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Executives

Alexis Pascal – IR, Stapleton Communications Inc.

Stephen DeLuca – CEO

Bill Steckel – CFO

Analysts

Colin Rusch – Broadpoint Capital

Jonathan Hoopes – ThinkPanmure

Adam Krop – Ardour Capital

Patrick Forkin – Tejas Securities

DayStar Technologies, Inc. (OTCPK:DSTI) Q2 2008 Earnings Call Transcript August 6, 2008 5:00 PM ET

Operator

Good evening and welcome to the DayStar second quarter 2008 earnings conference call. All lines have been placed on a listen-only mode throughout the duration of today's conference. Today's conference is being recorded. If you do have any objections, you may disconnect at this time. I would now like to turn the call over to Alexis Pascal. Thank you. You may begin.

Alexis Pascal

Thank you and welcome, everyone, to the DayStar second quarter 2008 financial results conference call. Speakers today will be Dr. Stephen DeLuca, the company's CEO, and the company's CFO, William Steckel.

Before we begin I would like to remind you that some of the comments we will make on this call are forward-looking including without limitations statements regarding expectations of further technological development, as well as timing and ability to scale to production capacity and complete the build-out of a production facility. These statements are only predictions based on assumptions that are believed to be reasonable at the time they are made and are subject to significant risks and uncertainty. You should not rely on these forward-looking statements as representing our views in the future, and we undertake no obligation to publicly update or revise these statements. Our actual results may differ materially and adversely from any projections and forward-looking statements discussed on this call. Our annual report on Form 10K-SB and other forms on file with the SEC identify important risk factors and uncertainties that you should consider and that may affect whether our forward-looking statements prove to be correct.

I will now turn the call over to Dr. Stephen DeLuca. Steve?

Stephen DeLuca

Thanks, Alexis, and thanks, all of you, for joining us today. With me today is our CFO, Bill Steckel. Bill will be making the presentation of our financial disclosures, but before that let me remind you that on our update call last month we said that we expected to begin depositing CIGS in Big Baby. I'm happy to report that we started work with the first CIGS deposition last week, and we are now working on refining the deposition parameters to give us a long term stable process. After Bill's presentation I'll give you a recap of our operational progress to date and set out the milestones for the next quarter.

Now let me turn it over to Bill.

Bill Steckel

Thank you, Steve. I would also like to thank everyone for joining us on today's call. I'm very excited to add my strategic financial leadership to the company and to be a part of the DayStar team. I will review our financial results for the second quarter before turning the call back over to Steve. I encourage all shareholders to review the details of our operations and financial condition that will be disclosed on Form 10Q which we expect to file with the SEC this week. Now let's review our results for the second quarter.

We incurred $3.9 million in research and development expenses during the quarter, an increase of $1.2 million or 46% compared to the second quarter of 2007. The increase reflects the continued ramp of personnel costs and other spending for the development of our CIGS-on-glass modules and the manufacturing processes we will utilize in our new factory. The higher costs were primarily due to the addition of key technical personnel, consumable tools and supplies, and share-based compensation expense.

Selling, general and administrative expenses in the second quarter were $2.1 million, an increase of $300,000 or 17% compared with the same quarter last year. This increase was primarily due to personnel costs to support our progress toward commercialization of our CIGS-on-glass modules. Total other income and expense was a loss of $574,000 compared with a loss of $1 million incurred in the second quarter of last year. Interest income increased by $198,000 due to the higher cash balances from our secondary offering in Q4 of last year, and we no longer incurred amortization of note discount and financing costs, which was an expense of $267,000 last year. Our loss on derivative liabilities was $803,000, a slight increase compared with $750,000 in Q2 of '07. Our net loss in the second quarter of 2008 was $7.3 million or a loss of $0.22 per share. This compares with a net loss of $6.4 million or a loss of $0.42 per share in the second quarter of 2007. The per share loss was calculated on the weighted average common shares outstanding of 33.1 million this year compared with 15 million last year, reflecting our Q4 '07 secondary offering. The increased loss mainly reflects higher research and development expenses for our CIGS-on-glass module and manufacturing process development.

