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 June 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.
----------------
______________________________________________________________________________
(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: 15,341,007 shares of Issuer's
voting common stock were outstanding on July 31, 2003.
SPACEDEV, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2003
INDEX PAGE
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited). . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Balance Sheets at June 30, 2003 and 2002 . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations for June 30, 2003 and 2002. . . . . . 3
Condensed Consolidated Statements of Cash Flows for June 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. . . . . . . . . . 22
ITEM 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 4. Submission of Matters to Vote of Security Holders . . . . . . . . . . . . . . 24
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . 26
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Certifications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 1. FINANCIAL STATEMENTS
SPACEDEV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, 2003 2002
--------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 80,734 $ 135,370
Accounts receivable 142,759 201,331
--------------------------------------------------
Total current assets 223,493 336,701
FIXED ASSETS - NET 127,314 2,130,306
CAPITALIZED SOFTWARE COSTS 33,375 172,513
OTHER ASSETS 34,502 158,292
--------------------------------------------------
$418,684 $2,797,812
==================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 1 -
SPACEDEV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, 2003 2002
-------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERSDEFICIT
CURRENT LIABILITIES
Current portion of notes payable (Note 3) $ 52,000 $ 218,257
Current portion of capitalized lease obligations 26,629 37,604
Notes payable - related party 80,000 80,000
Convertible debt notes payable (Note 4) 332,847 -
Accounts payable and accrued expenses 338,432 226,659
Accrued payroll, vacation and related taxes 122,129 145,581
Customer deposits and deferred revenue - 238,362
Billing in excess of costs incurred and estimated earnings (Note 2) - 441,720
Provision for anticipated loss (Note 2) 5,174 47,341
Income taxes payable 2,526 -
-------------------------------------------------------------------------------------------------------
Total current liabilities 959,737 1,435,524
NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 3) 65,260 2,350,797
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES 6,558 23,780
NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES 517,630 568,865
DEFERRED GAIN - ASSETS HELD FOR SALE 1,123,857 -
DEFERRED REVENUE 5,000 5,000
-------------------------------------------------------------------------------------------------------
Total liabilities 2,678,042 4,383,966
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS DEFICIT
Convertible preferred stock, $.0001 par value, 10,000,000 shares
authorized no shares issued or outstanding - -
Common stock, $.0001 par value; 25,000,000 shares authorized, and
15,338,907 and 14,858,396 shares issued and outstanding,
respectively 1,533 1,485
Additional paid-in capital (Note 5) 8,728,659 8,224,827
Additional paid-in capital - stock options 750,000 750,000
Deferred compensation (250,000) (250,000)
Accumulated deficit (11,489,550) (10,312,466)
-------------------------------------------------------------------------------------------------------
Total stockholders deficit (2,259,358) (1,586,154)
-------------------------------------------------------------------------------------------------------
$ 418,684 $ 2,797,812
=======================================================================================================
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 Six-Months Ending
Three and Six-Months Ending June 30, 2003 % 2002 % 2003 % 2002 %
--------------------------------------- ----------- ----------- ----------- -----------
NET SALES 753,956 100% 862,638 100% 1,286,795 100% 1,812,408 100%
TOTAL COST OF SALES 577,874 77% 729,614 85% 1,039,484 81% 1,441,577 80%
GROSS MARGIN 176,082 23% 133,024 15% 247,311 19% 370,831 20%
--------------------------------------- ----------- ---- ----------- ---- ----------- ---- ----------- ----
OPERATING EXPENSES
Marketing and sales expense 134,005 18% 42,527 5% 199,047 15% 68,772 4%
Research and development 251,983 33% - 0% 251,983 20% - 0%
General and administrative 155,006 21% 113,241 13% 524,922 41% 298,964 16%
--------------------------------------- ----------- ---- ----------- ---- ----------- ---- ----------- ----
TOTAL OPERATING EXPENSES 540,994 72% 155,768 18% 975,952 76% 367,736 20%
--------------------------------------- ----------- ---- ----------- ---- ----------- ---- ----------- ----
PROFIT (LOSS) FROM OPERATIONS (364,912) -48% (22,744) -3% (728,641) -57% 3,095 0%
--------------------------------------- ----------- ---- ----------- ---- ----------- ---- ----------- ----
OTHER INCOME (EXPENSE)
Interest income (expense) (14,179) -2% (64,852) -8% (34,628) -3% (120,012) -7%
Non-Cash interest income (expense) (100,453) -13% - 0% (200,908) -16% - 0%
debt discount (Note 5)
Gain on Building Sale (Note 4(a)) 29,318 4% - 0% 48,863 4% - 0%
--------------------------------------- ----------- ---- ----------- ---- ----------- ---- ----------- ----
TOTAL OTHER INCOME (EXPENSE) (85,314) -11% (64,852) -8% (186,673) -15% (120,012) -7%
--------------------------------------- ----------- ---- ----------- ---- ----------- ---- ----------- ----
