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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q**

 

**(Mark One)**

 

**x****  QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For thequarterly period ended December 31, 2008**

** **

**OR**

 

**o****  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934.**

** **

**For the transition period from             to**

** **

**Commission File Number: 0-27206**

** **

**SPACEHAB, Incorporated**

(Exact name of registrantas specified in this charter)

 

| **Washington**                                                   | ** ** | **91-1273737**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**907Gemini Street**

**Houston,Texas 77058-2762**

(Address of principalexecutive offices and zip code)

 

**(713)558-5000**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 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 suchreports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes  x No  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the ExchangeAct.

 

| Large accelerated filer  o                                             |   | Accelerated filer o         |
|------------------------------------------------------------------------|--------|-----------------------------|
|                                                                   |   |                        |
| Non-accelerated filer o  (Do not check if a smaller reporting company) |   | Smaller reporting company x |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act.)

 

Yes  o No  x

 

As of February 10, 2009 there were 16,392,718shares of the registrant’s common stock outstanding.

 

 

** **

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**December 31,2008 QUARTERLY REPORT ON FORM 10-Q**

** **

**TABLE OFCONTENTS**

** **
| ** **        | ** **                                                                                  | **Page**   |
|-------------------|---------------------------------------------------------------------------------------------|------------|
| ** **        | ** **                                                                                  | ** ** |
| DEFINITIONS       | 1                                                                                           |
|              |                                                                                        |
| **PART I:**  | **FINANCIAL INFORMATION**                                                                   | **2**      |
| ** **        | ** **                                                                                  |       |
| ITEM 1.           | UNAUDITED  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                      | 2          |
|              |                                                                                        |       |
| ITEM 2.           | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 16         |
|              |                                                                                        |       |
| ITEM 3.           | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 23         |
|              |                                                                                        |       |
| ITEM 4.           | CONTROLS AND  PROCEDURES                                                                    | 23         |
|              |                                                                                        |       |
| **PART II:** | **  OTHER  INFORMATION**                                                          | **24**     |
| ** **        | ** **                                                                                  |       |
| ITEM  1.          | LEGAL  PROCEEDINGS                                                                          | 24         |
|              |                                                                                        |       |
| ITEM  1A.         |   RISK  FACTORS                                                                   | 24         |
|              |                                                                                        |       |
| ITEM 2.           | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                | 24         |
|              |                                                                                        |       |
| ITEM 3.           | DEFAULTS UPON  SENIOR SECURITIES                                                            | 24         |
|              |                                                                                        |       |
| ITEM 4.           | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                        | 24         |
|              |                                                                                        |       |
| ITEM  6.          | EXHIBITS                                                                                    | 24         |

 

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** **

**DEFINITIONS**

** **

As used in this Form 10-Q, the abbreviations andacronyms contained herein have the meanings set forth below. Additionally, theterms “SPACEHAB”, “the Company”, “we”, “us” and “our” refer to SPACEHAB,Incorporated and its subsidiaries, unless the context clearly indicatesotherwise.

 
| 1994 Plan       | 1994 Stock Incentive Plan                     |
|-----------------|-----------------------------------------------|
| 2008 Plan       | 2008 Stock Incentive Plan                     |
| Astrium         | Astrium GmbH                                  |
| Astrotech       | Astrotech Space Operations                    |
| CMC             | Cargo Mission Contract                        |
| Common stock    | SPACEHAB common stock                         |
| EPS             | Earnings Per Share                            |
| ICC             | Integrated Cargo Carrier                      |
| ISS             | International Space Station                   |
| Lockheed Martin | Lockheed Martin Corporation                   |
| NASA            | National Aeronautics and Space Administration |
| PI&C        | Program Integration and Control               |
| SEC             | Securities and Exchange Commission            |
| SFAS            | Statement of Financial Accounting Standards   |
| SFS             | SPACEHAB Flight Services                      |
| SOTS            | SPACEHAB Orbital Transportation Services      |
| VCC             | Vertical Cargo Carrier                        |

 

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** **

**PART I:  FINANCIAL INFORMATION**

** **

**ITEM 1.  UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

** **

**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Balance Sheets**

(In thousands, except share data)