Now turning to the balance sheet, we had $47.9 million in cash, cash equivalents and short-term investments at June 30, 2008, compared with $56.3 million at the end of the first quarter. We continue to invest all of our excess cash in treasury instruments. We had total liabilities of $5.8 million and total stockholders’ equity of $56 million at the end of the second quarter of 2008. During the second quarter, we spent net cash of approximately $3.8 million for operating expenses, a modest decline compared with the first quarter of this year. We invested $4.5 million in capital expenditures in the second quarter in accordance with our stated plan to ramp toward commercial production. This compares with $1 million invested in the first quarter of 2008. In total our cash usage in the quarter was $8.4 million compared with cash usage of $5.1 million in the first quarter. Again this increased usage of cash is in line with our stated operational objectives. As we anticipated our commitments for capital expenditures increased significantly. As of August 4, we have outstanding purchase orders for approximately $15.6 million in production equipment. We have commenced the fit-up of our new manufacturing facility in Newark, California, and we expect to begin receiving production machinery in September. As we have reported previously, we anticipate the proceeds from our equity offering in 2007 coupled with some additional funding will be sufficient for our operations, the fit-up of the new factory, and our initial manufacturing line. We are actively evaluating appropriate financing alternatives. That completes my review of the financial information for the second quarter.

At this time, I will turn the call back over to Steve for a brief operational review and update.

Stephen DeLuca

Thanks, Bill. I'd like to take this opportunity now to summarize the significant operational progress that we made in the first half of 2008. At the beginning of this year we demonstrated the single-step sputter deposition process for CIGS, which gave us uniform films with greater than 14% conversion efficiency over large areas. This step showed that by using a scalable process, that's sputtering, we could deposit high-efficiency CIGS films. Our development line produced mini modules with greater than 11.5% conversion efficiency, and we have shown that our mini modules passed the 1,000 hour damp heat testing. These results demonstrate our ability to integrate all of the processes necessary to build complete modules that have the potential to survive in the environment for greater than 20 years. Once we had demonstrated that our deposition process produced high-quality CIGS, we built a production-scale prototype tool, Big Baby. This tool went from a paper design to a production scale tool making uniform films in six months. The work that was done on Big Baby in the first half of the year enabled us to release the design of the CIGS production tool before the end of Q2, maintaining our timeline for production. As I mentioned earlier, we have now begun depositing CIGS with Big Baby and we expect to have developed a stable CIGS deposition process by the end of this quarter. Our factory milestones included securing a facility and getting long lead time equipment on order. The fit-up of our factory is well underway and on schedule to be ready for tool deliveries which will begin in September.

In summary we have accomplished the tasks and met the milestones in the first half of 2008 that we set out at the end of last year. The milestones we set were and are aggressive; however, our performance in the first half of the year reinforces our confidence that we can commence production in our factory in Q1 2009.

Now we're happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from Colin Rusch from Broadpoint Capital. Your line is open.

Colin Rusch – Broadpoint Capital

Good afternoon gentlemen and congratulations on the 14%, it’s I think an impressive milestone in the short period of time that you've been working. Can you give us a little bit more guidance on the cycle time that you've demonstrated with the process here? Is it still within the guidelines and what you guys were targeting in terms of the process as you move into commercialization?

Stephen DeLuca

Sure, Colin. One of the real critical points is how long does the CIGS process take? And we gave our – I'm not going to tell you exactly what our process time is, but what I will tell you is it's well within the guidelines that we set out and those guidelines enable us to run our factory, and what we said in the past is that we would have a tag time of one module a minute, we're well within that time frame.

Colin Rusch – Broadpoint Capital

Okay and then what about the uptime in terms of running the tool continuously, is there any sort of update on that and kind of increased confidence in being able to run the tool for an extended period of time?

Stephen DeLuca

That's exactly what we're working on now, so when I said that we would have developed a process by the end of September that's really the key is being able to say that we can run this CIGS deposition process over and over and over again. And from the work that we're doing over the next couple of months, I think we'll be able to assess let's say an uptime or an OEE on that tool going forward. But once we build a production tool itself, then we'll get the detailed numbers from the production tool. But Big Baby will of course give us a clear picture that we have a stable process, and we expect to have that information by the end of this quarter, end of September.

Colin Rusch – Broadpoint Capital

Correct me if I'm wrong, but that seems like you're about a quarter ahead of schedule in terms of the stated goals previously for the company in terms of having a standardized test, or a standardized process?

Stephen DeLuca

Well, what we said was we're going to start the factory up in Q1. And so we definitely need to have that process ready to go in Q1. We gave ourselves the internal goal of having the process stable by the end of September. We've now made that a public rather than just an internal goal. So I would say is that ahead of schedule or is that on schedule, we're marching to the beat that we need. We need to get that process done by the end of this quarter. We'll continue to work on it through 2008 so that when we start up the production in 2009 we've have really shaken it out.

