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, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________________ to
______________________________
Commission File Number 000-28947.
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SPACEDEV, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1374613
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13855 Stowe Drive, Poway, California 92064
(Address of principal executive offices)
(Issuer's telephone number) (858) 375-2030.
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_
_____
(Former name, former address and former fiscal year, if changed since last
report)
Checkmark whether the issuer (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No ____
----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 19,065,623 shares of Issuer's voting
common stock were outstanding on August 2, 2004.
PAGE
SPACEDEV, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2004
INDEX PAGE
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PART I -- FINANCIAL INFORMATION 1
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ITEM 1. FINANCIAL STATEMENTS 1
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Consolidated Balance Sheets 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 14
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ITEM 3. CONTROLS AND PROCEDURES 28
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PART II -- OTHER INFORMATION 29
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ITEM 1. LEGAL PROCEEDINGS 29
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ITEM 2. CHANGES IN SECURITIES 29
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES 30
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 30
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ITEM 5. OTHER INFORMATION 30
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 30
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SIGNATURES 31
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PAGE
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
At June 30,. . . . . . . . . 2004 2003
---------------------------- ---------- --------
ASSETS
CURRENT ASSETS
Cash . . . . . . . . . $1,226,529 $ 80,734
Accounts receivable. . 602,151 142,759
Work in Progress . . . 10,316 -
---------------------------- ---------- --------
Total current assets. . . . 1,838,996 223,493
---------------------------- ---------- --------
FIXED ASSETS - NET. . . . . 184,996 127,314
CAPITALIZED SOFTWARE COSTS - 33,375
OTHER ASSETS. . . . . . . . 30,574 34,502
---------------------------- ---------- --------
$2,054,566 $418,684
---------------------------- ---------- --------
---------------------------- ---------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
1
PAGE
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
At June 30, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 2003
------------------------------------------------------------------------ ------------- -------------
LIABILITIES AND STOCKHOLDERS DEFICIT
CURRENT LIABILITIES
Current portion of notes payable . . . . . . . . . . . . . . . . . $ 35,778 $ 52,000
Current portion of capitalized lease obligations . . . . . . . . . 4,257 26,629
Note payable - related party (Note 3(b)) . . . . . . . . . . . . . 80,000 80,000
Convertible debt notes payable (Note 4). . . . . . . . . . . . . . - 332,847
Accounts payable and accrued expenses. . . . . . . . . . . . . . . 202,908 338,432
Accrued payroll, vacation and related taxes. . . . . . . . . . . . 252,221 122,129
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . 28,400 -
Provision for anticipated loss (Note 2). . . . . . . . . . . . . . - 5,174
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . - 2,526
Revolving credit facility (Note 3(c)). . . . . . . . . . . . . . . 408,003 -
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . 141,595 -
------------------------------------------------------------------------ ------------- -------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 1,153,162 959,737
------------------------------------------------------------------------ ------------- -------------
NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 3(A)). . . . . . . . . . . 28,021 65,260
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES. . . . . . . . . 3,445 6,558
NOTE PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES . . . . . . . . . 116,445 517,630
DEFERRED GAIN - ON BUILDING SALE (NOTE 3(A)). . . . . . . . . . . . . . 1,006,585 1,123,857
DEFERRED REVENUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 5,000
------------------------------------------------------------------------ ------------- -------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,312,658 2,678,042
------------------------------------------------------------------------ ------------- -------------
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; 50,000,000 shares authorized, and
18,985,285 and 15,338,907 shares issued and outstanding,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . 1,898 1,533
Additional paid-in capital (Note 3(c), 4 & 5). . . . . . . . . . . 12,787,202 8,728,659
Additional paid-in capital - stock options . . . . . . . . . . . . 750,000 750,000
Deferred compensation (Note 5) . . . . . . . . . . . . . . . . . . (250,000) (250,000)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . (13,547,192) (11,489,550)
------------------------------------------------------------------------ ------------- -------------
TOTAL STOCKHOLDERS DEFICIT . . .. . . . . . . . . . . . . . . . . . . . (258,092) (2,259,358)
------------------------------------------------------------------------ ------------- -------------
$ 2,054,566 $ 418,684
------------------------------------------------------------------------ ------------- -------------
------------------------------------------------------------------------ ------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
2
PAGE
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three and Six Months Ending Three-Months Ending Six-Months Ending
June 30, 2004 and 2003 2004 % 2003 % 2004 % 2003 %
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
NET SALES . . . . . . . . . . . . . $ 1,200,692 100.0% $ 753,956 100.0% $ 2,215,443 100.0% $ 1,286,795 100.0%
TOTAL COST OF SALES . . . . . . . . 942,116 78.5% 577,874 76.6% 1,749,639 79.0% 1,039,484 80.8%
GROSS MARGIN. . . . . . . . . . . . 258,576 21.5% 176,082 23.4% 465,804 21.0% 247,311 19.2%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
OPERATING EXPENSES
Marketing and sales expense. . . 116,132 9.7% 134,005 17.8% 215,284 9.7% 199,047 15.5%
Research and development . . . . 19,500 1.6% 251,983 33.4% 34,804 1.6% 251,983 19.6%
General and administrative . . . 90,079 7.5% 155,006 20.6% 170,931 7.7% 524,922 40.8%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
TOTAL OPERATING EXPENSES. . . . . . 225,711 18.8% 540,994 71.8% 421,019 19.0% 975,952 75.8%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
PROFIT (LOSS) FROM OPERATIONS . . . 32,865 2.7% (364,912) -48.4% 44,785 2.0% (728,641) -56.6%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
NON-OPERATING EXPENSE (INCOME)
Interest expense . . . . . . . . 19,736 1.6% 14,179 1.9% 39,524 1.8% 34,628 2.7%
Non-cash interest expense
debt discount (Note 4) . . . . - 0.0% 100,453 13.3% - 0.0% 200,908 15.6%
Gain on Building Sale (Note 3(a)) (29,318) -2.4% (29,318) -3.9% (58,636) -2.6% (48,863) -3.8%
Non-Cash Loan Fee -
Equity Conversions (Note 3(c)) 1,329,313 110.7% - 0.0% 1,793,313 80.9% - 0.0%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
TOTAL NON-OPERATING EXPENSE . . . . 1,319,731 109.9% 85,314 11.3% 1,774,201 80.1% 186,673 14.5%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
LOSS BEFORE TAXES . . . . . . . . . (1,286,866) -107.2% (450,226) -59.7% (1,729,416) -78.1% (915,314) -71.1%
INCOME TAX PROVISION. . . . . . . . - 0.0% (37,474) -5.0% - 0.0% 2,526 0.2%
NET LOSS. . . . . . . . . . . . . . $ (1,286,866) -107.2% $ (412,752) -54.7% $(1,729,416) -78.1% $ (917,840) -71.3%
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
NET LOSS PER SHARE:
Net loss . . . . . . . . . . . $ (0.07) $ (0.03) $ (0.09) $ (0.06)
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
Weighted-Average Shares Outstanding 17,986,803 15,092,489 17,410,651 15,092,489
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
------------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
3
PAGE
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ending June 30, 2004 and 2003 . . . . . . . 2004 2003
--------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $(1,729,416) $ (917,840)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . . 32,487 106,201
Gain on building sale. . . . . . . . . . . . . . . . (58,636) (48,863)
Non-cash interest expense - convertible debt program - 200,908
Non-cash loan fees . . . . . . . . . . . . . . . . . 1,793,313 -
Change in operating assets and liabilities:. . . . . (274,410) (159,009)
--------------------------------------------------------------- ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . . . . . . . (236,662) (818,603)
--------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of building. . . . . . . . . . . . - 3,150,124
Purchases of fixed assets . . . . . . . . . . . . . . . . (79,951) (3,100)
--------------------------------------------------------------- ------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES . . . . . . (79,951) 3,147,024
--------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principle payments on notes payable . . . . . . . . . . . (23,792) (2,524,537)
Principal payments on capitalized lease obligations . . . (7,883) (16,741)
Payments on notes payable - related party . . . . . . . . (415,000) (159,999)
Proceeds from issuance of common stock. . . . . . . . . . 978,889 425,942
Proceeds from revolving credit facility . . . . . . . . . 418,922 -
--------------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. . . . . . 951,136 (2,275,335)
--------------------------------------------------------------- ------------ ------------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . 634,523 53,086
--------------------------------------------------------------- ------------ ------------
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . 592,006 27,648
--------------------------------------------------------------- ------------ ------------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . $ 1,226,529 $ 80,734
--------------------------------------------------------------- ------------ ------------
--------------------------------------------------------------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
PAGE
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D.