 
| ** **                                                                                                           | ** ** | **December 31** | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                                                                                           | ** ** | **2008**             | ** ** | **2008**          | ** ** |
| **Assets**                                                                                                           | ** ** | ** **           | ** ** | ** **        | ** ** |
| Current assets                                                                                                       |       |                 |       |              |       |
| Cash and cash equivalents                                                                                            |       | $                    | 214        |              | $          | 2,640 |   |
| Accounts receivable, net                                                                                             |       | 4,842                |       | 3,872             |       |
| Inventory                                                                                                            |       | 466                  |       | 482               |       |
| Short term note receivable, net                                                                                      |       | 175                  |       | 175               |       |
| Prepaid expenses and other current assets                                                                            |       | 476                  |       | 464               |       |
| Total current assets                                                                                                 |       | 6,173                |       | 7,633             |       |
| Property and equipment                                                                                               |       |                 |       |              |       |
| Flight assets                                                                                                        |       | 49,210               |       | 49,210            |       |
| Capital improvements in progress                                                                                     |       | 263                  |       | 76                |       |
| Payload processing facilities                                                                                        |       | 42,600               |       | 42,600            |       |
| Furniture, fixtures, equipment and leasehold improvements                                                            |       | 18,440               |       | 18,244            |       |
|                                                                                                                 |       | 110,513              |       | 110,130           |       |
| Less accumulated depreciation and amortization                                                                       |       | (70,213              | )          | (69,131           | )          |
| Property and equipment, net                                                                                          |       | 40,300               |       | 40,999            |       |
| Restricted cash                                                                                                      |       | 7,079                |       | 8,386             |       |
| Deferred financing costs, net                                                                                        |       | 114                  |       | 264               |       |
| Long term note receivable, net                                                                                       |       | 705                  |       | 717               |       |
| Other assets, net                                                                                                    |       | 205                  |       | 212               |       |
| Total assets                                                                                                         |       | $                    | 54,576     |              | $          | 58,211 |   |
| **Liabilities and Stockholders’ Equity**                                                                        |       |                 |       |              |       |
| Current liabilities                                                                                                  |       |                 |       |              |       |
| Term note payable - current                                                                                          |       | $                    | 267        |              | $          | 267 |   |
| Accounts payable                                                                                                     |       | 1,960                |       | 1,845             |       |
| Accounts payable- Astrium                                                                                            |       | 297                  |       | 754               |       |
| Income tax payable                                                                                                   |       | 463                  |       | 463               |       |
| Accrued interest                                                                                                     |       | 83                   |       | 83                |       |
| Accrued expenses                                                                                                     |       | 687                  |       | 2,124             |       |
| Deferred gains on sale of buildings, current portion                                                                 |       | 86                   |       | 86                |       |
| Deferred revenue, current portion                                                                                    |       | 2,626                |       | 1,007             |       |
| Total current liabilities                                                                                            |       | 6,469                |       | 6,629             |       |
| Accrued contract costs and other                                                                                     |       | 57                   |       | 40                |       |
| Advances on construction contract                                                                                    |       | 3,989                |       | 4,863             |       |
| Deferred gains on sale of buildings, non-current                                                                     |       | 86                   |       | 129               |       |
| Deferred revenue, non-current                                                                                        |       | 1,162                |       | 1,227             |       |
| Term note payable - non current (net of discount)                                                                    |       | 3,433                |       | 3,526             |       |
| Senior convertible subordinated notes payable — 5.5%                                                            |       | 5,111                |       | 6,861             |       |
| Total liabilities                                                                                                    |       | 20,307               |       | 23,275            |       |
| Commitments and contingencies                                                                                        |       |                 |       |              |       |
| Stockholders’ equity                                                                                            |       |                 |       |              |       |
| Common stock, no par value, 75,000,000 shares authorized 16,392,718 and  14,942,718 shares outstanding, respectively |       | 183,306              |       | 183,306           |       |
| Treasury stock, 11,660 shares at cost                                                                                |       | (117                 | )          | (117              | )          |
| Additional paid-in capital                                                                                           |       | 1,523                |       | 691               |       |
| Accumulated deficit                                                                                                  |       | (150,443             | )          | (148,944          | )          |
| Total stockholders’ equity                                                                                      |       | 34,269               |       | 34,936            |       |
| Total liabilities and stockholders’ equity                                                                      |       | $                    | 54,576     |              | $          | 58,211 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

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**SPACEHAB, INCORPORATED AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Statements of Operations**

(In thousands,except share data)

 
| ** **                                                            | ** ** | **Three Months  Ended December 31,** | ** ** | **Six Months  Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue                                                               |       | $                                                   | 3,786      |                                              | $          | 4,310 |   | $ | 9,760 |   | $ | 12,906 |   |
| Costs of revenue                                                      |       | 3,250                                               |       | 4,455                                             |       | 6,768 |   | 10,892 |   |
| Gross profit                                                          |       | 536                                                 |       | (145                                              | )          | 2,992 |   | 2,014 |   |
| Operating  expenses:                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Selling, general  and administrative                                  |       | 2,150                                               |       | 2,199                                             |       | 3,849 |   | 4,013 |   |
| Research and  development                                             |       | 510                                                 |       | 444                                               |       | 1,083 |   | 762 |   |
| Total operating  expenses                                             |       | 2,660                                               |       | 2,643                                             |       | 4,932 |   | 4,775 |   |
| Loss from  operations                                                 |       | (2,124                                              | )          | (2,788                                            | )          | (1,940 | ) | (2,761 | ) |
| Interest expense                                                      |       | (187                                                | )          | (46                                               | )          | (410 | ) | (1,113 | ) |
| Debt conversion  expense                                              |       | —                                              |       | (30,191                                           | )          | — |   | (30,191 | ) |
| Gain on notes  repurchased                                            |       | 665                                                 |       | —                                            |       | 665 |   | — |   |
| Interest and  other income, net                                       |       | 92                                                  |       | 182                                               |       | 186 |   | 366 |   |
| Loss before  income taxes                                             |       | (1,554                                              | )          | (32,843                                           | )          | (1,499 | ) | (33,699 | ) |
| Income tax  (expense) benefit                                         |       | —                                              |       | —                                            |       | — |   | — |   |
| Net loss                                                              |       | $                                                   | (1,554     | )                                                 | $          | (32,843 | ) | $ | (1,499 | ) | $ | (33,699 | ) |
| Loss per share:                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Deemed dividend  related to induced conversion of preferred shares    |       | $                                                   | —     |                                              | $          | (3,344 | ) | $ | — |   | $ | (3,344 | ) |
| Net loss  applicable to common shares                                 |       | $                                                   | (1,554     | )                                                 | $          | (36,187 | ) | $ | (1,499 | ) | $ | (37,043 | ) |
| Loss per common  share:                                               |       |                                                |       |                                              |       |   |   |   |   |
| Loss per share —  basic and diluted                              |       | $                                                   | (0.09      | )                                                 | $          | (4.36 | ) | $ | (0.09 | ) | $ | (7.72 | ) |
| Shares used in  computing net loss per share — basic and diluted |       | 16,392,718                                          |       | 8,293,710                                         |       | 16,250,871 |   | 4,798,215 |   |

 

Seeaccompanying notes to unaudited condensed consolidated financial statements.

