenues were derived from one customer; for the six month period ended June 30, 2010, $6,221,024 or 100% of the total revenues were derived from one customer.

The Company has no supplier that accounts for greater than 10% of the Company’s costs of sales during the six months ended June 30, 2010 and 2009.




 
 
F-14

 
 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Lease agreement

In November 2005, the Company entered into a three year fixed term lease agreement for our corporate offices and facilities in Budapest, Hungary at a rate ranging from $4,543 to $15,433 per month as the lease has provisions for additional space for the period calendar year of 2006 and beyond. The lease agreement provides for moderate increases in rent after the first year in accordance with the inflationary index published by the Central Statistical Office. In November 2007, the terms of the lease agreement were modified effectively increasing the monthly rent to $20,800 per month starting on January 1, 2008 for the next three years through December 31, 2010. The Company also has other month to month leases for its offices and facilities. The minimum future cash flow commitment for the leases at June 30, 2010 is as follows:

   
Amount:
 
Year ending December 31, 2010
 
$
124,800
 
  
During the year ended December 31, 2009, the Company abandoned their facilities in Budapest, Hungary.  As such the Company accrued $250,000 for potential lease cancellation penalties at December 31, 2009.  Settlement is currently under negotiations.

Rent expense amounted to $10,122 and $134,709 for the six-month period ended June 30, 2010 and 2009, respectively.
 
Litigation

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

Solar Thin Films, Inc. vs. Strategic Growth International, Inc. (Supreme Court, New York State, New York County). On May 7, 2010, the Company commenced an action against Strategic Growth International, Inc. (“SGI”) in the Supreme Court of the State of New York, County of New York (the “Action”), seeking a temporary restraining order and preliminary injunction enjoining SGI and its affiliates from directly or indirectly selling, pledging, hypothecating or otherwise disposing of all or any portion of 400,000 shares of Company common stock issued to SGI as partial compensation under an investor relations services agreement with the Company dated March 31, 2009.  The Company claimed that SGI did not fulfill its obligations under the agreement and was not entitled to compensation.  On August 9, 2010, the Company and SGI entered into a settlement agreement under which, in full and final settlement of all claims and defenses asserted by the parties in the Action, SGI (i) delivered to the Company a certificate representing 150,000 shares of Company common stock previously issued to SGI, together with appropriate stock powers, for cancellation, (ii) waived any and all claims to warrants to be issued by the Company as compensation under the March 2009 agreement, and (iii) waived any and all claims to cash compensation under the March 2009 agreement.
 
From time to time, the Company is a party to litigation or other legal proceedings that the Company considers to be a part of the ordinary course of its business. The Company is not involved currently in legal proceedings that could reasonably be expected to have a material adverse effect on its business, prospects, consolidated financial condition or results of operations. The Company may become involved in material legal proceedings in the future.
 
 
 
 
F-15

 
 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)

Product Warranty Obligation

The Company provides for estimated costs to fulfill customer warranty obligations upon recognition of the related revenue in accordance with ASC 460-10. The range for the warranty coverage for the Company’s products is up to 18 to 24 months. The Company estimates the anticipated future costs of repairs under such warranties based on historical experience and any known specific product information. These estimates are reevaluated periodically by management and based on current information, are adjusted accordingly. The Company’s determination of the warranty obligation is based on estimates and as such, actual product failure rates may differ significantly from previous expectations. Accrued provision for product warranty was approximately $170,576 and $212,687 as of June 30, 2010 and December 31, 2009, respectively. The change represents foreign currency translation fluctuation.

Employment and Consulting Agreements

The Company has reached agreement with its key officers for employment agreements to be executed in the third quarter of 2010. In addition to compensation and benefit provisions, the agreements will include non-disclosure and confidentiality provisions for the protection of the Company's proprietary information.

The Company entered into a one year investor relations agreement beginning January 2010 for an overall obligation of  $110,000 including 50,000 shares of the Company Common Stock and $88,000 of cash payments, of which, $44,000 was paid during the six months ended June 30, 2010. The 50,000 shares of Common Stock were paid during the three months ended June 30, 2010.

The Company entered into a one year investor relations agreement beginning January 2010 in exchange for 1,000,000 shares of the Company’s common stock. The shares were issued during the three months ended June 30, 2010.

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

 
 
F-16

 
 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)

Share Exchange Agreement

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

On May 17, 2010, the Company entered into a new share exchange agreement with BudaSolar and the BudaSolar shareholders.  The revised transaction contemplates that the Company will directly acquire 100% of the share capital of BudaSolar in exchange for 70,000 shares of the Company’s Series B-5 convertible voting preferred stock (the “B-5 Preferred Stock”).  The B-5 Preferred Stock has a liquidation value of $7.0 million and is convertible at any time by the holders into a minimum of 7.0 million and a maximum of 49.0 million shares of the Company’s common stock, $0.01 par value per share (the “Common Stock”).  The aggregate number of shares of Company Common Stock into which all if the B-5 Preferred Stock would be convertible (the “Conversion Shares”) will depend upon the audited combined pre-tax income of the Company’s Kraft and BudaSolar subsidiary corporations (the “Corporations Pre-Tax Income”) at the end of each of the five consecutive fiscal years ending December 31, 2010 through December 31, 2014 (the “Measuring Period”).  The target Corporations Pre-Tax Income and the corresponding number of Conversion Shares that can be exercised at the end of any one or more fiscal years during the Measuring Period is based on a “grid” of such Pre-Tax Income and Conversion Shares.  For example if the Corporations Pre-Tax Profits at the end of any of the five fiscal years in the Measuring Period is $0 to $3.0 million, the number of Conversion Shares would be 7.0 million; if such Pre-Tax Income is $10.0 million, then the number of Conversion Shares would be 21.0 million; and if such Pre-Tax Income is $55.0 million or more, the Conversion Shares would be 49.0 million.  On March 31, 2015, any B-5 Preferred Stock not converted into Common Stock would automatically convert based upon the Corporations Pre-Tax Income for the fiscal year ending December 31, 2014.

Upon the execution of the BudaSolar share exchange agreement, the Company provided $75,000 to BudaSolar as a working capital advance, and is obligated to provide additional working capital thereafter. In addition, we shall assume the obligations of repayment of all outstanding loans made by the BudaSolar shareholders or their affiliates to BudaSolar prior to the date of the agreement, so that, as of the closing date, BudaSolar will have either positive stockholders equity or capital of not less than US $1,000. Such loans will be evidenced by a 5 year subordinated note of the Company, which shall (i) bear interest at an annual rate equal to LIBOR plus a margin of 3%; and (ii) be subject to full or partial repayment to the BudaSolar shareholders on the earlier to occur of (a) receipt of €30.0 million down payment by BudaSolar under its thin film silicon photovoltaic solar module process line sale and purchase agreement with China City Investments Limited; provided that, sufficient funds remain from such down payment to permit BudaSolar to meet all of its obligations under the China City agreement; (b) receipt of net proceeds, if any, in excess of $3.5 million received by the Company in a financing transaction; or (c) out of excess cash flow of BudaSolar and Kraft.  In addition, the Company has agreed to cause BudaSolar and Kraft to repay to Istvan Krafcsik by July 31, 2010 approximately $65,000 as repayment for a loan recently made by Mr. Krafcsik to BudaSolar. As of the date of this report, this payment has not been made.

The Company is currently in negotiations with BudaSolar to further revise the share exchange agreement.


 
 
F-17

 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30. 2010

NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)

Share Exchange Agreement (continued)

Under the terms of a separate agreement with BudaSolar, Kraft has contracted to purchase from BudaSolar (1) equipment assembly services on some of its equipment based on a fixed fee per equipment, and (2) installation related technical services based on hourly rates.  In connection with these services, Kraft has paid $1,370,000 in advances to BudaSolar during the second quarter of 2009 and an additional $144,930 during the first quarter of 2010. BudaSolar has provided $747,891 worth of services in 2009 and $669,192 worth of services for the six months ended June 30, 2010 to Kraft, which left a credit balance of advances wired to BudaSolar of $97,847 as of June 30, 2010.  During 2008, BudaSolar received $750,000 pursuant to the Stock Exchange Agreement from the Company, which was fully repaid in the second quarter of 2009.