LOSS BEFORE TAXES (450,226) -60% (87,596) -10% (915,314) -71% (116,917) -6%
INCOME TAX PROVISION (37,474) -5% - 0% 2,526 0% - 0%
NET LOSS (412,752) -55% (87,596) -10% (917,840) -71% (116,917) -6%
======================================= =========== ==== =========== ==== =========== ==== =========== ====
NET LOSS PER SHARE:
Net loss (0.03) (0.01) (0.06) (0.01)
--------------------------------------- ----------- ----------- ----------- -----------
Weighted-Average Sh. Outstanding 15,092,489 14,858,396 15,092,489 14,842,070
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
SPACEDEV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six-Months Ending June 30, 2003 2002
------------------------------------------------------------------------ ------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (917,840) $(116,917)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 106,201 134,240
Contributed assets - (16,251)
(Gain) loss on disposal of assets (48,863) 7,410
Non-cash interest expense - convertible debt program (Note 4) 200,908 -
Change in operating assets and liabilities: (159,009) (13,286)
------------------------------------------------------------------------ ------------ ----------
NET CASH (USED IN) OPERATING ACTIVITIES (818,603) (4,804)
------------------------------------------------------------------------ ------------ ----------
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
Principal payments on notes payable (2,524,537) (34,303)
Principal payments on capitalized lease obligations (16,741) (17,160)
Payments on notes payable - related party (159,999) (40,000)
Proceeds from issuance of common stock 425,942 20,000
NET CASH (USED IN) FINANCING ACTIVITIES (2,275,335) (71,463)
------------------------------------------------------------------------ ------------ ----------
Net increase (decrease) in cash 53,086 (76,267)
------------------------------------------------------------------------ ------------ ----------
CASH AT BEGINNING OF PERIOD 27,648 211,637
------------------------------------------------------------------------ ------------ ----------
CASH AT END OF PERIOD $ 80,734 $ 135,370
======================================================================== ============ ==========
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
SPACEDEV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D.
(UNAUDITED)
Six-Months Ending June 30, 2003 2002
----------------------------------------------------------------------- ------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $15,494 $124,012
NONCASH INVESTING AND FINANCING ACTIVITIES:
During 2002, the Company issued warrants to purchase 1,229,705 shares of common stock
under the Company's convertible debt program. A debt discount of $475,000 was recorded
related to this convertible debt (See Note 4). These warrants were valued in accordance
with SFAS 123 for fair value of approximately $475,000. As of June 30, 2003, $200,908
of the $475,000 was amortized to non-cash interest expense.
______________________________________________________________________________________________
The accompanying notes are an integral part of these 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 Oklahoma. 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 six months ended June 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 June 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 $700,000 as of June 30, 2003, and incurred a net loss of
approximately $918,000 for the six-months then ended. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
During the first six months of 2003, management raised approximately $426,000
through a private equity placement, concluded a transaction to sell its facility
and lease it back for a ten (10) year period and arranged for a revolving credit
facility on its accounts receivable with Laurus Master Fund, Ltd. Subsequent
to June 30, 2003, management filed a Form SB-2 related to the Laurus transaction
and intends to obtain new commercial and government contracts and to seek
additional financing through a combination of public and private debt or equity
placements, commercial project financing and government programs to fund future
operations and commitments. There is no assurance that new contracts or
additional debt or equity financing needed to fund operations will be available
or, if obtained, will be 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 the second quarter 2002, capitalized software costs are 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. As of June 30, 2003, management believed no impairment
existed, as defined by SFAS No. 144.
- 6 -
1. BASIS OF PRESENTATION CONT.
The Company expenses research and development costs as incurred. During the
period ending June 30, 2003, the Company expensed approximately $252,000,
consisting of approximately $171,000 related to its hybrid rocket propulsion
technology and approximately $81,000 related to its satellite bus design
technology.
2. REVENUE RECOGNITION
In November 1999, the Company was awarded a $4.9 million turnkey mission
contract by the Space Sciences Laboratory ("SSL") at University of California,
Berkeley ("UCB"). The Company was 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, the Compay 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. 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 the Company's
ongoing satellite design and development programs. As of June 30, 2003,
approximately 99% of the total contract costs were expended and the remaining
loss on the balance sheet at June 30, 2003 totaled approximately $5,000.
