FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20429
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________________ to
______________________________
Commission File Number 000-28947.
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SPACEDEV, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1374613
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13855 Stowe Drive, Poway, California 92064
(Address of principal executive offices)
(Issuer's telephone number) (858) 375-2030.
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_
_____
(Former name, former address and former fiscal year, if changed since last
report)
Checkmark whether the issuer (1) has filed all reports required to be filed by
Sections 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 such filing
requirements for the past 90 days. Yes X No
----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 16,184,360 shares of Issuer's
voting common stock were outstanding on October 31, 2003
SPACEDEV, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
INDEX PAGE
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets at September 30, 2003 and 2002 1
Condensed Consolidated Statements of Operations for September 30, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows for September 30, 2003 and 2002 4
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
ITEM 3. Qualitative and Quantitative Disclosures About Market Risk 24
ITEM 4. Controls and Procedures 25
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 26
ITEM 2. Changes in Securities 26
ITEM 3. Defaults Upon Senior Securities 27
ITEM 4. Submission of Matters to Vote of Security Holders 27
ITEM 5. Other Information 27
ITEM 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Certifications 29
ITEM 1. FINANCIAL STATEMENTS
SPACEDEV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
At September 30, 2003 2002
---------------------------- -------- ----------
ASSETS
CURRENT ASSETS
Cash $314,229 $ 35,743
Accounts receivable 297,037 117,552
Other assets 10,581 -
-------- ----------
Total current assets 621,847 153,295
-------- ----------
FIXED ASSETS - NET 115,288 2,090,925
CAPITALIZED SOFTWARE COSTS - 138,010
OTHER ASSETS 35,544 82,465
-------- ----------
TOTAL ASSETS $772,679 $2,464,695
-------- ----------
-------- ----------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
SPACEDEV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
At September 30, 2003 2002
------------------------------------------------------------------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS DEFICIT
CURRENT LIABILITIES
Current portion of notes payable $ 44,654 $ 215,065
Current portion of capitalized lease obligations 19,804 35,480
Notes payable - related party 80,000 234,666
Accounts payable and accrued expenses 349,464 542,786
Accrued payroll, vacation and related taxes 116,725 132,786
Customer deposits and deferred revenue - 219,957
Billing in excess of costs incurred and estimated earnings (Note 2) - 81,010
Provision for anticipated loss (Note 2) - 17,914
Revolving credit facility (Note 4) 629,500 -
Other accrued liabilities (Note 3) 139,759 -
------------ ------------
TOTAL CURRENT LIABILITIES 1,379,906 1,479,664
------------ ------------
NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 4) 55,012 2,330,126
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES 6,239 16,018
NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES 506,397 559,931
DEFERRED GAIN - ASSETS HELD FOR SALE (NOTE 4) 1,094,539 -
DEFERRED REVENUE 5,000 5,000
------------ ------------
TOTAL LIABILITIES 3,047,093 4,390,739
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERSDEFICIT
Convertible preferred stock, $.0001 par value, 10,000,000 shares
authorized no shares issued or outstanding - -
Common stock, $.0001 par value; 50,000,000 shares authorized, and
16,029,360 and 14,391,008 shares issued and outstanding,
respectively 1,602 1,439
Additional paid-in capital (Note 6) 8,921,791 7,785,810
Additional paid-in capital - stock options 750,000 750,000
Deferred compensation (250,000) (250,000)
Accumulated deficit (11,697,807) (10,213,293)
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS DEFICIT (2,274,414) (1,926,044)
------------ ------------
$ 772,679 $ 2,464,695
------------ ------------
------------ ------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
SPACEDEV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ending Nine Months Ending
Three and Nine Months Ending September 30, 2003 2002 2003 2002
---------------------------------------------- ------------ ------------ ------------ ------------
NET SALES $ 767,780 100% $ 757,116 100% $ 2,054,576 100% $ 2,569,524 100%
TOTAL COST OF SALES 642,940 84% 709,419 94% 1,682,424 82% 2,150,996 84%
---------------------------------------------- ------------ ---- ------------ ---- ------------ ---- ------------ ----
GROSS MARGIN 124,840 16% 47,697 6% 372,152 18% 418,528 16%
---------------------------------------------- ------------ ---- ------------ ---- ------------ ---- ------------ ----
OPERATING EXPENSES
Marketing and sales expense 112,321 15% 89,762 12% 311,368 15% 158,534 6%
Research and development 20,555 3% - 0% 272,537 13% - 0%
Stock and stock option based compensation 4,685 1% (454,062) -60% 4,685 0% (454,062) -18%
General and administrative 137,324 18% 247,731 33% 661,943 32% 546,695 21%
---------------------------------------------- ------------ ---- ------------ ---- ------------ ---- ------------ ----
TOTAL OPERATING EXPENSES 274,885 36% (116,569) -15% 1,250,533 61% 251,167 10%
---------------------------------------------- ------------ ---- ------------ ---- ------------ ---- ------------ ----
PROFIT (LOSS) FROM OPERATIONS (150,045) -20% 164,266 22% (878,381) -43% 167,361 7%
---------------------------------------------- ------------ ---- ------------ ---- ------------ ---- ------------ ----
NON-OPERATING EXPENSE (INCOME)
Interest expense 30,056 4% 65,093 9% 64,683 3% 185,105 7%
Non-cash interest expense
debt discount (recovery) (Note 5) (88,408) -12% - 0% 112,500 5% - 0%
Gain on Building Sale (Note 4(a)) (29,319) -4% - 0% (78,181) -4% - 0%
Loan Fee - Equity Compensation 148,412 19% - 0% 148,412 7% - 0%
---------------------------------------------- ------------ ---- ------------ ---- ------------ ---- ------------ ----
TOTAL NON-OPERATING EXPENSE (INCOME) 60,741 8% 65,093 9% 247,414 12% 185,105 7%
---------------------------------------------- ------------ ---- ------------ ---- ------------ ---- ------------ ----
PROFIT (LOSS) BEFORE TAXES (210,786) -27% 99,173 13% (1,125,795) -55% (17,744) -1%
INCOME TAX BENEFIT (2,526) 0% - 0% - 0% - 0%
---------------------------------------------- ------------ ---- ------------ ---- ------------ ---- ------------ ----
NET (LOSS) INCOME $ (208,260) -27% $ 99,173 13% $(1,125,795) -55% $ (17,744) -1%
---------------------------------------------- ------------ ---- ------------ ---- ------------ ---- ------------ ----
---------------------------------------------- ------------ ---- ------------ ---- ------------ ---- ------------ ----
NET LOSS PER SHARE:
Net loss ($0.01) $ 0.01 ($0.07) $ 0.00
---------------------------------------------- ------------ ------------ ------------ ------------
Weighted-Average Shares Outstanding 15,525,203 14,877,307 15,408,961 14,853,988
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SPACEDEV, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine-Months Ended September 30, 2003 2002
------------------------------------------------------------------------------ ------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,126,098) $ (17,744)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 153,023 218,204
Contributed assets - (16,251)
(Gain) loss on disposal of assets (78,181) 7,410
Common stock and stock options issued for compensation and services 153,028 (454,062)
Non-cash interest expense - convertible debt program 112,500 -
Change in operating assets and liabilities: (158,844) 42,096
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (944,572) (220,347)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of assets 3,150,124 -
Purchases of fixed assets (3,100) -
------------------------------------------------------------------------------ ------------ ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 3,147,024 -
CASH FLOWS FROM FINANCING ACTIVITIES
Principle payments on notes payable (2,542,131) (58,166)
Principal payments on capitalized lease obligations (25,306) (27,046)
Payments on notes payable - related party (179,999) 94,666
Proceeds from issuance of common stock 466,115 34,999
Proceeds from revolving credit facility 623,186 -
Payments on convertible debt program (257,736) -
------------------------------------------------------------------------------ ------------ ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,915,871) 44,453
Net increase in cash 286,581 (175,894)
CASH AT BEGINNING OF PERIOD 27,648 211,637
------------------------------------------------------------------------------ ------------ ----------
CASH AT END OF PERIOD $ 314,229 $ 35,743
------------------------------------------------------------------------------ ------------ ----------
------------------------------------------------------------------------------ ------------ ----------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SPACEDEV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D.
(UNAUDITED)
Nine-Months Ended September 30, 2003 2002
---------------------------------------------------------------------------------------------------------- ------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $30,470 $191,105
NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine-months ending September 30, 2003 and 2002, the Company issued 3,600 and
2,000 shares of stock for 2002 employee awards and services for 2003 summer & student
interns and recorded expenses of $4,685 and $938, respectively.
During the nine-months ending September 30, 2003, the Company issued 12,000 shares of
stock converted from employee stock options for $7,104 in cash.