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

On August 12, 2008, the Company entered into a stock purchase agreement (the “Purchase Agreement”) with Zoltan Kiss (“Z. Kiss”), Gregory Joseph Kiss (“G. Kiss”), Maria Gabriella Kiss (“M. Kiss”), and Steven H. Gifis (“Gifis”). Under the terms of the Purchase Agreement, the Company has agreed to arrange for the sale, and each of Z. Kiss, G. Kiss and M. Kiss (the “Selling Stockholders”) have agreed to sell, an aggregate of 3.6 million shares of common stock of the Company owned by the Selling Stockholders. The purchase price for the 3.6 million shares is $2.07 per share, or a total of $7,450,200 for all of the shares. At August 12, 2008, the closing price of the Company’s common stock, as traded on the OTC Bulletin Board, was $4.0 per share.
  
Z. Kiss, a former director and executive officer of the Company, is selling 2.0 million of the 3.6 million shares, representing his entire share holdings in the Company. In addition, Mr. Kiss has agreed to apply up to $831,863 of the proceeds from the sale of his 2.0 million shares to pay a portion of the $1,331,863 of indebtedness owed by his affiliate Renewable Energy Solutions Inc. (“RESI”), to the Company. G. Kiss and M. Kiss, the children of Z. Kiss, are each selling 800,000 shares in the transaction, and, after the sale, such persons will retain 10,000 and 200,000 shares of the Company’s common stock, respectively. Mr. Gifis is acting as agent for each of the Selling Stockholders (the “Sellers’ Agent”).
 
The Company intends to finance the purchase price for the 3.6 million shares being sold by the Selling Stockholders by arranging for a sale of the shares, either through a registered public offering for the account of the Selling Stockholders, or a private purchase.
 


 
 
F-18

 
  
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30. 2010

NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)

Agreement with Mr. Kiss and other Stockholders (continued)

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

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

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

 
·
to the extent not previously paid in full, out of the net proceeds received by him from the public or private sale of all or a portion of his 2,000,000 subject shares under the Purchase Agreement, Z. Kiss shall pay to the Company a total of up to $434,315 of the RESI Debt Balance, such amount to be appropriately pro-rated based upon $0.22 to be paid for each such 2,000,000 subject shares sold; and
  
 
·
unless a portion of the RESI Debt Balance has been paid by Z. Kiss in accordance with the above, the entire RESI Debt Balance(or any unpaid portion thereof) will be paid to the Company by Amelio on the earlier to occur of (i) receipt of net proceeds of a financing by Amelio (the “Amelio Financing”) of not less than $2,000,000, or (ii) receipt of payment by RESI or Amelio from CG Solar, the customer from whom the a-Si equipment giving rise to the RESI Debt was shipped.  To the extent that the RESI Debt Balance is paid in whole or in part by Z. Kiss, then Amelio shall issue to Z. Kiss a promissory note due and payable to the earlier to occur of the consummation of the Amelio Financing or one year from the closing date.
 
 
·
Amelio agreed to guaranty payment of the RESI Debt Balance to the Company.


 
 
F-19

 
  
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)

Agreement with Mr. Kiss and other Stockholders (continued)

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

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

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

Under the Second Amendment, the outside closing date of the transactions contemplated pursuant to the Settlement Agreement was extended to December 4, 2010 (the “Closing Date”). In addition, the definition of “RESI Debt” was amended to include the net amount of indebtedness, not to exceed $831,863, owed by RESI to the Company or its affiliates as of the Closing Date together with accrued interest thereon.

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

(a)  Z. Kiss will surrender all of his 2,000,000 shares of Company common stock to the Company;
 
(b)       an option (the “Option”) is granted to the Company or its designees to purchase all of the shares of Company common stock owned by both M. Kiss (1,018,400 shares) and G. Kiss (810,000 shares) until December 4, 2010.  For a period of nine months following the execution of the Second Amendment, the Option will be fixed at a price of $0.30 per share and any shares not purchased by the Company or its designees during such nine-month period may be purchased at the higher of (i) $0.30 per share, or (ii) 75% of the trading price of the Company’s common stock on the trading day prior to the Company’s payment of the exercise price; and

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

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

 
 
F-20

 
 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)

Agreement with Mr. Kiss and other Stockholders (continued)

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

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

On December 4, 2009, Z. Kiss surrendered his shares of Company common stock to the Company.

Proposed Acquisition of Algatec

On October 20, 2008, Robert M. Rubin, Chairman, Chief Executive Officer and Chief Financial Officer of Solar Thin Films, formed Algatec Equity Partners, L.P., a Delaware limited partnership (the “Partnership”), for the purpose of acquiring up to 49% of the share capital of Algatec.  Effective as of October 30, 2008, Algatec and members of Algatec senior management consisting of Messrs. Rainer Ruschke, Ullrich Jank, Dr. Stefan Malik and Andre Freud (collectively, the “Algatec Management Stockholders”), and Anderkonto R. Richter, Esq., as trustee for Mr. Ruschke and another Algatec stockholder (the “Trustee”), entered into a share purchase agreement (the “Algatec Share Purchase Agreement”).  Under the terms of the Algatec Share Purchase Agreement, on November 3, 2008 (the “First Closing”) the Partnership invested an aggregate of $3,513,000, of which approximately €2,476,000 was represented by a contribution to the equity of Algatec to enable it to acquire all of the assets and equity of Trend Capital, the predecessor to Algatec.  The Partnership also purchased for €1.00 per share a total of 13,750 Algatec shares, representing 27.5% of the outstanding share capital of Algatec.
  
The general partner of the Partnership is Algatec Management LLP, a Delaware limited liability company owned by The Rubin Family Irrevocable Marital Trust and other persons.  Mr. Rubin and Barry Pomerantz, a business associate of Mr. Rubin, are the managers of the general partner.  Under the terms of the limited partnership agreement, the general partner agreed to invest a total of $165,000 in the Partnership in consideration for 5.0% of the assets, profits and losses of the Partnership.  The limited partners, who invested an aggregate of $3,200,000 at the First Closing and additional persons the Partnership will seek to admit as limited partners by the Second Closing, will own 95.0% of the Partnership assets, profits and losses. As part of the First Closing, The Rubin Family Irrevocable Marital Trust invested an additional $1,500,000, as a limited partner, on the same terms as other limited partners of the Partnership.
 



 
 
F-21

 
 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)

Proposed Acquisition of Algatec (continued)

In addition to its equity investment, the Partnership has agreed under the terms of a loan agreement entered into at the same time as the Algatec Share Purchase Agreement, to lend to Algatec on or about November 30, 2008 (the “Second Closing”), an additional $2,600,000 or approximately €2,000,000.  The proceeds of the loan were to be used to assist Algatec in paying the balance of the purchase price for all of the assets and equity of the Trend Capital limited partnership.  Upon funding of the loan, the Partnership would purchase for €9,250 an additional 9,250 shares, representing 21.5% of the outstanding share capital of Algatec, thereby increasing its ownership to an aggregate of up to 49% of the outstanding share capital of Algatec.  The loan, together with interest at the rate of 6% per annum, is repayable on the earlier of December 31, 2011 or the completion of a financing providing Algatec with up to $50.0 million of proceeds for expansion (the “Algatec Financing”).  Upon the Partnership funding the entire €2,000,000 loan at the Second Closing, the Management Group would own the remaining 51% of the share capital of Algatec.  If the Partnership funds less than the full €2,000,000 loan, the additional 21.5% equity to be issued to the Partnership at the Second Closing was to have been appropriately pro-rated.  On December 29, 2008, the Partnership consummated the Second Closing with Algatec and funded a loan of €2,000,000 ($2.6 million). Ultimately, the Partnership provided total funding of approximately $5.75 million to Algatec which, after allowing for unfavorable currency conversion rates, left the Partnership with a total equity ownership in Algatec of approximately 47% of the total number of outstanding Algatec shares.

Effective as of October 30, 2008, the Trustee, the Management Group and the Partnership (collectively, the “Algatec Stockholders”) and Algatec entered into a stock exchange agreement. Under the terms of the stock exchange agreement the Algatec stockholders agreed, subject to certain conditions, to exchange 100% of the share capital of Algatec for shares of shares of Company capital stock. Consummation of the Algatec acquisition is subject to certain conditions, including Algatec obtaining up to $50.0 million financing for Algatec to enable it to construct the addition to its existing manufacturing facility and purchase the necessary equipment to expand its business.  On April 10, 2009, the parties agreed to extend the anticipated closing date of the transactions contemplated by the Stock Exchange Agreement to July 15, 2009.  The requisite financing for Algatec was not obtained and the agreement expired on July 15, 2009. The Company and Algatec Solar AG are no longer in discussions with respect to merger. However, they continue to discuss joint venture and other opportunities.
 
