FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20429
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] 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 .
---------------
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) 375-2011.
--------------
--------------------------------------------------------------------------------
(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: 14,396,008 shares of Issuer's voting
common stock were outstanding on November 8, 2002.
SPACEDEV, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX PAGE
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)..................................1
Condensed Consolidated Balance Sheets at September 30, 2002 and 2001....1
Condensed Consolidated Statements of Operations for September 30,
2002 and 2001.........................................................3
Condensed Consolidated Statements of Cash Flows for September 30,
2002 and 2001.........................................................4
Notes to Condensed Consolidated Financial Statements....................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................12
ITEM 3. 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....................................23
ITEM 4. Submission of Matters to Vote of Security Holders..................23
ITEM 5. Other Information..................................................24
ITEM 6. Exhibits and Reports on Form 8-K...................................24
Signatures....................................................................25
Certifications
ii
ITEM 1. FINANCIAL STATEMENTS
SPACEDEV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 2002 2001
-------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 35,743 $ 68,202
Accounts receivable 117,552 365,070
Other current assets - 11,804
-------------------------------------------------------------------------------
Total current assets 153,295 445,076
FIXED ASSETS - NET 2,090,925 2,215,615
INTANGIBLE ASSETS - NET - 983,889
CAPITALIZED SOFTWARE COSTS - NET (NOTE 1) 138,010 207,016
OTHER ASSETS 82,465 77,964
-------------------------------------------------------------------------------
$ 2,464,695 $ 3,929,560
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
1
SPACEDEV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 2002 2001
--------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of notes payable (Note 3 & 4(a)) $ 215,065 $ 13,000
Current portion of capitalized lease obligations 35,480 29,606
Current portion of notes payable - related party (Note 3 & 4(b)) 234,666 80,000
Accounts payable and accrued expenses 542,786 763,390
Accrued payroll, vacation and related taxes 132,786 108,527
Other accrued liabilities - 189,402
Customer deposits and deferred revenue 219,957 318,794
Billings in excess of costs incurred and estimated earnings (Note 2) 81,010 404,024
Provision for anticipated loss (Note 2) 17,914 468,567
--------------------------------------------------------------------------------------------------------------
Total current liabilities 1,479,664 2,375,310
NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 3 & 4(A)) 2,330,126 2,259,456
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES 16,018 35,266
NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES (NOTE 3 & 4(B)) 559,931 592,665
DEFERRED REVENUE 5,000 5,000
--------------------------------------------------------------------------------------------------------------
Total liabilities 4,390,739 5,267,697
STOCKHOLDERS' DEFICIT
Convertible preferred stock, $.001 par value, 10,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.0001 par value; 50,000,000 shares
authorized; 14,391,008 and 14,705,809 shares issued and
outstanding, respectively 1,439 1,480
Additional paid-in capital 7,785,810 8,153,541
Additional paid-in capital - stock options 750,000 750,000
Deferred compensation (250,000) (250,000)
Accumulated deficit (10,213,293) (9,993,158)
--------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (1,926,044) (1,338,137)
--------------------------------------------------------------------------------------------------------------
$ 2,464,695 $ 3,929,560
==============================================================================================================
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 Ended Nine Months Ended
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------
NET SALES $ 757,116 $ 1,164,832 $ 2,569,524 $ 2,643,020
Cost of Sales 709,419 793,075 2,150,996 1,697,021
------------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 47,697 371,757 418,528 945,999
OPERATING EXPENSES
General and administrative: 337,493 457,778 705,229 1,579,976
Stock and stock option based
compensation (Note 6) (454,062) 409,500 (454,062) 582,901
------------------------------------------------------------------------------------------------------------------------
TOTAL GENERAL AND ADMINISTRATIVE
EXPENSES (116,569) 867,278 251,167 2,162,877
Research and development - - - 198,400
------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES (116,569) 867,278 251,167 2,361,277
------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 164,266 (495,521) 167,361 (1,415,278)
OTHER EXPENSE
Interest expense 65,093 70,420 185,105 238,202
------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 99,173 $ (565,941) $ (17,744) $(1,653,480)
========================================================================================================================
NET INCOME (LOSS) PER SHARE; BASIC & DILUTED:
Net Income (loss) $0.01 ($0.04) ($0.00) ($0.11)
========================================================================================================================
Weighted-Average Shares Outstanding 14,877,307 14,741,425 14,853,988 14,771,790
========================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
SPACEDEV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 2001
------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (17,744) $ (1,653,480)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 218,204 656,414
Contributed assets (16,251) -
Loss on disposal of assets 7,410 -
Common stock and stock options issued for compensation
and services (Note 6) (454,062) 651,541
Change in operating assets and liabilities 42,096 232,025
------------------------------------------------------------------------------------------------------
NET CASH (USED IN) OPERATING ACTIVITIES (220,347) (113,500)
------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets - (50,641)
------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on notes payable (Note 3 & 4(a)) (58,166) (8,152)
Net Payments on capital lease obligations (27,046) (92,193)
Net proceeds (payments) on notes payable - related party
(Note 3 & 4(b)) 94,666 (46,934)
Proceeds from issuance of common stock 34,999 119,999
------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 44,453 (27,280)
------------------------------------------------------------------------------------------------------
Net (decrease) in cash (175,894) (191,421)
CASH AT BEGINNING OF PERIOD 211,637 259,623
------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 35,743 $ 68,202
======================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
SPACEDEV, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D.
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 2001
--------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 191,105 $ 156,361
NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended September 30, 2002 and 2001, the Company issued
2,000 and 567,247 shares of stock for services and recorded expenses of
$938 and $651,541, respectively.
During the nine months ended September 30, 2002 the Company recovered 500,000
shares of stock for a credit of $455,000 upon final judgment of the
outstanding litigation against EMC Holdings, Inc. The expense for this
matter was recorded during 2001.
In April 2001, the Company issued 80,000 stock options for the acquisition
of Explorespace.com, and recorded expenses of $67,055.
In August 2001, the Company issued 25,000 warrants for payment due to
AMROC for annual payment on a transaction in which the company entered
into on August 14, 1998 the expense was $21,925.