During the nine-months ending September 30, 2003, the Company eliminated its convertible debt
by repaying half of the notes in cash ($237,500) and having the note holders convert the other half
into 614,853 shares of the Company's common stock. The Company recorded additional
loan fees of $131,350 and charged these fees to equity.
During the nine-months ending September 30, 2003, the Company issued 60,000 shares of
its common stock to the Laurus Master Fund from conversions of its convertible debt notes
under its revolving credit facility with Laurus; thereby realizing a corresponding reduction in debt
of $33,000. The Company recorded additional loan fees of $16,994 and charged these fees
to equity.
During the nine-months ending September 30, 2003, the Company financed $10,135 in fixed
assets through various capital lease obligations.
During the nine-months ending September 30, 2002, the Company recovered 500,000 shares of
stock for a credit of $455,000 upon final judgment of the outstanding litigation against
EMC Holdings, Inc. The expense for this matter was recorded during 2001.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of SpaceDev, Inc.
(the "Company") include the accounts of the Company and its inactive
subsidiaries, Integrated Space Systems, Inc. ("ISS"), and SpaceDev, Inc., an
Oklahoma corporation. In the opinion of management, the condensed consolidated
financial statements reflect all normal and recurring adjustments, which are
necessary for a fair presentation of the Company's financial position, results
of operations and cash flows as of the dates and for the periods, presented.
The condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Consequently, these statements do not include all disclosures normally required
by generally accepted accounting principles of the United States of America for
annual financial statements nor those normally made in an Annual Report on Form
10-KSB. Accordingly, reference should be made to the Company's Form 10-KSB
filed on March 28, 2003 and other reports the Company filed with the U.S.
Securities and Exchange Commission for additional disclosures, including a
summary of the Company's accounting policies, which have not materially changed.
The consolidated results of operations for the nine-months ending September 30,
2003 are not necessarily indicative of results that may be expected for the
fiscal year ending December 31, 2003 or any future period, and the Company makes
no representations related thereto.
The accompanying condensed consolidated financial statements as of September 30,
2003 and 2002 have been prepared assuming the Company will continue as a going
concern. Even though the Company reduced its working capital deficit with the
sale and leaseback of its facility, the Company had a working capital deficit of
approximately $758,000 as of September 30, 2003, and incurred a net loss of
approximately $1,126,000 for the nine-months then ending. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. During the first nine-months of 2003, management raised approximately
$426,000 through a private equity placement, approximately $7,000 from the
exercise of employee stock options under the Company's 1999 Employee Stock
Option Plan, concluded a transaction to sell its facility and lease it back for
a ten (10) year period and secured a revolving credit facility with Laurus
Master Fund, Ltd. for $1.0 million. Subsequent to September 2003, management
intends to obtain new commercial and government contracts and to utilize its
revolving credit facility. Beyond this, management is not currently seeking
additional financing; however, management may seek additional capital through a
combination of public and private debt or equity placements in the future, if
sufficient contracts are not obtained. There can be no assurance that new
contracts or additional debt or equity financing needed to fund operations will
be available or obtained in sufficient amounts necessary to meet the Company's
needs.
The accompanying condensed consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the possible inability of the Company to continue as a going
concern.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities and the results of operations
during the reporting period. Actual results could differ materially from those
estimates.
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation. These
reclassifications had no effect on reported total assets or net loss. Beginning
in second quarter 2002, capitalized software costs are being amortized over
their estimated useful lives using the straight-line method. Periodically and at
least annually, management performs a review for impairment in accordance with
SFAS No. 144. During the nine-months ending September 30, 2003, these
capitalized software costs were fully amortized.
6
2. REVENUE RECOGNITION
In November 1999, SpaceDev was awarded a $4.9 million turnkey mission contract
by the Space Sciences Laboratory ("SSL") at University of California, Berkeley
("UCB"). SpaceDev was competitively selected by UCB/SSL to design, build,
integrate, test and operate for one year a small scientific, Earth-orbiting
spacecraft called CHIPSat. In 2000, the Company reviewed the contract status at
year-end and determined that the total estimated costs at the end of the program
would exceed the likely revenue. As a result, the Company accrued a loss of
approximately $860,000 based on the expected contract modification of $600,000,
which was approved on June 15, 2001. Pursuant to a series of subsequent
modifications, the total value of the CHIPSat project was increased to
approximately $7.2 million. The total expected loss on the contract is
approximately $514,000 of which approximately $18,000 remained on the balance
sheet for the nine-months ending September 30, 2002 while none remained at
September 30, 2003. As of September 30, 2003, approximately 99.5% of the total
contract costs were expended. The CHIPSat contract is expected to conclude in
the first quarter of 2004. Although we have concluded the majority of our work
on this project, the Company will continue to receive $5,000 per month for
support on this contract through January 2004.
In September 2001, the Company was awarded a contract for a proprietary
propulsion research program valued at approximately $1.6 million. Total revenue
was extended to $1.8 million in April 2002 and the contract expired on July 31,
2003. As a part of the propulsion program, the Company competed with another
vendor to design a hybrid propulsion system. On September 19, 2003, the Company
was awarded an exclusive contract for the proprietary components and technology
to power the hybrid rocket motor. The new total contract value is estimated to
be approximately $650,000. Revenues from this contract will begin during the
fourth quarter of 2003 and continue through 2004.
On the projects listed above billings in excess of costs incurred at September
30, 2002 was approximately $81,000 while there were no billings in excess of
costs incurred at September 30, 2003.
3. OTHER ACCRUED LIABILITIES
In June 2001, the Company accrued a $150,000 contingent liability related to its
guarantee on a performance bond on behalf of Space Innovations Limited ("SIL"),
which was then a subsidiary of the Company. In 1999, the Company was required
to guarantee a performance bond on behalf of SIL in connection with a contract
to build a satellite bus for an Australian domestic spacecraft project. SIL was
unable to perform on the contract and subsequently declared bankruptcy. The
Company paid this debt in January 2003 with the proceeds from the sale of the
building. (See Note 4(a))
4. NOTES PAYABLE
a. Building and Settlement Notes
In December 2002, the Company entered an agreement to sell its interest in its
facility. The transaction closed in January 2003. The escrow transaction
included the sale of the land and building. Net fixed assets were reduced by
approximately $1.9 million and notes payable were reduced by approximately $2.4
million while a deferred gain was recorded. The Company's Chief Executive
Officer provided a guarantee for the leaseback. In conjunction with the sale,
the Company entered into a lease agreement with the buyer to leaseback its
facilities. The gain on the sale of the facility was deferred and amortized in
proportion to the gross rental charged to expense over the lease term. Deferred
gain of $1,172,720 is being amortized at the rate of $117,272 per year for ten
(10) years ending in January 2013. As of September 30, 2003, the deferred
gain was $1,094,539. This amortization will be included in the Company's
occupancy and facility expense and totaled $78,181 as of September 30, 2003.
7
4. NOTES PAYABLE CONT.
Deferred Gain consisted of the following:
Nine-Months Ending September 30, 2003
Deferred Gain $1,172,720
Less Amortization to date (78,181)
------------------------------------- -----------
$1,094,539
-----------
In 2001, the Company entered into three settlement loan agreements with various
vendors. The total of $171,402 for all three loans called for payment between
24 and 50 months with interest that ranges from 0% to 8%. At September 30, 2003
and 2002, the outstanding balances on these notes were $99,666 and $161,008,
with interest expense of $5,638 and $3,287, respectively.
Future minimum principal payments on notes payable are as follows:
Period Ending September 30,
2003 44,654
2004 36,215
2005 18,797
--------------------------- ------
Total Settlement Notes 99,666
--------------------------- ------
b) Related Parties
The Company has a note payable to the CEO. At September 30, 2003 and 2002, the
balance was $586,397 and $639,931, respectively, with accrued interest of 10%.
The note was amended on March 20, 2000 to call for annual payments of not less
than $80,000 per year with interest at 10%.
Future minimum principal payments on notes payable, related parties are as
follows:
Period Ending September 30,
2003 $ 80,000
2004 80,000
2005 80,000
2006 80,000
2007 80,000
Thereafter 186,397
-----------------------------------------
$ 586,397
-----------------------------------------
8
4. NOTES PAYABLE CONT.
Interest expense on this note was $27,899 and $34,699 for the nine-months ending
September 30, 2003 and 2002, respectively.
c) Revolving Credit Facility.
On June 3, 2003, the Company entered into a Security Agreement, Secured
Convertible Note, Registration Rights Agreement and Common Stock Purchase
Warrant, with Laurus Master Fund, Ltd. ("Laurus"), which were filed on Form 8-K
dated June 18, 2003. Pursuant to the agreements, the Company received a $1
million revolving credit facility in the form of a three-year Convertible Note
secured by its assets. The net proceeds from the Convertible Note shall be used
for general working capital needs. Advances on the Convertible Note may be
repaid at the Company's option, in cash or through the issuance of the Company's
shares of common stock. The Convertible Note carries an interest rate of WSJ
Prime plus 0.75% on any outstanding balance. In addition, the Company is
required to pay a collateral management payment of 0.55% of the average
aggregate outstanding balance during the month plus an unused line payment of
0.20% per annum. The outstanding balance on the revolving credit facility at
September 30, 2003 was $629,500 of which, approximately $6,300 had been accrued
for interest.