(UNAUDITED)
For the Six Months Ending June 30, 2004 and 2003 . 2004 2003
--------------------------------------------------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . $82,614 $15,494
--------------------------------------------------- ------- -------
NONCASH INVESTING AND FINANCING ACTIVITIES:
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During the six-months ending June 30, 2004 the Company issued 1,403,182 shares
of its common stock to the Laurus Master Fund from conversions under its
revolving credit facility, thereby realizing a corresponding reduction in
current liabilities of approximately $772,000 The Company recorded
additional non-cash loan fees of approximately $1,178,000 and charged these
fees to expense.
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The accompanying notes are an integral part of these consolidated financial
statements.
5
PAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of SpaceDev, Inc. ("the
Company") include the accounts of the Company and its inactive subsidiary,
SpaceDev, Inc., an Oklahoma corporation. In the opinion of management, the
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 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 April 6, 2004 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
ending June 30, 2004 are not necessarily indicative of results that may be
expected for the fiscal year ending December 31, 2004 or any future period, and
the Company makes no representations related thereto.
As of June 30, 2004, management continues the opinion that the Company's
auditors, PKF, expressed in their formal auditors' opinion dated February 11,
2004 (except for Note 11 as to which the date is April 5, 2004), that in their
opinion, based on their audit, the Company's consolidated financial statements
referred to herein present fairly, in all material respects, the consolidated
financial position of SPACEDEV, INC. AND SUBSIDIARY as of December 31, 2003, and
the consolidated results of the Company's operations and cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America. The accompanying consolidated financial statements as
of June 30, 2004 have been prepared assuming the Company will continue as a
going concern. During the first six-months of 2004, the Company had a working
capital balance of $685,834 and incurred a net loss of $1,729,416 as compared to
a working capital deficit of $736,244 and a net loss of $917,840 for the same
six-month period in 2003. On March 31, 2004, the Company was awarded a
$43,362,271 contract from the Missile Defense Agency. The first task order was
awarded on April 1, 2004. Management intends to obtain new commercial and
government contracts, continue to utilize (and possibly expand) its revolving
credit facility and possibly raise some additional equity capital in a public or
private offering or fund-raising effort. There can be no assurance that
existing contracts will be completed successfully or that new contracts or
additional debt or equity financing that may be needed to fund operations will
be available or, if available, obtained in sufficient amounts necessary to meet
the Company's needs. Management does believe that, if current contracts remain
on schedule and are funded as expected, they will be sufficient to fund the
Company through 2004.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Beginning in the second quarter of 2002, the Company's capitalized software
costs were amortized over their estimated useful lives using the straight-line
method. Periodically and at least annually, management performs a review for
impairment in accordance with SFAS No. 144. During the six-months ended June
30, 2003, these capitalized software costs were $70,133 leaving a balance of
$33,375, which was fully amortized in 2003.
6
PAGE
2. REVENUE RECOGNITION
The Company's revenues for the six-months ended June 30, 2004 were derived
primarily from United States government cost plus fixed fee (CPFF) contracts
compared to a predominance of fixed price contracts for the same six-months in
2003. Revenues from the CPFF contracts during the first six-months of 2004 were
recognized as expenses were incurred compared to revenues from fixed price
contracts for the same period in 2003, which were recognized using the
percentage-of-completion method. Estimated contract profits are taken into
earnings in proportion to revenues recorded. Revenues under certain long-term
fixed price contracts, which provide for the delivery of minimal quantities or
require significant amounts of development effort in relation to total contract
value, are recorded upon achievement of performance milestones or using the
cost-to-cost method of accounting where revenues and profits are recorded based
on the ratio of costs incurred to estimated total costs at completion. Time and
material revenues are recognized as services are preformed and costs incurred.
Losses on contracts are recognized when estimated costs are reasonably
determined. 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 depending on the terms and conditions of
the specific contract. Time and material revenues are recognized as services
are performed and costs incurred.
Deferred revenue represents amounts collected from customers for projects,
products or services to be provided at a future date. Deferred revenue for the
six-months ended June 30, 2004 and 2003 was $33,400 and $5,000, respectively.
In November 1999, the Company was awarded a turnkey mission contract by the
Space Sciences Laboratory at the University of California at Berkeley ("UCB")
worth, as of December 31, 2003, approximately $7.4 million, including change
orders worth approximately $514,000. This contract represented 14% of the
Company's revenues for the year ending December 31, 2003. The contract
concluded on December 31, 2003. The micro satellite developed under this
mission, called CHIPSat, continues to operate successfully and UCB decided to
extend the mission. On February 25, 2004, a new time and materials purchase
order arrangement was initiated, on an as needed basis, between the University
of California at Berkeley and the Company.
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. In conjunction with the sale, the
Company entered into a lease agreement with the buyer to leaseback its
facilities. The Company's Chief Executive Officer provided a guarantee for the
leaseback. 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, 2004, the deferred gain was
$1,006,585. This amortization will be included in the Company's occupancy and
facility expense and totaled $58,636 and $48,863 for the six-months ending June
30, 2004 and 2003, respectively.
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PAGE
Deferred Gain consisted of the following:
Six-Months Ending June 30, 2004
-------------------------------------
Original Deferred Gain $1,172,720
Less Amortization 2003 (107,499)
Less Amortization 2004 (58,636)
-------------------------------------
$1,006,585
-------------------------------------
-------------------------------------
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 June 30, 2004 and
2003, the outstanding balances on these notes were $63,799 and $117,260,
respectively, with interest expense for the six-months ending June 30, 2004 and
2003 of $1,847 and $2,685, respectively.
Future minimum principal payments on settlement notes are as follows:
Period Ended June 30,
----------------------------------
2004 $35,778
2005 28,021
2006 0
----------------------------------
Total Settlement Notes $63,799
----------------------------------
----------------------------------
b) Related Parties
The Company has a note payable to the CEO. At June 30, 2004 and 2003, the
balances were $196,445 and $597,630, respectively, with interest accruing at
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 is currently
making principal and interest payments on the note.
Future minimum principal payments on note payable, related parties are as
follows:
Period Ending June 30,
-------------------------
2004 $80,000
2005 80,000
2006 36,445
2007 0
-------------------------
$196,445
-------------------------
-------------------------
Interest expense on this note was $25,923 and $23,633 for the six-month periods
ending June 30, 2004 and 2003, respectively.
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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 are 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. Approximately $11,900 in interest and $16,255 in fees were accrued under
the revolving credit facility in the first six-months of 2004. The outstanding
balance on the revolving credit facility at June 30, 2004 was $408,003.
The Company filed Form SB-2 on July 25, 2003 in connection with this
transaction. The shares were registered with the Securities and Exchange
Commission ("SEC") for public resale on August 6, 2003. Once the market price
exceeded 118% of the fixed conversion price, which occurred on or about July 21,
2003, the Company obtained the ability to pay amounts outstanding under the
revolving credit facility in cash or 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
is 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 agreement was modified on
March 31, 2004 to provide for a six-month waiver to us and a fixed conversion
price to Laurus of $0.85 per share on the first $500,000 after the first $1
million. Thereafter, the fixed conversion price will be adjusted after
conversion of the first $1.5 million to 103% of the then fair market value of
our common stock ("Adjusted Fixed Conversion Price").