============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
5
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), SpaceDev Australia,
and the newly formed SpaceDev, Inc., an Oklahoma corporation. In the opinion of
management, the condensed consolidated financial statements reflect all normal
and recurring adjustments, which are necessary for a fair presentation of the
Company's financial position, results of operations and cash flows as of the
dates and for the periods, presented. The condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. Consequently, these statements do
not include all disclosures normally required by generally accepted accounting
principles of the United States of America for annual financial statements nor
those normally made in an Annual Report on Form 10-KSB. Accordingly, reference
should be made to the Company's Form 10-KSB filed on March 29, 2002 and other
reports the Company filed with the U.S. Securities and Exchange Commission for
additional disclosures, including a summary of the Company's accounting
policies, which have not materially changed. The consolidated results of
operations for the nine months ended September 30, 2002 are not necessarily
indicative of results that may be expected for the fiscal year ending December
31, 2002 or any future period, and the Company makes no representations related
thereto.
The accompanying condensed consolidated financial statements as of
September 30, 2002 and 2001 have been prepared assuming the Company will
continue as a going concern. However, the Company had a working capital deficit
of $1,326,369 as of September 30, 2002, and incurred a net loss of $17,744 for
the nine months then ended. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. During the first nine months
of 2002, management raised $35,000 through a private equity placement.
Subsequent to September 2002, management intends to continue to raise additional
financing through a combination of public and/or private equity placements,
commercial project financing and government program funding to fund future
operations and commitments. In order to provide additional working capital to
the Company the Board of Directors approved the sale of up to $400,000 in
convertible notes and common stock purchase warrants to the officers and
directors of the Company during the fourth quarter 2002 (see "Note 8").
Management also entered into negotiations to sell its facility and lease it back
over an expected period of ten years to raise additional cash to fund operations
(see "Note 8"). There is no assurance that additional debt and equity financing
needed to fund operations will be consummated or obtained in sufficient amounts
necessary to meet the Company's needs.
The accompanying condensed consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the possible inability of the Company to
continue as a going concern.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities and the results of operations
during the reporting period. Actual results could differ materially from those
estimates.
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation. These
reclassifications had no effect on reported total assets or net loss.
6
Beginning in second quarter 2002, capitalized software costs are
amortized over their estimated useful lives of eighteen months using the
straight-line method. Periodically and at least annually, management performs a
review for impairment in accordance with SFAS No. 144.
2. REVENUE RECOGNITION
In November 1999, SpaceDev was awarded a $4,995,868 turnkey mission
contract by the Space Sciences Laboratory ("SSL") at University of California,
Berkeley ("UCB"). SpaceDev was competitively selected to design, build,
integrate, test and operate for one year a small scientific, Earth-orbiting
spacecraft called CHIPSat. In 2000, management performed a cost-analysis on the
contract and recorded a loss of approximately $861,000 when it was determined
that the costs would likely exceed revenue on the project. This review included
a modification in scope, which increased the contract price by $600,000 on June
15, 2001. When a second contract modification was signed on November 28, 2001,
again adding to the scope of the contract and increasing the contract price by
another $1,201,132, management performed another review and reduced the total
estimated loss to approximately $463,000. As of September 30, 2002,
approximately 96% of the total contract costs had been expended and the
remaining loss accrued on the balance sheet has been reduced to approximately
$17,900. The Company successfully negotiated an additional contract change in
July 2002 that increased the value of the CHIPSat contract by an additional
$100,000 as well as adding scope. We are currently in final negotiations of a
contract modification of approximately $300,000, which will take the CHIPSat
program to completion. The added value and scope changes will be reviewed again
during the fourth quarter of 2002. The Company receives monthly payments on the
contract according to a preset payment schedule detailed in the contract.
In September 2001, the Company was awarded a contract for a proprietary
research program valued in excess of $1 million. As a part of that 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 a total $2.2 million. Management believes that the award could lead to
a long-term market for our hybrid propulsion technology if we are successful in
winning the contract. Management expects the amount of revenue to be generated
in 2002 to be approximately $1.1 to $1.8 million. Work on this project generated
approximately $1,055,000 in revenues during the first nine months of 2002.
Management intends to review the contract status in the fourth quarter of 2002,
after a larger percentage of completion is obtained, to evaluate possible
changes to the total estimated costs to complete the contract. As a result,
management has elected to defer recognizing gross profit of $100,000.
3. OTHER ACCRUED LIABILITY
In June 2001, the Company accrued a $150,000 contingent liability
related to its guarantee on a performance bond on behalf of Space Innovations
Limited ("SIL"), which was then a subsidiary of the Company. In 1999, the
Company was required to guarantee the performance bond in connection with a
contract to build a satellite bus for an Australian domestic spacecraft project.
SIL was unable to perform on the contract and subsequently declared bankruptcy.
On May 6, 2002 a settlement agreement was reached with Technical & General
Guarantee Company Limited ("T&G"), which calls for twelve monthly payments in
the amount of $1,200 to begin March 1, 2002. After the twelve months the note
calls for a balloon payment on the anniversary of the effective date in the
amount of $139,000. The Company has the right to convert the balloon note to a
three-year loan with 36 equal monthly payments with a 10% interest rate when the
balloon note matures. At September 30, 2002 and 2001, the outstanding balance
was $145,000 and $150,000, respectively.
7
4. NOTES PAYABLE
(a) BUILDING AND SETTLEMENT NOTES
On February 23, 2000, the Company signed a $1,330,000 note to refinance
its facility in Poway, California. The note calls for 300 monthly payments of
approximately $10,000, which include principal and interest at prime plus 1.5%.
On September 30, 2002 and 2001 the interest rate on the note was 6.25% and 7%
with an outstanding balance of $1,288,150 and $1,314,176, respectively. The note
matures in February 2025.
In December 1998, the Chief Executive Officer (the "CEO") of the
Company entered into a $500,000 loan agreement with another lender to finance
additional costs of its new facility. This liability was assigned to the Company
and called for 59 monthly interest payments at 12.00% and a balloon payment of
$505,000, including interest, in December 2003. At September 30, 2002 and 2001,
the outstanding balance on this loan was $495,012 and $499,671, respectively.
In 1999, the Company entered into a second loan agreement with this
lender. The $460,000 loan called for 59 monthly interest payments at 10.5% and a
balloon payment of $464,000, including interest, in March 2004. At September 30,
2002 and 2001, the outstanding balance on this loan was $456,020 and $458,609,
respectively.