The Company filed a registration statement on Form SB-2 on July 25, 2003 in
connection with this transaction. The Form SB-2 was declared effective on
August 6, 2003. With the securities approved for public resale, the Company
will have an option to pay amounts outstanding under the revolving credit
facility by converting shares of its common stock at the fixed conversion price
of $0.55 per share on the first $1 million of principal, as long as the then
current market price is more than 118% of the fixed conversion price.
The Convertible Note includes a right of conversion in favor of Laurus. If
Laurus exercises its conversion right at any time or from time to time at or
prior to maturity, on any outstanding balance at the time, the Convertible Note
will be convertible into shares of the Company's common stock at a fixed
conversion price, subject to adjustments for stock splits, combinations and
dividends and for shares of common stock issued for less than the fixed
conversion price (unless exempted pursuant to the agreements). The fixed
conversion price will be adjusted after conversion of the first $1 million to
103% of the then fair market value of our common stock ("Adjusted Fixed
Conversion Price"). As of September 30, 2003, Laurus had converted 60,000
shares to reduce the amount borrowed under the revolving credit facility by
$33,000. The Company expensed approximately $17,000 for non-cash loan fee
expenses. Fair market value of the stock was determined by discounting the
closing market price on the date of the conversion by 20%.
Availability of funds under the revolving credit facility will be based on our
accounts receivables, except as waivers are provided by Laurus. An initial
three (3) month waiver was offered by Laurus, under which Laurus permitted a
credit advance up to $300,000, which amount might otherwise exceed eligible
accounts receivable during the period. Laurus subsequently extended the waiver
for an additional six (6) months, under which Laurus permitted a credit advance
up to $1 million, which amount might otherwise exceed eligible accounts
receivable during the period. The revolving credit facility is secured by all
of the assets of the Company.
In conjunction with this transaction, Laurus was paid a fee of $20,000 for the
first year (and the Company will be required to pay a continuation fee of
$10,000 for each year thereafter), which fee was expensed as additional interest
expense. In addition, Laurus received a warrant to purchase 200,000 shares of
the Company's common stock, as stated herein. The value of the warrant of
approximately $98,475 will be treated as additional interest expense and will be
amortized over the three-year life of the Convertible Note, unless sooner
terminated. The warrant exercise price is computed as follows: $0.63 per share
9
4. NOTES PAYABLE CONT.
for the purchase of up to 125,000 shares; $0.69 per share for the purchase of an
additional 50,000 shares; and $0.80 per share for the purchase of an additional
25,000 shares. The warrant exercise price may be paid in cash, in shares of the
Company's common stock, or by a combination of both. The warrant expiration date
is June 3, 2008. The warrant exercise price and the number of shares underlying
the warrant are subject to adjustments for stock splits, combinations and
dividends.
In addition to the initial warrant, the Company is obligated to issue an
additional five-year warrant to Laurus to purchase one share of common stock at
an exercise price equal to 125% of the Adjusted Fixed Conversion Price for every
ten dollars ($10) in principal of the Convertible Note converted into common
stock, if and when over $1 million is converted under the revolving credit
facility. The value of the warrant will be determined, if and when issued, and
will be treated as additional interest expense and will be amortized over the
remaining term of the Convertible Note, unless sooner terminated. No more than
an aggregate of 100,000 shares of the Company's common stock may be purchased by
Laurus under such additional warrants.
5. CONVERTIBLE DEBT NOTES PAYABLE
From October 14, 2002 through November 14, 2002, the Company sold an aggregate
of $475,000 of 2.03% convertible debentures to various director's and officers
of the Company. The total funding was completed on November 14, 2002. The
convertible debentures entitled the holder to convert the principal and unpaid
accrued interest into the Company's common stock when the note matures. The
maturity on the notes was six (6) months from issue date. On March 25, 2003, an
amendment was executed which extended these notes an additional six (6) months.
The convertible debentures were exercisable into a number of the Company's
common shares at a conversion price that equals the 20-day average ask price
less 10%, which was, established when the note was issued, or the initial
conversion price.
Concurrent with the issuance of the convertible debentures, the Company issued
warrants to purchase up to 1,229,705 shares of our common stock to the
subscribers. These warrants are exercisable for three (3) years from the date
of issuance at the initial exercise price which is equal to the 20-day average
ask price less 10%, which was established when the note was issued, or the
initial conversion price of the notes. Upon issuance, the issued warrants were
valued using the Black-Scholes pricing model based on the expected fair value at
issuance and the estimated fair value was recorded as debt discount. As a
result of the change to the maturity date of the convertible debt, the
amortization period for the debt discounts was also extended during the first
quarter in 2003.
On September 5, 2003, the Company repaid one-half of the convertible notes, with
the condition that the note holders would convert the other half. Also, as a
condition of the partial repayment, the note holders were required to relinquish
one-half of the previously issued warrants. Finally, as additional
consideration for the transaction, the note holders were offered 5% interest on
their notes, rather than the stated 2.03%. All the note holders accepted the
offer and the convertible notes were liquidated. As of September 30, 2003, the
Company recorded a credit of $88,408, as debt discount recovery; therefore, for
the nine-months ending September 30, 2003, the debt discount expense was
$112,500. The Company also expensed $39,184 for non-cash loan fee expense.
Fair market value of the stock was determined by discounting the closing market
price on the date of the transaction by 20%, based on the nature of the
restricted securities.
10
5. CONVERTIBLE DEBT NOTES PAYABLE, CONT.
Convertible debentures - beginning balance $475,000
Total interest expense incurred $ 20,236
Accrued interest paid - current year $ (18,161)
Accrued interest paid - prior year year $ (2,075)
Convertible debtures paid $(237,500)
Convertible debtures converted $(237,500)
----------
$(475,000)
----------
Convertible debentures - ending balance balance $ 0.00
---------------------------------------------------------- --------
---------------------------------------------------------- --------
Debt discount (Warrants) - beginning balance $475,000
Amount forfeited $(237,500)
Amount expensed prior year $(125,000)
Amount expensed current year $(267,879)
Current year - adjustment $ 155,379
----------
$(475,000)
----------
Debt discount (Warrants) - ending balance $ 0.00
---------------------------------------------------------- --------
---------------------------------------------------------- --------
6. STOCKHOLDERS' DEFICIT - COMMON STOCK AND WARRANTS
On November 5, 2000, the Company commenced a private placement offering ("PPO")
for a maximum of 1,000,000 shares of the Company's $0.0001 par value common
stock and warrants to purchase an additional 1,000,000 shares of common stock
(the "Units"). The offering price of the Unit(s) was the five-day average of
the bid and ask price for the Company's common stock on the date of issuance,
with a minimum per Unit price of $1.00. The warrants allowed the holder to
acquire additional shares at $0.50 above the offering price of the shares. The
Company sold to one related-party investor under these terms.
On March 2, 2001, the PPO price was amended to the average of the high bid
prices on the date of issuance and four preceding days, with no minimum per
share price, and the warrants were amended to allow the holder to acquire
additional shares at the Unit price.
The Company sold 153,060 Units under the PPO during 2002. The Company received
$75,000 for the Units sold under the PPO during 2002.
On January 16, 2003 and February 14, 2003, pursuant to an extension of the PPO,
the Company sold 665,188 and 196,079 Units, respectively. The Company received
approximately $326,000 and $100,000, respectively, for the Units sold under the
PPO during the first quarter 2003. The PPO was subsequently closed.
The Company has elected to account for its stock-based compensation plans under
APB 25. However, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during the period ending September 30, 2003 and
2002 using the minimum value method as prescribed by SFAS 123. Under this
method, the Company used the risk-free interest rate at the date of grant, the
expected volatility, the expected dividend yield and the expected life of the
options to determine the fair value of options granted. The risk-free interest
rates ranged from 6.0% to 6.5%, expected volatility was 117%, the dividend yield
was assumed to be zero, and the expected life of the options was assumed to be
three to five years based on the average vesting period of options granted.