 

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**SPACEHAB, INCORPORATED AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Statements of Cash Flows**

**(In thousands)**

 
| ** **                                                                                                  | ** ** | **Six Months Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities**                                                                   |       |                                              |       |   |   |
| Net loss                                                                                                    |       | $                                                 | (1,499     | ) | $ | (33,699 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                |       |                                              |       |   |   |
| Non-cash debt  conversion expense                                                                           |       | —                                            |       | 30,191 |   |
| Gain on note  repurchase                                                                                    |       | (665                                              | )          | — |   |
| Stock-based  compensation                                                                                   |       | 180                                               |       | 145 |   |
| Depreciation and  amortization                                                                              |       | 1,129                                             |       | 1,561 |   |
| Amortization of  deferred financing cost                                                                    |       | 111                                               |       | 171 |   |
| Recognition of  deferred gain                                                                               |       | (43                                               | )          | (111 | ) |
| Inventory write  down                                                                                       |       | 6                                                 |       | — |   |
| Loss on asset  sales                                                                                        |       | (11                                               | )          | — |   |
| Changes in  assets and liabilities:                                                                         |       |                                              |       |   |   |
| Decrease  (increase) in restricted cash                                                                     |       | 1,307                                             |       | (3,907 | ) |
| (Increase)  decrease in accounts receivable                                                                 |       | (958                                              | )          | 3,377 |   |
| Decrease  (increase) in prepaid expenses and other current assets                                           |       | 67                                                |       | (523 | ) |
| Decrease in  inventory                                                                                      |       | 10                                                |       | — |   |
| Decrease in  other assets                                                                                   |       | 3                                                 |       | 343 |   |
| Increase  (decrease) in deferred revenue                                                                    |       | 1,554                                             |       | (629 | ) |
| Increase  (decrease) in accounts payable, accounts payable-Astrium, accrued interest,  and accrued expenses |       | (1,128                                            | )          | 1,982 |   |
| Decrease in customer  deposits                                                                              |       | —                                            |       | (3,106 | ) |
| Decrease in  accrued subcontracting services and other                                                      |       | —                                            |       | (3,612 | ) |
| Increase  (decrease) in advance on construction contract                                                    |       | (1,116                                            | )          | 1,467 |   |
| Increase  (decrease) in long-term accrued contract costs and other liabilities                              |       | 17                                                |       | (86 | ) |
| Net cash used in  operating activities                                                                      |       | (1,036                                            | )          | (6,436 | ) |
| **Cash  flows from investing activities**                                                                   |       |                                              |       |   |   |
| Purchases of  property, equipment and leasehold improvements, net of reimbursements                         |       | (172                                              | )          | (80 | ) |
| Net cash used in  investing activities                                                                      |       | (172                                              | )          | (80 | ) |
| **Cash  flows from financing activities**                                                                   |       |                                              |       |   |   |
| Payment of term  note payable                                                                               |       | (133                                              | )          | — |   |
| Repurchase of  notes                                                                                        |       | (1,085                                            | )          | (2,867 | ) |
| Net cash used in  financing activities                                                                      |       | (1,218                                            | )          | (2,867 | ) |
| Net change in  cash and cash equivalents                                                                    |       | (2,426                                            | )          | (9,383 | ) |
| Cash and cash  equivalents at beginning of period                                                           |       | 2,640                                             |       | 9,724 |   |
| Cash and cash  equivalents at end of period                                                                 |       | $                                                 | 214        |   | $ | 341 |   |
|                                                                                                        |       |                                              |       |   |   |
| Non-cash  financing activities:                                                                             |       |                                              |       |   |   |
| Issuance of  common stock for bonds                                                                         |       | $                                                 | —     |   | $ | 83,031 |   |
| Issuance of  common stock for preferred stock                                                               |       | $                                                 | —     |   | $ | 11,892 |   |
| Deemed dividend  related to induced conversion of preferred shares                                          |       | $                                                 | —     |   | $ | 3,344 |   |
| Cash paid for  interest                                                                                     |       | $                                                 | 335        |   | $ | 316 |   |
| Cash paid for  income taxes                                                                                 |       | $                                                 | —     |   | $ | — |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**SPACEHAB, INCORPORATED ANDSUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements**

 

**1. Description of the Company and Operating Environment**

** **

SPACEHAB is a provider of governmental and commercialspacecraft pre-launch processing facilities and services, a provider of mannedand unmanned payload processing services, and an entrepreneurial force in spacecommerce providing access to, and utilization of the unique environment ofspace.

 

Historically, a substantial portion of our revenue hasbeen generated under contracts with NASA, which were subject to periodicfunding allocations by the agency. NASA’s funding is dependent on receivingannual appropriations from the U.S. Government. During the quarters ended December 31,2008 and 2007 approximately 23% and 29% of our revenues were generated underNASA contracts, respectively.

 

Our Astrotech Space Operations subsidiary providescommercial spacecraft launch processing services and payload processingfacilities in the U.S. These services are offered at the Astrotech facilitiesin Titusville, Florida and Vandenberg Air Force Base in California.Additionally, Astrotech supplies payload processing and facilities maintenancesupport services to Sea Launch Company, LLC for its Sea Launch program at theHome Port facilities in Long Beach, California. Our facilities and services areprovided on a fixed price per launch basis.

 

Our Astrotech Engineering Services subsidiary managesprojects in need of comprehensive engineering solutions, and provides uniquecapabilities such as specialty engineering, hardware design and development,and configuration and data management. Astrotech Engineering Services alsodesigns and fabricates space flight hardware. We continuously review and seeknew business opportunities with aerospace and defense contractors, NASA, theDepartment of Defense, and other governmental agencies, either through primecontracts or teaming with other aerospace companies on new contract bidinitiatives.

