DAYSTAR TECHNOLOGIES INC - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - DAYSTAR TECHNOLOGIES INC	exhibit31-2.htm
EX-32.1 - EXHIBIT 32.1 - DAYSTAR TECHNOLOGIES INC	exhibit32-1.htm
EX-31.1 - EXHIBIT 31.1 - DAYSTAR TECHNOLOGIES INC	exhibit31-1.htm
EX-32.2 - EXHIBIT 32.2 - DAYSTAR TECHNOLOGIES INC	exhibit32-2.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, 2012

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

For the Transition Period from ________ to ________

Commission File No. 001-34052

DayStar Technologies, Inc.
(Exact name of registrant as specified in its charter)

Delaware	84-1390053
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

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

(408) 582-7100
(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer [ ]	Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox

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

Title of Each Class	Outstanding- August 17, 2012
Common Stock par value $0.01 per share	2,200,732

DAYSTAR TECHNOLOGIES, INC.

Quarterly Report on Form 10-Q
Quarterly Period Ended June 30, 2012

Table of Contents

Part I – Financial Information
Item 1. Financial Statements	3
Balance Sheets—As of June 30, 2012 (unaudited) and December 31, 2011	3
Statements of Operations—For the Three Months and Six Months Ended June 30, 2012 and 2011 and For the Period From July 1, 2005 (Inception of the Development Stage) to June 30, 2012 (unaudited)	4
Statements of Changes in Stockholders’ Equity—For the Period From July 1, 2005 (Inception of the Development Stage) to June 30, 2012 (unaudited)	5
Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 and For the Period From July 1, 2005 (Inception of the Development Stage) to June 30, 2012 (unaudited)	7
Notes to Financial Statements (unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	20
Item 4. Controls and Procedures	20
PART II – Other Information
Item 1. Legal Proceedings	21
Item 1A. Risk Factors	21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3. Defaults Upon Senior Securities	22
Item 4. Mine Safety Disclosures	22
Item 5. Other Information	22
Item 6. Exhibits	23
Signatures	24

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DAYSTAR TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(Unaudited)

		June 30,			December 31,
		2012			2011
ASSETS
Current Assets:
Cash and cash equivalents	$	42,063		$	4,199
Other current assets		298,231			222,770
Total current assets		340,294			226,969
Property and Equipment, at cost		20,691,046			20,691,046
Less accumulated depreciation and amortization		(7,702,370	)		(7,138,167	)
Net property and equipment		12,988,676			13,552,879

Investment in nonconsolidated affiliate		294,285			—
Other assets		323,315			324,080
Total Assets	$	13,946,570		$	14,103,928

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Accounts payable and accrued expenses	$	5,965,831		$	5,162,228
Notes and capital leases payable, current portion, net of discount of $176,352 and $9,338, respectively		4,623,648			4,920,662
Total current liabilities		10,589,479			10,082,890
Long-Term Liabilities:
Conversion feature		—			33,541
Total long-term liabilities		—			33,541
Commitments and Contingencies		—			—
Stockholders’ Equity:
Preferred stock, $.01 par value; 3,000,000 shares authorized; 0 shares issued and outstanding		—			—
Common stock, $.01 par value; 120,000,000 shares authorized; 2,200,732 and 1,380,393 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively		22,007			13,804
Additional paid-in capital		159,158,824			157,501,134
Accumulated deficit		(10,145,391	)		(10,145,391	)
Deficit accumulated during the development stage		(145,678,349	)		(143,382,050	)
Total stockholders’ equity		3,357,091			3,987,497
Total Liabilities and Stockholders’ Equity	$	13,946,570		$	14,103,928

See accompanying notes to these financial statements.

DAYSTAR TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(Unaudited)

														For the Period
														from July 1, 2005
														(Inception of the
		For the Three Months Ended						For the Six Months Ended						Development Stage)
		June 30,						June 30,						to June 30,
		2012			2011			2012			2011			2012
Revenue:
Product revenue	$	—		$	—		$	—		$	—		$	3,528
Research and development contract revenue		—			—			—			—			615,000
Total revenue		—			—			—			—			618,528
Costs and Expenses:
Research and development		181,759			233,206			370,212			839,771			62,151,535
Selling, general and administrative		558,606			459,357			871,149			1,691,544			38,158,767
Restructuring		—			—			—			850,000			13,777,336
Depreciation and amortization		265,303			398,018			564,968			802,804			16,117,866
Total costs and expenses		1,005,668			1,090,581			1,806,329			4,184,119			130,205,504
Other Income (Expense):
Other income (expense)		—			—			—			—			2,263,332
Interest expense		(117,882	)		(111,782	)		(235,365	)		(345,569	)		(4,008,404	)
Amortization of note discount and financing costs		(247,529	)		(106,250	)		(288,146	)		(812,062	)		(17,431,546	)
(Loss) gain on derivative liabilities		—			245,898			33,541			3,896,066			14,075,981
Loss on extinguishment of debt		—			—			—			—			(10,990,736	)
Total other income (expense)		(365,411	)		27,866			(489,970	)		2,738,435			(16,091,373	)
Net Loss	$	(1,371,079	)	$	(1,062,715	)	$	(2,296,299	)	$	(1,445,684	)	$	(145,678,349	)

Weighted Average Common Shares Outstanding (Basic And Diluted)		1,714,389			1,272,093			1,714,389			1,195,558
Net Loss Per Share (Basic and Diluted)	$	(0.80	)	$	(0.84	)	$	(1.34	)	$	(1.21	)

See accompanying notes to these financial statements.

DAYSTAR TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE PERIOD FROM JULY 1, 2005 (INCEPTION OF THE DEVELOPMENT STAGE) TO JUNE 30, 2012
(Unaudited)