11
6. STOCKHOLDERS' DEFICIT - COMMON STOCK AND WARRANTS, CONT.
If the Company had accounted for these options in accordance with SFAS 123, the
total value of options granted during the periods ending September 30, 2003 and
2002 would be amortized on a pro forma basis over the vesting period of the
options. Thus, the Company's consolidated net loss would have been as follows:
Nine-Months Ending September 30, 2003 2002
-------------------------------- ------------ ----------
Net loss:
As reported $(1,033,870) $ (17,744)
Pro forma $(1,234,318) $(190,991)
Loss per Share:
--------------------------------
As reported $ (.06) $ (.00)
Pro forma $ (.08) $ (.01)
7. NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN
No. 45 elaborates on previously existing disclosure requirements for most
guarantees. It also clarifies that at the time a company issues a guarantee, the
company must recognize an initial liability for the fair value, or market value,
of the obligations it assumes under the guarantee and must disclose that
information in its financial statements. The provisions related to recognizing a
liability at inception of the guarantee for the fair value of the guarantor's
obligations does not apply to product warranties or to guarantees accounted for
as derivatives. FIN No. 45 also requires expanded disclosures regarding product
warranty expense. The initial recognition and initial measurement provisions
apply on a prospective basis to guarantees issued or modified after December 31,
2002. The adoption of this Statement is not expected to have a material effect
on the consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation (FIN) No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51."
This interpretation provides guidance on: 1) the identification of entities for
which control is achieved through means other than through voting rights, known
as "variable interest entities" (VIEs); and 2) which business enterprise is the
primary beneficiary and when it should consolidate the VIE. This new model for
consolidation applies to entities: 1) where the equity investors (if any) do not
have a controlling financial interest; or 2) whose equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, this
interpretation requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE make additional
disclosures. This interpretation is effective for all new VIEs created or
acquired after January 31, 2003. For VIEs created or acquired prior to February
1, 2003, the provisions of the interpretation must be applied no later than the
beginning of the first interim or annual reporting period beginning after June
15, 2003. Certain disclosures are effective immediately. The adoption of this
Statement is not expected to have a material effect on the consolidated
financial statements.
12
7. NEW ACCOUNTING PRONOUNCEMENTS, CONT.
In April 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 requires that contracts with comparable characteristics be accounted for
similarly. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of this Statement is not expected to have a material effect
on the consolidated financial statements.
In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this Statement is not expected to have a
material effect on the consolidated financial statements.
8. SUBSEQUENT EVENTS
On October 4, 2003 and October 14, 2003, respectively, Laurus Master Fund, Ltd.
Converted $30,250 and $55,000, respectively, of convertible debt under the
Revolving Credit Facility into 55,000 and 100,000 shares of common stock of the
Company, respectively. The Company's debt was reduced by the corresponding
$30,250 and $55,000, respectively.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
condensed consolidated financial statements and the notes thereto and the other
financial information appearing elsewhere in this document. Readers are also
urged to carefully review and consider the various disclosures made by us which
attempt to advise interested parties of the factors which affect our business,
including without limitation our General Registration Statement on Form
10SB12G/A filed January 28, 2000 and our Form 10-KSB filed March 28, 2003.
In addition to historical information, the following discussion and other parts
of this document may contain forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of the forward-looking statements. We
undertake no obligation to publicly update any of the forward-looking statements
after the date of this report to conform such statements to actual results or to
changes in our expectations.
Actual results could differ materially from those anticipated by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the level of sales to key
customers; the economic conditions affecting our industry; actions by
competitors; fluctuations in the price of raw materials; the availability of
outside contractors at prices favorable to the Company; our dependence on
single-source or a limited number of suppliers; our ability to protect our
proprietary technology; market conditions influencing prices or pricing; an
adverse outcome in potential litigation, claims and other actions by or against
us; technological changes and introductions of new competing products; the
current recession; terrorist attacks or acts of war, particularly given the acts
of terrorism against the United States on September 11, 2001 and subsequent
military responses by the United States and coalition forces; mission disasters
such as the loss of the space shuttle Columbia on February 1, 2003 during its
re-entry into earth's atmosphere; ability to retain key personnel; changes in
market demand; exchange rates; productivity; weather; and market and economic
conditions in the areas of the world in which we operate and market our
products. These are factors that we think could cause our actual results to
differ materially from expected and historical events.
OVERVIEW
We are engaged in the conception, design, development, manufacture, integration
and operations of space technology systems, products and services. We are
currently focused on the development of low-cost micro-satellites,
nano-satellites and related subsystems, hybrid rocket propulsion as well as
associated engineering and technical services primarily to government agencies,
and specifically the Department of Defense. Our products and solutions are sold,
mainly on a project-basis, directly to these customers and include sophisticated
micro- and nano-satellites, hybrid rocket-based orbital Maneuvering and orbital
Transfer Vehicles ("MTVs") as well as safe sub-orbital and orbital hybrid
rocket-based propulsion systems. Although we believe there will be a commercial
market for our micro-satellite and nano-satellite products and services in the
long-term, the early adopters of this technology appears to be the military and
our "products" are considered to be the outcome of specific projects. We are
also developing commercial hybrid rocket motors and small high performance space
vehicles and subsystems for commercial customers.
We were incorporated under the laws of the State of Colorado on December 23,
1996 as Pegasus Development Group, Inc. ("PDGI") and subsequently changed our
name to "SpaceDev." We became apublicly traded company in October 1997 and are
trading on the Over-the-Counter Bulletin Board ("OTCBB") under the symbol of
"SPDV."
14
In February 1998, our operations were expanded with the acquisition of
Integrated Space Systems, Inc. ("ISS"), a California corporation founded for the
purpose of providing engineering and technical services related to space-based
systems. The ISS employee base, acquired upon acquisition, largely consisted of
former General Dynamics personnel and enlarged our then current employee base to
20 employees. ISS was purchased for approximately $3.6 million, paid in Rule
144 restricted common shares of SpaceDev. Goodwill of approximately $3.5
million was capitalized and was to be amortized over a period of 60 months,
based on the purchase price exceeding the net asset value of approximately
$164,000. As a result of a change in corporate focus, on November 15, 2001, we
determined that the unamortized balance of goodwill from ISS, which was
approximately $923,000, had become impaired and it was written off. While the
ISS segment did provide small hybrid propulsion space systems and engineering
services on separate contracts (mainly with government agencies), the
engineering service contracts had expired and, therefore, would not be producing
revenue or cash flow to support future operations. We determined that all future
business, contracts and proposals would be sought after only in the SpaceDev
name, making it a more efficient way for us to manage and track multiple
contracts and work on many different business ventures at the same time within
the same operating segment. We intend to dissolve ISS by the end of the year,
now that all activities have been integrated into SpaceDev, Inc.
In November 1999, we won a $4.9 million turnkey mission contract by the Space
Sciences Laboratory ("SSL") at University of California, Berkeley ("UCB"). We
were competitively selected by UCB/SSL to design, build, integrate, test and
operate, for one year, a small NASA-sponsored scientific, Earth-orbiting
spacecraft called CHIPSat. CHIPSat is the first mission of NASA's low-cost
University-Class Explorer ("UNEX") series. CHIPSat launched as a secondary
payload on a Delta-II rocket on January 12, 2003. The satellite achieved 3-axis
stabilization, meaning it was pointing and tracking properly, with all
individual components and systems successfully operating and is continuing to
work well in orbit. In 2000, we reviewed the contract status at year-end and
determined that the total estimated costs at the end of the program would exceed
the likely revenue. As a result, we accrued a loss of approximately $860,000
based on the expected contract modification of $600,000, which was approved on
June 15, 2001. On November 28, 2001, a second contract modification was signed
with UCB, which added approximately $1.2 million to the contract as well as an
increase in contract scope. This increased the total contract revenue to
approximately $6.8 million and reduced the total expected loss on the contract
to approximately $460,000. During 2002, an additional contract modification for
approximately $400,000 was signed, which also increased the contract value and
scope to the current value of the CHIPSat project of approximately $7.4 million,
changing the total expected loss on the contract to approximately $514,000, most
of which could have been recorded as research and development costs associated
with the development of our ongoing satellite design and development programs.
As of September 30, 2003, approximately 99.5% of the total contract costs were
expended. The CHIPSat contract is expected to conclude in the first quarter of
2004, although we have concluded the majority of our work on this project, we
will continue to receive $5,000 per month for support on this contract through
January 2004. Revenues for the nine-months ending September 30, 2003 and 2002
were approximately $346,000 and $1.2 million, respectively.
In April 2001, we were awarded one of four $1.0 million contracts from NASA's
Jet Propulsion Laboratory in Pasadena, California. As part of a Boeing-led team,
we participated in a study of the options for a potential Mars sample return
mission in 2011. The contract ran from April through October 2001. Our revenue
from this contract in 2002 and 2001 was approximately $7,000 and $216,000,
respectively.
In September 2001, we were awarded a contract for a proprietary propulsion
research program valued at approximately $1.6 million. Total revenue was
extended to $1.8 million in April 2002 and the contract expired on July 31,
2003. As a part of the propulsion program, we competed with another vendor to
design a hybrid propulsion system. On September 19, 2003, we were awarded an
15
exclusive contract for the proprietary components and technology to power the
hybrid rocket motor. The new total contract value is estimated to be
approximately $650,000. Revenues from this contract will begin during the fourth
quarter of 2003 and continue through 2004.