In 2001, the Company entered into three settlement loan agreements with
various vendors. The total of $171,402 for all three loans called for payment
between 24 and 50 months with interest that ranges from 0% to 8%. At September
30, 2002, the outstanding balances on these notes were $161,008.
Future minimum principal payments on notes payable, building and settlement
notes are as follows:
Year Ended September 30,
--------------------------------------------------
2003 $ 70,065
2004 1,022,893
2005 46,000
2006 46,000
2007 21,250
Thereafter 1,193,982
--------------------------------------------------
$ 2,400,190
==================================================
(b) RELATED PARTIES
The Company had notes payable to the CEO. At September 30, 2002 and
2001, the balances were $639,931 and $672,665, respectively, with accrued
interest of 10%. The note was amended on March 20, 2000 to call for annual
payments of not less than $80,000 per year with interest at 10%.
The Company had short terms notes payable to the CEO and an Officer of
the Company. At September 30, 2002, the aggregate balance on these notes was
$154,666 with accrued interest of 0%.
8
Future minimum principal payments on notes payable, related parties are as
follows:
Year Ended September 30,
----------------------------------------------------
2003 $ 234,666
2004 80,000
2005 80,000
2006 80,000
2007 80,000
Thereafter 239,931
----------------------------------------------------
$ 794,597
====================================================
Interest expense on these notes was $42,156 and $40,699 for the nine months
ended September 30, 2002 and 2001, respectively.
5. OPERATING SEGMENTS
The Company's operating structure included one active operating segment
for 2002 and two active operating segments for 2001. As a result, no segment
information is presented for the nine months and three months ended September
30, 2002.
SEGMENT PRODUCTS AND SERVICES
The Company had the following reportable segments in 2001: Space
Mission Division (SMD), and ISS. SMD was in the process of developing deep space
science exploration satellites. ISS provided small hybrid propulsion space
systems and engineering services. Currently the SpaceDev product line offers a
combination of the former subsidiaries' product lines and services.
9
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
------------------------------------------------------------- ------------ ------------
(IN THOUSANDS) SMD ISS Total
------------------------------------ ------------ ------------ ------------ -----------
Net revenue from external
Customers $ 1,090 $ 75 $ 1,165
Depreciation and
amortization expense 43 176 219
------------------------------------
Segment loss $ (447) $ (119) $ (566)
====================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
------------------------------------------------------------- ------------ ------------
(IN THOUSANDS) SMD ISS Total
------------------------------------ ------------ ------------ ------------ -----------
Net revenue from external
Customers $ 2,326 $ 317 $ 2,643
Depreciation and
amortization expense 106 550 656
------------------------------------
Segment loss $(1,332) $ (321) $(1,653)
====================================
Total segment assets $ 3,280 $ 976 $ 4,256
Less intersegment assets (164) -- (164)
------------------------------------
Net segment assets $ 3,116 $ 976 $ 4,092
====================================
6. STOCK AND STOCK OPTION BASED COMPENSATION
On June 18, 2001, SpaceDev 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 the Company. EMC received
the first installment of 500,000 shares of common stock on June 26, 2001. Total
expense for the initial stock issuance through September 30, 2001 was $455,000.
Pursuant to a demand for arbitration filed on November 7, 2001, the Company
sought the return of all or a portion of the shares issued to EMC. EMC filed
its own claim with the American Arbitration Association on November 13, 2001,
alleging that the Company owed EMC $118,000 in fees, plus damages to be proven
at arbitration.
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 SpaceDev and EMC. On July 17, 2002, an interim award was issued in favor
of SpaceDev 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 SpaceDev. Included in this tentative final ruling was an award of
approximately $83,000 in attorney and arbitration fees to SpaceDev. 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, the Company has expensed all of its fees related to this matter. Any
recovery of the 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. Because the original expense was not recorded as an
extraordinary item, the reversal of the expense did not qualify as an
extraordinary item.
10
7. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that SFAS, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145
also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers."
Further, SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or described their applicability under changed
conditions. This pronouncement requires gains and losses from extinguishment of
debt to be classified as an extraordinary item only if the criteria in
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," have
been met. Further, lease modifications with economic effects similar to
sale-leaseback transactions must be accounted for in the same manner as
sale-leaseback transactions. The provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 shall be applied in fiscal years beginning after May
15, 2002. The provisions of SFAS No. 145 related to Statement 13 shall be
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 did not have a material impact on the
Company's consolidated financial position or results of operations for the nine
months ended September 30, 2002.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). SFAS 146 requires that a liability for costs
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. We do not expect the adoption of SFAS 146 to have a material impact on our
operating results or financial position.
8. SUBSEQUENT EVENTS
In order to provide additional working capital to the Company and to
allow the repayment of the short-term officer loans, on October 11, 2002, the
Board of Directors approved the sale of up to $400,000 in convertible notes and
common stock purchase warrants to the officers and directors of the Company. The
notes are convertible at a per share price equal to the 20-day average of the
high ask price for the Company's common stock on the Over-The-Counter Bulletin
Board, less 10%, on the date of execution. The warrants are exercisable for the
same number of shares which would be received upon conversion of the notes at an
exercise price equal to this conversion rate, and will expire after three years.
The notes will earn interest at the IRS imputed rate for short-term debt on an
annual basis or 2.03%. The interest rate was purposely set at the minimum
interest rate allowed by the IRS for short term loans. This rate is similar to
the return that the directors could get from investments in a money market fund
investment.
In October 2002, management entered into negotiations to sell its
facility and lease it back over an expected period of ten years. The terms of
the sale and related lease have not been finalized, however, any gain related to
the sale would be deferred and amortized into income over the period of the
lease. Management believes that the proceeds of the sale will be sufficient to
pay off $2,239,181 of mortgages on the building as well as to provide cash flow
for operations.
11
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. In
addition to historical information, the following discussion and other parts of
this document contain forward-looking information that involves risks and
uncertainties. Actual results could differ materially from those anticipated by
such forward-looking information due to a number of factors beyond the Company's
control.
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 or favorable outcome in litigation, claims and
other actions, and 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 in Afghanistan and, possibly, Iraq;
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 are products.
Given these uncertainties, investors are cautioned not to place too
much weight on such statements. We are not currently obligated to update these
forward-looking statements.