NOTE 10 – SEGMENT INFORMATION

The Company's operations fall into one single product segment, photovoltaic thin film modules: producing and/or installing and commissioning factory equipment that produces photovoltaic thin film modules. The Company manages its operations, and accordingly determines its operating segments, on a geographic basis. Consequently, the Company has one operating geographic location, Hungary. The performance of geographic operating segments is monitored based on net income or loss (after income taxes, interest, and foreign exchange gains/losses). The accounting policies of the segments are the same as those described in the summary of accounting policies in Note 1. There are no intersegment sales revenues. The following tables summarize financial information by geographic segment for the three and six month periods ended June 30, 2010 and 2009:
 


 
 
F-22

 
 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 10 – SEGMENT INFORMATION (continued)

Geographic information for the six month period ended June 30, 2010:

   
Hungary
   
(Corporate)
   
Total
Total Revenues
 
$
1,184,515
   
$
-
   
$
1,184,515
                       
Depreciation and amortization expense
   
35,704
     
-
     
35,704
                       
Interest income
   
26,701
     
-
     
26,701
Interest expense
   
(146
)
   
(213,580
)
   
(213,726)
Net interest income (expense)
   
26,555
     
(213,580
)
   
(187,025)
                       
Debt acquisition cost
   
-
     
-
     
-
Research and development
   
-
     
-
     
-
Net income (loss) attributable to Solar Thin Films, Inc. common shareholders
   
158,630
     
(1,119,215
   
(960,585)
                       
Fixed assets, net
   
138,308
     
-
     
138,308
Fixed asset additions
 
 $
-
   
 $
-
   
 $
-

Geographic information for the three month period ended June 30, 2010:

   
Hungary
   
(Corporate)
   
Total
 
Total Revenues
 
$
1,184,515
   
$
-
   
$
1,184,515
 
                         
Depreciation and amortization expense
   
19,133
     
-
     
19,133
 
                         
Interest income
   
13,248
     
-
     
13,248
 
Interest expense
   
(48
)
   
(69,660
)
   
(66,708
)
Net interest income (expense)
   
13,200
     
(69,660
)
   
(56,460
)
                         
Debt acquisition cost
   
-
     
-
     
-
 
Research and development
   
-
     
-
     
-
 
Net income (loss) attributable to Solar Thin Films, Inc. common shareholders
   
340,967
     
(443,161
   
(102,194
)
                         
Fixed assets, net
   
138,308
     
-
     
138,308
 
Fixed asset additions
 
 $
-
   
 $
-
   
 $
-
 
 


 
 
F-23

 
 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 10 – SEGMENT INFORMATION (continued)

Geographic information for the six month period ended June 30, 2009:

   
Hungary
   
(Corporate)
   
Total
 
Total Revenues
 
$
6,221,024
   
$
-
   
$
6,221,024
 
                         
Depreciation and amortization
   
49,695
     
-
     
49,695
 
                         
Interest Income
   
2,605
     
59,657
     
62,262
 
Interest expense
   
(307
)
   
(781,195
)
   
(781,502
)
Net interest expense
   
2,298
     
(721,538
)
   
(719,240
)
                         
Debt acquisition cost
   
-
     
(26,500
)
   
(26,500
)
Research and development
   
-
     
         -
     
         -
 
Net income (loss) attributable to Solar Thin Films, Inc.
   
284,704
     
(1,780,554
)
   
(1,495,850
)
                         
Fixed assets, net
   
368,167
     
-
     
368,167
 
Fixed asset additions
 
 $
41,015
   
 $
-
   
 $
41,015
 

Geographic information for the three month period ended June 30, 2009:

   
Hungary
   
(Corporate)
   
Total
 
Total Revenues
 
$
4,562,284
   
$
-
   
$
4,562,284
 
                         
Depreciation and amortization
   
25,645
     
-
     
25,645
 
                         
Interest Income
   
2,440
     
30,047
     
32,487
 
Interest expense
   
(307
)
   
(483,206
)
   
(483,513
)
Net interest expense
   
2,133
     
(453,159
)
   
(451,026
)
                         
Debt acquisition cost
   
-
     
(12,045
)
   
(12,045
)
Research and development
   
-
     
         -
     
         -
 
Net income (loss) attributable to Solar Thin Films, Inc.
   
34,326
     
(986,043
)
   
(951,717
)
                         
Fixed assets, net
   
368,167
     
-
     
368,167
 
Fixed asset additions
 
 $
6,343
   
 $
-
   
 $
6,343
 
 
Geographic information of revenues by customers’ locations/countries for six month periods ended June 30, 2010 and 2009:
 
Customer Countries:
 
 
2010
   
 2009
 
Spain
 
$
1,184,515
   
$
6,221,024
 

 
 
 
 
 
F-24

 
 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 10 – SEGMENT INFORMATION (continued)

Geographic information of revenues by customers’ locations/countries for three month periods ended June 30, 2010 and 2009:
 
Customer Countries:
 
2010
   
2009
 
Spain
 
$
1,184,515
   
$
4,562,284
 

NOTE 11 – SUBSEQUENT EVENTS

2Cor9, LLC

On July 21, 2010, the Company entered into a stock purchase agreement with 2Cor9, LLC (“2Cor9”) and its members under which the Company will acquire 100% of the outstanding membership interests of 2Cor9 from the members in exchange for 4,000,000 shares of the Company’s preferred stock.  2Cor9 intends to engage in the business of green energy management, including energy management assessment and retrofits, renewable energy installations (power projects), and energy monitoring.

The preferred stock may be converted over a five year period commencing on January 1, 2011 on the basis of four shares of Company common stock for each share of preferred stock into a minimum of 1,320,000 and a maximum of 16,000,000 shares of common stock. The aggregate number of shares of Company common stock into which all of the preferred stock would be convertible (the “Conversion Shares”) will depend upon the audited combined pre-tax profits computed on both an annual and a cumulative basis at the end of each of the five consecutive fiscal years ending December 31, 2010 through December 31, 2014 (the “Measuring Period”).  The target pre-tax profits and the corresponding number of Conversion Shares that can be exercised at the end of any one or more fiscal years during the Measuring Period is based on a “grid” of such pre-tax profits and Conversion Shares.  For example, if in year one the pre-tax profit was $2,500,000 and the year two pre-tax profit was $3,500,000, then 500,000 preferred shares are eligible for conversion into 2,000,000 Conversion Shares.  Any shares of preferred stock not converted within five years after January 1, 2011 will expire.

The Company is required to make up to $2,000,000 in capital contributions to 2Cor9 over a 12 month period of which (i) a $65,000 initial contribution was made upon the execution of the stock purchase agreement, and (ii) equal monthly contributions equal to $65,000 shall be made for the nine months commencing on August 31, 2010.

In the event that the Company consummates the 2Cor9 acquisition, there shall be three members appointed to the 2Cor9 board of managers, one of whom shall be appointed by the 2Cor9 members and the remaining two shall be appointed by the Company.

Consummation of the 2Cor9 acquisition is subject to certain conditions, including, without limitation, completion of satisfactory due diligence, our obtaining the requisite financing, and entry into certain employment agreements.  There can be no assurance that the Company will be able to consummate the 2Cor9 acquisition or, if consummated, that it will prove to be beneficial to the Company.



 
 
F-25

 
 
 
SOLAR THIN FILMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

NOTE 11 – SUBSEQUENT EVENTS (continued)

Change in Independent Registered Public Accounting Firm

On August 18, 2010, the Board of Directors of the Company dismissed RBSM LLP (“RBSM”) as the Company's independent registered public accounting firm. Additionally, effective August 18, 2010, the Board of Directors of the Company appointed Marcum LLP (“Marcum”) as the Company’s independent registered public accounting firm.

The reports of RBSM on the Company's financial statements for each of the two most recent fiscal years ended December 31, 2009 and 2008 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that the reports issued by RBSM on their audit of the Company’s financial statements as of and for the fiscal years ended December 31, 2009 and 2008 included an explanatory paragraph in their opinion for such years as to the substantial doubt about the Company’s ability to continue as a going concern.

During the fiscal years ended December 31, 2009 and 2008 and through August 18, 2010, there were no disagreements with RBSM on any matter of accounting principles or practices, financial statement disclosure, or auditing scope and procedure which, if not resolved to RBSM’s satisfaction, would have caused RBSM to make reference to the subject matter of the disagreements in connection with its reports on the financial statements for such years. In addition, during the years ended December 31, 2009 and 2008 and through August 18, 2010, there were no “reportable events” as such term is described in Item 304(a)(1)(v) of Regulation S-K.