				Class B															Deficit
	Common Stock			Common Stock															Accumulated
										Additional			Deferred						During the
										Paid-In			Equity Based			Accumulated			Development
	Shares		Amount	Shares			Amount			Capital			Compensation			Deficit			Stage			Total
BALANCES, July 1, 2005	80,686	$	807	3,222		$	32		$	22,493,465		$	(110,770	)	$	(10,145,391	)	$	—		$	12,238,143
Exercise of warrants and stock options, 7/05 -12/05 at $378.00 - $518.00 per share	18,901		189	—			—			7,220,013			—			—			—			7,220,202
Conversion of Class B common stock	921		9	(3,222	)		(32	)		23			—			—			—			—
Share-based compensation	615		6	—			—			412,294			(292,940	)		—			—			119,360
Net loss	—		—	—			—			—			—			—			(3,904,151	)		(3,904,151	)
BALANCES, December 31, 2005	101,123	$	1,011	—		$	—		$	30,125,795		$	(403,710	)	$	(10,145,391	)	$	(3,904,151	)	$	15,673,554
Reclassification upon adoption of SFAS 123(R)	—		—	—			—			(403,710	)		403,710			—			—			—
Exercise of warrants and stock options, 1/06, 3/06 & 9/06 at $129.78 - $472.50 per share	2,108		21	—			—			671,852			—			—			—			671,873
Share-based compensation	2,811		28	—			—			1,322,692			—			—			—			1,322,720
Beneficial conversion feature on convertible note	—		—	—			—			1,223,842			—			—			—			1,223,842
Shares issued in payment of principal and interest on convertible note, 8/06 - 12/06	18,143		181	—			—			7,377,978			—			—			—			7,378,159
Warrants issued for placement of convertible note at $338.94 per share	—		—	—			—			140,419			—			—			—			140,419
Net loss	—		—	—			—			—			—			—			(20,441,201	)		(20,441,201	)
BALANCES, December 31, 2006	124,185	$	1,241	—		$	—		$	40,458,868		$	—		$	(10,145,391	)	$	(24,345,352	)	$	5,969,366
Exercise of warrants and stock options, 1/07, 3/07, 6/07, 9/07 & 11/07 at $126.00 - $217.35 per share	8,225		82	—			—			3,174,235			—			—			—			3,174,317
Share-based compensation	3,118		31	—			—			4,090,013			—			—			—			4,090,044
Issuance of shares pursuant to offering, 2/07 at $126.00 per share	39,682		397	—			—			4,999,603			—			—			—			5,000,000
Issuance of shares pursuant to secondary offering, 10/07 at $267.75 per share, net of offering costs	273,810		2,738	—			—			67,892,180			—			—			—			67,894,918
Shares issued in payment of principal and interest on convertible note, 1/07 at $93.87 per share and 2/07 at $126.00 per share	61,514		615	—			—			7,326,310			—			—			—			7,326,925
Loss on extinguishment due to excess of fair market value of shares issued over issuance price	—		—	—			—			5,369,278			—			—			—			5,369,278
Shares issued for placement of note and offering 3/07 at $126.00 per share	7,263		73	—			—			2,397,598			—			—			—			2,397,671
Net loss	—		—	—			—			—			—			—			(36,142,861	)		(36,142,861	)

				Class B												Deficit
	Common Stock			Common Stock												Accumulated
								Additional			Deferred					During the
								Paid-In			Equity Based		Accumulated			Development
	Shares		Amount	Shares		Amount		Capital			Compensation		Deficit			Stage			Total
BALANCES, December 31, 2007 .	517,797	$	5,177	—	$	—	$	135,708,085		$	—	$	(10,145,391	)	$	(60,488,213	)	$	65,079,658
Exercise of stock options, 6/08 at $197.82 per share	25		—	—		—		5,024			—		—			—			5,024
Share-based compensation	12,952		130	—		—		4,794,998			—		—			—			4,795,128
Net loss	—		—	—		—		—			—		—			(26,330,271	)		(26,330,271	)
BALANCES , December 31, 2008	530,774	$	5,307	—	$	—	$	140,508,107		$	—	$	(10,145,391	)	$	(86,818,484	)	$	43,549,539
Share-based compensation	7,409		74	—		—		4,133,457			—		—			—			4,133,531
Warrants issued in connection with convertible note at $31.50 per share	—		—	—		—		497,578			—		—			—			497,578
Net loss	—		—	—		—		—			—		—			(25,040,028	)		(25,040,028	)
BALANCES, December 31, 2009	538,183	$	5,381	—	$	—	$	145,139,142		$	—	$	(10,145,391	)	$	(111,858,512	)	$	23,140,620
Exercise of warrants, 7/10 & 10/10 at $6.30 per share	9,524		95	—		—		60,334			—		—			—			60,429
Share-based compensation	99,077		991	—		—		4,668,085			—		—			—			4,669,076
Warrants issued in connection with convertible note at $18.90 - $31.50 per share	—		—	—		—		704,481			—		—			—			704,481
Shares issued in settlement of liabilities at $10.78 - $12.95 per share	275,319		2,753	—		—		2,755,909			—		—			—			2,758,662
Reverse split adjustment	4,255		43	—		—		257			—		—			—			300
Net loss	—		—	—		—		—			—		—			(28,081,673	)		(28,081,673	)
BALANCES, December 31, 2010	926,358	$	9,263	—	$	—	$	153,328,208		$	—	$	(10,145,391	)	$	(139,940,185	)	$	3,251,895
Cashless exercise of warrants, 11/11 at $1.61 per share	16,531		165	—		—		(165	)		—		—			—			—
Share-based compensation	44,585		446	—		—		1,224,841			—		—			—			1,225,287
Warrants issued in connection with notes at $3.64 - $10.85 per share	—		—	—		—		293,826			—		—			—			293,826
Shares issued in settlement of liabilities at $6.30 - $14.13 per share	110,857		1,109	—		—		1,115,331			—		—			—			1,116,440
Conversion of notes payable and accrued interest at $6.30 per share	198,063		1,981	—		—		1,245,813			—		—			—			1,247,794
Financing Costs	83,999		840	—		—		293,280			—		—			—			294,120
Net loss	—		—	—		—		—			—		—			(3,441,865	)		(3,441,865	)
BALANCES, December 31, 2011	1,380,393	$	13,804	—	$	—	$	157,501,134		$	—	$	(10,145,391	)	$	(143,382,050	)	$	3,987,497
Share-based compensation	62,303		623	—		—		138,456			—		—			—			139,079
Beneficial conversion feature on convertible notes issued 1/12 and 3/12	—		—	—		—		455,011			—		—			—			455,011
Warrants issued in connection with notes 1/12 at $2.80 - $3.50 per share	—		—	—		—		149			—		—			—			149
Shares issued in acquiring interest in non-consolidating affiliate	285,714		2,857	—		—		291,428			—		—			—			294,285
Conversion of notes payable and accrued interest 2/12 and 3/12 at $1.61 - $1.68 per share	472,322		4,723	—		—		772,646			—		—			—			777,369
Net loss	—		—	—		—		—			—		—			(2,296,299	)		(2,296,299	)
BALANCES, June 30, 2012	2,200,732	$	22,007	—	$	—	$	159,158,824		$	—	$	(10,145,391	)	$	(145,678,349	)	$	3,357,091

See accompanying notes to these financial statements.