 

Through our SPACETECH, Inc. and Astrogenetix(formerly BioSpace) subsidiaries, we are developing commercial applications forspace based technologies. SPACETECH is an incubator envisioned to commercializespace-industry technologies into real-world applications to be sold toconsumers and industry. The 1st Detect mini-massspectrometer and the AirWard hazardous cargo containers, both developed bySPACEHAB engineers, are being positioned for entry into the commercialmarketplace. Astrogenetix is commercializing the use of microgravity platforms,such as the Space Shuttle and the ISS, for the development of space-madeproducts that are to be sold on Earth. Astrogenetix has successfully processedvaccine samples in space on Space Shuttle Flights, STS-118, STS-123, andSTS-124, which have resulted in preliminary salmonella vaccine production data.

 

**Liquidity**

** **

As of December 31, 2008, we had cash andrestricted cash-on-hand of $7.3 million and our working capital deficit wasapproximately $0.3 million. Restricted cash, which consists of advance paymentson a government contract to modify certain spacecraft processing facilities andrestricted deposits relating to bank covenants, totaled $7.1 million at December 31,2008. We carry a liability of $4.0 million for obligations under thisconstruction contract.

 

In February 2008 (see Note 5), we consummated afinancing facility with a commercial bank. This facility provides for a threeyear $4.0 million term loan, payable in monthly installments of principal inthe amount of $22,222 plus interest and a $2.0 million revolving creditfacility. The term loan is secured by the assets of our Astrotech subsidiaryand the one-year revolving credit facility is secured by Astrotech’s accountsreceivable. In February 2009 we renewed the revolving credit facilityuntil February 6, 2010. As of December 31, 2008, no amounts wereoutstanding under the revolving credit facility.

 

We believe we have sufficient liquidity and backlog tofund ongoing operations for at least the next fiscal year and expect to utilizeexisting cash and proceeds from operations to support strategies for newbusiness initiatives.

 

**2.  Basis ofPresentation**

** **

In the opinion of management, the accompanyingunaudited condensed consolidated financial statements reflect all adjustments,consisting of only normal recurring accruals necessary, for a fair presentationof the consolidated financial position of SPACEHAB, Incorporated and itssubsidiaries as of December 31, 2008, and the results of its operationsand cash flows for the periods ended December 31, 2008 and 2007. However,the unaudited condensed consolidated financial statements do not include allrelated footnote disclosures.

 

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The consolidated results of operations for the sixmonth period ended December 31, 2008, are not necessarily indicative of theresults that may be expected for the full year. Our results of operationstypically fluctuate significantly from quarter to quarter. The interimunaudited condensed consolidated financial statements should be read inconjunction with our audited consolidated financial statements appearing in ourAnnual Report on Form 10-K for the fiscal year ended June 30, 2008.

 

Certain prior year amounts have been reclassified toconform to the current year presentation.

 

**3.  Loss perShare**

** **

The following is a reconciliation of the numerator anddenominator of the basic and diluted loss per share computations for the threeand six month periods ended December 31, 2008 and December 31, 2007(in thousands, except share and per share data):

 
| ** **                                                         | ** ** | **Three months ended  December 31, 2008** | ** ** | **Three months ended  December 31, 2007** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Loss**                                                      | ** ** | **Shares**                                                    | ** ** | **Per Share** | ** ** | **Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                                         | ** ** | **(Numerator)**                                               | ** ** | **(Denominator)**                                             | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic and  Diluted EPS:                                            |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net Loss                                                           |       | $                                                             | (1,554     | )                                                             | 16,392,718 |   | $ | (0.09 | ) | $ | (32,843 | ) | 8,293,710 |   | $ | (3.96 | ) |
|                                                               |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Deemed Dividend  Related to Induced Conversion of Preferred Shares |       |                                                          |       |                                                          |       |   |   | (3,344 | ) |   |   |   |   |
| Net Loss  Applicable to Common Shares                              |       | $                                                             | (1,554     | )                                                             | 16,392,718 |   | $ | (0.09 | ) | $ | (36,187 | ) | 8,293,710 |   | $ | (4.36 | ) |

 
| ** **                                                          | ** ** | **Six months ended  December 31, 2008** | ** ** | **Six months ended  December 31, 2007** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **Loss**                                                    | ** ** | **Shares**                                                  | ** ** | **Per Share** | ** ** | **Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                                          | ** ** | **(Numerator)**                                             | ** ** | **(Denominator)**                                           | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic and  Diluted EPS:                                             |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Net Loss                                                            |       | $                                                           | (1,499     | )                                                           | 16,250,871 |   | $ | (0.09 | ) | $ | (33,699 | ) | 4,798,215 |   | $ | (7.02 | ) |
|                                                                |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Deemed Dividends  Related to Induced Conversion of Preferred Shares |       |                                                        |       |                                                        |       |   |   | (3,344 | ) |   |   |   |   |
| Net Loss Applicable  to Common Stock                                |       | $                                                           | (1,499     | )                                                           | 16,250,871 |   | $ | (0.09 | ) | $ | (37,043 | ) | 4,798,215 |   | $ | (7.72 | ) |

 

Senior convertible notes payable outstanding as of December 31,2007, due 2010 convertible into 459,133 shares of common stock at $15.00 pershare, which include a mandatory conversion feature once the Company’s stockprice reaches $19.50 per share, have not been included in the computation ofdiluted EPS for the three months and six months ended December 31, 2007,as the conversion price(s) of the convertible notes payable per share weregreater than the average market price of the shares during the period and novalue has been assigned to the mandatory conversion feature.

 

Options to purchase 1,194,591 shares of common stockoutstanding at December 31, 2008, were not included in diluted EPS for thethree months and six months ended December 31, 2008, as they wereanti-dilutive due to our net loss. The options expire between March 31,2009 and December 1, 2018.

 

Options to purchase 97,900 shares of common stock outstandingat December 31, 2007, were not included in diluted EPS for the threemonths and six months ended December 31, 2007, as they were anti-dilutivedue to our net loss. The options expire between July 1, 2008 and December 12,2016.

