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| DSTI > SEC Filings for DSTI > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with our audited financial statements and related footnotes. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements, including those set forth in our registration statement on Form S-3 filed on July 8, 2008, as well as Part II, Item 1A below.
Overview
We have developed a proprietary thin film deposition technology for solar photovoltaic, or PV, products that we believe will allow us to achieve a total module manufacturing cost per watt of less than $1.00. We are utilizing our proprietary single-stage sputtering deposition process to apply high-efficiency copper indium gallium selenide, or CIGS, semiconductor material over large area substrates in a continuous fashion. Through our proprietary deposition process, we have achieved greater than 14% cell efficiencies over large areas on CIGS PV devices. We have developed a commercial scale proprietary deposition tool and intend to integrate this tool with commercially available thin film manufacturing equipment, which will provide us with a critically differentiated manufacturing process. We believe this approach will allow us to achieve commercial-scale production capacity with fewer potential line initialization difficulties.
We intend to manufacture monolithically integrated CIGS-on-glass modules to address near-term market opportunities, including grid-tied centralized utility markets, as well as grid-tied decentralized markets. We have begun installation of a planned 25 megawatt, or MW capacity manufacturing line, and expect commercial shipments to begin in 2009. However, we will require substantial funds beyond our current cash on hand in order to fully build-out our first production line, to commence and support commercial production and to fund future operations. We are currently considering various alternatives to secure the necessary additional financing to maintain our production scale-up and commercialization plans. To facilitate our entry into the addressable solar PV market, we have entered into a contract with Blitzstrom GmbH, a leading thin film solar PV integrator, that commits Blitzstrom to purchase a minimum of 50% of our production through 2011, subject to these products meeting defined performance criteria.
We have also signed a Letter of Intent with juwi Solar, to evaluate the viability of our PV products for sale and use by juwi Solar in their commercial PV projects. Based on the results of the evaluation, juwi Solar may commit to purchase up to 25% of our production through 2011.
In the future, we may seek to develop CIGS-on-foil packaged in flexible format for the emerging building integrated photovoltaic, or BIPV, markets.
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 the financial statements set forth in our Annual Report on Form 10-KSB filed on March 31, 2008. 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.
Investments. We account for investments in accordance with Statement of Financial Accounting Standards, or SFAS, No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of securities at the time of purchase. All securities held by the Company as of September 30, 2008 consisted of short-term Treasury Notes and Bills and are classified as available-for-sale. Such investments are carried at fair value, based on quoted market prices with the unrealized holding gains and losses reported as Accumulated Other Comprehensive Income in the stockholders' equity section of the Balance Sheets. Realized gains and losses on sales of all such securities, computed using the specific identification cost method, are included in Other Income (Expense) in the Statements of Operations. We evaluate declines in market value for potential impairment. If the decline results in a value below cost and is determined to be other than temporary, the investment is written down to its impaired value and a new cost basis is established.
Revenue Recognition. We recognize revenue in accordance with Securities and Exchange Commission, or SEC, Staff Accounting Bulletin, or SAB, No. 104, "Revenue Recognition," or SAB 104. SAB 104 requires 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) collectibility is reasonably assured. Since inception of the development stage on July 1, 2005, we have earned minimal amounts of product revenue.
Since inception of the development stage on July 1, 2005, our principal source of revenue has been from government funded research and development contracts and grants. Grant revenue is recognized when we fulfill obligations as set forth under the grant. Terms of the grant reflected in the accompanying financial statements require us to maintain specified employment criteria over a five year period. If we fail to meet the specified criteria, we must repay the unearned portion of the grant. As a result, we recorded deferred revenue of $420,000 as of September 30, 2008.
Property and Equipment. Property and equipment is stated at cost. Depreciation is computed using the straight-line and an accelerated method over estimated useful lives of three to seven 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. Effective January 1, 2006, we adopted the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment, or SFAS 123(R), 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," as amended by SAB 110, which provides supplemental SFAS 123(R) application guidance based on the views of the SEC. We adopted SFAS 123(R) using the modified prospective transition method. Under this transition method, share-based compensation expense recognized in our statements of operations for the three and nine months ended September 30, 2008 and 2007 included (a) compensation expense for all share-based awards granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123(R), and (b) compensation expense for all share-based awards granted beginning January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).