OVERVIEW
The Company formulated and began to implement its current business plan
in 1997. In February 1998, our operations were expanded with the acquisition of
Integrated Space Systems, Inc., a California corporation founded for the purpose
of providing engineering and technical services related to space-based systems
("ISS"). The ISS employee base acquired upon acquisition was largely made up of
former General Dynamics engineers and enlarged our then current employee base to
20 employees. ISS was purchased for a total of $3,625,000, paid in Rule 144
restricted common shares of SpaceDev. An excess in the calculated purchase price
of approximately $164,000 of net assets acquired was capitalized as goodwill and
was to be amortized over a period of 60 months.
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 the government), the engineering
service contracts had expired and, therefore, would not be producing revenue or
cash flow to support future operations. As a result, it was determined that all
future business, contracts, and proposals would be sought after only in the
SpaceDev name, making it a more efficient way for the Company to manage and
track multiple contracts and work on multiple business ventures at the same time
within the same operating segment.
12
In November 1999, SpaceDev was awarded a $4,995,868 turnkey mission
contract by the Space Sciences Laboratory ("SSL") at University of California,
Berkeley ("UCB"). SpaceDev was competitively selected to design, build,
integrate, test and operate for one year a small scientific, Earth-orbiting
spacecraft called CHIPSat. In 2000, we performed a cost-analysis on the contract
and recorded a loss of approximately $861,000 when it was determined that the
costs would likely exceed revenue on the project. This review included a
modification in scope, which increased the contract price by $600,000 on June
15, 2001. When a second contract modification was signed on November 28, 2001,
again adding to the scope of the contract and increasing the contract price by
another $1,201,132, we performed another review and reduced the total estimated
loss to approximately $463,000. As of September 30, 2002, approximately 96% of
the total contract costs had been expended and the remaining loss accrued on the
balance sheet has been reduced to approximately $17,900. We successfully
negotiated an additional contract change in July 2002 that increased the value
of the CHIPSat contract by an additional $100,000 as well as adding scope. We
are currently in final negotiations of a contract modification of approximately
$300,000, which will take the CHIPSat program to completion. The added value and
scope changes will be reviewed again during the fourth quarter of 2002. The
Company receives monthly payments on the contract according to a preset payment
schedule detailed in the contract.
In July 2000, the Company was awarded two contracts from the Office of
Space Launch of the National Reconnaissance Office ("NRO") totaling
approximately $800,000. These contracts were completed during the second quarter
of 2001. This work was a continuation of two previous contracts concerning the
development of hybrid space propulsion technology and orbital transfer vehicles.
In September 2001, SpaceDev was awarded a contract for a proprietary
research program valued in excess of $1 million. As a part of that 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 a total $2.2 million. We expect this contract to generate revenue in
2002 of approximately $1,100,000 to $1.8 million. Work on this project generated
approximately $1,055,000 in revenues during the first nine months of 2002. To
date, we have recognized approximately $236,000 of gross margin on this
contract. We intend to review the contract status in the fourth quarter of 2002,
after a larger percentage of completion is obtained, to evaluate possible
changes to the total estimated costs to complete the contract. Further
discussion of the impacts of the contract delay is included under "Liquidity and
Capital Resources - Forward Looking Statements and Risk Analysis" below. We plan
to evaluate possible changes to the total estimated costs to complete the
contract as well as any contract modifications due to the delay during the
fourth quarter 2002. As a result, we have elected to defer the remaining to date
gross margin of approximately $100,000 on this project.
On April 30, 2002, the Company was awarded Phase I of a contract to
develop a Shuttle-compatible propulsion module for the Air Force Research Lab
(AFRL). We anticipate receiving an award for Phase II of the contract in the
fourth quarter of 2002 and will use the project to further expand the Company's
product line to satisfy commercial and government space transportation
requirements. The first two Phases of the contract are worth up to $1.6 million,
of which $100,000 was awarded for Phase I. There can be no assurance that Phase
II will actually be awarded to SpaceDev. Congress has appropriated money to this
project and, as of the date of this report, we have submitted a proposal for
Phase II. Our success in winning this next phase of the program will depend on
our ability to meet the AFRL's objectives and their approval of our submitted
Phase II proposal.
On June 18, 2001, SpaceDev 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 the Company. EMC received
the first installment of 500,000 shares of common stock on June 26, 2001. Total
13
expense for the initial stock issuance through September 30, 2001 was $455,000.
Pursuant to a demand for arbitration filed on November 7, 2001, the Company
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 the Company owed EMC $118,000 in fees, plus damages to be proven
at arbitration.
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 SpaceDev and EMC. On July 17, 2002, an interim award was issued in favor
of SpaceDev 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 SpaceDev. Included in this tentative final ruling was an award of
approximately $83,000 in attorney and arbitration fees to SpaceDev. 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, the Company has expensed all of its fees related to this matter. Any
recovery of the 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. Because the original expense was not recorded as an
extraordinary item, the reversal of the expense did not qualify as an
extraordinary item. This reversal of shares had a positive impact on the current
quarter's financial statements and year to date financial statements and should
not be viewed as a current trend that would recur, but as a non-cash,
non-recurring one time positive impact to the current financial statements. See
"Results of Operations" below. The recovery should be excluded when discussing
current trends and day-to-day operations of the Company.
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 of the Company.
NINE MONTHS ENDED SEPTEMBER 30, 2002 -VS.- NINE MONTHS ENDED SEPTEMBER
30, 2001
During the nine months ended September 30, 2002, the Company had net
sales of $2,569,524 as compared to net sales of $2,643,020 for the same period
in 2001. Sales in the first nine months of 2002 were comprised of approximately
$1,237,000 from the CHIPSat program, $1,055,000 from a contract for a
proprietary development program, $174,000 from our State Grant programs, $40,000
from the Phase I AFRL program and $63,500 from all other programs. In the first
nine months of 2001, sales were comprised of approximately $2,117,000 from the
CHIPSat program, $228,000 from research and development performed for the Office
of Space Launch ("OSL"), $204,000 from the Boeing Mars Sample Return and Mars
Assent Vehicle projects, and $94,000 from all other programs.