DAYSTAR TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(Unaudited)

								For the Period
								from July 1, 2005
								(Inception of the
		For the Six Months Ended						Development Stage)
		June 30,						to June 30,
		2012			2011			2012
Cash Flows from Operating Activities:
Net loss	$	(2,296,299	)	$	(1,445,684	)	$	(145,678,349	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		564,968			802,804			16,117,866
Share-based compensation		139,079			1,110,368			20,632,280
Non-cash interest		235,365			345,569			3,248,005
Amortization of note discount and non-cash financing costs		288,146			812,062			16,854,847
Gain on derivative liabilities		(33,541	)		(3,896,066	)		(14,075,981	)
Non-cash restructuring		—			850,000			11,775,538
Loss on sale of fixed assets		—			—			389,784
Loss on extinguishment of debt		—			—			10,990,736
Changes in operating assets and liabilities:
Other assets		(75,461	)		143,824			(366,753	)
Accounts payable and accrued expenses		615,607			784,884			8,774,151
Deferred rent		—			—			1,595,239
Deferred revenue		—			—			217,618
Net cash used in operating activities		(562,136	)		(492,239	)		(69,525,019	)
Cash Flows from Investing Activities:
Purchase of investment		—			—			(71,957,732	)
Proceeds from sale of investments		—			—			72,662,973
Purchase of equipment and improvements		—			—			(42,570,127	)
Proceeds from sale of assets		—			—			2,035,280
Net cash used in investing activities		—			—			(39,829,606	)
Cash Flows from Financing Activities:
Proceeds from sale of stock		—			—			78,312,500
Proceeds from issuance of notes		600,000			450,000			30,730,000
Payments on notes and capital leases		—			(50,000	)		(11,545,310	)
Cost of financing		—			—			(6,342,379	)
Proceeds from exercise of warrants and stock options		—			—			8,870,549
Net cash provided by (used in) financing activities		600,000			400,000			100,025,360
Increase (decrease) in cash and cash equivalents		37,864			(92,239	)		(9,329,265	)
Cash and cash equivalents, beginning of period		4,199			97,058			9,371,328
Cash and cash equivalents, end of period	$	42,063		$	4,819		$	42,063
Supplemental Cash Flow Information:
Cash paid for interest	$	—		$	—
Non-Cash Transactions:
Investment in nonconsolidated affiliate	$	(294,285	)	$	—
Shares issued in common stock for investment in nonconsolidated affiliate	$	294,285		$	—
Shares issued in common stock reducing principal and interest on convertible notes	$	777,369		$	1,247,794
Beneficial conversion feature on convertible note	$	455,011		$	41,794
Shares issued for settlement of liabilities	$	—		$	1,116,440

See accompanying notes to these financial statements.

DAYSTAR TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

1. Organization and Nature of Operations

DayStar Technologies, Inc. (“DayStar” or the “Company”) is a development stage enterprise that was formed in 1997 for the purpose of developing, manufacturing and marketing innovative products to the solar photovoltaic (“PV”) industry. From its inception, the Company has focused primarily on thin film copper indium gallium di-selenide (“CIGS”) solar products. The Company has developed a proprietary one-step sputter deposition process and manufactured a commercial scale deposition tool to apply high efficiency CIGS material over large area glass substrates in a continuous fashion. This tool in one step completes the critical process of applying the CIGS material to the substrate and when integrated with commercially available thin film manufacturing equipment for the remaining steps, the Company believes it can provide a critically differentiated manufacturing process to produce low-cost monolithically integrated, CIGS-on-glass modules that address the grid-tied, ground-based PV market.

Given the changes in the economy and in the industry in recent years, the Company has significantly scaled back its development and manufacturing efforts and embarked on a strategy in which it is seeking strategic partnerships to advance its technology and enter new markets within the global renewal energy industry.

In March 2012, Sunlogics Power Fund Management, Inc., a subsidiary of Salamon Group, Inc., made an initial loan to DayStar. Sunlogics Power Fund Management (“Sunlogics”) is a fund that provides investments to companies in the solar industry and is a project-acquiring partner of Sunlogics PLC and its subsidiary, as well as other third party project developers, specializing in the design, development and operation of solar energy solutions, including rooftop and ground mount solar power systems. Simultaneous with the initial loan, Sunlogics entered into a consulting arrangement with DayStar to assist the management of the Company with business development and also with exploring and evaluating strategic opportunities. DayStar and Sunlogics plan to pursue opportunities that will be mutually beneficial in achieving the goals of both companies.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from these condensed unaudited financial statements. These condensed unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The condensed balance sheet as of December 31, 2011 has been derived from audited financial statements. The results of operations for the six months ended June 30, 2012 and 2011 are not necessarily indicative of the operating results for the full year.

In the opinion of management, all adjustments, consisting only of normal recurring accruals, have been made to present fairly the Company’s financial position at June 30, 2012 and the results of its operations and its cash flows for the six months ended June 30, 2012 and 2011 and for the period from July 1, 2005 (Inception of the Development Stage) to June 30, 2012.

Reverse Stock Split— On March 27, 2012, the Company’s shareholders approved a 1-for-7 reverse stock split of its issued and outstanding common shares with the total authorized shares of common stock remaining unchanged at 120,000,000. Trading of the Company’s common stock on the NASDAQ Capital Market on a split-adjusted basis began at the open of trading on April 9, 2012. The reverse stock split affected all shares of the Company’s common stock, as well as options to purchase the Company’s common stock and other equity incentive awards, as well as convertible debt instruments and warrants that were outstanding immediately prior to the effective date of the reverse stock split. All references to common shares and per-share data for prior periods have been retroactively restated to reflect the reverse stock split as if it had occurred at the beginning of the earliest period presented.

2. Liquidity and Future Operations

The Company’s financial statements for the year ended December 31, 2011 and the six months ended June 30, 2012 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company is in the development stage, and as such, has historically reported net losses, including a net loss of $2.3 million for the six months ended June 30, 2012. The Company anticipates it will continue to incur losses as it seeks strategic partnerships and investments. As noted herein, as a result of the Company’s current liquidity, there is substantial doubt as to its ability to continue as a going concern.

In order to continue operations and pursue strategic partnerships, the Company requires immediate and substantial additional capital beyond its current cash on hand.

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

The Company is pursuing long-term strategic partnerships and investments to advance its technology and enter new markets within the global renewal energy industry. Those potential partnerships, if consummated, could include joint ventures, licensing agreements, contract manufacturing agreements, a merger with or an acquisition of DayStar. Although the Company continues to seek strategic investors or partners, in light of its current cash position, the Company may in the near term be forced to cease operations. The Company has implemented cost savings measures to limit its cash outflows while pursuing strategic investments and partnerships.