Laurus converted 1,403,182 shares to reduce the Company's debt by $771,750 for
the six-month period ending June 30, 2004. Laurus converted a total of
1,818,182 shares to reduce the debt by $1,000,000 since the inception of the
revolving credit facility. For the six-month period ending June 30, 2004, the
Company expensed $1,177,846 for the non-cash loan fee expense based on the fair
market value of the stock when Laurus converted and approximately $1,304,000 for
the non-cash loan fee expense since the inception of the revolving credit
facility. The fair market value used in 2003 was established using a 20%
discount to the closing price on the date of conversion based on the restricted
and thinly-traded nature of the Company stock in 2003 and the fair market value
used in 2004 was established using the closing price on the date of conversion
with no discount taken due to the increased volume in the Company's stock.
Availability of funds under the revolving credit facility will be based on the
Company's accounts receivable, except as waivers are provided by Laurus. An
initial three (3) month waiver was offered by Laurus, under which Laurus
permitted a credit advance up to $300,000, which amount would have otherwise
exceeded eligible accounts receivable during the period. Laurus subsequently
extended the waiver for two additional six (6) month periods, under which Laurus
permitted a credit advance up to $1 million, which amount would have otherwise
exceeded eligible accounts receivable during the period. The revolving credit
facility is secured by all of the assets of the Company.
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PAGE
In conjunction with this transaction, Laurus was paid a fee of $20,000 for the
first year, which was expensed as additional interest expense in 2003. The
Company is required to pay a continuation fee of $10,000 each year thereafter.
In addition, Laurus received a warrant to purchase 200,000 shares of the
Company's common stock, as stated herein. 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.
The Company may terminate its agreements with Laurus before the end of the
initial three year term and Laurus will release its security interests upon
payment to Laurus of all obligations, if the Company has: (i) provided Laurus
with an executed release of all claims which the Company may have under the
agreements; and, (ii) paid to Laurus an early payment fee in an amount equal to
(x) four percent (4%) of the Capital Availability Amount if such payment occurs
prior to the first anniversary of the Initial Term (i.e., June 3, 2004); (y)
three percent ( 3%) of the Capital Availability Amount if such payment occurs
after the first anniversary and prior to the second anniversary of the Initial
Term; and, (z) two percent (2%) of the Capital Availability Amount if such
payment occurs after the second anniversary and prior to the end of the Initial
Term. The early payment fee is also due and payable by the Company to Laurus if
the Company terminates its Agreement after the occurrence of an Event of
Default, as define in the agreements.
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 directors and officers of
the Company. The total funding was completed on November 14, 2002. The
convertible debentures entitled the holder to convert the principal and unpaid
accrued interest into the Company's common stock when the notes matured. The
maturity on the notes was six (6) months from issue date. On March 25, 2003, an
amendment was executed which extended these notes an additional six (6) months.
The convertible debentures were exercisable into a number of the Company's
common shares at a conversion price that equals the 20-day average ask price
less 10%, which was, established when the note was issued, or the initial
conversion price.
Concurrent with the issuance of the convertible debentures, the Company issued
warrants to purchase up to 1,229,705 shares of the Company's 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 notes were issued, or the
initial conversion price of the notes. Upon issuance, the issued warrants were
valued using the Black-Scholes pricing model based on the expected fair value at
issuance and the estimated fair value was recorded as debt discount. As a
result of the change to the maturity date of the convertible debt, the
amortization period for the debt discounts was also extended during the first
quarter in 2003.
10
PAGE
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 was reflected
as debt discount of which $200,908 was amortized to non-cash interest expense
for the six-months ending June 30, 2003. Fair market value of the stock was
determined by discounting the closing market price on the date of the
transaction by 20%, based on the nature of the restricted securities and thinly
traded stock.
On September 5, 2003, the Company repaid one-half of the convertible notes, with
the condition that the note holders convert the other half. Also, as a condition
of the partial repayment, the note holders were required to relinquish one-half
of the previously issued warrants. Finally, as additional consideration for the
transaction, the note holders were offered 5% interest on their notes, rather
than the stated 2.03%. All of the note holders accepted the offer and the
convertible notes were retired.
Balances as of June 30, 2004 were:
Convertible debentures - beginning balance . $ 475,000
Total interest expense incurred . . . . $ 20,236
Accrued interest paid - current year. . $ (18,161)
Accrued interest paid - prior year. . . $ (2,075)
Convertible debtures paid . . . . . . . $(237,500)
Convertible debtures converted. . . . . $(237,500)
----------
$(475,000)
----------
Convertible debentures - ending balance. . . $ 0
-------------------------------------------- ----------
Debt discount (Warrants) - beginning balance $ 475,000
Amount forfeited. . . . . . . . . . . . $(237,500)
Amount expensed prior year. . . . . . . $(125,000)
Amount expensed current year. . . . . . $(267,879)
Current year - adjustment . . . . . . . $ 155,379
----------
$(475,000)
----------
Debt discount (Warrants) - ending balance. . $ 0
-------------------------------------------- ----------
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.
On January 16, 2003 and February 14, 2003, pursuant to an extension of the PPO,
the Company sold 665,188 and 196,079 Units, respectively. The Company received
approximately $326,000 and $100,000, respectively, for the Units sold under the
PPO during the first quarter 2003.
11
PAGE
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, 2004 and 2003
using the minimum value method as prescribed by SFAS 123 and 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 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 six-month period ending June 30, 2004
and 2003 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, 2004 2003
----------------------------- ----------- ------------
Net loss:
As reported $(1,729,416) $(917,840)
Pro forma $(1,863,048) $(1,056,426)
----------------------------- ----------- ------------
Loss per Share:
As reported $(.09) $(.06)
Pro forma $(.10) $(.07)
----------------------------- ----------- ------------
----------------------------- ----------- ------------
On November 21, 1997, the Company entered into a five (5) year employment
agreement with its CEO. On July 16, 2000, the Company amended the employment
agreement with its CEO extending the term until July 16, 2005. As part of the
original employment agreement, the Company granted options to the CEO to
purchase up to 2,500,000 shares of the Company's $.0001 par value restricted
common stock.
The options are subject to the following vesting conditions, which were amended
on January 21, 2000 and later ratified by the Board on July 16, 2000. The
agreement provided an option for the Board to award options on an additional
1,500,000 shares of restricted common stock at a later date. The exercise
prices are set forth in the following chart:
Exercise
Number price per
Of shares Vesting Conditions share
---------------- --------- ----------------------------------------------------------- -------------------
Granted Options:
500,000. . . . . Currently vested $ 1.00
500,000. . . . . Obtaining $6,500,000 additional equity capital $ 1.50
500,000. . . . . Financing and executing a definitive space launch agreement $ 2.00
500,000. . . . . Launching of first lunar or deep-space mission $ 2.50
500,000. . . . . Successful completion of first lunar or deep-space mission $ 3.00
Options to be
Granted upon
the Occurrence
of Certain Events:
250,000. . . . . Upon the Companymarket capitalization reading $250 million $ 5.00
500,000. . . . . Upon the Companymarket capitalization reading $500 million $ 10.00
750,000. . . . . Upon the Companymarket capitalization reading $1 billion $ 20.00
---------------- --------- ----------------------------------------------------------- -------------------
All options expire on July 16, 2010.
12
PAGE
In accordance with APB 25, the Company recognized $500,000 of compensation
expense and $250,000 of deferred compensation in 1997. The options granted to
the CEO are subject to vesting conditions and have exercise prices between $1.00
and $3.00 per share.
On August 27, 2001, as part of an annual review process, an additional 10,000
options were granted to the CEO at the exercise price of $0.9469 per share with
a set vesting schedule of 3,333 shares per year after issuance with the third
year having 3,334 options vest. These options expire five years from grant
date.
6. NEW ACCOUNTING PRONOUNCEMENTS
There were no recent Accounting Pronouncements that affect the Company during
the second quarter 2004. For past pronouncements please refer the Company's
10-KSB filed on April 6, 2004.
13
PAGE
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
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 as well as any or all of our recent filings including prior
year 10-KSB and quarterly 10-QSB filings.
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.