The gross margin percentage for the nine months ended September 30,
2002 was 16% as compared to 36% for the same period in 2001. The decrease was
due primarily to a higher level of low margin work and deferral of gross margin
on the proprietary research program. We experienced a decrease in operating
expenses from $2,361,277 during the nine months ended September 30, 2001 to
$251,167 for the same nine months in 2002. Operating expenses include general
and administrative expenses and research and development expenses. General and
administrative expenses consisted primarily of salaries for administrative
14
personnel, fees for outside consultants, insurance, legal and accounting fees
and other overhead expenses. However, a significant portion of the decrease was
due to the Arbitration ruling reversing the EMC stock issuance of 500,000 shares
and a resulting credit of $455,000. See "Overview" above. Excluding the credit
of the $455,000 for the cancellation of shares issued to EMC, we experienced a
net loss of $(706,167), representing a decrease of $1,655,110 from 2001. The
reduction can also be attributed to the reduction of research and development
costs from $198,400 during the first nine months of 2001 to $0 for the same
period in 2002, as well as a reduction in salaries of approximately $126,000 due
to changes in personnel in 2001. There was also an overall reduction of non-cash
expenses -- including stock based compensation of approximately $582,000 and
$519,000 of goodwill amortization -- during the first nine months in 2001 to
$900 and $0 for the same period in 2002. There remains a portion of the
reduction of these expenses that can also be attributed to the absorption of
certain Indirect General and Administrative costs into costs of good sold.
For the first nine months of 2002, the Company had cost of sales
(direct and allocated costs associated with individual contracts) of
approximately $2,150,996 as compared to $1,697,021 during the same period in
2001. This increase was primarily due to a decrease in gross margin and deferral
of revenue during the period as well as a reclassification of certain General
and Administrative costs to cost of goods sold. The percentage-of-completion
method of contract accounting is based on the ratio of total costs incurred to
total estimated costs, therefore an increase in costs incurred will increase
earned revenue during the period.
Interest expense for the nine months ending September 30, 2002 and 2001
was approximately $185,000 and $238,000, respectively. The decrease in interest
expense was caused by the decrease in the interest rates on the debt.
During the nine months ended September 30, 2002, we experienced a net
loss of $17,744, compared to a net loss of $1,653,480 for the same nine-month
period in 2001. The decrease in the net loss was due the overall reduction to
our operating expenses by approximately $2,110,000, of which $455,000 was
recorded when the company recovered 500,000 shares of stock from EMC. See
"Overview" above.
THREE MONTHS ENDED SEPTEMBER 30, 2002-VS.- THREE MONTHS ENDED SEPTEMBER
30, 2001
During the three months ended September 30, 2002, the Company had net
sales of $757,116 as compared to net sales of $1,164,832 for the same three
months in 2001. Sales in the third quarter of 2002 were comprised of
approximately $432,000 from the CHIPSat program, $249,000 from a contract for a
proprietary development program, $34,000 from our State Grant programs, $30,000
from the Phase I AFRL program and $12,000 from all other programs. During the
same period in 2001, there was $958,000 from the CHIPSat program, $29,000 from
research and development performed for the Office of Space Launch ("OSL"),
$113,000 from the Boeing Mars Sample Return and Mars Assent Vehicle projects and
$65,000 from all other programs.
Gross profit percentages in third quarter 2002 were 6% as compared to
32% for the same period in 2001. The decrease was due to a higher level of low
margin work on the CHIPSat project and managements deferral of gross margin on
the proprietary research program. During the three months ended September 30,
2002, we experienced a profit of $99,173 as compared to a net loss of $(565,941)
for the same period in 2001. The profit came as a result of the arbitration
award against EMC. Without taking the reversal of the $455,000 EMC expense into
consideration, we experienced a net loss of $(355,827), representing a decrease
of $210,114 from 2001. The decrease in the net loss was due to a decrease in
general and administrative expense and the stock recovery as detailed above.
15
During the three months ended September 30, 2002, the Company had cost
of sales (direct and allocated costs associated with individual contracts) of
$709,419 and $793,075 in the same period in 2001. This decrease was primarily
due to the decrease in revenues on percentage-of-completion programs as well as
the absorption of certain indirect General and Administrative costs to cost of
goods sold. The Company experienced a decrease in general and administrative
expenses from $867,278 for the three months ended September 30, 2001 to
($116,569) for the same period ended September 30, 2002. The decrease was
substantially attributable to the reversal of the $455,000 expensed upon
issuance of 500,000 shares to EMC in June 2001. Decreases in general and
administrative costs during the third quarter of 2002 also included the
following items that occurred during 2001, $150,000 for the contingent liability
due to Technical & General Guarantee Company Limited as referenced in Note 3 to
the consolidated financial statements, stock options that had a value of $67,000
for the acquisition of Explorespace.com, a reduction in amortization expense of
approximately $173,000 in 2001 to $0 for these items for the same period in
2002. The reduction of expenses can also be attributed to the absorption of
certain Indirect General and Administrative costs into costs of good sold.
There were no research and development expenses for the three-month
periods ended September 30, 2002 and 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's auditors have expressed a formal auditors' opinion that
the Company's December 31, 2001 financial position raises substantial doubt
about its ability to continue as a going concern. Management believes that this
condition remains at September 30, 2002. Our ability to continue as a going
concern depends upon our ability to obtain profitable new business, continue to
reduce the working capital deficit, and consummate additional funding. The
funding as well as new business can come from a variety of sources, including
public or private equity markets, state and federal grants, government and
commercial customer program funding as well as commercial product sales. In
order to provide additional working capital to the Company the Board of
Directors approved the sale of up to $400,000 in convertible notes and common
stock purchase warrants to the officers and directors of the Company during the
fourth quarter 2002 (see "Related Transactions" below). Management also entered
into negotiations to sell its facility and lease it back over an expected period
of ten years to raise additional cash to fund operations (see "Note 8" to the
Condensed Consolidated Financial Statements included as Item to Part I of this
report). However, there can be no assurance that we will be able to obtain such
funding as needed. 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 will operate.
CASH POSITION FOR NINE MONTHS ENDED SEPTEMBER 30, 2002 -VS.- NINE
MONTHS ENDED SEPTEMBER 30, 2001
We had a net decrease in cash during the nine months ended September
30, 2002 of ($175,894), compared to a net decrease of ($191,421) for the same
period in 2001. Net cash used in operating activities totaled ($220,347) for the
nine months ended September 30, 2002, a difference of ($106,847) as compared to
($113,500) used by operating activities during the same period in 2001. This is
attributable primarily to the increase in operating expenses as compared to
revenue. There was a reduction of the overall loss for the nine months ending
September 30, 2001 from ($1,653,480) to ($17,744) for the same period in 2002.