Derivative Stock Warrants. Certain terms in the convertible note ("Note") and related documents entered into on May 25, 2006, as well as subsequent agreements entered into on January 19, 2007, namely the potential for cash settlement require that the warrants issued in conjunction with these documents be treated as a derivative instrument and, therefore, classified as a liability on the balance sheet. As such, the liability must be adjusted to fair value at the end of each reporting period, in accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging Activities," and any changes in fair value reported as a gain or loss on derivative liabilities in our statement of operations. The Black-Scholes option-pricing model is used to estimate the warrant fair values. Upon a change of control of our company, warrant holders having the right to purchase 600,003 shares of common stock would have the right to require us to repurchase the warrants from them at a purchase price equal to the Black-Scholes value of the unexercised portion of the warrants. Generally, this accounting treatment will result in a reported loss during any accounting period in which there is a reported increase in the sales price of our common stock on the NASDAQ Capital Market. Conversely, this accounting treatment generally will result in a reported gain during any accounting period in which there is reported decrease in the sales price of our common stock on the NASDAQ Capital Market.
Results of Operations
Comparison of the Three Months Ended September 30, 2008 and 2007
Certain reclassifications have been made to the 2007 financial information to conform to the 2008 presentation. Such reclassifications had no impact on net loss.
Research and development expenses. Research and development expenses were $5,135,579 for the three months ended September 30, 2008 compared to $2,219,404 for the three months ended September 30, 2007, an increase of $2,916,175 or 131%. These expenses increased primarily due to the ramp up of development efforts for our monolithically integrated CIGS-on-glass modules and the manufacturing processes we will utilize for this product. We have hired several key individuals required for such development efforts and are currently in the process of constructing our initial manufacturing line in order to commercialize our products. As such, we experienced an increase in personnel-related costs, including an increase in share-based compensation expense of $589,689, as well as an overall increase in operational expenses for materials and supplies in this area.
Selling, general and administrative expenses. Selling, general and administrative expenses were $2,016,110 for the three months ended September 30, 2008 compared to $1,123,402 for the three months ended September 30, 2007, an increase of $892,708 or 79%. The increase in selling, general and administrative expenses was due primarily to an increase in personnel in support of the development efforts of our CIGS PV products and manufacturing processes and construction of our initial manufacturing line to commercialize such products, as well as additional consulting and professional fees during the period. Selling, general and administrative expenses included share-based compensation of $347,306 and $294,341 for the three months ended September 30, 2008 and 2007, respectively.
Restructuring. There were no restructuring expenses for the three months ended September 30, 2008. There was $201,855 in restructuring expenses for the three months ended September 30, 2007. The expense in 2007 related to our change in business strategy to focus on the commercialization of monolithically integrated CIGS-on-glass modules and the transition of our corporate headquarters to California.
Depreciation and amortization expenses. Depreciation and amortization expenses were $783,268 for the three months ended September 30, 2008 compared to $769,735 for the three months ended September 30, 2007, an increase of $13,533. Depreciation and amortization expenses remained consistent year over year as a full period of depreciation expense was incurred in each quarter on depreciable assets, primarily equipment utilized in the development of our CIGS PV products and manufacturing processes. The depreciable basis of such assets did not significantly increase during this comparative period. The overall increase in property and equipment on our balance sheet during the period was due primarily to the acquisition of and initial costs incurred for certain equipment required for the construction of our initial manufacturing line as well as certain development tools utilized in the scale-up of our deposition process. These items are classified as construction in progress until they are placed in service and therefore have no current impact on depreciation expense.
Other income. Other income was $268,394 for the three months ended September 30, 2008 compared to $44,563 for the three months ended September 30, 2007, an increase of $223,831. We experienced a significant increase in cash with the completion of a secondary offering in the fourth quarter of 2007, which resulted in an increase in interest income during the third quarter of 2008 as compared with the third quarter of 2007.
Interest expense. Interest expense was $8,877 for the three months ended September 30, 2008 compared to $122,499 for the three months ended September 30, 2007, a decrease of $113,622. The decrease in interest expense was primarily due to the decrease in outstanding notes and capital leases during the period.
Amortization of note discount and financing costs. There was no amortization of note discount and deferred financing costs for the three months ended September 30, 2008. Amortization of note discount and financing costs was $94,813 for the three months ended September 30, 2007. The Note contained a beneficial conversion feature as well as warrants issued to the original holder of the Note. The aggregate fair value of the conversion feature and warrants represented a discount to the Note, totaling $5.3 million and was amortized using the effective interest method over the life of the Note. The financing costs related to the Note were capitalized and amortized over the life of the Note as well. As the Note was converted to common stock during the first quarter of 2007, all unamortized note discount and remaining deferred financing costs at the time of the conversion were expensed.
Gain (loss) on derivative liabilities. Gain on derivative liabilities was $926,664 for the three months ended September 30, 2008 compared to a gain on derivative liabilities of $651,046 for the three months ended September 30, 2007. The warrants issued in conjunction with the Note 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 warrant liability and a gain on derivative liabilities. Conversely, an increase in our stock price during the period would result in an increase in the warrant liability and a loss on derivative liabilities. During the three months ended September 30, 2008 and 2007, our common stock price decreased which caused a decrease in the fair value of the warrant liability.