Revenues for the six-months ending June 30, 2003 and 2002 were approximately
$331,000 and $806,000 respectively. The Company is currently receiving monthly
payments on the contract according to a preset payment schedule detailed in the
contract. The CHIPSat contract is expected to conclude in January 2004.
In September 2001, the Company was awarded a contract for a proprietary
propulsion research program valued in excess of $1.0 million. As a part of the
Company's proprietary propulsion program, the Company is competing with another
party to design a space propulsion system. The entire contract, which will be
awarded based upon the submitted designs, is valued at approximately $2.2
million. Work on this project generated approximately $1.2 million in revenues
during 2002. As of June 30, 2003, the Company has recognized approximately
$24,000 of gross margin on this contract. The Company reviewed the contract
status in the fourth quarter of 2002, to evaluate changes to the total estimated
costs to complete the contract due to schedule delays, as a result, the overall
gross margin on this contract was reduced from approximately $388,000 to
approximately $28,000.
3. 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 lease back its
facilities.
- 7 -
3. NOTES PAYABLE CONT.
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 June 30, 2003, the deferred gain was
$1,123,857. This amortization will be included in the Company's occupancy and
facility expense and totaled $48,863 for the six-months ending June 30, 2003.
Deferred gain consisted of the following:
Six-Months Ending June 30, 2003
Deferred Gain $1,172,720
Less Amortization to date (48,863)
------------------------------- -----------
$1,123,857
In 2001, the Company entered into four (4) settlement loan agreements with
various vendors. The total of $171,402 for all four (4) loans called for
payments of between 24 and 50 months with interest rates that range from 0% to
8% per annum. At June 30, 2003 and 2002, the outstanding balances on these
notes were $117,260 and $175,390, with future interest expense of $7,100 and
$14,548, respectively.
Future minimum principal payments on notes payable and settlement notes are as
follows:
Period Ending June 30,
2003 52,000
2004 35,766
2005 29,494
---------------------- -------
Total Settlement Notes 117,260
b) Related Parties
The Company has a note payable to the CEO. At June 30, 2003 and 2002, the
balances were $597,630 and $648,864, respectively, including accrued interest of
10%. The note was amended on March 20, 2000 to call for annual principle
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 June 30,
2004 $ 80,000
2005 80,000
2006 80,000
2007 80,000
2008 80,000
Thereafter 197,630
---------------------- --------
$597,630
Interest expense on these notes was $19,133 and $23,633 for the six-months
ending June 30, 2003 and 2002, respectively.
- 8 -
3. NOTE PAYABLE CONT.
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. There was no outstanding balance on the revolving credit
facility at June 30, 2003.
The Company filed Form SB-2 on July 25, 2003 in connection with this
transaction. Once the shares are registered with the Securities and Exchange
Commission ("SEC") for public resale and the then current market price is 118%
of the fixed conversion price, the Company will have an option to pay amounts
outstanding under the revolving credit facility in shares of its common stock at
the fixed conversion price of $0.55 per share on the first $1 million of
principal.
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").
Availability of funds under the revolving credit facility will be based on our
accounts receivables. The revolving credit facility will be secured by all of
the Company's assets, except for an initial three (3) month period during which
Laurus will permit a credit advance up to $300,000, which amount might otherwise
exceed eligible accounts receivable during the period.
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 will be 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 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.
- 9 -
4. 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 entitle 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 extend these notes an additional six (6) months.
The convertible debentures are 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 debentures were 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 debentures were issued, or the
initial conversion price of the debentures. 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.
All debt discounts are to be amortized as additional interest expense over the
term of the convertible debenture. As of June 30, 2003, $475,000 has been
reflected as debt discount of which $200,908 was amortized to non-cash interest
expense for the first six-months ending June 30, 2003.
Convertible debentures $ 475,000
Accrued interest 6,938
Less debt discount
Total 475,000
Amount amortized to expense (325,909) (149,091)
--------------------------------------------- --------- ----------
Net convertible debt payable at June 30, 2003 $ 332,847
5. STOCKHOLDERS' EQUITY - 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 Units was the five-day average of the
bid and ask prices 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 offering 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.
- 10 -
5. STOCKHOLDERS' EQUITY - COMMON STOCK AND WARRANTS CONT.
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 $426,000 for the Units sold under the PPO during the first quarter
2003. The Company, in total, sold 1,196,079 Units under the PPO and received a
total of approximately $646,000 under the PPO.
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 June 30, 2003 and 2002
using the minimum value method as prescribed by SFAS 123, as amended by SFAS
148. 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 of
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.