During the fiscal years ended December 31, 2009 and 2008 and through August 18, 2010, neither the Company nor anyone acting on behalf of the Company consulted with Marcum regarding the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.  In addition, no written or oral advice was provided by Marcum that was a factor considered by the Company in reaching a decision as to accounting, auditing or financial reporting issues.

Management and Board Changes

On August 17, 2010, Mr. Robert M. Rubin resigned as the Chief Financial Officer of the Company. Mr. Rubin will remain as the Company’s Chief Executive Officer and Chairman of the Board of Directors.  There was no disagreement or dispute between Mr. Rubin and the Company which led to his resignation as Chief Financial Officer.

On August 18, 2010, the Board of Directors of the Company appointed Mr. Harry Shufrin as Chief Financial Officer and a member of the Board of Directors of the Company. There are no understandings or arrangements between Mr. Shufrin and any other person pursuant to which Mr. Shufrin was selected as an executive officer and director of the Company. Mr. Shufrin does not have any family relationship with any director, executive officer or person nominated or chosen by the Company to become a director or executive officer.

In addition, on August 18, 2010, Dr. Boris Goldstein resigned as a director of the Company. There was no disagreement or dispute between Dr. Goldstein and the Company which led to his resignation as a director.


 
 
 
F-26

 
 
ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

WE URGE YOU TO READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO BEGINNING ON PAGE F-1. THIS DISCUSSION MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING BUT NOT LIMITED TO THE RISKS AND UNCERTAINTIES DISCUSSED UNDER THE HEADING “RISK FACTORS” IN OUR FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 2010 AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. IN ADDITION, SEE “CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTSSET FORTH IN THIS REPORT.
 
 
Overview

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

On April 3, 2009, the Company and Kraft entered into a share exchange agreement with BudaSolar Technologies Co. Ltd. (“BudaSolar”) and its shareholders.  The agreement restated a prior agreement entered into in 2008.  Under the terms of the restated agreement, the BudaSolar shareholders were to have acquired a 49% equity interest in Kraft, in exchange for transferring 100% of the BudaSolar equity to Kraft.  Such agreement was subject to the satisfaction of certain closing conditions, including the Company’s repayment of all outstanding June 2006 convertible notes in order to secure the release of the shares of Kraft pledged as security to the June 2006 note holders.  Although only $268,000 of such notes are still outstanding, the Kraft shares still remain subject to the pledge agreement.  On May 17, 2010, the Company entered into a new stock exchange agreement with BudaSolar and the BudaSolar shareholders, the terms of which are described below.

For more than the past 21 months, BudaSolar has been providing technical support to our Kraft subsidiary under a separate agreement.  In connection with these services, Kraft has paid $1,370,000 in advances to BudaSolar during the second quarter of 2009 and an additional $144,930 during the first six months of 2010. BudaSolar has provided $747,891 worth of services in 2009 and $669,192 worth of services for the six months ended June 30, 2010 to Kraft, which left a credit balance of advances wired to BudaSolar of $97,847 as of June 30, 2010.  In addition, during 2008, BudaSolar received $750,000 in advances from the Company, which was fully repaid in the second quarter of 2009.

The Company’s Kraft subsidiary is highly dependent upon the ongoing technical expertise of the BudaSolar personnel in completing and making operational the Kraft line of a-Si solar module manufacturing lines.   In such connection, Kraft recently completed the installation of equipment for its sole active customer, Grupo Unisolar SA in Spain.  The customer resisted payment of the final €968,265 installment due under the April 8, 2008 contract allegedly due to certain maintenance and repair complaints with respect to our amorphous silicon equipment line. We engaged in good faith and productive discussions to resolve this, to establish joint research and product development efforts, to achieve international product certifications for Grupo’s a-Si modules, and to develop strategic alliances possibly including cross-ownership. The Company is confident that the full balance due from Grupo Unisolar will be collected.   In July 2010, subsequent to the financial statements, the Company collected €250,000 and reached an agreement on the remaining balance.
 
 
 
 
4

 
 

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

In the event that the Company is unable to acquire BudaSolar, 2Cor9, or any of the equity of Algatec, absent an alternative strategic acquisition or a significant increase in the current business of its Kraft subsidiary, it is unlikely that the Company will be able to achieve its expansion plans in the solar business, and may be required to cease doing business altogether.

Consummation of either or all of the BudaSolar, 2Cor9, and Algatec acquisitions, as well as all other expansion plans of the Company, are subject to its ability to solve its significant working capital shortages; make payment or other arrangements for the resolution of approximately $1.3 million of indebtedness currently in default as of the filing date of this report ($935,000 of which became in default in March 2009 and $268,000 of indebtedness which became in default in June 2009 (plus redemption penalties and accrued interest)) and other accrued accounts payable, all of which are overdue.  In the event that the Company is unable to resolve these matters within the next 120 days, it may be unable to continue in business and/or may be required to seek protection from its creditors under the Federal Bankruptcy Act.

 Subject to consummation of either or all of the BudaSolar, 2Cor9, or Algatec transactions, the Company will seek to further vertically integrate itself within this industry through activities in, but not limited to, investing in and/or operating solar module manufacturing plants, selling thin film photovoltaic modules, and installing and/or managing solar power plants. The Company also intends, directly and through joint ventures or strategic alliances with other companies or through governmental incentive programs, to sell equipment for and participate financially in solar power facilities using thin film a-Si solar modules or crystalline solar modules as the power source to provide electricity to municipalities, businesses and consumers.

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

Company History

Solar Thin Films History

The Company was initially organized as a New York corporation on June 22, 1988 under the name Alrom Corp. ("Alrom"), and completed an initial public offering of securities in August 1990. Alrom effected a statutory merger in December 1991, pursuant to which Alrom was reincorporated in the State of Delaware under the name American United Global, Inc. Prior to the acquisition of Kraft, the Company intended to focus its business strategy on acquisitions of operating businesses in various sectors. On June 14, 2006, in connection with its business strategy, the Company closed on the acquisition of 95.5% of the outstanding securities of Kraft. In addition, the Company acquired the remaining 4.5% minority interest in August 2007 and, as a result, now conducts its operations via Kraft, its wholly-owned subsidiary.
 
 
 
5

 

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

BudaSolar Technologies Co. Ltd.

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

On May 17, 2010, the Company entered into a new share exchange agreement with BudaSolar and the BudaSolar shareholders.  The revised transaction contemplates that the Company will directly acquire 100% of the share capital of BudaSolar in exchange for 70,000 shares of the Company’s Series B-5 convertible voting preferred stock (the “B-5 Preferred Stock”).  The B-5 Preferred Stock has a liquidation value of $7.0 million and is convertible at any time by the holders into a minimum of 7.0 million and a maximum of 49.0 million shares of the Company’s Common Stock.  The aggregate number of shares of Company Common Stock into which all of the B-5 Preferred Stock would be convertible (the “Conversion Shares”) will depend upon the audited combined pre-tax income of the Company’s Kraft and BudaSolar subsidiary corporations (the “Corporations Pre-Tax Income”) at the end of each of the five consecutive fiscal years ending December 31, 2010 through December 31, 2014 (the “Measuring Period”).  The target Corporations Pre-Tax Income and the corresponding number of Conversion Shares that can be exercised at the end of any one or more fiscal years during the Measuring Period is based on a “grid” of such Pre-Tax Income and Conversion Shares.  For example, if the Corporations Pre-Tax Profits at the end of any of the five fiscal years in the Measuring Period is 0 to $3.0 million, the number of Conversion Shares would be 7.0 million; if such Pre-Tax Income is $10.0 million, then the number of Conversion Shares would be 21.0 million; and if such Pre-Tax Income is $55.0 million or more, the Conversion Shares would be 49.0 million.  On March 31, 2015, any B-5 Preferred Stock not converted into Common Stock would automatically convert based upon the Corporations Pre-Tax Income for the fiscal year ending December 31, 2014.