OVERVIEW
We are engaged in the conception, design, development, manufacture, integration
and operation of space technology systems, products and services. We are
currently focused on the commercial and military development of low cost micro
satellites, nano satellites and related subsystems, hybrid rocket propulsion for
space, launch and human flight vehicles as well as associated engineering and
technical services primarily to government agencies, and specifically the
Department of Defense. Our products and solutions are sold, mainly on a
project-basis, directly to these customers and include sophisticated micro and
nano satellites, hybrid rocket-based launch vehicles, Maneuvering and orbital
Transfer Vehicles 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 government military agencies
and our "products" are considered to be the outcome of specific "projects." We
are also developing commercial hybrid rocket motors for possible use in small
launch vehicles, targets and sounding rockets and small high performance space
vehicles and subsystems for commercial customers.
14
PAGE
We were incorporated under the laws of the State of Colorado on December 23,
1996 as Pegasus Development Group, Inc. ("PDGI"). SpaceDev, LLC of Colorado was
originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed on August 22, 1997. On October 22, 1997, PDGI issued 8,245,000 of its
$.0001 par value common stock for 100 percent (1,000,000 shares) of SpaceDev's
common stock owned by SpaceDev, LLC. Upon the acquisition of the SpaceDev
stock, SpaceDev was merged into PDGI and, on December 17, 1997, PDGI changed its
name to SPACEDEV, INC. After the merger, SpaceDev, LLC, changed its name to SD
Holdings, LLC on December 17, 1997. We became a publicly traded company in
October 1997 and are trading on the Nasdaq Over-the-Counter Bulletin Board
("OTCBB") under the symbol of "SPDV."
SELECTION OF SIGNIFICANT CONTRACTS
On March 31, 2004, we were awarded a five-year, cost-plus-fixed fee indefinite
delivery/indefinite quantity contract for up to $43,362,271 to conduct a micro
satellite distributed sensing experiment, an option for a laser communications
experiment, and other micro satellite studies and experiments as required in
support of the Advanced Systems Deputate of the Missile Defense Agency. This
effort will be accomplished in a phased approach, with the first task order
awarded on April 1, 2004. The total five-year contract has a ceiling amount of
$43,362,271. The principal place of performance will be Poway, California. We
expect to complete the work under the contract before March 2009. Government
contract funds will not expire at the end of the current government fiscal year.
The micro satellite distributed sensing experiment is intended to design and
build up to six responsive, affordable, high performance micro satellites to
support national missile defense. The milestone-based, multiyear, multiphase
contract has an effective start date of March 1, 2004. Approximately $557,000
of revenue has been generated since the beginning of this contract of which
$62,000 was accrued for work performed in March 2004 but not invoiced until
April 2004 due to the late execution date of the contract. The first phase is
expected to be completed this year and will result in detailed mission and micro
satellite designs. The estimated first phase revenue is $1.1 million. The
overall contract calls for us to analyze, design, develop, fabricate, integrate,
test, operate and support a networked cluster of three formation-flying boost
phase and midcourse tracking micro satellites, with an option to design,
develop, fabricate, integrate, test, operate and support a second cluster of
three formation flying micro satellites to be networked on-orbit with high speed
laser communications technology. The second phase is anticipated to begin on or
before October 1, 2004 and run through 2005.
On October 2, 2003, we were awarded an exclusive, follow-on contract to provide
the hybrid rocket motor systems and components for SpaceShipOne. We provide our
facilities, resources and a team of launch vehicle and hybrid propulsion
engineers and technical personnel in continued support of the SpaceShipOne
program. The contract called for us to use our best efforts to satisfy the
requirements of the SpaceShipOne program, based on our experience with the prior
phases. We are to provide two sets of re-usable flight test hardware, including
a bulkhead, commonly known as the SpaceDev bulkhead, machined in the flight
configuration, a main oxidizer valve of the current design and associated
interfaces and plumbing to the SpaceDev bulkhead, a motor control system,
igniter housings, pressure transducers, and thermocouples as required for input
to the motor control system. In addition, we will produce and assemble test
motors, including but not limited to, all expendable or semi-reusable materials
as defined by our baseline design motor. We are also required to provide
on-site engineering test support and post-test analysis. Provisions are made in
the contract for minimum monthly payments in the event of customer schedule
slippage as well as additional levels of support via engineering change orders,
if required. The total contract value is estimated at $429,000. Approximately
$394,000 of revenue was realized in the six-months ending June 30, 2004, with
approximately $98,000 from engineering change orders and the remaining $296,000
from the contract.
15
PAGE
On July 9, 2003, we were awarded a contract by the Missile Defense Agency
("MDA") to explore the use of micro satellites in national missile defense. It
was a precursor contract to the $43 million contract mentioned above. Our micro
satellites are operated over the Internet and are capable of pointing and
tracking targets in space or on the ground. This study explored fast response
micro satellite launch and commissioning; small, low-power passive sensors;
target acquisition and tracking; formation flying and local area networking
within a cluster of micro satellites; and an extension of our proven use of the
Internet for on-orbit command, control and data handling. The contract was
successfully concluded on February 27, 2004. The total contract value was
$800,000 with approximately $318,000 of revenue realized in the six-month period
ending June 30, 2004. The total value of our micro satellite studies for MDA
was over $1 million in 2003. This contract was considered an investigatory
phase by MDA.
Also, on July 9, 2003, we were awarded a Phase I Small Business Innovation
Research ("SBIR") contract by Air Force Research Lab ("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. The SpaceDev Streaker(TM) SLV concept is based
on a proprietary combination of technologies to increase the performance of
hybrid rocket motor technology. Hybrid rocket motors are a combination of solid
fuel and liquid oxidizer, and can be relatively safe, clean, non-explosive, and
storable, and can be throttled, shut down and restarted. This contract is valued
at approximately $100,000, and is a fixed price, milestone-based agreement,
which should be completed within one year. We believe that this SBIR will move
into Phase II valued at approximately $750,000 of carry-forward work for us,
plus an additional $750,000 of funds provided by Congress based on discussions
with AFRL technical personnel. This money will be used to develop and test fire
our large Common Core Booster for the SpaceDev Streaker(TM) launch vehicle. We
believe that there may be some interest by Congress in providing additional
matching funding to expand and accelerate the scope of the work; however, there
can be no assurance that such work will be awarded to us. Revenues for the
six-month period ending June 30, 2004 were approximately $48,000.
Finally, on July 9, 2003, we were awarded a Phase I contract to develop micro
and nano satellite bus and subsystem designs. This AFRL SBIR contract, valued at
approximately $100,000, will enable us to explore the further miniaturization of
our unique and innovative micro satellite 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. We believe that this SBIR will move
into Phase II valued at approximately $750,000 of carry-forward work for us;
however, there can be no assurance that such work will be awarded to us.
Revenues for the six-month period ending June 30, 2004 were approximately
$32,000.
On December 18, 2003, we were awarded a contract by the Defense Advanced
Research Projects Agency ("DARPA") for the study of Novel Satcom Microsat
Constellation Deployment. The contract is a milestone-based, fixed price
contract with total consideration of approximately $200,000. Revenues for the
six-month period ending June 30, 2004 were approximately $136,000. We expect to
either expand this award or obtain new awards under this program; however, there
can be no assurance as to whether such work will be awarded to us or, if it is,
the amounts or terms of the awards.
16
PAGE
On April 30, 2002, we were awarded Phase I of a contract to develop a
Shuttle-compatible propulsion module for 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 fixed fee contract. In order to complete AFRL
Phase II, we requested and were granted approximately four months of additional
time and approximately $240,000 of additional funding, memorialized by a
contract amendment executed on July 7, 2004. In addition to the Phase I and
Phase II awards, there is an option worth approximately $800,000, which was
initiated on May 3, 2004. The additional funding to complete AFRL Phase II came
in part from the original $1 million option; thereby reducing the option to
approximately $800,000. Revenues for the six-month period ending June 30, 2004
were approximately $663,000 for AFRL Phase II, including the exercised option.
In November 1999, we won a $4.9 million turnkey mission contract by the Space
Sciences Laboratory ("SSL") at 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 and
only successful mission of NASA's low-cost University-Class Explorer ("UNEX")
series to date. 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 after one year.