 

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### **4.  RevenueRecognition**

### ** **

Our business units’ revenue is derived primarily fromcontracts with the U.S. Government, U.S. Government contractors, and commercialcustomers. Revenue under these contracts is recognized using the methodsdescribed on the following page. Estimating future costs and, therefore,revenues and profits is a process requiring management judgment. Managementbases its estimate on historical experience and on various assumptions that arebelieved to be reasonable under the circumstances including the negotiation(s) ofequitable adjustment(s) and change orders on the Cargo Mission Contract (“CMC”)that are added to the contract as pricing amendment(s) due to delay(s) inthe space shuttle launch schedule and customer directed changes to the baselinecontracted mission. Costs to complete include, when appropriate, material,labor, subcontracting costs, lease costs, commissions, insurance, and depreciation.Our business segment personnel perform periodic contract status and performancereviews. In the event of a change in total estimated contract cost or profit,the cumulative effect of such change is recorded in the period that the changein estimate occurs.

 

We, from time to time, make expenditures for specificenhancements and/or additions to our facilities as required by certaincontracts where the customer agrees to reimburse us for all or substantiallyall of such expenditures. We account for such reimbursements as a reduction inthe cost of such investments and recognize any excess of such reimbursementsover the required investment as revenue.

 

**A Summary of Revenue Recognition Methods Follows:**

 
| **Business Segment**       | ** ** | **Services/Products   Provided**                                                 | ** ** | **Contract Type**                                                                                                   | ** ** | **Method of Revenue   Recognition**                                                                                                                                          | ** ** |
|---------------------------------|------------|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| SPACEHAB Flight  Services       |       | Commercial Space Habitat Modules,  Integration & Operations Support Services |       | Firm Fixed Price                                                                                                         |       | Percentage-of-completion based on costs incurred                                                                                                                                            |       |
|                            |       |                                                                                  |       |                                                                                                                     |       |                                                                                                                                                                                        |       |
| Astrotech Space  Operations     |       | Payload Processing Facilities                                                         |       | Firm Fixed Price – Mission Specific 

 

 

 

Firm Fixed Price – Guaranteed Number of Missions |       | Ratably, over the occupancy period of a satellite  within the facility from arrival through launch 

 

Ratably, for multi-year contract payments recognized  over the contract period |       |
|                            |       |                                                                                  |       |                                                                                                                     |       |                                                                                                                                                                                        |       |
| Astrotech  Engineering Services |       | Configuration Management, Engineering Services                                        |       | Cost Plus Award/Fixed Fee                                                                                                |       | Earned as reimbursable costs incurred plus  award/fixed fee                                                                                                                                 |       |

 

Revenue for Astrotech Space Operations recognizedunder a building modification contract with a government agency (see Note 12)is being accounted for under the percentage-of-completion method based on costsincurred over the period of the agreement.

 

### **5.  Long TermDebt**

### ** **

### **Credit Facilities**

### ** **

On February 6, 2008, we entered into a financingfacility with a bank providing a $4.0 million term loan terminating February 2011and a $2.0 million revolving credit facility terminating in February 2009.The term loan requires monthly payments of principal totaling $22,222, plusinterest at the rate of prime plus 1.75% and the revolving credit facilityincurs interest at the rate of prime plus 1.75% (5% at December 31, 2008).Funds available under the revolving credit facility are limited to 80% of eligibleaccounts receivable. Effective February 6, 2009, we renewed the $2.0million revolving credit facility for an additional one-year period expiring February 2010.The bank financing facilities are secured by the assets of our Astrotech SpaceOperations Florida facilities and other covenants including a minimum tangiblenet worth covenant, a cash flow coverage covenant, a debt service coverageratio, and a ratio of total liabilities to tangible net worth covenant. Inaddition, the covenants require us to restrict a $0.6 

 

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million deposit account balance. The balance of the$4.0 million term loan at December 31, 2008, was $3.7 million. No amountswere outstanding on the $2.0 million revolving credit facility as of December 31,2008 and June 30, 2008.

 

### **Senior Convertible Subordinated Notes Payable**

### ** **

The Company’s 5.5% Senior Convertible Notes payablemature on October 15, 2010 and pay interest on April 15 and October 15annually. On October 31, 2008, the Company repurchased $1,750,000principal amount of its Senior Convertible Notes (see Note 14).

 

### **6.  Fair Valueof Financial Instruments**

### ** **

In general, fair values utilize quoted prices(unadjusted) in active markets for identical assets or liabilities. Thefollowing table presents the carrying amounts and estimated fair values ofcertain of the Company’s financial instruments as of December 31, 2008 andJune 30, 2008 in accordance with SFAS No. 107, “Disclosures aboutFair Value of Financial Instruments” (in thousands):

 
| ** **                                   | ** ** | **December 31, 2008** | ** ** | **June 30, 2008** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **Carrying****   Amount**  | ** ** | **Fair****   Value**   | ** ** | **Carrying****   Amount** | ** ** | **Fair****   Value** | ** ** |
|                                         |       |                            |       |                        |       |   |   |   |   |
| Term Loan Payable                            |       | $                               | 3,700      |                        | $          | 3,700 |   | $ | 3,793 |   | $ | 3,793 |   |
| Senior Convertible Notes Payable – 5.5% |       | $                               | 5,111      |                        | $          | 3,169 |   | $ | 6,861 |   | $ | 3,775 |   |

 

The fair value of our long term debt is based onquoted market prices, or is estimated based on the current rates offered to usfor debt of similar remaining maturities and other terms. The carrying amountsof cash and cash equivalents, investments, accounts receivable, accountspayable, and accrued expenses approximate their fair market value because ofthe relatively short duration of these instruments.