Upon the execution of the BudaSolar share exchange agreement, the Company provided $75,000 to BudaSolar as a working capital advance, and is obligated to provide additional working capital thereafter. In addition, we shall assume the obligations of repayment of all outstanding loans made by the BudaSolar shareholders or their affiliates to BudaSolar prior to the date of the agreement, so that, as of the closing date, BudaSolar will have either positive stockholders equity or capital of not less than US $1,000. Such loans will be evidenced by a 5 year subordinated note of the Company, which shall (i) bear interest at an annual rate equal to LIBOR plus a margin of 3%; and (ii) be subject to full or partial repayment to the BudaSolar shareholders on the earlier to occur of (a) receipt of €30.0 million down payment by BudaSolar under its thin film silicon photovoltaic solar module process line sale and purchase agreement with China City Investments Limited; provided that, sufficient funds remain from such down payment to permit BudaSolar to meet all of its obligations under the China City agreement; (b) receipt of net proceeds, if any, in excess of $3.5 million received by the Company in a financing transaction; or (c) out of excess cash flow of BudaSolar and Kraft.  In addition, the Company has agreed to cause BudaSolar and Kraft to repay to Istvan Krafcsik by July 31, 2010 approximately $65,000 as repayment for a loan recently made by Mr. Krafcsik to BudaSolar.  As of the date of this report, this payment has not been made.

The Company is currently in negotiations with BudaSolar to further revise the share exchange agreement.

Under the terms of a separate agreement with BudaSolar, Kraft has contracted to purchase from BudaSolar (1) equipment assembly services on some of its equipment based on a fixed fee per equipment, and (2) installation related technical services based on hourly rates.  In connection with these services, Kraft has paid $1,370,000 in advances to BudaSolar during the second quarter of 2009 and an additional $144,930 during the first six months of 2010. BudaSolar has provided $747,891 worth of services in 2009 and $669,192 worth of services for the six months ended June 30, 2010 to Kraft, which left a credit balance of advances wired to BudaSolar of $97,847 as of June 30, 2010. In addition, during 2008, BudaSolar received $750,000 in advances from the Company, which was fully repaid in the second quarter of 2009.
 
 
 
 
6

 

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

The Company’s Kraft subsidiary is highly dependent upon the ongoing technical expertise of the BudaSolar personnel in completing and making operational the Kraft line of a-Si solar module equipment.   In such connection, Kraft recently completed the installation of equipment for its sole customer, Grupo Unisolar SA in Spain.  The customer resisted payment of the final €968,265 installment due under the April 8, 2008 contract allegedly due to certain maintenance and repair complaints with respect to our amorphous silicon equipment line. We engaged in good faith and productive discussions to resolve this, to establish joint research and product development efforts, to achieve international product certifications for Grupo’s a-Si modules, and to develop strategic alliances possibly including cross-ownership. The Company is confident that the full balance due from Grupo Unisolar will be collected.   In July 2010, subsequent to the financial statements, the Company collected €250,000 and reached an agreement on the remaining balance.

The ongoing operations of Kraft and BudaSolar will require approximately €1.0 million of working capital to sustain and expand their operations during 2010.  In addition, if the Company were to acquire Algatec, it is anticipated that a condition of such acquisition would be that the Company provide expansion financing of not less than $5.0 million for that corporation.  Accordingly, the Company’s ability to achieve it acquisition plans and expand its business will require the Company to source additional debt or equity financing from third party.  Absent receipt of additional financing, the Company’s operating subsidiaries may be unable to pay their obligations as they come due.

Agreements with Algatec Solar AG

On October 20, 2008, Robert M. Rubin, Chairman, Chief Executive Officer and Chief Financial Officer of Solar Thin Films, formed Algatec Equity Partners, L.P., a Delaware limited partnership (the “Partnership”), for the purpose of acquiring up to 49% of the share capital of Algatec.  Effective as October 30, 2008, Algatec and members of Algatec senior management consisting of Messrs. Rainer Ruschke, Ullrich Jank, Dr. Stefan Malik and Andre Freud (collectively, the “Algatec Management Stockholders”), and Anderkonto R. Richter, Esq., as trustee for Mr. Ruschke and another Algatec stockholder (the “Trustee”), entered into a share purchase agreement (the “Algatec Share Purchase Agreement”).  Under the terms of the Algatec Share Purchase Agreement, on November 3, 2008 (the “First Closing”) the Partnership invested an aggregate of $3,513,000, of which approximately €2,476,000 was represented by a contribution to the equity of Algatec to enable it to acquire all of the assets and equity of Trend Capital, the predecessor to Algatec.  The Partnership also purchased for €1.00 per share a total of 13,750 Algatec shares, representing 27.5% of the outstanding share capital of Algatec.
 
 
 
 
7

 

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

In addition to its equity investment, the Partnership has agreed under the terms of a loan agreement entered into at the same time as the Algatec Share Purchase Agreement, to lend to Algatec on or about November 30, 2008 (the “Second Closing”), an additional $2,600,000 or approximately €2,000,000.  The proceeds of the loan were to be used to assist Algatec in paying the balance of the purchase price for all of the assets and equity of the Trend Capital limited partnership.  Upon funding of the loan, the Partnership would purchase for €9,250 an additional 9,250 shares, representing 21.5% of the outstanding share capital of Algatec, thereby increasing its ownership to an aggregate of up to 49% of the outstanding share capital of Algatec.  The loan, together with interest at the rate of 6% per annum, is repayable on the earlier of December 31, 2011 or the completion of a financing providing Algatec with up to $50.0 million of proceeds for expansion (the “Algatec Financing”).  Upon the Partnership funding the entire €2,000,000 loan at the Second Closing, the Management Group would own the remaining 51% of the share capital of Algatec.  If the Partnership funds less than the full €2,000,000 loan, the additional 21.5% equity to be issued to the Partnership at the Second Closing was to have been appropriately pro-rated.  On December 29, 2008, the Partnership consummated the Second Closing with Algatec and funded a loan of €2,000,000 ($2.6 million). Ultimately, the Partnership provided total funding of approximately $5.75 million to Algatec which, after allowing for unfavorable currency conversion rates, left the Partnership with a total equity ownership in Algatec of approximately 47% of the total number of outstanding Algatec shares.

Effective as of October 30, 2008, the Trustee, the Management Group and the Partnership (collectively, the “Algatec Stockholders”) and Algatec entered into a stock exchange agreement. Under the terms of the stock exchange agreement the Algatec stockholders agreed, subject to certain conditions, to exchange 100% of the share capital of Algatec for shares of shares of Company capital stock. Consummation of the Algatec acquisition is subject to certain conditions, including Algatec obtaining up to $50.0 million financing for Algatec to enable it to construct the addition to its existing manufacturing facility and purchase the necessary equipment to expand its business.  On April 10, 2009, the parties agreed to extend the anticipated closing date of the transactions contemplated by the Stock Exchange Agreement to July 15, 2009.  The requisite financing for Algatec was not obtained and the agreement expired on July 15, 2009. The Company and Algatec Solar AG are no longer in discussions with respect to merging. However, they continue to discuss joint venture and other opportunities.

Solar Thin Power

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

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

At the time of the merger, an aggregate of 64,403,333 shares of Solar Thin Power were issued and outstanding, of which Solar Thin Films owned 43,000,000 shares or 66.77% of Solar Thin Power common stock, and stockholders of Solar Thin Power, other than Solar Thin Films, owned an aggregate of 21,403,333 shares of the 64,403,333 outstanding shares of Solar Thin Power common stock.   The Company consummated an Agreement and Plan of Merger dated effective June 30, 2009 pursuant to which Solar Thin Power was merged with and into the Company (the “Merger”).  Following the consummation of the Merger, effective June 30, 2009, Solar Thin Power is operated as a division of the Company and will seek to facilitate power projects and joint ventures designed to provide solar electricity using thin film a-Si solar modules. 
 
 
 
 
8

 

 
Under the terms of the Merger:

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

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

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

2Cor9, LLC

On July 21, 2010, the Company entered into a stock purchase agreement with 2Cor9, LLC (“2Cor9”) and its members under which the Company will acquire 100% of the outstanding membership interests of 2Cor9 from the members in exchange for 4,000,000 shares of the Company’s preferred stock.  2Cor9 intends to engage in the business of green energy management, including energy management assessment and retrofits, renewable energy installations (power projects), and energy monitoring.

The preferred stock may be converted over a five year period commencing on January 1, 2011 on the basis of four shares of Company common stock for each share of preferred stock into a minimum of 1,320,000 and a maximum of 16,000,000 shares of common stock. The aggregate number of shares of Company common stock into which all of the preferred stock would be convertible (the “Conversion Shares”) will depend upon the audited combined pre-tax profits computed on both an annual and a cumulative basis at the end of each of the five consecutive fiscal years ending December 31, 2010 through December 31, 2014 (the “Measuring Period”).  The target pre-tax profits and the corresponding number of Conversion Shares that can be exercised at the end of any one or more fiscal years during the Measuring Period is based on a “grid” of such pre-tax profits and Conversion Shares.  For example, if in year one the pre-tax profit was $2,500,000 and the year two pre-tax profit was $3,500,000, then 500,000 preferred shares are eligible for conversion into 2,000,000 Conversion Shares.  Any shares of preferred stock not converted within five years after January 1, 2011 will expire.