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 increased the
scope of the contract to the current value of the CHIPSat project of
approximately $7.4 million, thereby increasing the total expected loss to
approximately $514,000. In retrospect, some of the CHIPSat expenses creating the
loss could have been recorded as research and development costs associated with
our ongoing satellite design and development programs. As of December 31, 2003,
the total contract costs were expended, mainly as cost of goods sold. The
original support contract expired on December 31, 2003. CHIPSat is still
operating successfully and providing UCB with new and interesting data. UCB
requested to extend the program and we negotiated a new time and materials
contract in the first quarter of 2004 in the form of a purchase order with UCB
for continuing support of this project. The contract will continue until UCB
decides that no further relevant information is forthcoming or funding is
terminated, at which time the use of the micro satellite will revert to NASA and
then to us. Revenues for the six-month periods ending June 30, 2004 and 2003
were approximately $22,000 and $331,000, respectively.
RESULTS OF OPERATIONS
Please refer to the consolidated financial statements, which are a part of this
report, for further information regarding the results of operations.
17
PAGE
Six-Months Ending June 30, 2004 -vs.- Six-Months Ending June 30, 2003
During the six-months ending June 30, 2004, we had net sales of approximately
$2,215,000 as compared to net sales of approximately $1,287,000 for the same
six-month period in 2003, an increase of over 65%. Sales increased primarily due
to the addition and expansion of government contacts, e.g., AFRL and MDA, which
created new revenue opportunities for us. Revenues in the six-month period
ending June 30, 2004 were comprised of approximately $663,000 from AFRL Phase
II, $557,000 from MDA Phase I, $318,000 from the MDA Phase 0, $394,000 from
SpaceShipOne, $136,000 from our DARPA contract, $80,000 from the two SBIR
contracts listed above and $66,000 from all other programs. During the same
period of 2003, sales were comprised of approximately $397,000 from
SpaceShipOne, $250,000 from the MDA project, $331,000 from the CHIPSat program,
$242,000 from Phase I and Phase II of the AFRL project and approximately $67,000
from all other programs.
For the six-month period ending June 30, 2004, we had costs of sales (direct and
allocated costs associated with individual contracts) of approximately
$1,749,000, or 79.0% of net sales, as compared to approximately $1,039,000, or
80.8% of net sales, during the same period in 2003. The increase in cost of
sales was primarily due to higher revenues since the majority of our current
contracts are cost plus fixed fee contracts. We continue to focus efforts on
developing project management skills and reports to assist in the efficient and
effective management of our projects. The gross margin percentage for the
six-month period ending June 30, 2004 was 21.0% of net sales, an increase of
1.8% of net sales, as compared to 19.2% of net sales for the same six-month
period in 2003.
We experienced a decrease of approximately $555,000 in operating expenses from
approximately $976,000, or 75.8% of net sales, for the six-month period ending
June 30, 2003 to approximately $421,000 or 19.0% of net sales, for the six-month
period ending June 30, 2004. Operating expenses include general and
administrative expenses ("G&A"), marketing and sales expenses and research and
development expenses as well as stock and stock option based compensation
expenses. Fluctuations in operating expenses for 2004 from 2003 are primarily
attributable to the following:
- Marketing and sales expenses increased during the first six-months of
2004 compared to the same period in 2003. The increase in marketing and
sales expense, from approximately $199,000, or 15.5% of net sales, for the
six-month period ending June 30, 2003, to approximately $215,000, or 9.7%
of net sales, during the same period in 2004, are mainly due to personnel
expenses related to our decision to expand the marketing and sales
department.
- Research and development ("R&D") expenses decreased during the first
six-months of 2004 from approximately $252,000 or 19.6% of net sales in
2003 to approximately $35,000 or 1.6% of net sales for the six-month period
ending June 30, 2004, mainly due to our decision to focus our limited
resources on billable projects and develop new technologies under existing
contracts.
- The decrease of approximately $354,000 in G&A expenses from approximately
$525,000 for the six-month period ending June 30, 2003 to approximately
$171,000 for the same six month period in 2004 was primarily due to
software amortization expense of $69,000, which is no longer present in
2004 as well as refinement of our allocation model to appropriately
classify certain expenses as cost of goods sold rather than G&A.
Non-operating expense (income) consists of interest expense, non-cash debt
discount expense and deferred gain on the sale of our building, as well as,
other loan fees and expenses.
18
PAGE
- Interest expense for the six-month period ending June 30, 2004 and 2003
was approximately $39,500, or 1.8% of net sales, and $34,600, or 2.7% of
net sales, respectively. The slight increase was due to accrued interest on
our revolving credit facility. Interest expense is comprised of interest on
our note to our CEO, interest on our revolving credit facility/convertible
debt and interest on our settlement notes/capital leases. For the six-month
period ending June 30, 2004 and 2003, interest expense on our note to our
CEO was approximately $25,900 and $24,000, respectively. For the six-month
period ending June 30, 2004 and 2003, interest expense on our revolving
credit facility/convertible debt was $11,900 and $4,900, respectively. And
interest expense on our settlement notes/capital leases for the six-month
period ending June 30, 2004 and 2003 were approximately $1,800 and $2,700,
respectively.
- We recognized approximately $58,600 and $48,900 of the deferred gain on
the sale of the building during the six-month periods ending June 30, 2004
and 2003, respectively, and we will continue to amortize the remaining
deferred gain of approximately $1,006,600 into non-operating 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 $2,526 at June
30, 2003 of which none remained at December 31, 2003. The reduction of the
income tax payable was due to a change in estimate based on the loss we
experienced during the year.
- During the six-month period ending June 30, 2003, we expensed in
conjunction with our convertible notes, part of the 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 ended June 30, 2003 and paid or
converted in September 2003. There was no debt discount for the first
six-months of 2004.
- - We realized $1,793,000 in loan fees of which approximately $1,178,000
was related to our revolving credit facility and approximately $615,000 was
related to the conversion of notes to common stock below fair market value
for the six-month period ending June 30, 2004. We accrued approximately
$11,900 of interest for the six-month period ending June 30, 2004. We
anticipate additional expenses related to similar note to equity
conversions.
During the six-month period ending June 30, 2004, we incurred a net loss of
approximately $1,729,000, or 78.1% of net sales, compared to a net loss of
approximately $918,000, or 71.3% of net sales, for the same six-month period in
2003. During the six-month period ending June 30, 2004, we incurred an EBITDA
(earnings before interest taxes depreciation and amortization) of approximately
$77,000, or 3.5% of net sales, compared to an EBITDA loss of approximately
<$622,000>, or <48.4> % of net sales, for the six-month period ending June 30,
2003.
The following table reconciles EBITDA to net loss for the six-month period
ending June 30, 2004 and 2003, respectively:
FOR THE SIX-MONTHS ENDING JUNE 30, 2004 June 30, 2003
(UNAUDITED) (Unaudited)
NET LOSS (INCOME). . . . . . . . . . . (1,729,416) (917,840)
-------------------------------------- -------------- --------------
Interest Expense . . . . . . . . . . . 39,524 34,628
Non-Cash Interest exp. (Debt Discount) - 200,908
Gain on Building Sale. . . . . . . . . (58,636) (48,863)
Loan Fee - Equity Conversion. . . . . 1,793,313 0
Provision for income taxes . . . . . . - 2,526
Depreciation and Amortization. . . . . 32,487 106,201
-------------------------------------- -------------- --------------
EBITDA . . . . . . . . . . . . . . . . 77,272 (622,440)
-------------------------------------- -------------- --------------
-------------------------------------- -------------- --------------
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EBITDA should not be considered as an alternative to net income or loss (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations). We believe that
EBITDA provides an important additional perspective on our operating results,
our ability to service our long-term obligations, our ability to fund continuing
growth, and our ability to continue as a going concern.