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

3. Significant Accounting Policies

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

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

Cost-Basis Method Valuation—The Company’s non-marketable equity investment is recorded using the cost-basis method of accounting, and is classified within other long-term assets on the accompanying balance sheet as permitted by FASB ASC 325, “Cost Method Investments”, as the Company owns less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of the entity. See Note 4 Investment in Non-Consolidating Affiliate ” for more information.

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

Since inception of the development stage on July 1, 2005, the principal source of revenue for the Company has been from government funded research and development contracts and grants. Grant revenue is recognized when the Company fulfills obligations as set forth under the grant. Terms of the grant reflected in the accompanying financial statements require the Company to maintain specified employment criteria over a five year period. If the Company fails to meet the specified criteria, it must repay the unearned portion of the grant. As a result, the Company reported a liability of $520,000 at June 30, 2012 and December 31, 2011, respectively.

Research and development contract revenue is recognized as the Company meets milestones as set forth under the contract. The Company recognized no revenue for the six months ended June 30, 2012 and 2011, respectively.

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

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

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

Share-based compensation expense for the three months and six months ended June 30, 2012 and 2011 was as follows:

		For the Three Months				For the Six Months
		Ended June 30,				Ended June 30,
		2012		2011		2012		2011
Share-based compensation:
Selling, general and administrative	$	19,891	$	128,686	$	75,620	$	766,107
Research and development		49,570		48,929		63,459		344,261
Total share-based compensation	$	69,461	$	177,615	$	139,079	$	1,110,368

During the six months ended June 30, 2012, the Company granted 57,144 restricted stock awards. There were no restricted stock units or options to purchase common stock granted, and no restricted stock awards, restricted stock units or options to purchase common stock were forfeited during the six months ended June 30, 2012.

Subsequent to June 30, 2012 and through the date of this filing, the Company issued as an inducement to new officers' a start bonus award of 200,000 shares of Company stock that will be paid upon commencement of employment with vesting over 12 equal installments. The Company has already issued one award to the CFO and is expected in the near term to offer three to four other awards as the Company builds the team to implement the new platform and direction the Company is embarking on. The Company has added 4 new Board Members and have granted 3 each a 25,000 award of Company stock upon acceptance of the Directors Letter of Indemnification.

Reclassifications —Certain reclassifications have been made to the 2011 financial statements to conform to the 2012 presentation. Such reclassifications had no impact on net loss.

Impact of Recently Issued Accounting Pronouncements—

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

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. ASU 2011-05 is effective for fiscal years and interim periods beginning after December 15, 2011 and must be applied retrospectively. The Company did not have any other comprehensive income during the three months ended March 31, 2012 and the adoption of ASU 2011-05 in the first quarter of 2012 did not have an impact on the Company’s financial position, results of operations, or cash flows.

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

4. Investment in Non-Consolidating Affiliate

Investment in unconsolidated affiliate is a long term, strategic equity investment in Eco Energy Solutions (Australia) Pty. Ltd. ("Eco") that will help to enable the Company implement its new strategy in energy projects construction, ownership and solutions business. On May 31, 2012 the Company entered into a purchase agreement to acquire a 10% interest in Eco for 285,714 shares of its common stock that had a closing market stock price of $1.03. The total value of Eco is carried under the cost method of accounting at $294,285.

This investment has been accounted for as a cost-basis investment as the Company owns less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of the entity. The Company’s investment is in an entity that is not publicly traded and, therefore, no established market for the securities exists. The fair value of a cost-method investment is not estimated if there is no identified event or change in circumstances that would have a significant adverse effect on the fair value of the investment. The Company’s cost-method investment is carried at historical cost in its financial statements and measured at fair value on a nonrecurring basis. If the Company believes that the carrying value of the cost basis investment is in excess of estimated fair value, the Company’s policy is to record an impairment charge in “Other income (expense)” in the accompanying statements of operations. The Company regularly evaluates the carrying value of this cost-method investment for impairment. As of June 30, 2012, the Company believes that no event had occurred that would adversely affect the carrying value of this investment, and accordingly, the Company did not record any impairment charges relating to this investment during the three and six months ended June 30, 2012.

5. Notes Payable and Warrants

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

On January 25, 2012, the Company and Michael Moretti entered into a securities purchase agreement. Pursuant to the securities purchase agreement, Mr. Moretti agreed to loan the Company $225,000 (including $125,000 advanced prior to December 31, 2011) and the Company issued Mr. Moretti (a) a secured convertible promissory note and (b) a warrant to purchase 192,858 shares of the Company’s common stock (subject to adjustment for certain corporate transactions). The note carries an interest rate of 10% per annum and is convertible into shares of the Company’s common stock based on a $1.75 conversion price (subject to adjustment for certain corporate transactions), contains a term of two years and is secured by all the assets of the Company. The warrant is immediately exercisable, expires on January 24, 2014, and has an exercise price of $2.80 per share if exercised prior to July 25, 2012, $3.15 if exercised during the period July 25, 2012 through January 24, 2013, and $3.50 if exercised after January 24, 2013 and through the expiration of the warrant. Additionally, the securities purchase agreement contains a provision that if and only if, the Company consummates a fundamental transaction that results in a change in control, the Company will use its commercially reasonable best efforts to cause the Company or other parties to the fundamental transaction to issue securities (be it common stock, other securities of the Company, or securities of another party to the fundamental transaction) equal to the original principal amount of the note divided by $1.75.

On March 14, 2012, the Company and Sunlogics entered into a securities purchase agreement. Pursuant to the purchase agreement, Sunlogics agreed to loan the Company $500,000. On March 14, 2012, and March 16, 2012, the Company issued Sunlogics two senior convertible promissory notes, representing the Company’s Senior Debt, in the principal amounts of $400,000 and $100,000, respectively. The notes carry an interest rate of 6% per annum, a term of one year, and each note is convertible into shares of the Company’s common stock at a conversion price equal to the consolidated closing bid price of the Company’s common stock on the last business day prior to the issuance of the note (subject to adjustment for certain corporate transactions). As of June 20, 2012, the company converted these notes and issued 305,023 shares of common stock

As of June 30, 2012, the aggregate principal balance of all outstanding Notes was $4,800,000 and the Notes were convertible into 2,814,908 shares of common stock.