If the Company had accounted for these options in accordance with SFAS 123, the
total value of options granted during the period ending June 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:
Six-Months Ending June 30, 2003 2002
Net loss:
As reported ($917,840) ($116,917)
Pro forma ($1,056,426) ($206,876)
Loss per Share:
As reported ($0.06) ($0.01)
Pro forma ($0.07) ($0.01)
6. 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 condensed consolidated financial statements.
- 11 -
6. NEW ACCOUNTING PRONOUNCEMENTS CONT.
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 condensed
consolidated financial statements.
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 condensed 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, except for mandatorily redeemable financial instruments of
nonpublic entities. For nonpublic entities, mandatorily redeemable financial
instruments are subject to the provisions of SFAS No. 150 for the first fiscal
period beginning after December 15, 2003. The adoption of this Statement is not
expected to have a material effect on the condensed consolidated financial
statements.
7. SUBSEQUENT EVENTS
On May 17, 2002, the Company entered into an "at-will" employment agreement with
Mr. Schaffer. The agreement provided for Mr. Schaffer's compensation of salary,
benefits and options to purchase up to 450,000 shares of the Company's common
stock. The agreement also provided for severance under certain termination
provisions. Due to a shift in the Company's short-term focus toward projects
rather than products, Mr. Schaffer signed a Separation Agreement and General
Release on July 2, 2003. Mr. Schaffer will receive salary and benefits until
August 8, 2003 and will remain on the Company's Board of Directors without
further board compensation for a one-year period. Mr. Schaffer will retain
certain exercise rights on his vested options of 90,000 shares until the earlier
of (i) eighteen (18) months from his resignation as a member of the Company's
Board of Directors or other subsequent consulting relationship with the Company,
or (ii) July 19, 2008.
- 12 -
7. SUBSEQUENT EVENTS CONT.
On July 9, 2003, the Company was 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 the Company's unique and
innovative microsat subsystems. It will also enable the Company 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 (1) year.
On July 9, 2003, the Company was 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 also valued at approximately $100,000, is
a fixed price, milestone-based agreement, which should be completed within one
(1) year. Both SBIRs have the possibility of Phase II carry-forward work;
however, there can be no assurance that such work will be awarded to the
Company.
Also, on July 9, 2003, the Company was awarded a second contract by the Missile
Defense Agency (MDA) to explore the use of micro-satellites in national missile
defense. The Company's 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 is over $1 million this year.
On July 24, 2003, the Company was 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 Company will 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 contract is valued at
$100,000, is a fixed price, milestone-based agreement, which should be completed
by November 20, 2003.
- 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,
nanosatellites and related subsystems, hybrid rocket propulsion as well as the
associated engineering technical services primarily to government, and
specifically Department of Defense, agencies. Our products and solutions are
sold, mainly on a project-basis, directly to these customers and include
sophisticated micro- and nanosatellites, 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 a publicly 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.
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 June 30, 2003, approximately 99% of the total contract costs were expended
and the remaining loss on the balance sheet at June 30, 2003 totaled
approximately $5,000. Revenues for the six-months ending June 30, 2003 and 2002
were approximately $331,000 and $806,000 respectively. The Company is currently
receiving monthly payments on the contract according to a preset payment
schedule detailed in the contract. The CHIPSat contract is expected to conclude
in January 2004.
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 in excess of $1.0 million. As a part of that program, we
are competing with another party to design a space propulsion system. The entire
contract, which will be awarded based upon the submitted designs, is valued at
approximately $2.2 million. We expect this contract to generate revenue in 2003
of approximately $240,000. Work on this project generated approximately $1.2
million in revenues during 2002. As of June 30, 2003 we have recognized
approximately $24,000 of gross margin on this contract. We reviewed the contract
status in the fourth quarter of 2002, to evaluate changes to the total estimated
costs to complete the contract due to schedule delays. Further discussion of the
impacts of the contract delay is included under "Liquidity and Capital Resources
- Forward Looking Statements and Risk Analysis" below.
- 15 -
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.
On July 9, 2003, we were awarded a Phase I contract to develop micro- and
nanosatellite 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.
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 also valued at approximately $100,000, is a fixed
price, milestone-based agreement, which should be completed within one year.
Both SBIRs have the possibility of Phase II carry-forward work; however, there
can be no assurance that such work will be awarded to us.
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.
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. 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.
- 16 -
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.