 

### **7.  Business andCredit Risk Concentration**

### ** **

Historically, a substantial portion of our revenue hasbeen generated under contracts with NASA, which were subject to period fundingallocations by the agency. NASA’s funding is dependent on receiving annualappropriations from the U.S. Government. During the six month periods ended December 31,2008 and 2007, approximately 23% and 29%, respectively, of our revenues weregenerated under U.S. Government contracts. Of the accounts receivable balanceas of December 31, 2008, totaling $4.8 million, 73% of the balance isattributed to three customers. For June 30, 2008, the $3.9 million ofreceivables was comprised of $3.0 million or 77% from the same three customers.

 

We maintain our cash primarily with major U.S.domestic banks and other financial institutions. The amounts held in interestbearing accounts periodically exceed the insured limit of $250,000 ($100,000 atJune 30, 2008) and exceeded that balance as of December 31, 2008 by$1.8 million and at June 30, 2008 by $6.3 million. The terms of otherdeposits are on demand and are subject to guarantees in full by the FDIC underthe Transaction Account Guarantee Program.

 

In addition, on December, 31, 2008, we held aninvestment account of $4.1 million with a financial institution other than abank. These funds are invested in money market funds. We have not incurredlosses related to these deposits.

 

### **8.  SegmentInformation**

### ** **

Based on our organization forthe second quarter of fiscal year 2009, we operated in three business segments:SPACEHAB Flight Services (“Flight Services”), Astrotech Space Operations (“Astrotech”)and Astrotech Engineering Services (“Engineering Services”). Our FlightServices business segment was founded to commercially develop space habitatmodules that operate in the cargo bay of the space shuttles. Flight Servicesprovided access to the modules and integration and operations support servicesfor both NASA and commercial customers. We completed our last manifested spaceshuttle mission utilizing our space habitat modules in the first quarter offiscal year 2008. Astrotech provides payload processing facilities and servicesto serve the spacecraft manufacturing and launch services industries.Engineering Services is primarily engaged in providing engineering services andproducts to the Government, including NASA.

 

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Ourchief operating decision maker utilizes both revenue and loss before incometaxes, depreciation and amortization in assessing performance and makingoverall operating decisions and resource allocations.

 

Three Months Ended December 31, 2008 (in thousands):

 
| ** **           | ** ** | ** **  | ** ** | **Income (loss)** | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|----------------------|------------|-------------|------------|------------------------|------------|------------|------------|------------------|------------|
| ** **           | ** ** | ** **  | ** ** | **before**             | ** ** | **Fixed**  | ** ** | **and**          | ** ** |
| ** **           | ** ** | **Revenue** | ** ** | **income taxes**       | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| Flight Services      |       | $           | 1          |                   | $          | (1,083     | )          | $                | 247        |   | $ | 0 |   |
| Astrotech            |       | 3,695       |       | 678                    |       | 39,887     |       | 544              |       |
| Engineering Services |       | 90          |       | (9                     | )          | —     |       | —           |       |
| Corporate and Other  |       | —      |       | (1,140                 | )          | 166        |       | 27               |       |
|                 |       | $           | 3,786      |                   | $          | (1,554     | )          | $                | 40,300     |   | $ | 571 |   |

 

ThreeMonths Ended December 31, 2007(in thousands):

 
| ** **           | ** ** | ** **  | ** ** | **Income (loss)** | ** ** | **Net**    | ** ** | **Depreciation** |   |
|----------------------|------------|-------------|------------|-------------------|------------|------------|------------|------------------|--------|
| ** **           | ** ** | ** **  | ** ** | **before**        | ** ** | **Fixed**  | ** ** | **and**          |   |
| ** **           | ** ** | **Revenue** | ** ** | **income taxes**  | ** ** | **Assets** | ** ** | **Amortization** |   |
| Flight Services      |       | $           | 498        |              | $          | (1,282     | )          | $                | 282    |   | $ | 13 |   |
| Astrotech            |       | 2,438       |       | 296               |       | 41,737     |       | 531              |   |
| Engineering Services |       | 1,374       |       | 170               |       | —     |       | —           |   |
| Corporate and Other  |       | —      |       | (32,027           | )          | 487        |       | 29               |   |
|                 |       | $           | 4,310      |              | $          | (32,843    | )          | $                | 42,506 |   | $ | 573 |   |

 

SixMonths Ended  December 31, 2008(in thousands):

 
| ** **           | ** ** | ** **  | ** ** | **Income (loss)** | ** ** | **Net**    | ** ** | **Depreciation** |       |
|----------------------|------------|-------------|------------|-------------------|------------|------------|------------|------------------|------------|
| ** **           | ** ** | ** **  | ** ** | **before**        | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| ** **           | ** ** | **Revenue** | ** ** | **income taxes**  | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| Flight Services      |       | $           | 195        |              | $          | (1,924     | )          | $                | 247        |   | $ | 15 |   |
| Astrotech            |       | 9,399       |       | 2,959             |       | 39,887     |       | 1,048            |       |
| Engineering Services |       | 166         |       | (16               | )          | —     |       | —           |       |
| Corporate and Other  |       | —      |       | (2,518            | )          | 166        |       | 67               |       |
|                 |       | $           | 9,760      |              | $          | (1,499     | )          | $                | 40,300     |   | $ | 1,129 |   |

 