The conversion features on the notes issued prior to 2012 were determined to be embedded derivative liabilities and therefore were bifurcated from the notes and recorded as a discount to the notes at their fair value at issuance and are required to be adjusted to fair value at the end of each reporting period. The change in fair value of the conversion features, calculated using the Black Scholes model, is recorded as a gain or loss on derivative liabilities. The conversion feature fair values at June 30, 2012 and December 31, 2011 were $0 and $33,541, respectively. The change in fair value of the conversion features during the three months ended June 30, 2012 and 2011 resulted in a gain on derivative liabilities of $0 and $245,898, respectively. The change in fair value of the conversion features during the six months ended June 30, 2012 and 2011 resulted in a gain on derivative liabilities of $33,541 and $3,896,066, respectively.

The conversion features on the notes issued in 2012 were determined to be beneficial conversion features and were recorded as additional paid-in capital and as a discount to the notes at their fair value at issuance of $455,011, calculated using the Black Scholes model.

The proceeds remaining, if any, after allocation to the conversion features are allocated on a relative fair value basis between the Notes and the warrants and the amounts allocated to the warrants, calculated using the Black Scholes model, are recorded as additional note discount. The discount attributable to the issuance date aggregate fair value of the conversion features and warrants, is being amortized using the effective interest method over the terms of the Notes. During the three months ended June 30, 2012 and 2011, $247,529 and $106,250, respectively, of this discount was amortized to expense. During the six months ended June 30, 2012 and 2011, $288,146 and $812,062, respectively, of this discount was amortized to expense.

The warrants issued in connection with these Notes are exercisable upon issuance (with the exception of the warrants issued to Dynamic Worldwide Solar Energy, LLC) and entitle the Lenders to purchase up to 1,136,530 shares of common stock at exercise prices ranging from $2.80 – $11.90 per share, as adjusted for standard anti-dilution provisions and are exercisable for a period of 2 – 7 years from their respective issuance dates.

The following table summarizes the pertinent details of the outstanding notes and warrants as of June 30, 2012.

												Warrant
						Note Payable	Note Conversion		Conversion			Exercise
Lender		Principal Amount		Discount		(net of discount)	Shares Issuable		Price	Warrants		Price
Peter Lacey(1)	$	3,075,000*	$	—	$	3,075,000	1,909,938	$	1.61	103,440	$	8.75
Peter Lacey(1)										384,657	$	11.90
Peter Lacey(1)		125,000*		—		125,000	N/A		N/A	35,715	$	7.00
Peter Lacey(1)		150,000*		—		150,000	93,168	$	1.61	41,209	$	3.64
Michael Moretti		750,000*		—		750,000	465,839	$	1.61	119,048	$	8.75
Michael Moretti		150,000*		—		150,000	93,168	$	1.61	27,650	$	10.85
Michael Moretti		125,000*		—		125,000	N/A		N/A	35,715	$	7.00
Michael Moretti		150,000*		—		150,000	93,168	$	1.61	41,209	$	3.64
Michael Moretti		225,000		176,352		48,648	128,571	$	1.75	192,858	$	2.80 – 3.50
John Gorman		—		—		—	—		—	95,239	$	8.75
Richard Schottenfeld		—		—		—	—		—	15,873	$	8.75
William Steckel(2)		—		—		—	—		—	1,588	$	8.75
Robert Weiss(3)		50,000*		—		50,000	31,056	$	1.61	7,937	$	8.75
Dynamic Worldwide Solar Energy, LLC.		—		—		—	—		—	34,392	$	8.75
	$	4,800,000	$	176,352	$	4,623,648	2,814,908			1,136,530

____________________

*	As of the date of filing of this report, these notes have matured and the Company is in the process of extending the maturity date with the Lenders.

In February 2012, John Gorman converted his entire outstanding principal balance of $100,000 as well as the accrued interest thereon into shares of the Company’s common stock. In March 2012, Richard Schottenfeld converted his entire outstanding principal balance of $100,000 as well as the accrued interest thereon into shares of the Company’s common stock. In June 2012, William Steckel converted his entire outstanding principal balance of $30,000 as well as the accrued interest thereon into shares of the Company's common stock. In March 2012, Sunlogics was issued $500,000 of convertible notes for cash advanced to the Company. In June 2012, Sunlogics converted their entire outstanding principal balance of $500,000 as well as the accrued interest thereon into shares of the Company's common stock.

The following table summarizes the pertinent details of the outstanding notes and warrants as of December 31, 2011.

												Warrant
						Note Payable	Note Conversion		Conversion			Exercise
Lender		Principal Amount		Discount		(net of discount)	Shares Issuable		Price	Warrants		Price
Peter Lacey(1)	$	3,075,000	$	—	$	3,075,000	1,909,938	$	1.61	103,440	$	8.75
Peter Lacey(1)										384,657	$	11.90
Peter Lacey(1)		125,000		—		125,000	N/A		N/A	35,715	$	7.00
Peter Lacey(1)		150,000		4,669		145,331	93,168	$	1.61	41,209	$	3.64
Michael Moretti		750,000		—		750,000	465,839	$	1.61	119,048	$	8.75
Michael Moretti		150,000		—		150,000	93,168	$	1.61	27,650	$	10.85
Michael Moretti		125,000		—		125,000	N/A		N/A	35,715	$	7.00
Michael Moretti		150,000		4,669		145,331	93,168	$	1.61	41,209	$	3.64
Michael Moretti		125,000		—		125,000	N/A		N/A	N/A		N/A
John Gorman		100,000		—		100,000	62,112	$	1.61	95,239	$	8.75
Richard Schottenfeld		100,000		—		100,000	62,112	$	1.61	15,873	$	8.75
William Steckel(2)		30,000		—		30,000	18,634	$	1.61	1,588	$	8.75
Robert Weiss(3)		50,000		—		50,000	31,056	$	1.61	7,937	$	8.75
Dynamic Worldwide Solar Energy, LLC.		—		—		—	—		—	34,392	$	8.75
	$	4,930,000	$	9,338	$	4,920,662	2,829,195			943,672

____________________

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

(2)	Mr. Steckel is a Director of the Company and the former Chief Executive Officer and Chief Financial Officer.
(3)	Mr. Weiss is the Company’s Chief Technology Officer.

6. Derivative Liabilities

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

The conversion feature liability on the balance sheet at June 30, 2012 and 2011, and the change in the liability for the six months ended June 30, 2012 and 2011 is summarized as follows:

		Conversion
		Feature
		Liability
Balance, December 31, 2010	$	3,854,272
New debt issuances		41,794
Change in fair value		(3,896,066	)
Balance, June 30, 2011	$	—
Balance, December 31, 2011	$	33,541
Change in fair value		(33,541	)
Balance, June 30, 2012	$	—

In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for its financial liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011. There were no financial assets subject to the provisions of ASC 820 as of June 30, 2012 and December 31, 2011.