16
Net cash used in investing activities totaled $0 for the nine months
ended September 30, 2002 compared to $50,641 used in investing activities for
the same period in 2001. Fixed assets purchased during the nine months ended
September 30, 2001 totaled $50,641 as compared to $0 in the first nine months
ended September 30, 2002. Net cash provided by financing activities totaled
$44,453 for the nine months ended September 30, 2002, an increase of $71,733
versus the ($27,280) used in financing activities during the same period on
2001. This increase is primarily attributable to generating $94,666 from
proceeds on notes payable - related party .
At September 30, 2002, the Company's cash, which includes cash reserves
and cash available for investment, was $35,743 as compared to $68,202 at
September 30, 2001, a decrease of $32,459. At September 30, 2002, the Company
had accounts receivable of $117,552, and accounts payable and accrued expenses
of $542,786.
As of September 30, 2002, the Company's backlog of funded and
non-funded business was approximately $2.9 million, as compared to approximately
$3.1 million as of September 30, 2001.
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 $2,316,000 consisted primarily of the income
tax benefits from net operating loss carryforwards, amortization of goodwill and
research and development credit carryforwards. 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 increased
approximately $280,000 during the nine months ended September 30, 2002, from
$2,036,000 at December 31, 2001 to $2,316,000 at September 30, 2002.
FORWARD-LOOKING STATEMENTS AND RISK ANALYSIS
We continue to sustain operations with a mix of government and
commercial contracts. In 2001, we had about 80% government or government-related
work. In 2002, we expect the ratio to be approximately 70% government or
government-related work. We will continue to do both government and commercial
business and anticipate the mix of government revenues to continue to be above
60% for the next several years as we increase our government marketing efforts
for both of our product lines. In addition, there may be opportunities to offer
solutions to the government, leveraging our existing product lines, given the
emphasis in the public sector on Homeland Security.
SpaceDev can continue to grow and execute certain parts of its strategy
without additional equity funding by identifying, bidding and winning new
commercial or government funded programs. During the third quarter of 2002,
SpaceDev submitted several bids for commercial and government programs, worked
with the U.S. Congress to secure directed funding for our programs and actively
worked to procure some significant commercial projects. The win of some of these
programs would enable SpaceDev to grow and broaden its business base.
As of the date of this filing, we have signed a contract with the Air
Force Research Lab (AFRL). Phase 1 of the contract was awarded on April 30, 2002
and we anticipate that we will be awarded Phase II of this program, which should
lead to approximately $1.6 million of new business over the next 15 months.
Although we do anticipate winning Phase II of the program, there can be no
assurance that we will receive the award. Congress appropriated money to this
project for the 2002 fiscal year and, as of the date of this report, SpaceDev,
with AFRL's input, has submitted a fast-track proposal for Phase II. Our success
in winning Phase II is now dependent upon the government's set timetable for
contract award of fast-track Phase II. An additional $2 million was appropriated
in the recently enacted 2003 fiscal year Department of Defense Appropriations
17
Act. We anticipate these monies will be applied directly to the company's work
with the AFRL. A failure to win Phase II of the AFRL contract could have a
negative effect on our financial position during the next twelve months. In that
event, we would attempt to offset the loss with other contract wins or a
reduction in overhead costs, including, potentially, a reduction in work force.
While we do not expect a reduction of government sales, we are
continuing to aggressively market our products and services to the commercial
market, particularly our subsystems and hybrid propulsion for orbital and
sub-orbital applications. We are also aggressively marketing our small
spacecraft to a variety of commercial customers. Our business model does
anticipate the winning of contracts in either the government or commercial
market segments. Based on current trends and proposals, we believe that we can
offset fluctuations in one market segment with contract wins from the other;
however, our inability to win business in either market would have a negative
effect on the Company's business operations and financial condition. To mitigate
this risk, we have embarked on a strategy of marketing our satellite subsystem
products, developed during the CHIPSat program, to numerous commercial
customers. To date, we have received positive interest in and quote requests for
these products.
We are forecasting a modest decline in sales for 2002 as compared to
2001. At this time about 70% of the forecasted sales are under contract. There
is no guarantee that we will win enough new business to achieve this forecast.
To obtain these results, we do not expect to have to make significant capital
expenditures for 2002.
We will receive total fixed compensation on the CHIPSat project in the
amount of $6,897,000, of which about $6.2 million in revenues was generated in
prior to 2002 and approximately $1,237,000 was generated through the first nine
months of 2002. The contract calls for total payments of $1,404,000 in 2002 and
$572,000 in 2003. As outlined above, we reviewed the contract again in late 2001
and the total loss was reduced from $861,000 to approximately $463,000. The
Company successfully negotiated an additional contract change in July 2002 that
increased the value of the CHIPSat contract by an additional $100,000 as well as
adding scope. We are currently in final negotiations of a contract modification
of approximately $300,000, which will take the CHIPSat program to completion. At
this time, we do not expect any additional losses from or increases to the
contract.
CHIPSat successfully completed all environmental testing and stringent
reviews by NASA personnel and is currently in launch integration at Vandenberg
Air Force Base (VAFB) in California for the scheduled launch on December 19,
2002. The successful and/or timely launch of CHIPSat depends on a number of
factors, many of which are beyond our control. In the event of a delay in the
launch or an unsuccessful launch of CHIPSat, we would request a contract
modification from our customer to cover all resulting expenses pursuant to the
terms of the original contract. A failed CHIPSat launch could negatively impact
our marketing efforts and our ability to raise additional equity funding, if
necessary.
We expected payments of about $1.5 million in 2002 from a commercial
contract that was awarded in November 2001, of which approximately $1,055,000 in
revenues was generated during the first nine months of 2002. Due to significant
delays on the part of our commercial customer, payments in 2002 from this
contract have been less than previously anticipated. This contract could lead to
follow-on contracts or commitments from the same customer later this year or in
2003, but at this time we cannot assess the probability of winning or the value
of those contracts or commitments. In the event of further significant delays,
or not achieving follow-on contracts to this commercial customer, we would
attempt to offset the loss with other contract wins or a reduction in overhead
costs, including, potentially, a reduction in work force.
18
We expect to incur losses through 2002 from the ongoing operations of
our business and do not expect to generate net positive cash flow from annual
operations sufficient to fund both operations and any significant capital
expenditures. There can be no assurance that SpaceDev will achieve or sustain
any positive cash flow or profitability thereafter.