Six-Months Ending June 30, 2003 -vs.- Six-Months Ending June 30, 2002
During the six-months ending June 30, 2003, we had net sales of approximately
$1,287,000 as compared to net sales of approximately $1,812,000 for the same
six-month period in 2002. Sales in 2003 were comprised of approximately
$397,000 from the proprietary propulsion contract, $331,000 from the CHIPSat
program, $250,000 from the MDA project, $242,000 from Phase I and Phase II of
the AFRL project and approximately $67,000 from all other programs. In the
first six-months of 2002, sales were comprised of approximately $806,000 from
the CHIPSat program, $807,000 from the proprietary propulsion contract and
$199,000 from all other programs.
For the six-months ending June 30, 2003, we had costs of sales (direct and
allocated costs associated with individual contracts) of approximately
$1,039,000, or 81% of net sales, as compared to approximately $1,442,000, or 80%
of net sales, during the same period in 2002. Although proportionally
consistent, this decrease in amount was primarily due to an overall reduction of
direct costs on current projects and to delays and schedule slips on additional
projects. The gross margin percentage for the six-months ending June 30, 2003
remained at approximately the same level as the same six-month period in 2002.
We experienced an increase in operating expenses from approximately $368,000, or
20% of net sales, in the six-months ending June 30, 2002 to approximately
$976,000, or 76% of net sales, for the six-months ending June 30, 2003.
Operating expenses include general and administrative expenses ("G&A"),
marketing and sales expenses as well as research and development expenses.
Marketing and sales expenses increased from approximately $69,000, or 4% of net
sales, for the first six-months of 2002, to approximately $199,000, or 15% of
net sales, during the same period in 2003, due to our decision to expand our
marketing department and add a Vice President of Marketing and Product
Development. We began incurring research and development ("R&D") expenses of
approximately $252, 000, during the six-months ending June 30, 2003.
Approximately $171,000 of R&D was in connection with our hybrid rocket
propulsion design and the remaining $81,000 was part of our satellite bus design
and development. The increase in G&A expenses of approximately $226,000 was
primarily due to certain new expenses including rent of approximately $130,000
(we owned the building in 2002 and incurred interest expense on loans but not
rental payments), amortization of previously capitalized technology costs of
approximately $35,000, which amortization began in the second quarter of 2002,
and fees related our new Laurus revolving credit facility of approximately
$42,000, which credit facility began on June 3, 2003.
Interest expense for the six-months ending June 30, 2003 and 2002 was
approximately $35,000, 3% of net sales, and $120,000, 7% of net sales,
respectively. The decrease was due to the building sale on January 31, 2003,
which 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 and
convertible debentures. In the six-months ending June 30, 2003 and 2002, the
accrued interest on our related party note was $19,133 and $23,633,
respectively. We also accrued $4,863 of interest on our convertible notes for
the six-months ending June 30, 2003. In conjunction to our convertible notes
there is an existing convertible debt discount related to warrants that
accompanied the convertible debt issue in 2002 of approximately $475,000, of
which approximately $201,000 was expensed during the six-months ending June 30,
2003. The remainder will be amortized over the remaining life of the notes. We
recognized approximately $49,000 of the deferred gain on the sale of the
building during the six-months ending June 30, 2003 and we will continue to
amortize the remaining deferred gain of $1,123,857 into 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
only $2,526 remained at June 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 six-months of 2003.
- 17 -
During the six-months ending June 30, 2003, we incurred a net loss of
approximately $918,000, or 71% of net sales, compared to a net loss of
approximately $117,000, or 6% of net sales, for the same six-months ending in
2002. The increase in the net loss was due to our reduction in revenues with
the substantial completion of CHIPSat and to an increase in operating expenses,
as discussed above.
Three-Months Ending June 30, 2003 -vs.- Three-Months Ending June 30, 2002
During the three-months ending June 30, 2003, we had net sales of approximately
$754,000 as compared to net sales of approximately $863,000 for the same
three-month period in 2002. Sales in second quarter of 2003 were comprised of
approximately $160,000 from the proprietary propulsion contract, $265,000 from
the CHIPSat program, $92,000 from the MDA project, $222,000 from Phase I and
Phase II of the AFRL project and approximately $14,000 from all other programs.
In the three-months ended June 30 2002, sales were comprised of approximately
$325,000 from the CHIPSat program, $441,000 from the proprietary propulsion
contract and $97,000 from all other programs.