		Level 1		Level 2		Level 3		Total
Financial liabilities at June 30, 2012:
Conversion feature	$	—	$	—	$	—	$	—
	$	—	$	—	$	—	$	—
Financial liabilities at December 31, 2011:
Conversion feature	$	—	$	—	$	33,541	$	33,541
	$	—	$	—	$	33,541	$	33,541

7. Subsequent Events

In August 2012, the Company is intending to commence with a tender offer to the shareholders of Salamon Group, Inc. to acquire at least 50.1% of Salamon's outstanding shares of common stock. The Company intends to offer one (1) share of DayStar for each six (6) shares of common stock of the Salamon Group. The closing of any transaction would be contingent upon other things, final due diligence, continued listing of the combined company on the NASDAQ Capital Market and compliance with all applicable judicial and other regulatory requirements. This acquisition would extend the Company's presence in the energy project business solutions business, further building out its reach and functional expertise in the area of engineering, construction, and ownership of solar power generation projects in the attractive and growing Caribbean, South America, Australian and South Pacific renewable markets. Salamon Group, Inc., through its Sunlogics Power Fund Management Inc. division, is a solar energy project company specializing in the construction management and acquisition of renewable energy power projects. The management of DayStar intends, upon completion of the planned acquisition, to continue to pursue strategic opportunities that will be beneficial to the shareholders of both DayStar and Salamon Group/Sunlogics. Sunlogics Power also looks to acquire assets and other companies in the solar and renewable energy space that are a strategic fit. Sunlogics Power is also a project-acquiring partner of Sunlogics Plc and its Subsidiary as well as other third party developers.

In August 2012, the Company is intending to file a S-3 Registration Statement registering two shareholders, Mr. Peter Lacey and Mr. Michael Moretti, who are converting debt for shares from the convertible debt that is on the books as of June 30, 2012. In addition, there are two shareholders who are owed money for work performed while employed by the Company. The Company is in the process of finalizing an Employment and Separation Release of Robert Weiss and Christopher Lail for shares of Company stock as full payment for the monies owed them while employed. The amount accrued in liabilities as of June 30, 2012 was $703,477. The amount owed Robert Weiss totaled $477,562 made up of $428,235 in accrued salaries and $49,327 in accrued vacation and the amount owed Chris Lail totaled $225,915 made up of $201,684 in accrued salaries and $24,231 in accrued vacation.

In August 2012, the Company has elected to increase the number of Board Members from five to nine and has elected four new members who along with the existing Members will have experience in helping implement the new strategy and direction of the Company. The Company, as an inducement to joining the Board, has offered three Board Members a grant of 25,000 shares each with these grants vesting ratably over twelve months. The inducement grants will be issued upon acceptance of an executed Director Letter of Indemnification.

In August 2012, the Company has offered stock awards to Highlands Pacific Management for consulting services rendered in connection helping the CEO run the business for more than the last year. The award was for 200,000 shares of Company stock valued at a closing market price of $1.45 per share. The accrued value reported in the liabilities is $290,000.

In August 2012, the Company has offered as an inducement to new officers' a start bonus award of up to 200,000 shares of Company stock that will be paid upon commencement of employment with vesting over 12 equal installments. The Company has already issued one award to the CFO and is expected in the near term to offer three to four other awards as the Company builds to implement the new platform described earlier.

In July 2012, the Company has proposed a Debt Swap deal relating to a July 2012 resolution proposing to issue debt to Mr. Michael Matvieshen in return for him transferring a portion of his debt held in Salamon Group, Inc in the amount of $15 million per the proposed Secured Promissory Note dated July 10, 2012. This swap has been agreed to in principal but has not been finalized yet even though the Company expects this deal to be consummated in August 2012.

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

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with our audited financial statements and related footnotes. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements, including those set forth in our Annual Report on Form 10-K filed on March 30, 2012 as well as Part II, Item 1A below.

Overview

We are a development stage enterprise that was formed in 1997 for the purpose of developing, manufacturing and marketing innovative products to the solar photovoltaic (“PV”) industry. From our inception, we have focused primarily on thin film copper indium gallium di-selenide (“CIGS”) solar products. We have developed a proprietary one-step sputter deposition process and manufactured a commercial scale deposition tool to apply high efficiency CIGS material over large area glass substrates in a continuous fashion. This tool in one step completes the critical process of applying the CIGS material to the substrate and when integrated with commercially available thin film manufacturing equipment for the remaining steps, we believe it can provide a critically differentiated manufacturing process to produce low-cost monolithically integrated, CIGS-on-glass modules that address the grid-tied, ground-based PV market.

Given the changes in the economy and in the industry in recent years, we have significantly scaled back our development and manufacturing efforts and embarked on a strategy in which we are seeking strategic partnerships to advance our technology and enter new markets within the global renewal energy industry. The Company is expected to announce strategic partnerships in the near term to own and construct solar and renewable power plants.

In August 2012, the Company has elected to increase the number of Board Members from five to nine and has elected four new Members who along with the existing Members will have experience in helping implement the new strategy and direction of the Company.

In March 2012, Sunlogics Power Fund Management, Inc., a subsidiary of Salamon Group, Inc., made an initial loan to DayStar. Sunlogics Power Fund Management (“Sunlogics”) is a fund that provides investments to companies in the solar industry and is a project-acquiring partner of Sunlogics PLC and its subsidiary, as well as other third party project developers, specializing in the design, development and operation of solar energy solutions, including rooftop and ground mount solar power systems. Simultaneous with the initial loan, Sunlogics entered into a consulting arrangement with us to assist our management team with business development and also with exploring and evaluating strategic opportunities. We plan to pursue opportunities with Sunlogics that will be mutually beneficial in achieving the goals of both companies.

Critical Accounting Policies and Estimates

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

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

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

Results of Operations

Comparison of the Three Months Ended June 30, 2012 and 2011

Certain reclassifications have been made to the 2011 financial information to conform to the 2012 presentation. Such reclassifications had no impact on net loss.

Research and development expenses. Research and development expenses were $181,759 for the three months ended June 30, 2012 compared to $233,206 for the three months ended June 30, 2011, a decrease of $51,447 or 22%. The decrease was primarily related to a reduction in share based compensation as well as a decrease in certain personnel and facilities related costs.

Selling, general and administrative expenses. Selling, general and administrative expenses were $558,606 for the three months ended June 30, 2012 compared to $459,357 for the three months ended June 30, 2011, an increase of $99,249 or 22%. The increase was related to an accrual for consulting fees earned of $290,000 and decreases primarily related to a reduction in share based compensation as well as a decrease in certain personnel costs and professional fees.