Three-Months Ending June 30, 2004 -vs.- Three-Months Ending June 30, 2003
We recorded our sixth consecutive quarter of revenue growth. During the
three-month period ending June 30, 2004, we had net sales of approximately
$1,201,000 as compared to net sales of approximately $754,000 for the same
three-month period in 2003, an increase of over 59.3%. Sales increased primarily
due to the addition and expansion of our contracts such as AFRL and MDA, which
created new revenue opportunities for us. Revenues in the three-month period
ending June 30, 2004 were comprised of approximately $557,000 from MDA Phase I,
$250,000 from AFRL Phase II, $288,000 from SpaceShipOne, $45,000 from our DARPA
contract, $36,000 from the two SBIR contracts listed above and $25,000 from all
other programs. During the same period of 2003, sales were comprised of
approximately $160,000 from SpaceShipOne, $92,000 from the MDA project, $265,000
from the CHIPSat program, $222,000 from Phase I and Phase II of the AFRL project
and approximately $15,000 from all other programs.
For the three-month period ending June 30, 2004, we had costs of sales (direct
and allocated costs associated with individual contracts) of approximately
$942,000 or 78.5% of net sales, as compared to approximately $578,000 or 76.6%
of net sales, during the same period in 2003. The increase in cost of sales was
primarily due to higher revenues since the majority of our current contracts are
cost plus fixed fee contracts. We continue to focus efforts on developing
project management skills and reports to assist in the efficient and effective
management of our projects. The gross margin percentage for the three-month
period ending June 30, 2004 was 21.5% of net sales, a decrease of 1.9% of net
sales, as compared to 23.4% of net sales for the same three-month period in
2003.
We recorded our second consecutive quarter of profit from operation. We
experienced a decrease of approximately $315,000 in operating expenses from
approximately $541,000, or 71.8% of net sales, for the three-month period ending
June 30, 2003 to approximately $226,000, or 18.8% of net sales, for the
three-month period ending June 30, 2004. Operating expenses include general and
administrative expenses ("G&A"), marketing and sales expenses and research and
development expenses as well as stock and stock option based compensation
expenses. Fluctuations in operating expenses for 2004 from 2003 are primarily
attributable to the following:
- Marketing and sales expenses decreased during the three-month period
ending June 30, 2004 compared to the same period in 2003. The decrease in
marketing and sales expense, from approximately $134,000, or 17.8% of net
sales, for the three-months ending June 30, 2003, to approximately
$116,000, or 9.7% of net sales, during the same period in 2004, was mainly
due to the departure of our Vice President of Engineering in March 2004 and
our decision to have our Vice President of New Business Development expand
his duties to include engineering; thereby allocating some of his expenses
out of marketing and sales and into cost of sales.
- Research and development ("R&D") expenses decreased during the
three-month period ending June 30, 2004 from approximately $252,000, or
33.4% of net sales in 2003, to $19,500, or 1.6% of net sales for the
three-month period ending June 30, 2004, mainly due to our decision to
focus our limited resources on billable projects and develop new
technologies under existing contracts.
- The decrease of approximately $65,000 in G&A expenses from approximately
$155,000 for the three-month period ending June 30, 2003 to approximately
$90,000 for the same three-month period in 2004 was primarily due to a
refinement of our allocation model to appropriately classify certain
expenses as cost of goods sold rather than G&A.
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Non-operating expense (income) consists of interest expense, non-cash debt
discount expense and deferred gain on the sale of our building, as well as,
other loan fees and expenses.
- Interest expense for the three-month periods ending June 30, 2004 and
2003 was approximately $19,700, or 1.6% of net sales, and $14,000, or 1.9%
of net sales, respectively. The slight increase was due to accrued interest
on our revolving credit facility. Interest expense is comprised of interest
on our note to our CEO, interest on our revolving credit
facility/convertible debt and interest on our settlement notes/capital
leases. For the three-month period ending June 30, 2004 and 2003, interest
expense on our note to our CEO was approximately $11,300 and $9,300,
respectively. For the three-month period ending June 30, 2004 and 2003,
interest expense on our revolving credit facility/convertible debt was
$7,800 and $2,500, respectively. And interest expense on our settlement
notes/capital leases for the three-month periods ending June 30, 2004 and
2003 were approximately $600 and $2,200 respectively.
- We recognized approximately $29,300 and $29,300 of the deferred gain on
the sale of the building during the six-months ending June 30, 2004 and
2003, respectively, and we will continue to amortize the remaining deferred
gain of approximately $1,006,600 into non-operating income over the
remainder of the lease. In relation to the gain we received on the
building, we also credited our accrued income tax payable expense by
($37,474) during the three-month period ending June 30, 2003, of which none
remained at December 31, 2003. The reduction of the income tax payable was
due to a change in estimate based on the loss we experienced during the
year.
- During the three-month period ending June 30, 2003, we expensed in
conjunction with our convertible notes, part of the existing convertible
debt discount related to warrants that accompanied the convertible debt
issue in 2002 of approximately $475,000, of which approximately $100,400
was expensed during the three-month period ending June 30, 2003 and paid or
converted in September 2003. There was no debt discount for the same period
of 2004.
- We realized $1,329,000 in loan fees of which $714,000 was related to our
revolving credit facility and approximately $ 615,000 was related to the
conversion of notes to common stock below fair market value for the
three-month period ending June 30, 2004. We anticipate additional expenses
related to similar note to equity conversions.
During the three-month period ending June 30, 2004, we incurred a net loss of
approximately $1,287,000 or 107.2% of net sales, compared to a net loss of
approximately $413,000, or 54.7% of net sales, for the same three-month period
in 2003. During the three-month period ending June 30, 2004, we incurred an
EBITDA (earnings before interest taxes depreciation and amortization) of
approximately $49,000, or 4.1% of net sales, compared to an EBITDA loss of
approximately <$316,000>, or <42.0> % of net sales, for the three-months ending
June 30, 2003.
The following table reconciles EBITDA to net loss for the three-months ending
June 30, 2004 and 2003, respectively:
FOR THE THREE-MONTHS ENDING JUNE 30, 2004 June 30, 2003
(UNAUDITED) (Unaudited)
NET LOSS (INCOME). . . . . . . . . . . (1,286,866) (412,752)
-------------------------------------- -------------- --------------
Interest Expense . . . . . . . . . . . 19,736 14,179
Non-Cash Interest exp. (Debt Discount) - 100,453
Gain on Building Sale. . . . . . . . . (29,318) (29,318)
Loan Fee - Equity Conversion. . . . . 1,329,313 0
Provision for income taxes . . . . . . - (37,474)
Depreciation and Amortization. . . . . 16,533 48,505
-------------------------------------- -------------- --------------
EBITDA . . . . . . . . . . . . . . . . 49,398 (316,407)
-------------------------------------- -------------- --------------
21
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EBITDA should not be considered as an alternative to net income or loss (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations). We believe that
EBITDA provides an important additional perspective on our operating results,
our ability to service our long-term obligations, our ability to fund continuing
growth, and our ability to continue as a going concern.
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION FOR SIX-MONTHS ENDING JUNE 30, 2004 -VS.- SIX-MONTHS ENDING JUNE
30, 2003
Net cash increased during the six-months ending June 30, 2004 by approximately
$634,500 to $1,226,500, compared to an increase of approximately $53,000 to
$80,700 for the same six-month period in 2003. Net cash used in operating
activities totaled approximately $237,000 for the six-months ending June 30,
2004, a decrease of approximately $582,000 as compared to approximately $819,000
used in operating activities during the same six-month period in 2003, mainly
due to the decrease in operating expenses for the first six-months of 2004
compared to the same period in 2003.
Net cash used in investing activities totaled approximately $80,000 for the
six-months ending June 30, 2004, compared to $3,147,000 provided by investing
activities during the same six-month period in 2003. The decrease in cash
provided by investing activities is attributable to the sale of the building on
January 31, 2003 and no comparable transaction in 2004. During the first
six-month period in 2004, we invested approximately $80,000 in specialized
software and certain upgrades to computer hardware for our engineering team.