For the three-months ending June 30, 2003, we had costs of sales (direct and
allocated costs associated with individual contracts) of approximately $578,000,
or 77% of net sales, as compared to approximately $730,000, or 85% of net sales,
during the same three-month period in 2002. This improvement was primarily
attributable to an effort to separate investments in technology development from
direct costs on current projects. Beginning in the second quarter of 2003,
specifically identified developmental efforts that are expected to provide
general added value to many projects will be recorded as research and
development expense, rather than cost of sales to a specific project. The gross
margin percentage for the three-months ending June 30, 2003 increased to 23% as
compared to 15% for the same three-month period in 2002, due to a shift in
business from fixed price to cost-plus projects, with the beginning of AFRL
Phase II during the three-months ending June 30, 2003. AFRL Phase II is a
cost-plus program.
We experienced an increase in operating expenses from approximately $156,000, or
18% of net sales, in the three-months ending June 30, 2002 to approximately
$541,000, or 72% of net sales, for the three-months ending June 30, 2003.
Operating expenses include general and administrative expenses ("G&A"),
marketing and sales expenses as well as research and development expenses.
Marketing and sales expenses increased from approximately $43,000, or 5% of net
sales, for the three-months ending June 30, 2002, to approximately $134,000, or
18% of net sales, during the same period in 2003, due to our decision to expand
our marketing department and add a Vice President of Marketing and Product
Development. We had R&D expenses of approximately $171,000 related to our
hybrid rocket propulsion design and R&D expenses of approximately $81,000
related to our satellite bus design and development, totaling approximately
$252,000, or 33% of net sales, during the three-months ending June 30, 2003.
G&A expenses consist primarily of salaries for administrative personnel, fees
for outside consultants, rent, insurance, legal and accounting fees and other
overhead expenses. The increase in total G&A expenses of approximately $42,000
was primarily due to new rent expenses in 2003. There were only interest
expenses in 2002, as we owned the building in 2002.
Interest expense for the three-months ending June 30, 2003 and 2002 was
approximately $14,000, or 2% of net sales, and $65,000, or 8% of net sales,
respectively. The decrease was due to the building sale on January 31, 2003,
which 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 and
convertible debentures. In the three-months ending June 30, 2003 and 2002, the
accrued interest on our related party note was $9,266 and $11,566, respectively.
We also accrued $2,738 of interest on our convertible notes for the
three-months ending June 30, 2003. In conjunction with our convertible notes
there is an existing convertible debt discount related to warrants that
accompanied the convertible debt issue in 2002 of approximately $475,000, of
which approximately $100,000 was expensed during the three-months ending June
30, 2003. The remainder will be amortized over the remaining life of the notes.
We recognized approximately $29,000 of the deferred gain on the sale of the
building during the three-months ending June 30, 2003 and we will continue to
amortize the remaining deferred gain of $1,123,857 into 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 ($37,474) due to a
change in accrual estimate during the first quarter of 2003 and a larger loss
than anticipated for the three-months ending June 30, 2003.
- 18 -
During the three-months ended June 30, 2003, we incurred a net loss of
approximately $413,000, or 55% of net sales, compared to a net loss of
approximately $88,000, or 10% of net sales, for the same three months ended in
2002. The increase in the net loss was due to our reduction in revenues and to
an increase in operating expenses, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Position For Six-Months Ending June 30, 2003 -vs.- Six-Months Ending June
30, 2002
Net increase in cash during the six-months ending June 30, 2003 was
approximately $53,000, compared to a net decrease of approximately ($76,000) for
the same six-months in 2002. Net cash used in operating activities totaled
approximately ($819,000) for the six-months ending June 30, 2003, an increase of
approximately $814,000 as compared to approximately ($5,000) used in operating
activities during the same six-months in 2002. This is attributable in part to
the increase in our research and development projects of approximately $253,000.
The increase can also be attributed to our overall increase in G&A expenses, the
reduction of our revenues, an increase in marketing and sales expenses and the
decrease in accounts payable for the six-months ending June 30, 2003 compared to
those positions during the same period in 2002.
Net cash provided by investing activities totaled approximately $3,147,000 for
the six-months ending June 30, 2003, compared to no cash used in or provided by
investing activities during the same six-month period in 2002. The increase in
cash provided by investing activities is primarily attributable to the sale of
the building on January 31, 2003.
Net cash used in financing activities totaled approximately ($2,275,000) for the
six-months ending June 30, 2003, which is a decrease of approximately $2,204,000
from the approximately ($71,000) used in financing activities during the same
six-month period 2002. This is primarily attributable to paying off notes
payable associated with the building sale.
At June 30, 2003, our cash, which includes cash reserves and cash available for
investment, was approximately $81,000, as compared to approximately $135,000 at
June 30, 2002, a decrease of approximately $54,000. At June 30, 2003, our
working capital ratio remained at 0.23 for the six-months ended June 30, 2003
and 2002.