Restructuring. There were no restructuring expenses for the three months ended June 30, 2012 and June 30, 2011.

Depreciation and amortization expense. Depreciation and amortization expense was $265,303 for the three months ended June 30, 2012 compared to $398,018 for the three months ended June 30, 2011, a decrease of $132,715 or 33%. The decrease in depreciation reflects the reduction in certain depreciable equipment.

Interest expense. Interest expense was $117,882 for the three months ended June 30, 2012 compared to $111,782 for the three months ended June 30, 2011, an increase of $6,100 or 5%. Due to the larger loan balance throughout the second quarter primarily relating to the outstanding notes issued in connection with our bridge financing in 2012, there was a slight increase in expenses from the same quarter in 2011.

Amortization of note discount and financing costs. Amortization of note discount and financing costs was $247,529 for the three months ended June 30, 2012 compared to $106,250 for the three months ended June 30, 2011, an increase of $141,279 or 133%. The convertible notes issued in connection with our debt financing contain conversion features as well as warrants which result in discounts to the principal amount of the notes payable reflected on our balance sheet, based on the fair value of the warrants and conversion features. The discounts on the convertible notes are amortized using the effective interest method over the terms of the notes. In the third quarter of 2010, we restructured all of our existing convertible notes which resulted in the recording of new notes and corresponding discounts. The expense for the three months ended June 30, 2011 includes amortization of the discount on the original notes as well as a portion of the discount on the restructured notes. The expense for the three months ended June 30, 2012 primarily reflects amortization of the discount on the notes issued in 2012 plus the exercise of the convertible feature resulting in a one-time charge of $168,603. The majority of the notes issued in 2012 were issued toward the end of the quarter and all 2012 notes contained terms longer than the notes issued in prior years. This factor resulted in a higher discount amortization in the second quarter of 2012 as compared with the same period in 2011.

Gain on derivative liabilities. Gain on derivative liabilities was $0 for the three months ended June 30, 2012 compared to $245,898 for the three months ended June 30, 2011, a decrease of $245,898 or 100%. The conversion features on certain convertible notes issued in conjunction with our debt financing are considered derivative liabilities and are therefore required to be adjusted to fair value each quarter. A decrease in our stock price during the period results in a decrease in the liabilities and a gain on derivative liabilities. Conversely, an increase in our stock price during the period would result in an increase in the liabilities and a loss on derivative liabilities. During the three months ended June 30, 2011, our common stock price significantly decreased resulting in a significant gain on derivative liabilities for the quarter. The gain on derivative liabilities for the three months ended June 30, 2012 reflects the change in fair value of the outstanding conversion feature liability on the notes issued prior to 2012.

Comparison of the Six Months Ended June 30, 2012 and 2011

Certain reclassifications have been made to the 2011 financial information to conform to the 2012 presentation. Such reclassifications had no impact on net loss.

Research and development expenses. Research and development expenses were $370,212 for the six months ended June 30, 2012 compared to $839,771 for the six months ended June 30, 2011, a decrease of $469,559 or 56%. The decrease was primarily related to a reduction in share based compensation as well as a decrease in certain personnel and facilities related costs.

Selling, general and administrative expenses. Selling, general and administrative expenses were $871,149 for the six months ended June 30, 2012 compared to $1,691,544 for the six months ended June 30, 2011, a decrease of $820,395 or 48%. The decrease was primarily related to a reduction in share based compensation as well as a decrease in certain personnel costs and professional fees.

Restructuring. There were no restructuring expenses for the six months ended June 30, 2012. Restructuring expenses were $850,000 for the six months ended June 30, 2011. The restructuring expenses in 2011 resulted from impairment charges on certain equipment, as we cancelled orders for such equipment and settled the outstanding obligations with the vendors. The settlement amounts of $850,000 which were paid in shares of our common stock were recorded as restructuring expense during the six months ended June 30, 2011.

Depreciation and amortization expense. Depreciation and amortization expense was $564,968 for the six months ended June 30, 2012 compared to $802,804 for the six months ended June 30, 2011, a decrease of $237,836 or 30%. The decrease in depreciation reflects the reduction in certain depreciable equipment.

Interest expense. Interest expense was $235,365 for the six months ended June 30, 2012 compared to $345,569 for the six months ended June 30, 2011, a decrease of $110,204 or 32%. Interest expense relates primarily to the outstanding notes issued in connection with our bridge financing. During the first quarter of 2011, we recorded interest on certain outstanding payables which resulted in a larger expense in the first quarter of 2011 as compared to the same period in 2012.

Amortization of note discount and financing costs. Amortization of note discount and financing costs was $288,146 for the six months ended June 30, 2012 compared to $812,062 for the six months ended June 30, 2011, a decrease of $523,916 or 65%. The convertible notes issued in connection with our debt financing contain conversion features as well as warrants which result in discounts to the principal amount of the notes payable reflected on our balance sheet, based on the fair value of the warrants and conversion features. The discounts on the convertible notes are amortized using the effective interest method over the terms of the notes. In the third quarter of 2010, we restructured all of our existing convertible notes which resulted in the recording of new notes and corresponding discounts. The expense for the six months ended June 30, 2011 includes amortization of the discount on the original notes as well as a portion of the discount on the restructured notes. The expense for the six months ended June 30, 2012 primarily reflects amortization of the discount on the notes issued in 2012. The majority of the notes issued in 2012 were issued toward the end of the quarter and all 2012 notes contained terms longer than the notes issued in prior years. These factors resulted in a lower discount amortization in the first quarter of 2012 as compared with the same period in 2011.

Gain on derivative liabilities. Gain on derivative liabilities was $33,541 for the six months ended June 30, 2012 compared to $3,896,066 for the six months ended June 30, 2011, a decrease of $3,862,525 or 99%. The conversion features on certain convertible notes issued in conjunction with our debt financing are considered derivative liabilities and are therefore required to be adjusted to fair value each quarter. A decrease in our stock price during the period results in a decrease in the liabilities and a gain on derivative liabilities. Conversely, an increase in our stock price during the period would result in an increase in the liabilities and a loss on derivative liabilities. During the six months ended June 30, 2011, our common stock price significantly decreased resulting in a significant gain on derivative liabilities for the quarter. The gain on derivative liabilities for the six months ended June 30, 2012 reflects the change in fair value of the outstanding conversion feature liability on the notes issued prior to 2012.

Liquidity and Capital Resources

At June 30, 2012, our cash and cash equivalents totaled $42,063 compared to $4,199 at December 31, 2011.