The Company is required to make up to $2,000,000 in capital contributions to 2Cor9 over a 12 month period of which (i) a $65,000 initial contribution was made upon the execution of the stock purchase agreement, and (ii) equal monthly contributions equal to $65,000 shall be made for the nine months commencing on August 31, 2010.

In the event that the Company consummates the 2Cor9 acquisition, there shall be three members appointed to the 2Cor9 board of managers, one of whom shall be appointed by the 2Cor9 members and the remaining two shall be appointed by the Company.

Consummation of the 2Cor9 acquisition is subject to certain conditions, including, without limitation, completion of satisfactory due diligence, our obtaining the requisite financing, and entry into certain employment agreements.  There can be no assurance that the Company will be able to consummate the 2Cor9 acquisition or, if consummated, that it will prove to be beneficial to the Company.
 
 
 
 
9

 

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

·  
Revenue Recognition;

·  
Cost of Sales;

·  
Allowance for Doubtful Accounts;

·  
Research and Development;

·  
Product Warranty Reserve;

·  
Stock Based Compensation; and

·  
Use of Estimates.

Revenue Recognition

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

Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. Deferred revenues as of June 30, 2010 and December 31, 2009 amounted to $765,875 and $2,373,067, respectively. ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arraignments (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.
 
The Company recognizes revenue when persuasive evidence of an arrangement exists, the price to the customer is fixed, collectibility is reasonable assured and title and risk of ownership is passed to the customer, which is usually upon shipment. However, certain customers traditionally have requested to take title and risk of ownership prior to shipment. Revenue for these transactions is recognized only when:

·  
Title and risk of ownership have passed to the customer;

·  
The Company has obtained a written fixed purchase commitment;

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

·  
The customer has provided a delivery schedule;
 
 
 
 
10

 

 
·  
All performance obligations related to the sale have been completed;

·  
The product has been processed to the customer’s specifications, accepted by the customer and made ready for shipment; and

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

The remittance terms for these “bill and hold” transactions are consistent with all other sale by the Company. There were no bill and hold transactions at June 30, 2010 and June 30, 2009.
 
For Complete Factory sales, which include sale of equipment, installation and commissioning, the Company recognizes revenues from the product portion (pieces of equipment) on shipment and services portion (installation and commissioning process) upon completion of the installation and commissioning process.  The commissioning includes a range of consulting services necessary to successfully complete a performance test, such as training of management, engineering and production personnel, debugging and resolving problems, initial oversight or support for vendor relations and purchasing, documentation and transfer of process knowledge and potential co-management of the production line during performance testing or completion of the training process.  The Company has started its shipment of the factory sales, product portion (pieces of equipment) in December 2008, and the service portion (installation and commissioning) is expected to be completed during the fiscal year 2010.

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

Cost of Sales

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

Allowance For Doubtful Accounts

We are required to estimate the collectibility of our trade receivables. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past due balances. In order to assess the collectibility of these receivables, we perform ongoing credit evaluations of our customers' financial condition. Through these evaluations we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received. Our reserves are also based on amounts determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but are not limited to, current economic trends, historical payment and bad debt write-off experience. We are not able to predict changes in the financial condition of our customers and if circumstances related to our customers deteriorate, our estimates of the recoverability of our receivables could be materially affected and we may be required to record additional allowances. Alternatively, if we provided more allowances than are ultimately required, we may reverse a portion of such provisions in future periods based on our actual collection experience.
 
 
 
 
11

 

 
Research and development

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

Product Warranty Reserves

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

During the six month period ended June 30, 2009, the Company accrued an additional $26,000 in warranty costs as a result of shipments to Grupo Unisolar, and did not incur any product warranty costs. During the six months ended June 30, 2010, the Company did not accrue or incur product liability costs.  The balance as of June 30, 2010 and December 31, 2009 was $170,576 and $212,687, respectively. The change represents foreign currency translation.

Stock Based Compensation

Effective for the year beginning January 1, 2006, the Company has adopted Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”).  The Company made no employee stock-based compensation grants before December 31, 2005 and therefore had no unrecognized stock compensation related liabilities or expense unvested or vested prior to 2006. Stock-based compensation in connection with stock options granted, vested and repriced for the six months ended June 30, 2010 and 2009 was $41,945 and $643,105, respectively.

Use of Estimates

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

Commitments and Contingencies

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

In connection with the acquisition of Kraft, the Company entered into consulting agreements with Robert Rubin and Zoltan Kiss pursuant to which each consultant would receive an annual salary of $160,000 per annum, reimbursement for up to $5,000 in expenses associated with company activities and major medical benefits in consideration for services performed on behalf of the company. Each of these agreements was for a term of three years and has been supplanted by subsequent events. Mr. Rubin’s salary was increased to $225,000 per annum when he assumed the duties of Chief Financial Officer. In December 2007, Mr. Kiss resigned as director of the Company and subsequently agreed to waive his rights to such payments pursuant to a pending settlement agreement with the Company as described elsewhere in this report.
 
 
 
 
12

 

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

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

In June 2009, the amended employment agreement with Peter Lewis was terminated by the parties. Effective as of October 1, 2009, Mr. Lewis was engaged as a non-exclusive sales and marketing consultant and representative of the Company through May 31, 2010; specifically with respect to the manufacture and sale of amorphous silicon thin film solar module manufacturing equipment and/or equipment lines (the “PV Equipment”).  As a marketing representative, Mr. Lewis was primarily responsible for generating orders and sales of the PV Equipment. In full settlement of Mr. Lewis’ claims to accrued salary, stock options, future earnings and other benefits, he will be paid $112,500 for the period ending September 30, 2009.  For the period from October 1, 2009 through May 31, 2010, Mr. Lewis was to be paid a monthly stipend of $15,000; all but the last two months have been paid.  In addition, Mr. Lewis was entitled to receive sales commissions pursuant to his agreement with Kraft.
 
 
 
13

 
 
 
In November 2005, the Company entered into a three year fixed term lease agreement for our corporate offices and facilities in Budapest, Hungary at a rate ranging from $4,543 to $15,433 per month as the lease has provisions for additional space for the period calendar year of 2006 and beyond. The lease agreement provides for moderate increases in rent after the first year in accordance with the inflationary index published by the Central Statistical Office. In November 2007, the Company signed the modification of lease agreement resulted a charge of $20,800 per months from January 1, 2008 for three years period of time through December 31, 2010. In July 2009 and January 2010, Kraft terminated its lease agreements covering its corporate offices and facilities in Budapest and Körmend Hungary.  In addition, in December 2009 and January 2010, Kraft entered into new lease agreements for its corporate offices and facilities in Budapest, Hungary. The minimum future cash flow for the leases at June 30, 2010 is as follows:

   
Amount:
 
Year ending December 31, 2010
 
$
124,800
 
Total
 
$
124,800
 
 
Results of Operations

Three months ended June 30, 2010 as compared to the three months ended June 30, 2009

Revenues

The following table summarizes our revenues for the three months ended June 30, 2010 and 2009:

Three months ended June 30,
 
2010
   
2009
 
Total Revenues
 
$
1,184,515
   
$
4,562,284
 
 
For the three months ended June 30, 2010, revenues decreased by 74% or $3,377,769 as compared to the three months ended June 30, 2009.  The Company did not deliver any Equipment or Factory sales for the period ended June 30, 2010, but completed aspects of a larger contract substantially completed in 2009.

During 2007 and 2008, the Company began to shift its marketing focus from Equipment Sales to Factory Sales (delivered on a “turnkey” basis, which by definition include a full set of equipment plus installation and training services or commissioning process). The Company signed its first deal in June of 2008 (and received the balance of its deposit in September 2008), for which it completed its first minor equipment portion of the Factory Sales delivery in December of 2008 valued at $147,262. The Company began shipping the balance of the equipment in March 2009 and has delivered substantially all of the equipment for this 7.9 million euro order during fiscal year 2010. During 2010, the Company also expects that a majority of its revenue will come from Factory Sales rather than Equipment Sales, and does not expect to derive any substantial revenue from related parties. Revenues was reported in the second quarter of 2010 was under the Company's only contract with Grupo Unisolar. Commencing in 2008, the Company has decided to further break out its revenue into Equipment Sales and Factory Sales and to continue to do so in the future in both annual and quarterly filings.
 