Net cash provided by financing activities totaled approximately $951,000 for the
six-month period ending June 30, 2004, which is an increase of approximately
$3,226,000 from the approximately $2,275,000 used in financing activities during
the same period in 2003. This is primarily attributable to the repayment of
notes payable associated with the building sale in 2003, payments on related
party notes in 2004, conversions under our revolving credit facility in 2004, as
well as an increase in issuance of common stock from the exercise of stock
options and warrants.
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PAGE
At June 30, 2004, our cash was approximately $1,227,000, as compared to
approximately $81,000 at June 30, 2003, an increase of approximately $1,146,000,
mainly due to conversions under our revolving credit facility and the exercise
of stock options and warrants.
As of June 30, 2004, our backlog of funded and non-funded business was
approximately $44 million due to the follow-on, five-year contract from MDA for
up to $43,362,271. We expect approximately $2 million in revenue from the MDA
program in 2004. Although the MDA contract was awarded to us and the first task
order was issued to us on April 1, 2004, there can be no assurance that the
contract will be continued through all phases, and if continued, that it will
generate the amounts anticipated. Backlog as of June 30, 2003 was $3.2 million.
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 $2,808,000 and $2,190,000 as of June 30,
2004 and December 31, 2003, respectively, consisted primarily of the income tax
benefits from net operating loss and capital loss carryforwards, amortization of
goodwill and research and development credits. 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 increase
approximately $665,000 in 2004 from $2,190,000 at December 31, 2003 to
$2,855,000 at June 30, 2004.
At June 30, 2004, we had federal and state tax net operating loss and capital
loss carryforwards of approximately $5,973,000 and $3,651,000, respectively.
The federal and state tax loss carryforwards will expire in 2023 and 2013,
respectively, unless previously utilized. The State of California has suspended
the utilization of net operating loss for 2002, 2003 and 2004.
CRITICAL ACCOUNTING STANDARDS
Our revenues transitioned in 2003 and early 2004 from being based primarily on
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 primarily cost-plus fixed fee
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. 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 Financial Accounting Standards Board (FASB) issued SFAS No.
123, "Accounting for Stock-Based Compensation." We 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 in SFAS No. 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.
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PAGE
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation,
was published by Financial Accounting Standards Board on December 31, 2002. The
effective date of FASB No. 148 is December 15, 2002. SFAS No. 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 SFAS No. 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.
SFAS No. 148 also provides some flexibility for the transition, if a company
chooses the fair-value cost recognition of employee stock options.
CASH POSITION AND REMOVAL OF GOING CONCERN
As of June 30, 2004, we believe that the opinion our auditors expressed in their
formal auditors' opinion dated February 11, 2004 (except for Note 11 as to which
the date is April 5, 2004) is still accurate. PKF stated, that in their opinion,
based on their audit, our consolidated financial statements referred to herein
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiary as of December 31, 2003, and our consolidated
results of operations and cash flows for the year then ended are in conformity
with accounting principles generally accepted in the United States of America.
Our ability to continue as a going concern depends upon our ability to
ultimately implement our plan, which includes (but is not limited to) generation
of substantial new revenue from MDA, by successfully performing under the newly
awarded contract and continuing to attract and successfully complete other
government and commercial contracts, development of a project management
expertise to profitably execute on new business contracts and reduction of the
working capital deficit by raising additional capital. We are working with
Laurus, our revolving credit facility provider, and investigating the
possibility of raising additional capital to further support operations as new
contracts and business opportunities materialize. The prospective funding, as
well as new business opportunities, can come from a variety of sources,
including public or private equity markets, state and federal grants and
government and commercial customer program funding. However, there can be no
assurance that we will be able to obtain such funding or contracts as needed or,
if such funding or contracts are available, that we can obtain them on terms
favorable to us. 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 and industry 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 leaseback. The selling price of the
facility was $3.2 million. The total debt repayment from the transaction was
approximately $2.4 million. The net proceeds to us for working capital purposes
was approximately $636,000.
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
entitled the holder to convert the principal and unpaid accrued interest into
our common stock when the note matured. The original maturity on the notes was
six (6) months from issue date; however, on March 19, 2003, the maturity date
was extended to twelve (12) months from issue date. The convertible debentures
were exercisable into common shares at a conversion price that equals the 20-day
average asking price less 10%, which was established when the debentures were
issued, or the initial conversion price. Concurrent with the issuance of the
convertible debentures, we issued warrants to purchase up to 1,229,705 shares of
our common stock to the subscribers. These warrants are exercisable for three
(3) years from the date of issuance at the initial exercise price, or the
initial conversion price on the debentures. On September 5, 2003, we repaid
one-half of the convertible notes, with the condition that the note holders
would convert the other half. Also, as a condition of the partial repayment,
the note holders were required to relinquish one-half of the 1,229,705 warrants
previously issued. As additional consideration for the transaction, the note
holders were offered 5% interest on their notes, rather than the stated 2.03%.
All the note holders accepted the offer and the convertible notes were retired
in 2003.
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PAGE
During the six-month period ending June 30, 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 ("PPO")
made under Section 4(2) of the Securities Act of 1933, and Rule 506, to
accredited investors only. We subsequently closed the PPO.
We have sustained ourselves over the last few years with a mixture of government
and commercial contracts and capital raised in the private market. In
particular, we anticipated and received an award for AFRL Phase II on March 28,
2003 and MDA on March 31, 2004. The AFRL and MDA contracts are cost-plus
contracts, which have required us to incur certain costs in advance of regular
contract reimbursements from our customers. Although we have needed a certain
amount of cash to fund advance payments on the contracts, we have been entitled,
as a small business concern, to recover our costs on a weekly basis and we
established the Laurus Master Fund revolving credit facility at the end of the
second quarter of 2003, in part, to support our advance payment needs.
On March 31, 2004, we negotiated an amendment to our Secured Convertible Note
dated June 3, 2003 with the Laurus Master Fund to add a fixed conversion price
at $0.85 per share for the next $500,000 converted under the revolving credit
facility, after the initial $1 million conversion. In exchange for the
amendment, Laurus granted us a six-month waiver to utilize the full revolving
credit facility in advance of eligible accounts. At June 30, 2004, Laurus had
converted 1,403,182 shares under the revolving credit facility, which
represented approximately $772,000 of debt converted to equity.
We recorded our third consecutive quarter of positive cash flow. We realized a
small positive cash flow from operations during the fourth quarter of 2003 and
the first and second quarters of 2004. Our improving EBITDA is an indicator of
our financial performance. We expect to continue realizing positive cash flow
as well as net losses in 2004. The continued net losses are primarily due to
non-cash interest expense and other fees related to our revolving credit
facility and debt related warrant conversion. While EBITDA should not be
considered as an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of liquidity or
ability to service debt obligations, we believe that by using EBITDA as a
measure of performance, we can illustrate the improving results of our core
business, despite the net losses derived from financing activities. Our EBITDA
was approximately $77,000 for the six-month period ending June 30, 2004,
compared to a negative EBITDA of $622,000 for the same period in 2003, an
improvement of approximately $699,000.
We recorded our second consecutive quarter of profit from operation, which is a
significant indicator of our improving financial performance. Operating results
are an important measure of the performance of our core business. We recorded a
profit from operations of approximately $12,000 in the first quarter of 2004,
compared to a loss from operations of $364,000 in the first quarter of 2003. We
recorded a profit from operations of approximately $33,000 in the second quarter
of 2004, compared to a loss from operations of $365,000 in the second quarter of
2003. Profits or losses from operations are derived from all expenses excluding
interest, taxes, non-cash expenses related to our revolving credit facility and
other non-cash financing activities.
We expect to continue showing a positive trend in cash flow and operating
profits in 2004. We anticipate that with the projected increase in revenue and
backorders from near term contracts, combined with our fiscally responsible
budget and project controls and borrowings under our revolving credit facility,
that net positive cash flow from operations will be sufficient to fund both
operations and capital expenditures in 2004. There is no assurance, however,
that we will achieve or sustain any positive cash flow or profitability now or
thereafter.
RECENT ACCOUNTING PRONOUNCEMENTS
There were no recent Accounting Pronouncements that affect the Company during
the second quarter of 2004. For past pronouncements please refer the company's
10-KSB filed on April 6, 2004.