We are in the development stage, and as such, have historically reported net losses, including a net loss of $2.3 million for the six months ended June 30, 2012. We anticipate incurring losses in the future, as we seek long-term strategic partnerships and investments to advance our technology and enter new markets within the global renewal energy industry.

Our financial statements for the year ended December 31, 2011 and the six months ended June 30, 2012 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As noted herein, as a result of our current liquidity, there is substantial doubt as to our ability to continue as a going concern.

We have historically financed our operations primarily from proceeds of the sale of equity securities and the issuance of convertible notes. We presently do not have any bank lines of credit that provide us with an additional source of debt financing.

Beginning in September 2009, we have funded our operations through a series of debt financing transactions in which we have issued convertible and traditional notes with an aggregate principal amount of $6.7 million and also issued warrants exercisable for shares of our common stock. Currently, $4.8 million of these notes remains outstanding.

Also, in order to help address our capital requirements, in February 2011, we entered into a Securities Purchase Agreement with Socius CG II, Ltd. (the “Investor” or “Socius”). Pursuant to the terms of the Purchase Agreement, we have the right over a term of two years, subject to certain conditions, to demand through separate tranche notices that the Investor purchase up to a total of $5.0 million of Series B preferred stock. However, we will require additional capital beyond these funding sources in order to implement our business plans.

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

Commitments. At June 30, 2012, we had no outstanding purchase orders for equipment and improvements. Other commitments include rental payments under operating leases for office space and equipment, and commitments under employment contracts with our executive officers. These commitments are discussed further in the Commitments and Contingencies footnote to our financial statements in our Annual Report on Form 10-K.

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

As required by Rule 13a-15(b) or Rule 15d-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2012.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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

Item 1A. Risk Factors

Item 1A (“Risk Factors”) of our annual report on Form 10-K for our fiscal year ended December 31, 2011 (“Annual Report”) sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition or operating results. The risks and uncertainties described in our Annual Report do not constitute all the risk factors that pertain to our business but we do believe that they reflect the more important ones. Accordingly, you should review and consider such Risk Factors in making any investment decision with respect to our securities. An investment in our securities continues to involve a high degree of risk. There has been no material changes in the Risk Factors contained in our Annual Report.

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

On January 25, 2012, we entered into a securities purchase agreement with Michael Moretti. Pursuant to the securities purchase agreement, Mr. Moretti agreed to loan us $225,000 to fund operating capital and general corporate purposes. On January 25, 2012, we issued Mr. Moretti (a) a secured convertible promissory note and (b) a warrant to purchase 192,858 shares of our common stock (subject to adjustment for certain corporate transactions). The note carries an interest rate of 10% per annum and is convertible into shares of our common stock based on a $1.75 conversion price (subject to adjustment for certain corporate transactions). The note, to the extent that any part of the outstanding principal amount is not converted into shares of common stock, matures on the second anniversary of the date of the note, is secured by all of our assets, and includes customary provisions concerning events of default. The warrant is immediately exercisable, expires on January 24, 2014, and has an exercise price of $2.80 per share if exercised prior to July 25, 2012, $3.15 if exercised during the period July 25, 2012 through January 24, 2013, and $3.50 if exercised after January 24, 2013 and through the expiration of the warrant. Additionally, the securities purchase agreement contains a provision that if and only if, we consummate a fundamental transaction that results in a change in control, we will use our commercially reasonable best efforts to issue or to cause the other parties to the fundamental transaction to issue securities (be it Common Stock, other securities of DayStar, or securities of another party to the fundamental transaction) equal to the original principal amount of the note divided by $1.75.

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

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

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

(a) None.

(b) None.

Item 6. Exhibits

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

Exhibit
No.	Description
3.1(1)	Amended and Restated Certificate of Incorporation.
3.2(2)	Certificate of Amendment of Amended and Restated Certificate of Incorporation.
3.3(3)	Amended and Restated Bylaws.
3.4(4)	Text of Amendment of Amended and Restated Bylaws
3.5(5)	Certificate of Designations, Preferences and Rights of a Series of Preferred Stock classifying and designating the Series B Preferred Stock.
4.1(6)	Form of Common Stock Certificate.
4.2(6)	Form of Class A Public Warrant.
4.3(6)	Form of Class B Public Warrant.
4.4(6)	Form of Unit Certificate.
4.5(6)	Form of Warrant Agent Agreement.
4.6(6)	Form of Representative’s Warrant.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

____________________

**	Submitted herewith. Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under those sections.
(1)	Incorporated by reference to our Quarterly Report on Form 10-QSB filed with the SEC on August 11, 2006.
(2)	Incorporated by reference to our Quarterly Reports on Form 10-Q filed with the SEC on November 14, 2008 and April 9, 2012.
(3)	Incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on August 7, 2008.
(4)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 25, 2010.
(5)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on February 3, 2011.
(6)	Incorporated by reference to our Registration Statement on Form SB-2 filed with the SEC on November 7, 2003.

SIGNATURES

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

	DAYSTAR TECHNOLOGIES, INC.


Date: August 17, 2012	By:	/S/ PETER A. LACEY
		Peter A. Lacey
		Interim Chief Executive Officer (Principal Executive Officer)


Date: August 17, 2012	By:	/s/ DALE E. HOOVER
		Dale E. Hoover
		Chief Financial Officer (Principal Financial & Accounting Officer)

EXHIBIT INDEX

Exhibit
No.	Description
3.1(1)	Amended and Restated Certificate of Incorporation.
3.2(2)	Certificate of Amendment of Amended and Restated Certificate of Incorporation.
3.3(3)	Amended and Restated Bylaws.
3.4(4)	Text of Amendment of Amended and Restated Bylaws
3.5(5)	Certificate of Designations, Preferences and Rights of a Series of Preferred Stock classifying and designating the Series B Preferred Stock.
4.1(6)	Form of Common Stock Certificate.
4.2(6)	Form of Class A Public Warrant.
4.3(6)	Form of Class B Public Warrant.
4.4(6)	Form of Unit Certificate.
4.5(6)	Form of Warrant Agent Agreement.
4.6(6)	Form of Representative’s Warrant.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

____________________

**	Submitted herewith. Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under those sections.
(1)	Incorporated by reference to our Quarterly Report on Form 10-QSB filed with the SEC on August 11, 2006.
(2)	Incorporated by reference to our Quarterly Reports on Form 10-Q filed with the SEC on November 14, 2008 and April 9, 2012.
(3)	Incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on August 7, 2008.
(4)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 25, 2010.
(5)	Incorporated by reference to our Current Report on Form 8-K filed with the SEC on February 3, 2011.
(6)	Incorporated by reference to our Registration Statement on Form SB-2 filed with the SEC on November 7, 2003.

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