As of June 30, 2003, our backlog of funded and non-funded business was
approximately $3.2 million, as opposed to approximately $2.6 million as of June
30, 2002. During the six-months ending June 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,
continued the proprietary propulsion project, completed significant milestones
on CHIPSat, completed MDA's Phase I project and obtained a purchase order for an
$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 six-months ending June 30, 2003, from $1.4 million at December 31,
2002 to $1.3 million at June 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.
- 19 -
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 Consolidated Financial
Statements). Actual results of contracts may differ from management's estimates
and such differences could be material to the 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
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.
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 Consolidated Financial Statements).
- 20 -
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 a significant reduction in the working capital deficit, items
remain that raise substantial doubt about our ability to continue as a going
concern. Management believes that this condition remains at June 30, 2003. Our
ability to continue as a going concern depends upon our ability to implement our
plans to reduce the working capital deficit, consummating additional funding and
obtaining profitable new business. The funding as well as new business 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.
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 are
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 which equals
to the 20-day average asking price less 10% as established when the debentures
were issued, or the initial conversion price on the debentures. There can be no
assurance that additional funds will be raised or, if raised, will be under the
same or more favorable terms than the convertible debentures.
During the first six-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") (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. 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.
- 21 -
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 were
successful in obtaining a revolving credit facility from Laurus Master Fund, as
described herein; however, there is 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. 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.
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 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 June 30, 2003, there was no amount
outstanding under the revolving credit facility.
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.
- 22 -
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 second 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 J. Mark
Grosvenor and 5,000 shares each to Curt Dean Blake, Robert Walker, Howell M.
Estes, III, Scott McClendon and Wesley T. Huntress for their attendance and
participation at the Board of Directors meeting held on May 6, 2003. These
options were issued with an exercise price of $0.46 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 June 3, 2003, we issued warrants to purchase 200,000 shares of common stock
to Laurus Master Fund Ltd. The warrants were issued at three different price
levels: warrants on 125,000 shares of common stock at an exercise price of $0.63
per share; warrants on 50,000 shares of common stock at an exercise price of
$0.69 per share; and warrants on 25,000 shares of common stock at an exercise
price of $0.80 per share.
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.
Pursuant to its independent director compensation plan, adopted January 16,
2000, we 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.
- 23 -
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 six-year anniversary date of the date of
grant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of SpaceDev, Inc. was held at 13855 Stowe
Drive, Poway, California 92064, on July 18, 2003, at 11:00 A.M. Out of a total
of 15,338,907 shares outstanding on the date of record, 13,896,380 shares, or
approximately 90.6%, were voted in person or by proxy. The following proposals
were presented and passed by the amounts indicated below:
PROPOSAL 1: To elect eight directors to hold office until the 2003 Annual Meeting of Stockholders:
FOR AGAINST ABSTAIN
James W. Benson 13,871,287 9,975 15,118
Scott McClendon 13,873,462 7,800 15,118
Curt Dean Blake 13,873,462 7,800 15,118
Gen. Howell M. Estes, III 13,873,462 7,800 15,118
Robert S. Walker 13,873,462 7,800 15,118
Wesley T. Huntress 13,873,462 7,800 15,118
Stuart E. Schaffer 13,812,129 69,133 15,118
J. Mark Grosvenor 13,873,462 7,800 15,118
PROPOSAL 2: To approve the appointment of PKF, Certified Public Accountants, as our independent
public accountants for the fiscal year ending December 31, 2003:
FOR AGAINST ABSTAIN
13,875,288 10,213 10,879
PROPOSAL 3: To approve an amendment of our Articles of Incorporation to increase the number of
authorized shares of our Common Stock from 25,000,000 shares to 50,000,000 shares:
FOR AGAINST ABSTAIN
13,573,244 309,991 13,145
- 24 -
ITEM 5. OTHER INFORMATION
The Sarbanes-Oxley Act of 2002 ("Act") established the Public Company Accounting
Oversight Board ("PCAOB") and charged it with the responsibility of overseeing
the audits of public companies that are subject to the federal securities laws.
Under the Act, the PCAOB's duties include the establishment of a registration
system for public accounting firms. The PCAOB has proposed rules for the
registration process, which will require approval of the U.S. Securities
Commission ("SEC") prior to enforcement. Within 180 days after SEC approval, all
public accounting firms will be required to register with the PCAOB if they wish
to prepare or issue audit reports on U.S. public companies, or to play a
substantial role in the preparation or issuance of such reports. Once
registered, public accounting firms will be required to file periodic reports
with the PCAOB. At this time, the cost of compliance with these new rules
cannot be determined, and, as a result of the recent legislation, the cost of
professional liability insurance for public accounting firms has dramatically
increased. We were informed by our independent auditor, Nation Smith Hermes
Diamond, Accountants and Consultants, P.C. ("Nation Smith"), that it would not
register with the PCAOB and, as a result, would not be able to continue to act
as our independent auditor once the rules were in effect. Nation Smith did not
resign its position as a result of any disagreements with us on accounting or
financial disclosure issues.