Colin Rusch – Broadpoint Capital

Then in terms of getting the TUV and UL certification, when does that process start for you guys and when do you expect to have those certifications? I know there are some accelerated options for getting certification at this point, are you expecting to proceed with those?

Stephen DeLuca

Yes, well, the IEC and so on, those certifications need to happen on modules that come off of the production line. And so we can do a lot of work up front. We have the capability of doing a lot of that, almost all of that, testing in house, and in fact we're getting the capability of doing all of that testing in house. So we've already started doing that. I mentioned damp heat testing and so on that we've already begun that level of testing. We will have a good idea before we get to start up the production line of whether our modules are going to pass. But once we run the production line, then we have to take modules off of that line and submit it to testing. And so what we expect is in the third quarter of next year, so we start in Q1, we start the production line, in Q3 what we said is we would have the certified product. So whether it's –

Colin Rusch – Broadpoint Capital

Go ahead.

Stephen DeLuca

So how we actually go through that process, we aren't just going to wait and not do any testing until the production line starts, we'll do a lot of testing before that so we'll be confident that when things come off the line we'll know what the issues are and how to deal with them.

Colin Rusch – Broadpoint Capital

So we're still looking at first revenues in 3Q '09. Is that –?

Stephen DeLuca

Q3, yes.

Colin Rusch – Broadpoint Capital

Okay. And can you give us an update on strategic options obviously for ramping up beyond this initial factory, have you made any sort of decisions on that or how you're going to proceed? Can you give us just an update on where your thought process is right now?

Stephen DeLuca

Certainly if we made concrete decisions on that then we would be disclosing those publicly. I have said before we're looking at all the options from – if you think about how can we ramp this business up as fast as possible, one of the options is to have strategic partnerships, maybe something like a JV, where you can build a factory in a location and get it up and running fast. So our goal is once we've got our first line running is to scale up our production as fast as possible, and one of the approaches to do that is with partnerships.

Colin Rusch – Broadpoint Capital

Perfect. I'll let some other people ask questions and hop back in the queue and congratulations on all the continued progress and on-time meeting of the goals.

Stephen DeLuca

Thanks, Colin.

Operator

Thank you. Jonathan Hoopes from ThinkPanmure, your line is open.

Jonathan Hoopes – ThinkPanmure

Thanks. Steve, can you talk about the competitive environment for personnel in Silicon Valley especially with regard to the private equity financing that's been going on for other thin-film companies? Are you finding it–any change in your ability to either hire or retain executives and engineers? What's your outlook on this front?

Stephen DeLuca

Well, remember we moved here – when we moved to Silicon Valley, we said one of the major issues was access to the engineering and management talent that was available here, and I think we've been able to take advantage of that. We've been able to bring people like Ratson onboard, and Ratson has brought in a very good set of managers that are building up that factory, getting it running. So I'm very happy with what we've been able to accomplish here, the people that we've been able to bring in. It is a competitive environment of course here, but there's also a lot of talent. And if you look around, yes there are a lot of start-up solar companies but there's also a lot of semiconductor industry, and some of those companies are downsizing and so there's a lot of people available from, if you're talking about operators and engineers, there's a lot of people available from those other companies as well.

Jonathan Hoopes – ThinkPanmure

Great. Thanks. Could you also talk about or just give your thoughts on what the implications if any GE's increased stake in PrimeStar suggests? I know that I think last year around June this time of the summer they had taken some of your modules for tests, is the door still open there with GE or is that something we shouldn't be worried about?

Stephen DeLuca

If you recall what was publicly stated was we were supplying them with some of those flexible foil cells for them to do their work on making modules and capsulants [ph] and so on. So as we stated publicly in our New York operation we stopped making those foil cells and we refocused the efforts of our organization in New York towards helping us get our glass factory running. I don't want to speculate about why GE is making investments in cad-telluride. That's what they choose to do. That's what they think is the near-term best fit for their business model, and so that's what they're doing.

Jonathan Hoopes – ThinkPanmure

Great. Could I just clarify that you mentioned during your prepared remarks that you released the production tool design. Is it complete, or are there still tweaks that need to be done to that design after you test the sputtering process?

Stephen DeLuca

The design of that tool is released. There are things that you can do inside the tool that as we develop the process we could make some tweaks inside the tool but the basic, the chambers and so on, all of the systems that drive through there, those are all set.