During the years ended December 31, 2001 and December 31, 2000, we
raised approximately $145,000 through private sales of stock. The Company raised
an additional $35,000 in the first nine months of 2002. To execute the Company's
total strategy of small, capable, low-cost microsatellites, hybrid propulsion
products and new commercial revenue sources, we require significant funding
and/or the winning of significant government and commercial programs. At this
time, we do have an ongoing private placement to generate private equity, but do
not have a commitment from any individual, placement agent or underwriter to
implement any additional public or private offering.
SpaceDev may also need to raise additional capital if, for example, (i)
significant delays occur in any of its primary projects, including the
commercial contract highlighted above of deployment of its first microsatellite
due to technical difficulties, launch, or satellite failure, or other reasons;
(ii) it does not enter into agreements with customers on the terms we
anticipate; (iii) its net operating deficit increases because it incurs
significant unanticipated expenses; or (iv) it incurs additional costs from
modifying its satellite products or its proposed hybrid-related systems to meet
changed or unanticipated market, regulatory, or technical requirements. If these
or other events occur, there is no assurance that we could raise additional
capital on favorable terms, on a timely basis or at all. A substantial shortfall
in funding would delay or prevent deployment of the hybrid-related systems, or
other projects and programs.
Our ability to execute a public offering or otherwise obtain funds is
subject to numerous factors beyond our control, including, without limitation, a
receptive securities market and appropriate governmental clearances. No
assurances can be given that SpaceDev will be profitable, or that any additional
public offering will occur, that we will be successful in obtaining additional
funds from any source or be successful in implementing an acceptable exit
strategy on behalf of our investors. Moreover, additional funds, if obtainable
at all, may not be available on terms acceptable to the Company when such funds
are needed or may be on terms which are significantly adverse to our current
shareholders. The unavailability of funds when needed would have a material
adverse effect on the Company.
During the fourth quarter of 2002, the Company has borrowed funds from
its officers on a short-term basis, as more fully discussed under "Related
Transactions" below, for working capital. In order to provide additional working
capital to the Company and to allow the repayment of the short-term officer
loans, on October 11, 2002, the Board of Directors approved the sale of up to
$400,000 in convertible notes and common stock purchase warrants to the officers
and directors of the Company. See "Related Transactions" below. We anticipate
that the proceeds from the convertible note offering, when added to the
Company's revenue, will sustain our working capital needs moving forward. The
terms of the convertible note offering extend through April 2003.
In October 2002, management entered into negotiations to sell its
facility and lease it back over an expected period of ten years. The terms of
the sale and related lease have not been finalized, however, any gain related to
the sale would be deferred and amortized into income over the period of the
lease. We believe that the proceeds of the sale will be sufficient to pay off
$2,239,181 of mortgages on the building as well as to provide cash flow for
operations. If consummated, the sale and leaseback of the building is expected
to have a favorable effect on the Company's cash position but may or may not
effect cash flows generated from operating activities.
19
Our business partially depends on activities regulated by various
agencies and departments of the U.S. government and other companies that rely on
the government. Given recent terrorists' activities and threats aimed at the
United States, we may experience a small increase in operating costs, such as
costs for transportation, insurance, and security as a result of the activities
and potential activities to counter these. The U.S. economy in general has been
adversely affected by the terrorist activities and potential activities, and
this economic downturn could adversely impact our results of operations, impair
our ability to raise capital, or otherwise adversely affect our ability to grow
our business. Conversely, because of the nature of our products, there may be
opportunities for the Company to offer solutions to the government that may
address some of the problems that the country faces at this time.
CONTRACTUAL OBLIGATIONS
Commercial commitments are intended to include lines of credit,
guarantees, and other potential cash outflows resulting from a contingent event
that requires registrant performance pursuant to a funding commitment.
The Company's contractual obligations and commercial commitments are
detailed below:
---------------------------------------------------------------------------------------------------------------
Contractual 12 Months 12 Months 12 Months 12 Months Thereafter Total
Obligations 9-30-03 9-30-04 9-30-05 9-30-06
---------------------------------------------------------------------------------------------------------------
Notes Payable,
Unrelated $ 215,065 $1,022,893 $ 46,000 $ 46,000 $1,215,232 $2,545,190
---------------------------------------------------------------------------------------------------------------
Capital Lease
Obligations 35,480 15,543 475 - - 51,498
---------------------------------------------------------------------------------------------------------------
Related Party Notes
Payable 234,666 80,000 80,000 80,000 319,931 794,597
---------------------------------------------------------------------------------------------------------------
Total Cash
Contractual
Obligations $ 485,211 $1,118,436 $126,475 $126,000 $1,535,163 $3,391,285
---------------------------------------------------------------------------------------------------------------
RELATED TRANSACTIONS
During the three months ended September 30, 2002, the Company borrowed
funds from its officers as follows:
20
------------------------------- ----------------------- ------------------------ -----------------------------------
Name Date Amount Status
------------------------------- ----------------------- ------------------------ -----------------------------------
James W. Benson July 30, 2002 $15,000 Repaid on August 6, 2002
September 10, 2002 $94,544.70 Outstanding
September 11, 2002 $30,000 Outstanding
------------------------------- ----------------------- ------------------------ -----------------------------------
Stuart E. Schaffer September 10, 2002 $30,000 Repaid on September 20, 2002
September 25, 2002 $30,000 Repaid October 23, 2002
October 9, 2002 $40,000 Repaid October 23, 2002
------------------------------- ----------------------- ------------------------ -----------------------------------
Emery E. Skarupa October 9, 2002 $35,000 Repaid October 23, 2002
------------------------------- ----------------------- ------------------------ -----------------------------------
Each loan was made pursuant to a no-interest promissory note, with repayment due
within 30 days or upon demand by the holder. The proceeds from these short-term
loans were used as general working capital by the Company.
In order to provide additional working capital to the Company and to
allow the repayment of the short-term officer loans, on October 11, 2002, the
Board of Directors approved the sale of up to $400,000 in convertible notes and
common stock purchase warrants to the officers and directors of the Company. The
notes are convertible at a per share price equal to the 20-day average of the
high ask price for the Company's common stock on the Over-The-Counter Bulletin
Board, less 10%, on the date of execution. The warrants are exercisable for the
same number of shares which would be received upon conversion of the notes at an
exercise price equal to this conversion rate, and will expire after three years.