SixMonths Ended  December 31, 2007(in thousands):

 
| ** **           | ** ** | ** **  | ** ** | **Income (loss)** | ** ** | **Net**    | ** ** | **Depreciation** |       |
|----------------------|------------|-------------|------------|-------------------|------------|------------|------------|------------------|------------|
| ** **           | ** ** | ** **  | ** ** | **before**        | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| ** **           | ** ** | **Revenue** | ** ** | **income taxes**  | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| Flight Services      |       | $           | 4,081      |              | $          | (1,072     | )          | $                | 282        |   | $ | 435 |   |
| Astrotech            |       | 6,150       |       | 1,653             |       | 41,737     |       | 1,063            |       |
| Engineering Services |       | 2,675       |       | 314               |       | —     |       | —           |       |
| Corporate and Other  |       | —      |       | (34,594           | )          | 487        |       | 111              |       |
|                 |       | $           | 12,906     |              | $          | (33,699    | )          | $                | 42,506     |   | $ | 1,561 |   |

### ** **

### **9.  Common StockOptions, Stock Purchase Plans and Other Long Term Incentive Plans**

### ** **

We grant options to employees and directors utilizingthree shareholder-approved plans and issue Company stock under an EmployeeStock Purchase Plan. Stock options and other equity awards are granted at thesole discretion of the Compensation Committee of the Board of Directors. Thenumber and price of the options granted are specifically defined by theCompensation Committee at the time of each award. Such options typically vestincrementally over a period of four years and generally expire within ten yearsof the date of grant. Equity awards are valued at the closing bid price for theCompany’s stock on the day of grant. As of December 31, 2008, there were2,567,063 shares available for future grant under the Company’s shareholderapproved plans.

 

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### **Table ofContents**

 

### **The 1994 Stock Incentive Plan**

### ** **

Under the terms of the 1994 Plan, the number and priceof the options granted to employees is determined by the Board of Directors andsuch options vest, in most cases, incrementally over a period of four years andexpire no more than ten years after the date of grant. The total number of sharesthat are available under this plan is 395,000. As of December 31, 2008,there are 157,619 available for grant.

 

### **The Directors’ Stock Option Plan**

### ** **

Prior to suspension of the Directors’ Stock OptionPlan in January 2008, each new non-employee director received a one-timegrant of an option to purchase 1,000 shares of common stock at an exerciseprice equal to the fair market value on the date of grant. In addition,effective as of the date of each annual meeting of our stockholders, eachnon-employee director who was elected or continued as a member of the Board ofDirectors of the Company was awarded an option to purchase 500 shares of commonstock. Options under the Director’s Plan vest after one year and expire sevenyears from the date of grant. The total number of options that are availableunder this plan is 50,000. As of December 31, 2008, there are 22,000available for grant.

 

### **1997 Employee Stock Purchase Plan**

### ** **

We adopted an employee stock purchase plan thatpermits eligible employees to purchase shares of common stock of the Company atprices no less than 85% of the current market price. Eligible employees mayelect to participate in the plan by authorizing payroll deductions from 1% to10% of gross compensation for each payroll period. On the last day of eachquarter, each participant’s contribution account is used to purchase themaximum number of whole and fractional shares of common stock determined bydividing the contribution account’s balance by the lesser of 85% of the priceof a share of common stock on the first day of the quarter or the last day of aquarter. The number of shares of common stock that may be purchased under theplan is 150,000. Through December 31, 2008, employees have purchased148,265 shares under this plan. During the fourth quarter of fiscal year 2007,we suspended purchases under this plan. The shares purchased under this planare considered compensatory for accounting and reporting purposes.

 

### **2008 Stock Incentive Plan (“2008 Plan”)**

### ** **

On March 27, 2008 the stockholders of the Companyapproved the 2008 Stock Incentive Plan. The purpose of the 2008 Plan is tofoster and promote the long-term financial success of the Company, and toincrease shareholder value by attracting, motivating, and retaining keyemployees, consultants, and directors and providing such participants in the2008 Plan with a program for obtaining an ownership interest in the Companythat links and aligns their personal interests with the Company’s stockholders.The 2008 Plan authorizes grants of stock compensation, restricted stock, stockoptions, performance units, and other equity based performance awards. Thetotal number of shares that are available under the 2008 Plan is 5,500,000.During the three months ended December 31, 2008, 297,583 options net ofcancellations were granted to employees. As of December 31, 2008, therewere 2,385,709 shares available for future grant.

 

### **Other Stock Based Incentive Awards**

### ** **

·                  Special performance shares – Weissued 62,200 performance shares on December 21, 2007, that vest on January 15,2009, subject to certain events or upon designation by the CompensationCommittee. Termination of employment, except for resignation or cause was notan event of forfeiture. The employees receiving special performance shares weresubsequently terminated by the Company and the risk of subsequent forfeiturewas not material. Consequently, we expensed the entire fair value of the grant$127,510 in the three months ended December 31 of fiscal year 2008 valuingthe performance shares at the close of business on the date of grant.Subsequently, 9,750 shares have been forfeited and the stock price hasdecreased from $2.05 to $0.26 resulting in recovery of $5,245 in the threemonths ended December 31, 2008.

·                  2007 performance shares – We issued239,900 performance shares on December 21, 2007, that vest on February 15,2011 subject to certain events or upon designation by the CompensationCommittee. Termination of employment for any cause is an event of forfeiture.We valued the 2007 performance shares granted at the close of business on thedate of grant, and recognize expense and accrue an incentive compensationliability, pro rata over the vesting period. 126,000 shares were subsequentlyforfeited and the stock price decreased from $2.05 to $0.26 which allowed for arecovery of expense in the amount of $935 for the three months ended December 31,2008.

 

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·                  Restricted stock grants – On March 27,2008 the Board of Directors granted 25,000 shares of restricted stock to eachnon-employee director of the Company. The Restricted Stock vests annually overa period of four years and unvested shares are forfeited if the director leavesthe Board of Directors prior to the vesting date. On July 18, 2008, theBoard of Directors granted a total of 400,000 shares of restricted stock to itsnamed executive officers. The restricted stock vests 50% on January 15,2009, 25% on January 15, 2010, and 25% on January 15, 2011. In thethree months ended December 31, 2008, we recognized compensation anddirector fee expense of $70,691 for restricted stock grants.