On April 30, 2002, we were awarded Phase I of a contract to develop a
Shuttle-compatible propulsion module for the Air Force Research Lab ("AFRL").
We received an award for Phase II of the contract on March 28, 2003, and will
use the project to further expand our product line to satisfy commercial and
government space transportation requirements. The first two phases of the
contract (including an additional add-on option) are worth up to approximately
$2.5 million, of which $100,000 was awarded for Phase I, and approximately $1.4
million was awarded for Phase II. AFRL Phase II is a cost-plus contract. In
addition to the Phase I and Phase II awards, there is an option worth
approximately $1 million. The option has been awarded and work will begin once
certain milestones are met to the satisfaction of the AFRL project manager.
Revenues for the nine-month period ending September 30, 2003 were approximately
$29,600 for Phase I and $676,000 for Phase II.
On July 9, 2003, we were awarded a Phase I contract to develop micro- and
nano-satellite bus and subsystem designs. This AFRL Small Business Innovation
Research ("SBIR") contract, valued at approximately $100,000, will enable us to
explore the further miniaturization of our unique and innovative microsat
subsystems. It will also enable us to explore ways to reduce the time and cost
to build small satellites through further standardization in order to help
define de facto standards for payload hardware and software interfaces. The
contract is fixed price, milestone-based and should be completed within one
year. This SBIR has the possibility of Phase II carry-forward work; however,
there can be no assurance that such work will be awarded to us. Revenues for
the nine-months ending September 30, 2003 were approximately $16,000.
On July 9, 2003, we were awarded a Phase I SBIR contract by AFRL to design and
begin the development of the SpaceDev Streaker(TM) small launch vehicle ("SLV").
SpaceDev Streaker(TM) will be designed to responsively and affordably lift up to
1,000 pounds to Low Earth Orbit ("LEO"). The SpaceDev Streaker(TM) SLV concept
is based on a proprietary combination of technologies to increase the
performance of hybrid rocket motor technology. Hybrid rocket motors are a
combination of solid fuel and liquid oxidizer, and can be relatively safe,
clean, non-explosive, and storable, and can be throttled, shut down and
restarted. This contract is valued at approximately $100,000, is a fixed price,
milestone-based agreement, which should be completed within one year. This SBIR
has the possibility of Phase II carry-forward work; however, there can be no
assurance that such work will be awarded to us. Revenues for the nine-months
ending September 30, 2003 were approximately $20,000.
Also, on July 9, 2003, we were awarded a second contract by the Missile Defense
Agency ("MDA") to explore the use of micro-satellites in national missile
defense. Our microsats are operated over the Internet and are capable of
pointing and tracking targets in space or on the ground. This study will
explore fast response microsat launch and commissioning; small, low-power
passive sensors; target acquisition and tracking; formation flying and local
area networking within a cluster of microsats; and an extension of our proven
use of the Internet for on-orbit command, control and data handling. The
contract value is $800,000, and the total value of our microsatellite studies
for MDA will be over $1 million this year. Revenues for the nine-months ending
September 30, 2003 were approximately $145,000.
On July 24, 2003, we were awarded a contract by Lunar Enterprise of California
("LEC") for a first phase project to begin developing a conceptual mission and
spacecraft design for a lunar lander program. The unmanned mission will be
designed to put a small dish antenna near the south pole of the Moon. From that
location it will be in near-constant sunlight for solar power generation, and
should be able to perform multi-wavelength astronomy while communicating with
ground stations on Earth. The contract value is $100,000 to be completed by
November 2003, with a possible immediate follow-on phase of $140,000 to further
analyze launch opportunities, spacecraft design, trajectory possibilities,
potential landing areas, available technologies for a small radio astronomy
system, and communications and data handling requirements. This phase, if
awarded, would be targeted for a February 2004 completion. Revenues for the
nine-months ending September 30, 2003 were approximately $70,000.
16
On June 18, 2001, we entered into a relationship with two individuals (doing
business as EMC Holdings Corporation ("EMC")) whereby EMC was to provide certain
consulting and advisory services to us. EMC received the first installment of
500,000 shares of our common stock on June 26, 2001. Total expense for the
initial stock issuance through September 30, 2001 was approximately $455,000.
Pursuant to a demand for arbitration filed by us on November 7, 2001, we sought
the return of all or a portion of the shares issued to EMC. Following a
three-day arbitration in May and June 2002, on July 17, 2002, an interim award
was issued in favor of us against EMC, ordering the return of the initial
installment of our 500,000 shares and denying EMC's own claim for $118,000. On
October 22, 2002, a tentative final award was issued in our favor including an
award of approximately $83,000 in attorney and arbitration fees to us. The
tentative final ruling became effective on October 29, 2002, and has been
submitted to the Superior Court of California, Orange County, for entry of
judgment. Because collection of the attorney and arbitration fees award is not
assured, we expensed all of our fees related to this matter. Any recovery of
the fees will be recorded as income in the period they are received; however, at
this time, we do not expect any recovery. The return of our 500,000 shares, as
provided in the interim award issued on July 17, 2002, was recorded in the third
quarter of 2002 as a reversal of the original expense recorded. Because the
original expense was not recorded as an extraordinary item, the reversal of the
expense did not qualify as an extraordinary item.
RESULTS OF OPERATIONS
Please refer to the condensed consolidated financial statements, which are a
part of this report, for further information regarding the results of
operations.
Nine-Months Ending September 30, 2003 -vs.- Nine-Months Ending September 30,
2002
During the nine-months ending September 30, 2003, we had net sales of
approximately $2,055,000 as compared to net sales of approximately $2,570,000
for the same nine-month period in 2002. Sales in 2003 reflected the substantial
completion of CHIPSat and the completion of the proprietary propulsion contract,
AFRL Phase I and MDA Phase I, while a new exclusive proprietary propulsion
contract, as well as, new contracts with MDA, AFRL and Lunar Enterprises began.
Revenues for the nine-months ending September 30, 2003 were comprised of
approximately $30,000 and $675,000 from Phase I and Phase II, respectively, of
the AFRL project, $397,000 and $13,000 from the old and new proprietary
propulsion contract, respectively, $250,000 and $145,000 from MDA Phase I and
II, respectively, $346,000 from the CHIPSat program, $70,000 from the contract
by Lunar Enterprises of California and approximately $129,000 from all other
programs. In the first nine-months of 2002, sales were comprised of
approximately $1,237,000 from the CHIPSat program, $1,055,000 from the
proprietary propulsion contract and $278,000 from all other programs.
For the nine-months ending September 30, 2003, we had costs of sales (direct and
allocated costs associated with individual contracts) of approximately
$1,682,000, or 82% of net sales, as compared to approximately $2,151,000, or 84%
of net sales, during the same period in 2002. Although proportionally
consistent, the decrease in cost of sales was primarily due to a lower overall
cost structure, combined with the implementation of stronger cost controls and
project monitoring. Also, we altered our cost allocation method in the second
quarter as we completed CHIPSat, our main fixed price contract at the time, and
began work on our new AFRL and MDA cost plus contracts. We continue to focus
efforts on developing project management skills and reports to assist in the
efficient and effective management of our projects. The gross margin percentage
for the nine-months ending September 30, 2003 was 18% of net sales as compared
to 16% of net sales for the same nine-month period in 2002.
17
We experienced an increase of approximately $999,700 in operating expenses from
approximately $251,000, or 10% of net sales, in the nine-months ending September
30, 2002 to approximately $1,251,000, or 61% of net sales, for the nine-months
ending September 30, 2003. Operating expenses include general and
administrative expenses ("G&A"), marketing and sales expenses and research and
development expenses as well as stock and stock option based compensation
expenses. In 2002, we experienced a one-time reversal for the EMC transaction
(see EMC Holdings Corporation transaction in MD&A Overview Section above). The
increase in operating expenses for the nine-month period would have been
approximately $546,000, rather than the stated $999,700 increase, without the
one-time EMC reversal.
- Marketing and sales expenses accounted for approximately 28% of the
increase in operating expenses, from approximately $158,500, or 6% of net sales,
for the first nine-months of 2002, to approximately $311,000, or 15% of net
sales, during the same period in 2003, mainly due to our decision to expand our
marketing department and add a Vice President of Marketing and Product
Development. Although our Vice President of Marketing and Product Development
is no longer with us, our CEO, Mr. Benson is leading our marketing & sales
efforts and his expenses are being charged to that department.
- Research and development ("R&D") expenses accounted for approximately 49%
of the increase in operating expenses. We began incurring R&D expenses of
approximately $273,000, or 13% of net sales, during the nine-months ending
September 30, 2003. Approximately $192,000 of R&D was in connection with our
hybrid rocket propulsion design system and technologies and the remaining
$81,000 was part of our satellite bus design and development.
- Without the EMC one-time adjustment, approximately 2% of the increase in
operating expenses came from stock and stock option based compensation expense.