While the Company is pursuing additional business opportunities - both Factory Sales and Equipment Sales, given the limited amount of historical business volume we cannot provide assurance regarding future sales. As the Company shifts primarily from Equipment Sales secured by purchase orders to Factory Sales secured by contracts, management expects that it may become easier to forecast future volume based upon long-term contracts and then established trends.  Comparison of different financial reporting periods may show significant fluctuations, primarily due to the value of outstanding and completed contracts or orders during the period. Therefore, historical figures (whether on a comparative period over period percentage analysis in a linear fashion or otherwise) may not have much meaning with respect to future changes in revenue and should not be used to make predictions about future revenue performance. For example, revenue could increase 400% period over period if the Company booked and invoiced one or more complete factory orders or it could decrease 100% or more if the Company failed to successfully deliver on a Factory Sale order or only managed to book and invoice orders for production of selected equipment, i.e. an Equipment Sale.  Therefore, management is not in the position to predict future revenue flow or make conclusions based on actual historical figures and we can not provide absolute assurance that signed contracts, Grupo Unisolar or others, will be completed as expected or predicted. One complete factory may exceed $12 million in value but with unexpected financial or technical problems, production may slow down the completion of the contract.  In conclusion, revenue prediction by management is difficult as of the date of this report. 
 
 
 
14

 
 
 
Cost of sales

The following table summarizes our cost of sales for the three months ended June 30, 2010 and 2009:

Three months ended June 30,
 
2010
   
2009
 
Total cost of sales
 
$
692,624
   
$
3,297,095
 
 
For the three months ended June 30, 2010, our cost of sales was $692,624 as compared to $3,297,095, or 58.4% of our revenue for the three months ended June 30, 2010 as compared to 72% for the same period last year.  During 2010, we incurred less than anticipated costs in completing the Grupo Unisolar contract.  The decline in cost of goods sold is primarily due to the substantial completion of the Grupo Unisolar contract in the prior period. We had limited work and costs to complete this contract, during 2010 as compared to 2009. This contract was completed on July 12, 2010 and the outstanding accounts receivable was collected.
 
Our cost of revenue predominantly consists of the cost of labor, raw materials, depreciation and absorbed indirect manufacturing cost.

Selling, General and Administration Expenses

The following table summarizes our selling, general and administration expense for the three months ended June 30, 2010 and 2009:

Three months ended June 30,
 
2010
   
2009
 
Total selling, general and administration expense
 
$
515,545
   
$
1,389,308
 

For the three months ended June 30, 2010, selling, general and administrative expenses were $515,545 as compared to $1,389,308 for the three months ended June 30, 2009. The decrease in selling, general and administrative expenses is attributable to reduction in staff costs, consultants, legal and audit related incurred in 2010 as compared with 2009.
 
Depreciation and amortization

The following table summarizes our depreciation (excluding depreciation allocated to cost of sales) and amortization for the three months ended June 30, 2010 and 2009:

Three months ended June 30,
 
2010
   
2009
 
Depreciation and amortization
 
$
19,133
   
$
25,645
 
 
Depreciation and amortization has decreased by $6,512 in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The decrease is mainly due to the aging of equipment purchased in previous years.

Interest expense, net

The following table summarizes our interest expense, net for the three months ended June 30, 2010 and 2009:

Three months ended June 30,
 
2010
   
2009
 
Interest expense, net
 
$
56,460
   
$
451,026
 

Interest expense, net has decreased by $394,566 in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The decrease is mainly due to the debt discount of convertible debentures being fully amortized by the second quarter of 2009, and there was no such amortization in 2010.  

Six months ended June 30, 2010 as compared to the six months ended June 30, 2009
 
 
 
 
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Revenues

The following table summarizes our revenues for the six months ended June 30, 2010 and 2009:

Six months ended June 30,
 
2010
   
2009
 
Total Revenues
 
$
1,184,515
   
$
6,221,024
 
 
For the six months ended June 30, 2010, revenues decreased by 81% or $5,036,509 as compared to the six months ended June 30, 2009.  The Company did not deliver any Equipment or Factory sales for the period ended June 30, 2010, but completed aspects of a larger contract substantially completed in 2009.

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

Cost of sales

The following table summarizes our cost of sales for the six months ended June 30, 2010 and 2009:

Six months ended June 30,
 
2010
   
2009
 
Total cost of sales
 
$
692,524
   
$
4,125,771
 
 
For the six months ended June 30, 2010, our cost of sales was $692,624 as compared to $4,125,771, or 58.4% of our revenue for the three months ended June 30, 2010 as compared to 66% for the same period last year.  During 2010, we incurred less than anticipated costs in completing the Grupo Unisolar contract. The decline in cost of goods sold is primarily due to the substantial completion of the Grupo Unisolar contract in the prior period. We had limited work and costs to complete this contract, during 2010 as compared to 2009. This contract was completed on July 12, 2010 and the outstanding accounts receivable was collected.

 
Our cost of revenue predominantly consists of the cost of labor, raw materials, depreciation and absorbed indirect manufacturing cost.

Selling, General and Administration Expenses

The following table summarizes our selling, general and administration expense for the six months ended June 30, 2010 and 2009:

Six months ended June 30,
 
2010
   
2009
 
Total selling, general and administration expense
 
$
1,218,341
   
$
2,559,095
 

For the six months ended June 30, 2010, selling, general and administrative expenses were $1,218,341 as compared to $2,559,095 for the six months ended June 30, 2009. The decrease in selling, general and administrative expenses is attributable to reduction in staff costs, consultants, legal and audit related incurred in 2010 as compared with 2009.
 
Depreciation and amortization

The following table summarizes our depreciation (excluding depreciation allocated to cost of sales) and amortization for the six months ended June 30, 2010 and 2009:

Six months ended June 30,
 
2010
   
2009
 
Depreciation and amortization
 
$
35,704
   
$
49,695
 
 
Depreciation and amortization has decreased by $13,991 in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease is mainly due to the aging of equipment purchased in previous years.

Interest expense, net

The following table summarizes our interest expense, net for the six months ended June 30, 2010 and 2009:

Six months ended June 30,
 
2010
   
2009
 
Interest expense, net
 
$
187,025
   
$
719,240
 

Interest expense, net has decreased by $532,215 in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease is mainly due to the debt discount of convertible debentures being fully amortized by the second quarter of 2009, and there was no such amortization in 2010. 

Liquidity and Capital Resources
 
As of June 30, 2010, we had working capital deficit of $3,774,541. We generated a deficit in cash flow from operations of $652,605 for the six months ended June 30, 2010. This deficit is primary attributable to our net loss of $960,585, net with depreciation and amortization and deferred compensation of  $317,852 as well as $175,906 stock based compensation and stock issued in exchange for operating expenses paid by shareholders, loss on sale of equipment, $9,979 and the changes in the balances of assets and liabilities. Operating assets decreased $417,917, net with a decrease in operating liabilities of $613,704.

Cash flow generated by investing activities for the six months ended June 30, 2010 was $30,975 resulting from the sale of property and equipment.

Cash generated by financing activities for the six months ended June 30, 2010 was $28,862 from proceeds from related party advances.

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

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

As at June 30, 2010, the Company’s consolidated current liabilities exceeded its consolidated current assets by $3,774,541.   As of the filing date of this report, the Company is currently in default in the payment of certain notes payable aggregating $935,000 and $268,000 (plus redemption penalties and accrued interest) which became due in March and June 2009, respectively, and accounts payable and accrued liabilities of approximately $2.9 million are also due.  Unless the Company is able to obtain additional capital or other financing within the next 90 to 120 days, or sooner, its creditors may sue to collect on their notes and accounts.  In such event, the Company may be required to seek protection from its creditors under the Federal Bankruptcy Act.  Although the Company is actively pursuing such financing, there is no assurance that it will be obtained on commercially reasonable terms, if at all.  Even if such financing is obtainable, it may be expected that the terms thereof will significantly dilute the equity interests of existing stockholders of the Company.

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

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

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

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

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

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

On April 26, 2010, one of the Company’s March 2006 convertible note holders settled for 146,900 shares of the Company’s Common Stock as settlement of convertible debenture of $65,000 and unpaid accrued interest.

On April 28, 2010, the Company issued 115,000 shares of the Company’s Common Stock in payment of interest on note payable.