Comparison of the Nine Months Ended September 30, 2008 and 2007
Certain reclassifications have been made to the 2007 financial information to conform to the 2008 presentation. Such reclassifications had no impact on net loss.
Research and development expenses. Research and development expenses were $11,991,015 for the nine months ended September 30, 2008 compared to $7,159,576 for the nine months ended September 30, 2007, an increase of $4,831,439 or 67%. These expenses increased primarily due to the ramp up of development efforts for our monolithically integrated CIGS-on-glass modules and the manufacturing processes we will utilize for this product. We have hired several key individuals required for such development efforts and are currently in the process of constructing our initial manufacturing line in order to commercialize our products. As such, we experienced an increase in personnel-related costs, including an increase in share-based compensation expense of $1,220,525, as well as an overall increase in operational expenses for materials and supplies in this area.
Selling, general and administrative expenses. Selling, general and administrative expenses were $6,806,396 for the nine months ended September 30, 2008 compared to $4,286,315 for the nine months ended September 30, 2007, an increase of $2,520,081 or 59%. The increase in selling, general and administrative expenses was primarily due to the increase in personnel, as well as, an increase in consulting and professional fees. These increases correspond with our ramp up of development efforts of our CIGS PV products and manufacturing processes and construction of our initial manufacturing line to commercialize such products. Additionally, we experienced an increase of $938,518 in share-based compensation provided to selling, general and administrative personnel.
Restructuring. There were no restructuring expenses for the nine months ended September 30, 2008. There was $1,756,220 in restructuring expenses for the nine months ended September 30, 2007. The expense in 2007 primarily related to charges incurred in connection with the restructuring of a $15 million convertible note issued in 2006 as well as our change in business strategy to focus on the commercialization of monolithically integrated CIGS-on-glass modules and the transition of our corporate headquarters to California.
Depreciation and amortization expenses. Depreciation and amortization expenses were $2,307,672 for the nine months ended September 30, 2008 compared to $2,227,082 for the nine months ended September 30, 2007, an increase of $80,590. Depreciation and amortization expenses remained consistent year over year as a full period of depreciation expense was incurred each period on depreciable assets, primarily equipment utilized in the development of our CIGS PV products and manufacturing processes. The depreciable basis of such assets did not significantly increase during this comparative period. The overall increase in property and equipment on our balance sheet during the period was due primarily to the acquisition of and initial costs incurred for certain equipment required for the construction of our initial manufacturing line as well as certain development tools utilized in the scale-up of our deposition process. These items are classified as construction in progress until they are placed in service and therefore have no current impact on depreciation expense.
Other income. Other income was $716,165 for the nine months ended September 30, 2008 compared to $129,322 for the nine months ended September 30, 2007, an increase of $586,843. We experienced a significant increase in cash with the completion of a secondary offering in the fourth quarter of 2007, which resulted in an increase in interest income during the nine months ended September 30, 2008 as compared with the nine months ended September 30, 2007.
Interest expense.Interest expense was $32,039 for the nine months ended September 30, 2008 compared to $250,825 for the nine months ended September 30, 2007, a decrease of $218,786. The decrease in interest expense was primarily due to the restructuring and conversion to equity in the first quarter of 2007, of the Note, as well as the decrease in outstanding notes and capital leases during the period.
Amortization of note discount and financing costs. There was no amortization of note discount and deferred financing costs for the nine months ended September 30, 2008. Amortization of note discount and financing costs was $4,162,312 for the nine months ended September 30, 2007. The Note contained a beneficial conversion feature as well as warrants issued to the original holder of the Note. The aggregate fair value of the conversion feature and warrants represented a discount to the Note, totaling $5.3 million and was amortized using the effective interest method over the life of the Note. The financing costs related to the Note were capitalized and amortized over the life of the Note as well. As the Note was converted to common stock during the first quarter of 2007, all unamortized note discount and remaining deferred financing costs at the time of the conversion were expensed.
Gain (loss) on derivative liabilities. Gain on derivative liabilities was $1,914,782 for the nine months ended September 30, 2008 compared to a loss on derivative liabilities of $2,305,293 for the nine months ended September 30, 2007. The warrants issued in conjunction with the Note 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 warrant liability and a gain on derivative liabilities. Conversely, an increase in our stock price during the period would result in an increase in the warrant liability and a loss on derivative liabilities. During the nine months ended September 30, 2008, our common stock price decreased which caused a reduction in the fair value of the warrant liability.
Loss on extinguishment of debt. There was no loss on extinguishment of debt for the nine months ended September 30, 2008. There was a loss of $6,091,469 for the nine months ended September 30, 2007. The loss in 2007 was due to the excess of the consideration in the form of cash payments, shares of common stock and additional Class A Warrants provided to the original holder of the Note for payment of the outstanding principal and accrued interest on the Note.