During the nine-months ending September 30, 2003, we had an increase in stock
and stock option based compensation expense from approximately ($454,000), or
(18%) of net sales, in 2002 to approximately $4,700 or 0% of net sales during
the same nine-month period in 2003. This increase was mainly due to the
reversal of stock compensation from the EMC arbitration ruling as noted above.
- G&A expenses accounted for approximately 21% of the increase in operating
expenses. The increase in G&A expenses from approximately $547,000 for the
nine-months ended September 30, 2002 to approximately $662,000 for the same
nine-months in 2003 was primarily due to new one-time revolving credit facility
expenses plus rent of approximately $207,000 (we owned the building in 2002 and
incurred interest expense on loans but not rental payments), offset by a
reduction in G&A labor expense of $92,000 primarily due to the loss of our Vice
President of Operations, which led to the net increase of approximately
$115,000 in G&A expenses.
Non-operating expenses/(income) consists of interest expense, non-cash debt
discount expenses and deferred gain on the sale of our building, as well as,
other loan fees and expenses.
- Interest expense for the nine-months ending September 30, 2003 and 2002
was approximately $65,000, or 3% of net sales, and $185,000, or 7% of net sales,
respectively. The decrease was due to the building sale on January 31, 2003,
which eliminated building debt and reduced overall interest on the notes
associated with the building. We continue to pay interest expense on certain
capital leases and settlement notes. In addition, we accrued interest expense
related to our related party note, convertible debentures and our revolving
credit facility. In the nine-months ending September 30, 2003 and 2002, the
accrued interest on our related party note was $27,899 and $34,699,
respectively. We also accrued and paid $18,161 of interest on our convertible
notes for the nine-months ending September 30, 2003.
18
- In conjunction with our convertible notes, we recorded a convertible note
debt discount of $475,000 related to warrants that accompanied the convertible
debt issue in 2002; however, since we made a partial repayment and the note
holders converted the remaining balance and forfeited half of their warrants,
the debt discount amount was reduced from $475,000 to $237,500. The reduction
is exclusively attributable to forfeiture of half of the original warrants.
During the nine-months ended September 30, 2003, the convertible debt was
eliminated. A debt discount adjustment of $234,394 was made and the ending
balance of $112,500 was recorded on the income statement for the nine-months
ending September 30, 2003.
- We recognized approximately $78,000 of the deferred gain on the sale of
the building during the nine-months ending September 30, 2003 and we will
continue to amortize the remaining deferred gain of $1,094,539 into other income
over the remainder of the lease. In relation to the gain we received on the
building, we also accrued an income tax payable expense of $40,000 at March 31,
2003 of which none remained at September 30, 2003. The reduction of the income
tax payable was due to a change in estimate based on the loss we experienced
during the first nine-months of 2003.
- We realized loan fees related to our revolving credit facility and
expenses related to the conversion of notes to common stock below fair market
value of approximately $148,000 for the three and nine-months ending September
30, 2003. We anticipate additional expenses related to similar note to equity
conversions in the quarters ahead.
During the nine-months ending September 30, 2003, we incurred a net loss of
approximately $1,126,000, or 55% of net sales, compared to a net loss of
approximately $18,000, or 1% of net sales, for the same nine-months ending in
2002. The increase in the net loss was due to our reduction in revenues with
the substantial completion of CHIPSat and the delay in starting our new AFRL and
MDA projects, combined with the increase in our operating expenses, as discussed
above.
Three-Months Ending September 30, 2003 -vs.- Three-Months Ending September 30,
2002
During the three-months ending September 30, 2003, we had net sales of
approximately $768,000 as compared to net sales of approximately $757,000 for
the same three-month period in 2002. Sales in the third quarter of 2003
reflected the substantial completion of CHIPSat and the completion of the
proprietary propulsion contract, AFRL Phase I and MDA Phase I, while a new
exclusive proprietary propulsion contract, as well as, new contracts with MDA,
AFRL and Lunar Enterprises, began. Revenues for the three-months ending
September 30, 2003 were comprised of approximately $463,000 from Phase II of the
new AFRL contract, $145,000 from the new MDA project, $70,000 from the Lunar
Enterprises contract, $36,000 from the AFRL SBIR programs, $15,000 from the
CHIPSat program, $13,000 from the new exclusive proprietary propulsion contract
and $26,000 from all other programs. In the three-months ended September 30
2002, sales were comprised of approximately $432,000 from the CHIPSat program,
$249,000 from the proprietary propulsion contract and $76,000 from all other
programs.
For the three-months ending September 30, 2003, we had costs of sales (direct
and allocated costs associated with individual contracts) of approximately
$643,000, or 84% of net sales, as compared to approximately $709,000, or 94% of
net sales, during the same three-month period in 2002. The reduction in cost of
sales was primarily attributable to an effort to separate investments in
technology development from direct costs on current projects and a reduction in
headcount and overall spending during the period. Also, we altered our cost
allocation method in the second quarter as we completed CHIPSat, our main fixed
price contract at the time, and began work on our new AFRL and MDA cost plus
contracts in the third quarter. We recorded a corresponding increase in the
gross margin percentage for the three-months ending September 30, 2003, which
increased to 16% as compared to 6% for the same three-month period in 2002. We
also experienced a shift in business from fixed price to cost-plus projects,
with the award of AFRL Phase II in the second quarter and the start of our
newest MDA project during the third quarter of 2003. AFRL Phase II and the MDA
project are both cost-plus programs.
19
We experienced an increase of approximately $392,000 in operating expenses from
approximately ($117,000), or (15%) of net sales, in the three-months ending
September 30, 2002 to approximately $275,000, or 36% of net sales, for the same
three-months period in 2003. Operating expenses include general and
administrative expenses and marketing and sales expenses, as well as research
and development expenses. In 2002, we experienced a one-time reversal for the
EMC transaction (see EMC Holdings Corporation transaction in MD&A Overview
Section above). Our operating expenses for the three-month period would have
decreased by approximately $63,000, rather than an increase of $392,000, without
the one-time EMC reversal.
- Marketing and sales expenses accounted for an increase of approximately
41% in operating expenses, from approximately $90,000, or 12% of net sales, for
the three-months ending September 30, 2002, to approximately $112,000, or 15% of
net sales, during the same period in 2003, mainly due to our decision to expand
our marketing department and allocate a majority of Mr. Benson's expenses to
marketing and sales for as long as he continues to lead our marketing & sales
efforts.
- Research and development expenses accounted for an increase of
approximately 39% in operating expenses, from no R&D expenses during the
three-months ending September 30, 2002, to approximately $21,000, or 3% of net
sales, during the same three-month period in 2003, due to an effort to separate
investments in technology development from direct costs on current projects.
- Without the EMC one-time adjustment, approximately 26% of the increase in
operating expenses came from stock and stock option based compensation expense.
During the three-months ending September 30, 2003, we had an increase in stock
and stock option based compensation expense from approximately ($454,000), or
(60%) of net sales, in 2002 to approximately $4,700 or 1% of net sales during
the same three-month period in 2003. This increase was mainly due to the
reversal of stock compensation from the EMC arbitration ruling as noted above.
- G&A expenses accounted for approximately a 206% decline in operating
expenses, more than offsetting the M&S, R&D and stock based compensation
increases. G&A expenses consist primarily of salaries for administrative
personnel, fees for outside consultants, rent, insurance, legal and accounting
fees and other overhead expenses. We experienced a decrease of approximately
$111,000 in G&A expenses from approximately $248,000 for the three-months ending
September 30, 2002 to approximately $137,000 for the same three-month period in
2003. This decrease was due to a number of factors, including the reallocation
of the CEO compensation to marketing and sales, the absence of other salaries
previously charged to G&A in 2002 and the change in allocation method as we
shift from mainly fixed-price contracts to cost-plus contracts for the time
being.
Non-operating expenses/(income) consist of interest expense, non-cash debt
discount expenses, deferred gain on the sale of our building, other loan fees
and expenses.
- Interest expense for the three-months ending September 30, 2003 and 2002
was approximately $30,000, or 4% of net sales, and $65,000, or 9% of net sales,
respectively. The decrease was due to the building sale on January 31, 2003,
which eliminated building debt and reduced overall interest on the notes
associated with the building. We continue to pay interest expense on certain
capital leases and settlement notes. In addition, we accrued and paid interest
expense related to our related party note and convertible debentures. In the
three-months ending September 30, 2003 and 2002, the accrued interest on our
related party note was $8,766 and $11,066, respectively. We also paid $20,236
in interest on our convertible notes for the three-months ending September 30,
2003.