As of the date of this report, an aggregate of $268,000 of the Company’s June 2006 convertible notes held by 2 noteholders remain unpaid and in default, and a former holder of convertible notes is suing the Company for $255,000 of alleged fees and penalties it claims is owed under the June 2006 agreements.  See Note 9, “Litigation.” The Company is in the process of negotiating settlements with such note holders.

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

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

Inflation and Foreign Currency

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

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

The translation of the Company’s subsidiaries forint denominated balance sheets into U.S. dollars, as of June 30, 2010, has been affected by the U.S. dollar against the Hungarian forint due to recent strengthening of the U.S. dollar. The currency has changed from 193.27 as of June 30, 2009 to 234.50 as of June 30, 2010, approximate 21.3% depreciation in value. The average Hungarian forint/U.S. dollar exchange rates used for the translation of the subsidiaries forint denominated statements of operations into U.S. dollars for the six months ended June 30, 2010 and 2009 were 205.30 and 218.34, respectively, an approximate 6% depreciation in value.
 
New Accounting Pronouncements

In March 2010, the FASB issued new accounting guidance, under ASC Topic 605 on Revenue Recognition.  This standard provides that the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved.  Determining whether a milestone is substantive requires judgment that should be made at the inception of the arrangement.  To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement.  No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement.  The standard is effective for interim and annual periods beginning on or after June 15, 2010.  The Company is currently evaluating the impact the adoption of this guidance will have on its financial statements.

            In May 2010, the FASB issued Accounting Standards Update No. 2010-19, “Foreign Currency Issues: Multiple Foreign Currency Exchange Rates.” The guidance provides clarification of accounting treatment when reported balances in an entity’s financial statements differ from their underlying U.S. dollar denominated values due to different rates being used for remeasurement and translation. The guidance indicates that upon adopting highly inflationary accounting for Venezuela, since the U.S. dollar is now the functional currency of a Venezuelan subsidiary, there should no longer be any differences between the amounts reported for financial reporting purposes and the amount of any underlying U.S. dollar denominated value held by the subsidiary. Therefore, any differences between these should either be recognized in the income statement or as a cumulative translation adjustment, if the difference was previously recognized as a cumulative translation adjustment. The adoption of this standard did not have any impact on the Company’s consolidated financial position and results of operations.
 
 
 
 
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           In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-13, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades” (“ASU 2010-13”). ASU 2010-13 addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. FASB Accounting Standards Codification (“ASC”) Topic 718 was amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade shall not be considered to contain a market, performance or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies for equity classification. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010, with early application permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

Off-Balance Sheet Arrangements

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

ITEM 3.             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4T.          CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer (principal financial officer) as appropriate, to allow timely decisions regarding required disclosure. During the quarter ended June 30, 2010 we carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the 1934 Act. Based on this evaluation, because of the Company’s limited resources and limited number of employees, management concluded that our disclosure controls and procedures were ineffective as of June 30, 2010.

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

During the fiscal quarter ended June 30, 2010, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
 
 
 
 
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PART II - OTHER INFORMATION

ITEM 1.              LEGAL PROCEEDINGS.

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

Solar Thin Films, Inc. vs. Strategic Growth International, Inc. (Supreme Court, New York State, New York County). On May 7, 2010, the Company commenced an action against Strategic Growth International, Inc. (“SGI”) in the Supreme Court of the State of New York, County of New York (the “Action”), seeking a temporary restraining order and preliminary injunction enjoining SGI and its affiliates from directly or indirectly selling, pledging, hypothecating or otherwise disposing of all or any portion of 400,000 shares of Company common stock issued to SGI as partial compensation under an investor relations services agreement with the Company dated March 31, 2009.  The Company claimed that SGI did not fulfill its obligations under the agreement and was not entitled to compensation.  On August 9, 2010, the Company and SGI entered into a settlement agreement under which, in full and final settlement of all claims and defenses asserted by the parties in the Action, SGI (i) delivered to the Company a certificate representing 150,000 shares of Company common stock previously issued to SGI, together with appropriate stock powers, for cancellation, (ii) waived any and all claims to warrants to be issued by the Company as compensation under the March 2009 agreement, and (iii) waived any and all claims to cash compensation under the March 2009 agreement.

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

ITEM 1A.          RISK FACTORS.

           There have been no material changes to the risks to our business described in our Annual Report on Form-10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on April 15, 2010.

ITEM 2.             UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

In April 2010, the Company issued an aggregate of 1,100,000 shares of its common stock for services rendered and to be rendered.

In April 2010, the Company issued 146,900 shares of its common stock in exchange for $65,000 convertible note and related accrued interest of $8,450.

In April 2010, the Company issued 145,000 shares of its common stock, at a conversion price of $0.50 per share, upon conversion of a March 2006 note in the amount of $65,000 plus accrued interest.

On April 28, 2010, the Company issued 115,000 shares of the Company’s Common Stock in payment of interest on note payable.
  
On May 17, 2010, the Company entered into a new share exchange agreement with BudaSolar and the BudaSolar shareholders.  The revised transaction contemplates that the Company will directly acquire 100% of the share capital of BudaSolar in exchange for 70,000 shares of the Company’s  newly designated Series B-5 convertible voting preferred stock (the “B-5 Preferred Stock”).  The B-5 Preferred Stock has a liquidation value of $7.0 million and is convertible at any time by the holders into a minimum of 7.0 million and a maximum of 49.0 million shares of the Company’s common stock, $0.01 par value per share (the “Common Stock”).  The aggregate number of shares of Company Common Stock into which all if the B-5 Preferred Stock would be convertible (the “Conversion Shares”) will depend upon the audited combined pre-tax income of the Company’s Kraft and BudaSolar subsidiary corporations (the “Corporations Pre-Tax Income”) at the end of each of the five consecutive fiscal years ending December 31, 2010 through December 31, 2014 (the “Measuring Period”).  The target Corporations Pre-Tax Income and the corresponding number of Conversion Shares that can be exercised at the end of any one or more fiscal years during the Measuring Period is based on a “grid” of such Pre-Tax Income and Conversion Shares.  For example if the Corporations Pre-Tax Profits at the end of any of the five fiscal years in the Measuring Period is 0 to $3.0 million, the number of Conversion Shares would be 7.0 million; if such Pre-Tax Income is $10.0 million, then the number of Conversion Shares would be 21.0 million; and if such Pre-Tax Income is $55.0 million or more, the Conversion Shares would be 49.0 million.  On March 31, 2015, any B-5 Preferred Stock not converted into Common Stock would automatically convert based upon the Corporations Pre-Tax Income for the fiscal year ending December 31, 2014.

We believe that all of the above offerings and sales were deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of the Company or executive officers of the Company, and transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.
 
 
 
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ITEM 3.             DEFAULTS UPON SENIOR SECURITIES.

           As of the filing date of this report, the Company is currently in default in the payment of certain notes payable aggregating $935,000 and $268,000 (plus redemption penalties and accrued interest) which became due in March and June 2009, respectively, and accounts payable and accrued liabilities of approximately $2.9 million are also due.  Unless the Company is able to obtain additional capital or other financing within the next 90 to 120 days, or sooner, its creditors may sue to collect on their notes and accounts.  In such event, the Company may be required to seek protection from its creditors under the Federal Bankruptcy Act.  Although the Company is actively pursuing such financing, there is no assurance that it will be obtained on commercially reasonable terms, if at all.  Even if such financing is obtainable, it may be expected that the terms thereof will significantly dilute the equity interests of existing stockholders of the Company.

ITEM 4.             (REMOVED AND RESERVED).

ITEM 5.             OTHER INFORMATION.

           None.
  
ITEM 6.             EXHIBITS.

           The exhibits listed below are required by Item 601 of Regulation S-K.  Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-Q has been identified.

Exhibit No.
 
Exhibit Name
     
10.1
 
Stock Purchase Agreement dated as of July 21, 2010 by and among Solar Thin Films, Inc., 2Cor9, LLC, Chris Schuring, J. Kyle McCue and Philip McAnelly.
     
31.1
 
Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of Chief Executive Officer pursuant to 18 United States Code Section 1350,  as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of Chief Financial Officer pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.

 
 
 
 
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SIGNATURES

           Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

   
SOLAR THIN FILMS, INC.
     
 Date: August 23, 2010
 
/s/ Robert M. Rubin
   
Robert M. Rubin
   
Chief Executive Officer (Principal Executive Officer)
     
 Date: August 23, 2010
 
/s/ Harry Shufrin
   
Harry Shufrin
   
Chief Financial Officer (Principal Accounting and Financial Officer)

 
 
 
 
 
 
 
 
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