Jonathan Hoopes – ThinkPanmure

What's the expected delivery time of that tool, the full-size production tool?

Stephen DeLuca

We will begin receiving parts of that in September.

Jonathan Hoopes – ThinkPanmure

And then you just kind of keep receiving parts through the end of the year, through first quarter of '09 when you start your initial production?

Stephen DeLuca

We haven't laid out exactly how long it's going to take us to put it all together, and we haven't laid out our delivery schedule for all of the chambers and pumps and so on, on that tool. So it will be in place in plenty of time to start the production line in Q1.

Jonathan Hoopes – ThinkPanmure

One final question. Are you still entertaining interest and requests for investors to come through the facility and the plant, and what's been the kind of read from those who come in for their first visit, if you could share that?

Stephen DeLuca

So the plant – I'm not – we haven't brought anybody to the factory.

Jonathan Hoopes – ThinkPanmure

I mean Big Baby, to see your progress so far.

Stephen DeLuca

Seeing the progress is not – there's two things. You can walk in and look at Big Baby, it’s a big piece of steel sitting on the floor, and there's stuff going in and stuff coming out. That's not – without really looking at our data, it doesn't give you probably a good picture of what's actually happening. I think one of the keys is showing people that Big Baby actually exists. It's sitting there. You can see a picture of it on our website. The message there is we really did build this thing that we said we were going to build. It really does exist. It does the things that we said it's doing, and it's a physical piece of evidence that we're on track, we're on our milestones. So I think that's the message to the people looking at that piece of equipment. I think it also gives a sense of the scale of this thing. The other message there is this is not a laboratory tool. This isn't fooling around. This is a real production scale tool that is built back there.

Jonathan Hoopes – ThinkPanmure

Thanks, Steve.

Stephen DeLuca

Thanks, Jon.

Operator

Thank you. Adam Krop from Ardour Capital, your line is open.

Adam Krop – Ardour Capital

Hi. Good afternoon. Just a follow on from the previous question on the purchase order commitments, can you just maybe provide a little bit more color on the timing of when those commitments will hit the cash flow statement? Is that going to be mostly in the third quarter or maybe back-end loaded in the fourth quarter?

Stephen DeLuca

So the process is when you make the commitment to the company to buy the stuff, you pay cash out at that time, then when the equipment gets delivered you pay the next tranche, and then when the equipment is accepted, in other words it runs the process, then you pay the last tranche. So you can expect basically all of that cash will be spent by the end of this year because we're going to have the stuff sitting on the floor and starting it up in Q1. So the latest would be – the last little pieces of it might actually get spent in Q1 as the processes are coming online, but the bulk of that will be spent in this year.

Adam Krop – Ardour Capital

Okay. Then just a quick follow-up, now, how much does that represent for your total equipment CapEx for the 25 megawatt line?

Stephen DeLuca

I'm not sure what your question is. What does what represent? You mean what percent of total –?

Adam Krop – Ardour Capital

Million dollar number.

William Steckel

$16 million as a percent of the total.

Stephen DeLuca

You mean $16 million as a percent of the total?

Adam Krop – Ardour Capital

Total equipment CapEx for the 25 megawatt line.

Stephen DeLuca

What we said in the past is the CapEx is roughly $40 million, we haven't given the exact number out, but it's roughly $40 million, so you can do the arithmetic there. And that was what we said was the cash commitment that we've made in this – that's not on the books. It's the commitment, but it's not showing up on the books at this point. So we've also spent money in the past couple of quarters leading to that as well.

Adam Krop – Ardour Capital

Right. Thanks. And just I think you said your headcount at early July was about 90 people. Can you just provide an update there?

Stephen DeLuca

Yes. It's about – we're in that neighborhood. We're not giving out exact numbers, but yes.

Adam Krop – Ardour Capital

Okay. Thanks, guys.

Stephen DeLuca

Okay.

Operator

Thank you. Patrick Forkin from Tejas Securities, your line is open.

Patrick Forkin – Tejas Securities

Good afternoon and congratulations on the project guys. Steve, in your prepared remarks you indicated that you did get a full CIGS film on the full-sized panels using Big Baby which is a production scale tool. Could you comment on, can you make any comment on the characteristics of what you've been able to produce so far with respect to uniformity and electrical characteristics? And is it consistent with what you saw with the mini modules?