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FORWARD-LOOKING STATEMENTS AND RISK ANALYSIS
During the first six-months of 2004, we submitted two bids for government
programs, continued our work with the US Congress to identify directed funding
for our programs and are actively working to win several significant commercial
programs. We believe that we will win some of these programs, which would
enable us to continue to grow and broaden our business base, although there can
be no assurance that these contracts will be awarded to us.
To date, we have maintained a mix of government and commercial business. In
2003, we had about 82% government or government-related work. In 2002, we had
about 64% government and government-related work. In 2004, we expect the ratio
to be about 90% 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 70% for the next several years as we increase
our government and commercial marketing efforts for both of our product lines.
Currently, we are focusing on the domestic U.S. government market, which we
believe is only about one-half of the global government market for our
technology, products and services. Although we are interested in exploring
international revenue and contract opportunities, we are restricted by export
control regulations, e.g., International Traffic in Arms Regulations ("ITAR"),
which may limit our ability to develop market opportunities outside the United
States and we have chosen to focus our effort on the United States marketplace
for the near term.
While we do not expect a reduction of government sales, a majority of our
government work is contract related and could be affected by political and
budget changes. We are beginning to develop commercial products with the
long-term idea and vision of becoming a product-oriented company; however, in
the short-term, a majority of our revenue is expected to come from government
cost plus fixed fee and firm fixed price contracts. Our definition of
short-term is the next three to five years and long-term is five to ten years
and beyond. We anticipate winning contracts in both the government and
commercial market segments, although there can be no assurance that the
contracts will be awarded to us. If they are not awarded to us, based on
current trends and proposals, we believe that we can offset fluctuations in one
market segment with contracts from the other; however, our inability to win
business in both markets would have a negative effect on our business operations
and financial condition.
We believe that we will experience an accelerated growth in sales over the next
few years. At this time, over 90% of the forecasted sales for 2004 are under
contract or near contract award. There is no guarantee and there can be no
assurance that we will win enough new business to achieve our targeted growth
projection or to maintain our positive cash flow position. Additionally, there
is no guarantee that awarded contracts will not be altered or terminated prior
to us recognizing our projected revenue from them. Many contracts have "exit
ramps," i.e., provides the customer the right to terminate the contract for any
of a variety of reasons, including but not limited to non-performance by us. We
do not believe that any of our contracts will be terminated early; however,
there can be no assurance that they will not be terminated early in the future.
Finally, we do not believe that significant capital expenditures will be
required to achieve this increase in sales; however, additional capital will be
required to support and sustain our growth.
During the six-month period ending June 30, 2004, we raised approximately
$1,751,000 through a combination of conversions on our revolving credit facility
(approximately $772,000), exercises of warrants previously issued (approximately
$276,000), from participants in our employee stock purchase plan (approximately
$6,000) and from exercises of employee stock options, mainly from Mr. Lloyd, our
former Chief Financial Officer (approximately $697,000). During the year ended
December 31, 2003, we raised approximately $654,000 through a combination of
private sales of our stock (approximately $426,000) and conversions on our
revolving credit facility (approximately $228,000). During the year ended
December 31, 2002, we raised approximately $475,000 from our convertible debt
offering, of which $237,500 plus interest was repaid in 2003. To execute our
strategy of growing our Company with small, capable, low-cost micro and nano
satellites, hybrid propulsion products and new commercial revenue sources, we
require additional funding and/or the win of both significant government and
commercial programs. We believe investor or customer funding of $5 to $15
million may be required, which could come from a combination of private and/or
public equity placements or government and commercial customers.
26
PAGE
The amount of capital we need to raise is dependent upon many factors, e.g., the
need for additional capital will be greater if (i) we do not enter into
agreements with our customers on the terms we anticipate; (ii) our net operating
deficit increases because we incur significant unanticipated expenses; or (iii)
we incur additional costs from modifying our micro satellite products or our
hybrid-related propulsion 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. If additional capital is not raised, it could have a
significant negative effect on our business operations and financial condition.
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 we will be maintain operating profitability and positive cash flow,
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 us when
such funds are needed or may be on terms which are significantly adverse to our
current shareholders, which could have a material adverse effect on us.
Our business partially depends on activities regulated by various agencies and
departments of the U.S. government and other companies and agencies that rely on
the federal government. Recently, in response to terrorists' activities and
threats aimed at the United States, transportation, mail, financial, and other
services have been slowed or stopped altogether. Further delays or stoppages in
transportation, mail, financial, or other services could have a material adverse
effect on our business, results of operations, and financial condition.
Furthermore, 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. The U.S. economy in general is being adversely
affected by the terrorist activities and potential activities, and any 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 us to offer solutions to the government that may address some of the
problems that the country faces at this time.
27
PAGE
ITEM 3. 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
intend to review our controls and procedure regularly with our management and
Board of Directors.
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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.
See "Results of Operations." In June 2003, we ceased efforts to recover the
awarded fees, as it was determined that the cost to pursue collection exceeded
the likelihood of collection.
ITEM 2. CHANGES IN SECURITIES
On April 1, 2004, we issued 250,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $137,500 reduction in our revolving credit facility.
As part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on August 6, 2003.
On April 20, 2004, we issued 300,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $165,000 reduction in our revolving credit facility.
As part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on August 6, 2003.
Pursuant to our independent director compensation plan, adopted January 16, 2000
and modified March 25, 2004, we granted options to purchase 5,000 shares each to
Curt Dean Blake, Wesley T. Huntress and Scott McClendon for their attendance and
participation at the Audit Committee Meeting held on May 4, 2004. These options
were issued with an exercise price of $1.20 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 three-year anniversary date of the date of grant.
Pursuant to our independent director compensation plan, adopted January 16, 2000
and modified March 25, 2004, we granted options to purchase 6,000 shares each to
Curt Dean Blake, Howell M. Estes, III, Wesley T. Huntress, Scott McClendon and
Robert Walker for their attendance and participation at the Board of Directors
meeting held on May 6, 2004. These options were issued with an exercise price
of $1.18 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 three-year
anniversary date of the date of grant.
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On May 17, 2004, we issued 353,182 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $194,250 reduction in our revolving credit facility.
As part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on August 6, 2003.
On July 12, 2004, we issued 41,876 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $35,595 reduction in our revolving credit facility.
As part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on July 1, 2004.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On January 21, 2000, we entered into an "at-will" employment agreement with Mr.
Jeffrey Janicik which outlined both salary compensation and benefits. Mr.
Janicik was originally hired as manager of our micro satellite project for
NASA's University Explorer Program in conjunction with the University of
California at Berkeley and later served as our director of satellite systems and
director of engineering. Mr. Janicik tendered his resignation to the Company on
June 18, 2004. Mr. Janicik has agreed to provide transitional support as an
independent consultant until at least October 1, 2004, the details of which are
outlined in a Separation Agreement and General Release dated June 18, 2004. In
exchange for his transitional support and a general release of claims, the
Company agreed to an extension of certain exercise rights on his vested options
of 77,494 shares until the earlier of (i) eighteen (18) months from his
resignation as a consultant to the Company, or (ii) the original expiration date
of the options, subject to certain conditions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Separation Agreement and General Release, by and between SpaceDev
and Jeffrey Janicik dated June 18, 2004 10.1
Modification to Small Shuttle Compatible Propulsion Module
contract with AFRL dated July 7, 2004 10.2
Lunar Enterprises of California contract with SpaceDev
dated July 20, 2004 10.3
Certificate of James W. Benson Pursuant to Section 1350
of Chapter 63 of Title 18 U.S. Code 31.1
Certificate of Richard B. Slansky Pursuant to Section 1350
of Chapter 63 of Title 18 U.S. Code 31.2
(b) Reports on Form 8-K
None.
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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 9, 2004 /s/ James W. Benson
---------------- --------------------
James W. Benson
Chief Executive Officer
Dated: August 9, 2004 /s/ Richard B. Slansky
---------------- ----------------------
Richard B. Slansky
Chief Financial Officer
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