Liquidity and Capital Resources
Liquidity. At September 30, 2008, our cash, cash equivalents and short-term investments totaled $34.4 million. During the fourth quarter of 2007, we completed a registered public offering in which we sold 17,250,000 shares of our common stock at $4.25 per share and generated net proceeds of approximately $68 million after deducting underwriting discounts and the fees and expenses of the offering. Upon receipt of the proceeds from the offering, we repaid in full, $9.2 million of existing indebtedness. We are using the remaining net proceeds from this offering to manufacture our proprietary deposition tool, for construction of a planned 25MW capacity line, working capital and other general corporate purposes.
We are in the development stage, and as such, have historically reported net losses, including a net loss of approximately $18.5 million for the nine months ended September 30, 2008. We anticipate continuing to incur losses in the future as we transition to commercialization. We have experienced negative cash flows from operations since our inception and do not anticipate generating sufficient positive cash flows to fund our operations in the foreseeable future.
In 2008, we have ramped up operations by increasing headcount with the hiring of several key personnel and incurring significant capital expenditures required to transition from a development stage company to commercialization. We continue to develop our monolithically integrated CIGS-on-glass modules as well as the associated manufacturing technologies to commercialize this product. As discussed above, we are constructing our first manufacturing line. Commercial shipments from our initial manufacturing line are currently expected to be made in the third quarter of 2009. We believe that our current cash on hand provides sufficient funds to produce limited quantities of complete 2' x 4' CIGS-on-glass modules. However, we will require substantial funds beyond our current cash on hand in order to fully build-out our first production line and commence commercial shipments as currently planned for the third quarter of 2009. Given current market conditions, such financing may not be available to us on terms that are acceptable to us, if at all, and any new equity financing may be dilutive to our stockholders. A wide variety of factors relating to us including those described in the section entitled "Risk Factors" in Part II Item 1A below, as well as external conditions could adversely affect our ability to secure additional funding to expand manufacturing capacity and the terms of any funding that we secure.
During the first nine months of 2008, we spent cash of approximately $11.8 million on operating expenses for research and development, and selling, general and administrative costs, as well as approximately $15.0 million on capital expenditures. Such capital expenditures included costs associated with the construction of our prototype proprietary deposition tool and other research and development equipment, as well the costs associated with the construction of our initial manufacturing line. The cash burn rate has increased in 2008 due to the ramp up of commercialization efforts. If we are unable to obtain additional financing, we are prepared to take appropriate measures to preserve our cash currently on-hand, and focus our efforts in the near-term on demonstrating our ability to produce complete 2' x 4' CIGS-on-glass modules using our proprietary deposition process in the first quarter of 2009.
Capital Resources. We have historically financed our operations primarily from proceeds of the sale of equity securities and revenues or funds received under research and development contracts and grants. We presently do not have any bank lines of credit that provide us with an additional source of debt financing.
We believe that our current cash on hand provides sufficient funds to produce limited quantities of complete 2' x 4' CIGS-on-glass modules beginning in the first quarter of 2009. However, we will require substantial funds beyond our current cash on hand in order to fully build-out our first production line and commence commercial shipments as currently planned for the third quarter of 2009. We believe that successful demonstration of our commercial grade proprietary deposition tool, combined with our ability to produce complete 2' x 4' CIGS-on-glass modules, should facilitate our ability to secure additional financing. Given current market conditions, such financing may not be available to us on terms that are acceptable to us, if at all, and any new equity financing may be dilutive to our stockholders. Additionally, if we complete a financing transaction that meets certain criteria prior to August 31, 2012, we must offer to issue warrants to purchase an aggregate of 1,110,041 shares of common stock at an exercise price of $4.89 per share to certain of our stockholders pursuant to amended registration rights agreements entered into in August 2007. A wide variety of factors relating to our company including those described in the section entitled "Risk Factors" in Part II Item 1A below, and external conditions could adversely affect our ability to secure funding to expand our manufacturing capacity and the terms of any funding that we secure.
Commercial shipments from our initial manufacturing line are currently expected to begin in the third quarter of 2009. In order to achieve profitability, we will have to expand our manufacturing capacity beyond our initial 25MW manufacturing line. We have the ability to expand our capacity in our Newark, California facility to approximately 100MW. However, this expansion to 100MW will require substantial additional funds beyond those needed to get our first manufacturing line in operation. One significant factor in achieving long term market success is reducing the cost per watt for our panels to below $1.00 per watt. We believe that at a capacity of 100MW, we will have the ability to reduce the cost of our 2' x 4' CIGS-on-glass modules to approximately $1.00 per watt.
Commitments. At September 30, 2008, we had approximately $24.0 million in commitments under outstanding purchase orders for equipment and improvements. Such commitments are primarily related to manufacturing equipment which we . . .
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