Stephen DeLuca

So let me step back. With the mini modules we had a complete line in place, and so we could take it from this four-inch by four-inch cell, we could take that all the way through and make a complete module out of it. With Big Baby we have two-foot by four-foot substrates, and we're putting a film on that two-foot by four-foot substrate, a film of CIGS, but we don't have the capability of scribing that two-foot by four-foot, putting PCO on that two-foot by four-foot, all those other things. We don't have all of that in place right now. So our approach at this point in time is to take the big piece of glass two-foot by four-foot and break it into the four-inch cells that we can work with. So we're in that process now of breaking the glass up into pieces and characterizing – basically you look at the pieces and then you remap the large-scale substrate. So that's the process we're in right now. I don't have data to report to you at this point in time. But we'll report on all of that when we get to the end of the quarter.

Adam Krop – Ardour Capital

Okay. So you don't have data but obviously you must have some kind of sense.

Stephen DeLuca

I didn't say we don't have data. What I said is I'm not going to report the results at this point in time.

Adam Krop – Ardour Capital

Okay.

Stephen DeLuca

So we're going through this process, and it's early. I said we started this last week, so getting enough data to be statistically valid is something that we want to be mindful of here. We don't want to just take one little result and trumpet that. We want to be certain that we have something that we can reproduce and work with.

Adam Krop – Ardour Capital

I respect and understand the process. I guess what I'm trying to determine is to gauge your level of confidence today versus where you were at when you reported a month ago.

Stephen DeLuca

When we reported a month ago we had put molly on glass. Now we went through the steps of putting CIG on glass, putting selenium on glass, and putting selenium and CIG on glass at the same time. So we've made a lot of progress there, and that certainly raises our confidence in being able to get to a process by the end of this quarter.

Adam Krop – Ardour Capital

Okay. So if we talk about the measurables at the end of this quarter, my question I guess is when do you get to the point where you're at a level that you're able to convince the customers, prospective customers, the potentially strategic or collaborative partners, that there's a good chance that this commercialization is going to be successful along the lines that you're shooting for? Is that at the end of September, or are you already there?

Stephen DeLuca

I would say at the end of this quarter when we have demonstrated – our goal is to demonstrate a stable process. We have a bunch of metrics around what that means, but sputtering stably in a selenium environment making CIGS, that's our goal by the end of this quarter to have that process stabilized. At that point then it becomes optimization. It's always making it better. You never stop trying to make it better. So I'm not going to say that we're going to get to the end of this quarter and then we stop and nothing else happens. We're certainly going to continue working on developing and making the process better. But the key here–the first key was can we make high-efficiency CIGS using this direct deposition sputter process? And the answer is yes. We showed that. We showed we can reproduce that. We're very confident that that process works, and there's no more question about can you do a single-step sputter deposition. The next question is can we do that on this large scale and have a stable – there's two two-foot by four-foot pieces of glass, so four-feet by four-feet of glass going through this thing can we get a stable, uniform film on that scale? That's what we're going to have shown by the end of this quarter. And at that point then it's getting the production line running. We have the production tools showing up, and we're building that out starting in September, and then we have to get that tool up and running. At that point, though, it's setting up the manufacturing line, building it, getting it up and running. It's not developing new science anymore. We're past the developing new science. We're now in the engineering of the scale-up. That will be demonstrated in the end of this quarter. At least that's our plan, to demonstrate that by the end of this quarter. And then it's building up the factory.

Adam Krop – Ardour Capital

Okay. Very good. Thank you.

Stephen DeLuca

I don't know if that – hopefully that answers the question.

Adam Krop – Ardour Capital

Well, I'll tell you what, since you've opened it up, I'll ask it one more way. Have you seen anything that would indicate that you're not going to get at least – in the past you stated it’s greater than 11.5% module efficiency, have you seen anything that would significantly change that assessment?

Stephen DeLuca

No. No, we haven't seen anything that says we're off our track and we can't do this.

Adam Krop – Ardour Capital

Fair enough. I appreciate it, Steve.

Stephen DeLuca

Okay. Thanks.

Operator

Thank you. I am showing no other questions. We'd like to turn the call back over to Dr. DeLuca.

Stephen DeLuca

Thank you. And thanks, everybody, again for joining us. We'll just say goodbye for now and look forward to talking to you again at the end of the quarter. Thanks.

Operator

Thank you. That concludes today's conference. You may now disconnect from the audio portion and thank you for your participation.

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Source: DayStar Technologies, Inc. Q2 2008 Earnings Call Transcript
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