Effective June 2, 2003, we confirmed with our auditors, Nation Smith Hermes
Diamond, P.C., "Nation Smith"), that Nation Smith would no longer be
representing us as our accountants, except to provide consent herein. As of
that date, we informed Nation Smith that we were engaging a new audit firm as
our accountants.
Nation Smith last reported on Registrant's financial statements as of February
13, 2003. The report, which covered the two fiscal years ended December 31,
2002, was an unqualified report modified for going concern. While Nation Smith
expressed concern as to the Registrant's ability to remain a going concern,
neither the report nor the financial statements for the periods contained any
other adverse opinion or disclaimer of opinion, nor were they modified as to
audit scope or accounting principles.
Our Board of Directors ratified the change of independent accountants on June 3,
2003.
During our fiscal year 2002 and the subsequent interim period through July 25,
2003, there were no disagreements with Nation Smith on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved, to Nation Smith's satisfaction, would have
caused it to make reference to the subject matter of the disagreement in
connection with its report.
During fiscal year 2002 and the subsequent interim period through July 25, 2003,
there have been no reportable events (as defined in Regulation S-B Item
304(a)(1)(v)).
During fiscal year 2002 and the subsequent interim period through July 25, 2003,
Nation Smith did not advise us that the internal controls necessary for us to
develop reliable financial statements do not exist.
During fiscal year 2002 and the subsequent interim period through July 25, 2003,
Nation Smith did not advise us that any information had come to their attention
which had led them to no longer be able to rely on management's representation,
or that had made Nation Smith unwilling to be associated with the financial
statements prepared by management.
During fiscal year 2002 and the subsequent interim period through July 25, 2003,
Nation Smith did not advise us that the scope of any audit needed to be expanded
significantly or that more investigation was necessary.
- 25 -
During fiscal year 2002 and the subsequent interim period through July 25, 2003,
Nation Smith did not advise us that there was any information which the
accountants concluded would materially impact the fairness and reliability of
either (i) a previously issued audit report or the underlying financial
statements, or (ii) the financial statements issued or to be issued covering
the fiscal period(s) subsequent to the date of the most recent financial
statements covered by an audit report (including information that, unless
resolved to the accountant's satisfaction, would prevent it from rendering an
unqualified audit report on those financial statements.
We requested that Nation Smith furnish us with a letter addressed to the SEC
stating whether or not it agrees with the above statements. A copy of such
letter, dated June 4, 2003, was filed as Exhibit 16.1 to our Form 8-K filing of
the same date.
We engaged PKF, Certified Public Accountants, A Professional Corporation
("PKF"), as our new independent accountants on June 2, 2003 for the fiscal year
ending December 31, 2003, and to review our quarterly financial statements for
the periods ending June 30, 2003 and September 30, 2003. Prior to June 2, 2003,
we had not consulted with PKF regarding (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our financial statements, and no
written report or oral advice was provided to us by PKF concluding there was an
important factor to be considered by us in reaching a decision as to an
accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304 of
Regulation S-B, or a reportable event, as that term is defined in Item
304(a)(1)(iv) of Regulation S-B.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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
(b) Reports on Form 8-K
A Current Report on Form 8-K/A filed June 9, 2003 was filed with the Commission
under Item 4 (Changes in Registrant's Certifying Accountant), regarding the
replacement of Nation Smith Hermes Diamond P.C. with PKF, Certified Public
Accountants, as our accountants.
A Current Report on Form 8-K filed June 18, 2003 was filed with the Commission
under Item 5 (Other Events and Regulation FD Disclosure), regarding the
revolving credit facility with Laurus Master Fund, Ltd.
- 26 -
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: August 13, 2003
/s/ James W. Benson
-------------------
James W. Benson
Chief Executive Officer
Dated: August 13, 2003
/s/ Richard B. Slansky
----------------------
Richard B. Slansky
Chief Financial Officer
- 27 -
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: August 13, 2003
By: /s/ James W. Benson
---------------------------
James W. Benson
Chief Executive Officer
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: August 13, 2003
By: /s/ Richard B. Slansky
----------------------------
Richard B. Slansky
Chief Financial Officer