20
- In conjunction with our convertible notes, we recorded a convertible note
debt discount of $475,000 related to warrants that accompanied the convertible
debt issue in 2002; however, since we made a partial repayment and the note
holders converted the remaining balance and forfeited half of their warrants,
the debt discount was reduced to $237,500. The reduction is exclusively
attributable to forfeiture of half of the original warrants. During the
three-month period ending September 30, 2003, the convertible debt was
eliminated. A debt discount adjustment of $267,879 was made and the ending
credit balance of $88,408 was recorded on the income statement for the
three-month period ending September 30, 2003.
- We recognized approximately $29,000 of the deferred gain on the sale of
the building during the three-months ending September 30, 2003 and we will
continue to amortize the remaining deferred gain of $1,094,539 into other
income over the remainder of the lease. In relation to the gain we received on
the building, we also credited the accrued income tax payable expense by $2,526
due to a change in accrual estimate during the first quarter of 2003 and the
loss we incurred for the three-months ending September 30, 2003.
- We realized loan fees related to our revolving credit facility and
expenses related to the conversion of notes to common stock below fair market
value of approximately $148,000 for the three-months ending September 30, 2003.
We anticipate additional expenses related to similar note to equity conversions
in the quarters ahead.
During the three-months ending September 30, 2003, we incurred a net loss of
approximately $208,000, or 16% of net sales, compared to a profit of
approximately $99,000, or 13% of net sales, for the same three-months ending in
2002. The net loss would have decreased, if not for the one-time recovery charge
related to the EMC transaction, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Position For Nine-Months Ending September 30, 2003 -vs.- Nine-Months Ending
September 30, 2002
Net increase in cash during the nine-months ending September 30, 2003 was
approximately $287,000, compared to a net decrease of approximately $176,000 for
the same nine-months in 2002. Net cash used in operating activities totaled
approximately $945,000 for the nine-months ending September 30, 2003, an
increase of approximately $725,000 as compared to approximately $220,000 used in
operating activities during the same nine-months in 2002, mainly due to the
increase in our net loss.
Net cash provided by investing activities totaled approximately $3,147,000 for
the nine-months ending September 30, 2003, compared to no cash used in or
provided by investing activities during the same nine-month period in 2002. The
increase in cash provided by investing activities is attributable to the sale of
the building on January 31, 2003.
Net cash used in financing activities totaled approximately $1,916,000 for the
nine-months ending September 30, 2003, which is a decrease of approximately
$1,960,000 from the approximately $44,000 provided by financing activities
during the same nine-month period 2002. This is primarily attributable to
paying off notes payable associated with the building sale and advances on our
new revolving credit facility.
At September 30, 2003, our cash, which includes cash reserves and cash available
for investment, was approximately $314,000, as compared to approximately $36,000
at September 30, 2002, an increase of approximately $278,000, mainly due to
advances on our revolving credit facility. At September 30, 2003, our
working capital ratio improved to 0.49 for the nine-months ended, an increase
from 0.10 for the same nine-month period in 2002.
21
As of September 30, 2003, our backlog of funded and non-funded business was
approximately $2.6 million, as opposed to approximately $2.9 million as of
September 30, 2002. During the nine-months ending September 30, 2003, we won
the AFRL Phase II contract worth approximately $1.4 million, negotiated
increases of approximately $1.0 million to the AFRL Phase II Contract as a
deferred option still open, completed our first proprietary propulsion contract
and was awarded a new exclusive proprietary propulsion contract, completed
significant milestones on CHIPSat, completed MDA's Phase I project and obtained
a purchase order for a new $800,000 project, obtained two AFRL SBIR Phase I
grants and were awarded a $100,000 contract by Lunar Enterprises.
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
deferred tax asset of approximately $1.3 million consisted primarily of the
income tax benefits from net operating loss carryforwards, amortization of
goodwill and research and development credit carryforwards. The federal and
state tax loss carry forwards will expire through 2022 unless previously
utilized. The State of California has suspended the utilization of net
operating losses for 2003. A valuation allowance has been recorded to fully
offset the deferred tax asset as it is more likely than not that the assets will
not be utilized. The valuation allowance decreased approximately $100,000
during the nine-months ending September 30, 2003, from $1.4 million at December
31, 2002 to $1.3 million at September 30, 2003. Please refer to our
consolidated financial statements, which are a part of this report for further
information regarding our liquidity and capital resources.
Critical Accounting Standards
Our revenues are transitioning from primarily fixed-price contracts, where
revenues are recognized using the percentage-of-completion method of contract
accounting based on the ratio of total costs incurred to total estimated costs,
to cost-plus contracts, where revenues are recognized as costs are incurred and
services are performed. Losses on contracts are recognized when they become
known and reasonably estimable (see Notes to the Condensed Consolidated
Financial Statements). Actual results of contracts may differ from management's
estimates and such differences could be material to the condensed consolidated
financial statements. Professional fees are billed to customers on a
time-and-materials basis, a fixed-price basis or a per-transaction basis.
Time-and-materials revenues are recognized as services are performed. Billings
in excess of costs incurred and estimated earnings represent the excess of
amounts billed in accordance with the contractual billing terms. Deferred
revenue represents amounts collected from customers for services to be provided
at a future date. Research and development costs are expensed as incurred.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." We adopted FAS 123 in 1997. We have elected to measure
compensation expense for our stock-based employee compensation plans using the
intrinsic value method prescribed by APB Opinion 25, "Accounting for Stock
Issued to Employees" and have provided pro forma disclosures as if the fair
value based method prescribed SFAS 123 has been utilized. (See Notes to the
Condensed Consolidated Financial Statements.) We have valued our stock, stock
options and warrants issued to non-employees at fair value in accordance with
the accounting prescribed in SFAS No. 123, which states that all transactions in
which goods or services are received for the issuance of equity instruments
shall be accounted for based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more reliably
measurable.
22
FAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure,
which amends the FAS 123, Accounting for Stock-Based Compensation was published
by Financial Accounting Standards Board on December 31, 2002. The effective
date of the new FASB Statement is December 15, 2002. FAS 123 prescribes a "fair
value" methodology to measure the cost of stock options and other equity awards.
Companies may elect either to recognize fair value stock-based compensation
costs in their financial statements or to disclose the pro forma impact of those
costs in the footnotes. We have chosen the latter approach. The immediate
impact of FAS 148 is more frequent and prominent disclosure of stock-based
compensation costs, starting with financial statements for the year ended
December 31, 2002 for companies whose fiscal year is the calendar year. FAS 148
also provides some flexibility for the transition, if a company chooses the
fair-value cost recognition of employee stock options.
Fixed assets are depreciated over their estimated useful lives of three-to-five
years using the straight-line method of accounting in accordance with Statement
of Financial Accounting Standards No. 144. Goodwill and other intangible assets
were created upon the acquisition of our subsidiaries. Intangible assets are
amortized over their assets' estimated future useful lives on a straight-line
basis over three-to-five years. Goodwill and other intangibles are periodically
reviewed for impairment based on an assessment of future operations to ensure
they are appropriately valued in accordance with Statement of Financial
Accounting Standards No. 142. Effective November 2001, there will be no more
amortization of goodwill. (See Notes to the Condensed Consolidated Financial
Statements.)
Cash Position and Going Concern
Our auditors expressed in their formal auditors' opinion dated February 13, 2003
that our December 31, 2002 financial position raises substantial doubt about our
ability to continue as a going concern. The opinion is based on net losses
incurred by us for the years ended December 31, 2002 and 2001 of approximately
$400,000 and $1.9 million, respectively, and working capital deficits of
approximately $200,000 and $1.0 million, respectively, for those years.
Although there was an improvement in the working capital deficit in the third
quarter of 2003 and we anticipate further progress along these lines, items
remain that raise substantial doubt about our ability to continue as a going
concern. Management believes that this condition remains at September 30, 2003.
Our ability to continue as a going concern depends upon our ability to
ultimately implement our plans to obtain profitable new business and reduce the
working capital deficit. We are also investigating the possibility of raising
additional capital to further support operations as new contracts and business
opportunities materialize. The prospective funding, as well, as new business
opportunities can come from a variety of sources, including public or private
equity markets, state and federal grants and government and commercial customer
program funding. However, there can be no assurance that we will be able to
obtain such funding as needed or, if such funding is available, that we can
obtain it on terms favorable to the Company. The likelihood of our success must
be considered in light of the expenses, difficulties and delays frequently
encountered in connection with the developing businesses, those historically
encountered by us, and the competitive environment in which we operate.
On January 31, 2003, we closed escrow on the sale of our facility in Poway,
California and entered into a ten-year lease for the same facility. The selling
price of the facility was $3.2 million. The total debt repayment from the
transaction was approximately $2.4 million. The approximate net proceeds to us
for working capital purposes was approximately $636,000. However, due to
continuing delays and customer schedule slips on existing contracts and further
delays in obtaining new contract business, we remain in a tight cash position.