The notes will earn interest at the IRS imputed rate for short-term debt on an
annual basis or 2.03%. The interest rate was purposely set at the minimum
interest rate allowed by the IRS for short term loans. This rate is similar to
the return that the directors could get from investments in a money market fund
investment.
Each convertible note will mature on the six-month anniversary of the
date of issuance; provided, however, that the notes will be repaid at an earlier
date the Company's receipt of new capital in an amount of Three Hundred Fifty
Thousand Dollars ($350,000) or more.
Messrs. Schaffer and Skarupa each invested $50,000 in the convertible
notes and warrants on October 29, 2002. Mr. Benson has invested a total of
$250,000 in the convertible notes and warrants in three separate notes issued on
October 14, 2002 for $75,000, October 21, 2002 for $100,000 and October 28, 2002
for $75,000.
CRITICAL ACCOUNTING STANDARDS
The Company's revenues are derived primarily from fixed price contracts
and are recognized using the percentage-of-completion method of contract
accounting based on the ratio of total costs incurred to total estimated costs.
Losses on contracts are recognized when they become known and reasonably
estimable. Actual results of contracts may differ from management's estimates
and such differences could be material to the consolidated financial statements.
21
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.
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting
for Stock-Based Compensation." The Company adopted SFAS No. 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 No. 123 has been
utilized. The Company has valued its 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.
Fixed assets are depreciated over their estimated useful lives of
three-to-thirty years using the straight-line method of accounting. Goodwill and
other intangible assets were created upon the acquisition of the Company's
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 reviewed annually for impairment based on an
assessment of future operations to ensure they are appropriately valued in
accordance with Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or disposal of Long-Lived Assets." Effective November 2001,
there was no more amortization of goodwill.
Net income (loss) per common share has been computed on the basis of
the weighted average number of shares outstanding, according to the rules of
SFAS No. 128, "Earnings per Share." In accordance with SFAS No. 128, the
computation of diluted net income (loss) per share excludes options and warrants
with exercise prices greater than the average share price of the Company's
common stock for 2002. As a result, 4,992,812 options and 371,416 warrants are
excluded from the calculation as they are anti-dilutive.
ITEM 3. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management,
including our Chief Executive Officer and Vice President of Operations, who
currently acts as our principal financial officer, we conducted an evaluation of
our disclosure controls and procedures, as such term is defined under Rule
13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), within 90 days of the filing date of this report. Based on
their evaluation, our Chief Executive Officer and Vice President of Operations
concluded that the Company's disclosure controls and procedures are effective.
(b) There have been no significant changes (including corrective
actions with regard to significant deficiencies or material weaknesses) in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referenced in paragraph (a)
above.
22
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 18, 2001, SpaceDev 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 the Company. EMC received
the first installment of 500,000 shares of common stock on June 26, 2001. Total
expense for the initial stock issuance through September 30, 2001 was $455,000.
Pursuant to a demand for arbitration filed on November 7, 2001, the Company
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 the Company owed EMC $118,000 in fees, plus damages to be proven
at arbitration.
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 SpaceDev and EMC. On July 17, 2002, an interim award was issued in favor
of SpaceDev 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 SpaceDev. Included in this tentative final ruling was an award of
approximately $83,000 in attorney and arbitration fees to SpaceDev. 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. For a
discussion of the financial impact of the award, please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview" in Part I, Item 2 of this report.
ITEM 2. CHANGES IN SECURITIES
On August 9, 2002, the Company issued 30,612 shares of common stock and
warrants to purchase an additional 30,612 shares of common stock at an exercise
price of $0.49 per share to an individual investor in exchange for an investment
of $15,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 19, 2002, the Registrant held its annual meeting of
shareholders. At that meeting the shareholders voted to elect the following
directors to the Registrant's Board of Directors, to serve until the 2003 annual
meeting of shareholders:
Director For Against Abstain
-------- --- ------- -------
James W. Benson 13,899,467 0 200
Wesley T. Huntress* 13,899,467 0 200
Curt Dean Blake* 13,899,467 0 200
Stuart E. Schaffer 13,899,467 0 200
Howell M. Estes, III* 13,899,467 0 200
Scott McClendon* 13,899,467 0 200
Robert S. Walker* 13,899,467 0 200
*Denotes Independent Director.
The shareholders also voted in favor of ratification of Nation Smith
Hermes Diamond, Accountants and Consultants, as the Company's independent
auditor for the year ending December 31, 2002 by a vote of 13,899,467 shares in
favor, 200 shares against and no shareholders abstaining.
23
In addition to the election of directors, the shareholders voted to
approve Nation Smith Hermes Diamond Accountants & Consultants, a professional
corporation ("Nation Smith"), to act as the Registrant's independent auditor for
the fiscal year ending December 31, 2002. Nation Smith acted as the independent
auditor for the Registrant's financial statements for the period ended December
31, 2001.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
-----------
(4.1) Note Purchase Agreement for Series A Subordinated Convertible
Notes
(4.2) Form of Series A Subordinated Convertible Note
(4.3) Form of Warrant for Series A Subordinated Convertible Note
Offering
(99.1) Certificate of James W. Benson Pursuant to Section 1350 of
Chapter 63 of Title 18 United States Code.
(99.2) Certificate of Emery E. Skarupa Pursuant to Section 1350 of
Chapter 63 of Title 18 United States Code.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed July 30, 2002 was filed with the
Commission under Item 5 (other information), regarding actions taken by
the shareholders at the Annual Shareholders' Meeting held July 18, 2002
and the issuance of the interim Arbitration Award against EMC Holdings
Corporation .
24
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
/s/ James W. Benson
Dated: November 14, 2002
--------------------------
James W. Benson
Chief Executive Officer
25
SPACEDEV, INC.
a Colorado corporation
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 302 Certification
I, James W. Benson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SpaceDev, Inc., a
Colorado corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: /s/ James W. Benson
--------------------
James W. Benson
Chief Executive Officer
SPACEDEV, INC.
a Colorado corporation
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Section 302 Certification
I, Emery E. Skarupa, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SpaceDev, Inc., a
Colorado corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: /s/ Emery E. Skarupa
-----------------------------
Emery E. Skarupa
Vice President of Operations