23
At the end of 2002, we raised $475,000 from certain of our directors and
officers by issuing 2.03% convertible debentures. The convertible debentures
entitle the holder to convert the principal and unpaid accrued interest into our
common stock when the note matures. The original maturity on the notes was six
(6) months from issue date; however, on March 19, 2003, the maturity date was
extended to twelve (12) months from issue date. The convertible debentures were
exercisable into common shares at a conversion price that equals the 20-day
average asking price less 10%, which was established when the debentures were
issued, or the initial conversion price. Concurrent with the issuance of the
convertible debentures, we issued warrants to purchase up to 1,229,705 shares of
our common stock to the subscribers. These warrants are exercisable for three
(3) years from the date of issuance at the initial exercise price, or the
initial conversion price on the debentures. On September 5, 2003, we repaid
one-half of the convertible notes, with the condition that the note holders
would convert the other half. Also, as a condition of the partial repayment,
the note holders were required to relinquish one-half of the 1,229,705 warrants
previously issued. As additional consideration for the transaction, the note
holders were offered 5% interest on their notes, rather than the stated 2.03%.
All the note holders accepted the offer and the convertible notes were
liquidated.
During the first nine-months of 2003, we raised approximately $426,000 from
accredited investors by selling 861,267 units of our common stock and common
stock purchase warrants under in a private placement offering made under Section
4(2) of the Securities Act of 1933, and Rule 506, to accredited investors only
("PPO"). We subsequently closed the PPO. (See Note 6 of the Condensed
Consolidated Financial Statements.)
We have sustained ourselves over the last few years with a mixture of government
and commercial contracts. In particular, we anticipated and received an award
for AFRL Phase II on March 28, 2003. AFRL Phase II is a cost-plus contract,
which will require us to incur certain costs in advance of regular contract
reimbursements from AFRL. Although we will need a certain amount of cash to fund
advance payments on the contract, we will be entitled, as a small business
concern, to recover our costs on a weekly basis and we have established the
Laurus Master Fund revolving credit facility at the end of the second quarter of
2003 to support our advance payment needs. In addition, we anticipated and
received a purchase order from the MDA to explore the use of micro-satellites in
national missile defense. To be explored in this study will be fast response
microsat launch and commissioning; small, low-power passive sensors; formation
flying and local area networking within a cluster of microsats; and an extension
of our proven use of the Internet for on-orbit command, control and data
handling. The purchase order value is $800,000. It is a cost plus agreement and
should be completed in the first quarter of 2004.
We can continue to grow and execute certain parts of our strategy without
additional equity funding by identifying, bidding and winning new commercial and
government funded programs. We expect to obtain new commercial and government
contracts; however, depending on the timing of those contracts, we may need to
seek additional and possibly immediate financing through a combination of public
and private debt or equity placements, commercial project financing and
government programs to fund future operations and commitments. We obtained a
revolving credit facility from Laurus Master Fund, with certain waivers through
the first quarter of 2004; however, there can be no assurance that new contracts
or additional debt or equity financing needed to fund operations will be
available or obtained in sufficient amounts necessary to meet our needs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risks relate primarily to changes in interest rates. We borrow money,
when necessary, on a revolving basis under our $1.0 million revolving credit
facility from Laurus to fund capital expenditures and other working capital
needs. Our revolving credit facility carries a variable interest rate pegged to
market indices and, therefore, our statements of operations and our cash flows
may be impacted by changes in interest rates. As of September 30, 2003, there
was $629,500 amount outstanding under the revolving credit facility.
24
ITEM 4: CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, 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 the design and operation of our disclosure controls and
procedures. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in the
reports that we file under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure. There
have been no significant changes in our internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our
evaluation, including any significant actions regarding any deficiencies. We
have and continue to review our controls and procedures regularly with our
management and Board of Directors.
25
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 18, 2001, we entered into a relationship with two individuals (doing
business as EMC Holdings Corporation ("EMC")), whereby EMC was to provide
certain consulting and advisory services to us in exchange for our common stock.
EMC received the first installment of 500,000 shares of our common stock on June
26, 2001. Total expense for the initial stock issuance through September 30,
2001 was valued at approximately $455,000. Pursuant to a demand for arbitration
filed by us on November 7, 2001, we sought the return of all or a portion of the
shares issued to EMC. EMC filed a its own claim with the American Arbitration
Association on November 13, 2001, alleging that we owed EMC $118,000 in fees,
plus damages.
A three-day arbitration hearing was held in May and June 2002 with respect to
claims arising out of consulting and advisory service agreements between EMC and
us. On July 17, 2002, an interim award was issued in favor of us against EMC,
ordering the return of the initial installment of 500,000 shares and denying
EMC's claim for $118,000. On October 22, 2002, a status conference was held and
a tentative final award was issued again in the favor of us. Included in this
tentative final ruling was an award of approximately $83,000 in attorney and
arbitration fees to us. The tentative final ruling became effective on October
29, 2002, and was submitted to the Superior Court of California, Orange County,
for entry of judgment.
Because collection of the attorney and arbitration fees award is not assured, we
expensed all of our fees related to this matter. Any recovery of fees will be
recorded as income in the period they are received. The return of the 500,000
shares, as provided in the interim award issued on July 17, 2002, was recorded
in the third quarter of 2002 as a reversal of the original expense recorded.
There were no further developments during the third quarter of 2003.
ITEM 2. CHANGES IN SECURITIES
Pursuant to its independent director compensation plan, adopted January 16,
2000, the Company granted options to purchase 10,000 shares each to Howell M.
Estes, III and Scott McClendon and 5,000 shares each to Robert Walker and Wesley
T. Huntress for their attendance and participation at the Board of Directors
meeting held on July 18, 2003. These options were issued with an exercise price
of $0.71 per share, (based on the closing price of our common stock on the date
of grant), will vest over two years and will expire on the five-year anniversary
date of the date of grant.
On July 18, 2003, we issued a total of 2,100 shares to employees in exchange for
services rendered to us in 2002 and awards given by us in 2002. The shares were
issued with restrictions pursuant to Section 4(2) of the Securities Act.
Also, on July 18, 2003, pursuant to our 1999 Stock Option Plan, we granted
options to purchase up to 50,000 shares of our common stock to one of our new
engineers. These options were issued with an exercise price of $0.60 per share
(based on the closing price of our common stock on the date of grant), will vest
over five years and will expire on the nine-year anniversary date of the date of
grant.
On August 7, 2003, we issued a total of 1,000 shares to an employee in exchange
for summer intern services rendered to us in 2003. The shares were issued with
restrictions pursuant to Section 4(2) of the Securities Act.
On September 15, 2003, we issued a total of 500 shares to an employee in
exchange for summer intern services rendered to us in 2003. The shares were
issued with restrictions pursuant to Section 4(2) of the Securities Act.
26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
AFRL Small Vehicle Launch Technology SBIR contract 10.1
AFRL Small Satellite Bus Technologies SBIR contract 10.2
AFRL Small Shuttle Compatible Propulsion Module contract 10.3
MDA Advanced Systems Deputate for the Micro Satellite Experiment 10.4
MDA Advanced Systems Deputate for the Micro Satellite Experiment (Modification) 10.5
Lunar Enterprises of California contract 10.6
Hybrid Rocket Motor Systems and Components contract* 10.7
Third Amendment to Series A Subordinated Convertible Note - Benson1, dated Sept. 5, 2003 10.8
Third Amendment to Series A Subordinated Convertible Note - Benson2, dated Sept. 5, 2003 10.9
Third Amendment to Series A Subordinated Convertible Note - Benson3, dated Sept. 5, 2003 10.10
Third Amendment to Series A Subordinated Convertible Note - Benson4, dated Sept. 5, 2003 10.11
Third Amendment to Series A Subordinated Convertible Note - Skarupa, dated Sept. 5, 2003 10.12
Third Amendment to Series A Subordinated Convertible Note - Schaffer, dated Sept. 5, 2003 10.13
Certificate of James W. Benson Pursuant to Section 1350 of Chapter 63 of Title 18 U.S. Code 99.1
Certificate of Richard B. Slansky Pursuant to Section 1350 of Chapter 63 of Title 18 U.S. Code 99.2
* Registrant has requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with the
Commission.
(b) Reports on Form 8-K
27
SIGNATURES
Pursuant to 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.
SPACEDEV, INC.
Registrant
Dated: November 11, 2003 ---------------------
James W. Benson
Chief Executive Officer
Dated: November 11, 2003 ---------------------
Richard B. Slansky
Chief Financial Officer
28
SPACEDEV, INC.
a Colorado corporation
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 302 Certification
I, James W. Benson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SpaceDev,
Inc., a Colorado corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2003
By: /s/ James W. Benson
-------------------------------
James W. Benson
Chief Executive Officer
29
SPACEDEV, INC.
a Colorado corporation
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Section 302 Certification
I, Richard B. Slansky, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SpaceDev,
Inc., a Colorado corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2003
By: /s/ Richard B. Slansky
----------------------------
Richard B. Slansky
Chief Financial Officer
30