·                  Other equity awards – On July 18,2008, the Board of Directors granted an award of 1,100,000 shares ofunrestricted common stock to Mr. Thomas B. Pickens, III, the Company’sChief Executive Officer, 200,000 shares of unrestricted common stock to Mr. BarryA. Williamson, a director, and 150,000 shares of unrestricted common stock to Mr. MarkE. Adams, a director. Such grants of unrestricted common stock were made fromthe 2008 Plan and compensation expense of $1,002,500 was recognized in fiscalyear 2008.

 

### **Cash Based Long Term Incentive Awards**

### ** **

In December 2007 the Compensation Committee ofthe Board of Directors adopted and implemented a Long Term Cash Incentive plan.The plan makes cash incentive awards to employees based on the successfulcompletion of certain events and passage of time as established by theCommittee. These units vest on February 15, 2011 and are subject tomaterial risk of forfeiture. The Committee has granted such awards to employeesvalued at $344,900. As of December 31, 2008, the Company had a remainingcommitment for such awards of $161,900. We have accrued $57,441 towards thisfuture commitment.

 

### **Accounting for Stock Issued to Employees**

### ** **

The fair value of each option award is estimated onthe date of grant using the Black Scholes option pricing model, whichdetermines inputs as shown in the following table.

 
| ** **                       | ** ** | **December 31, 2008** | ** ** | **December 31,**    | ** ** |
|----------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| ** **                       | ** ** | **2-Year Options**         | ** ** | **10-Year Options** | ** ** | **2007*** | ** ** |
| Expected  Dividend Yield         |       | 0                               |       | 0                        |       | N/A |   |
| Expected  Volatility             |       | 1.15                            |       | 1.15                     |       | N/A |   |
| Risk Free  Interest Rates        |       | 0.36                            | %          | 1.76                     | %          | N/A |   |
| Expected Option  Life (in years) |       | 0.58                            |       | 6.25                     |       | N/A |   |

 

----

*No options were issued for the period ended December 31,2007

 

Because of differences in option terms and historicalexercise patterns among the plans, we have segregated option awards into threehomogenous groups for the purpose of determining fair values for options.Valuation assumptions are determined separately for the three groups thatrepresent, respectively, options with a term of 2 years, options generally witha term of 10 years, and options under the Directors Stock Option Plan thatgenerally have a term of 7 years. The assumptions are as follows:

 

·                  We estimated volatility using ourhistorical share price performance over the last ten years. Managementconsidered the guidance in SFAS No. 123R and believes the historicalestimated volatility is materially indicative of expectations about expectedfuture volatility.

·                  We use the simplified method outlinedin the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107to estimate expected lives for options granted.

·                  The risk-free interest rate is basedon the U.S. Treasury yield curve in effect at the time of grant for theexpected term of the option.

·                  The expected dividend yield is basedon our current dividend yield and the best estimate of projected dividend yieldfor future periods within the expected life of the option, which is zero.

 

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A summary ofour stock option activity as of December 31, 2008, and changes during thefirst six months of fiscal year 2009 are presented in the following table:

 
| ** **                             | ** ** | **Shares Under  Fixed Options** | ** ** | **Weighted-  Average   Exercise   Price** | ** ** | **Weighted-  Average   Remaining   Contractual   Term** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding at  June 30, 2008     |       | 85,400                                    |       | $                                                   | 26.48      |                                                                   | 3.65       |                                        | $          | — |   |
| Granted                                |       | 1,161,708                                 |       | $                                                   | 0.42       |                                                                   | 5.59       |                                        | $          | — |   |
| Exercised                              |       | —                                    |       | $                                                   | —     |                                                                   | —     |                                        | $          | — |   |
| Forfeited/Expired                      |       | (52,517                                   | )          | $                                                   | 1.70       |                                                                   | —     |                                        | $          | — |   |
| Outstanding at  December 31, 2008 |       | 1,194,591                                 |       | $                                                   | 2.225      |                                                                   | 5.37       |                                        | $          | — |   |
| Exercisable                            |       | 115,500                                   |       | $                                                   | 18.575     |                                                                   | 5.20       |                                        | $          | — |   |

 

The weighted-average grant-date fair value of optionsgranted during the first six months of fiscal year 2009 was $0.25 per share.The intrinsic value for stock options is defined as the difference between thecurrent market value ($0.26 per share as of December 31, 2008) and thegrant price. There were no options exercised during the first six months offiscal year 2009. As of December 31, 2008, there was $224,057 ofunamortized expense related to our stock option plans.

 

### **10.  RelatedParty Transactions**

### ** **

We engaged in certain transactions with directors andexecutive officers during the six months ended December 31, 2008 and December 31,2007. Following is a description of these transactions:

 

### **Astrium GmbH**

### ** **

Dr. Graul, a member of SPACEHAB’s Board of Directorsuntil his resignation in August 2007, is the Executive Vice President forAstrium GmbH (“Astrium”). Astrium provides unpressurized payload andintegration efforts to SPACEHAB on a fixed-price basis in addition to providingengineering services as required. For the six months ended December 31,2007, Astrium’s payload and integration services included in cost of revenuewere approximately $1.0 million. Astrium did not provide such services to theCompany during the six months ended December 31, 2008. In August 2007SPACEHAB terminated its ICC/VCC lease agreements with Astrium North America. Weagreed to reimburse Astrium North America $1.4 million upon termination ofthese leases and agreed to provide certain facilities for Astrium’s use withoutcost to Astrium through December 2008.

 

### **Executive Credit Cards**

### ** **

Certain Named Executive Officers of the Company havecompany paid credit cards for ordinary business expenses. Although the Companypays the amounts on the credit cards, the executive officer is obligated tosubstantiate the charges and reimburse the Company for any non-business relatedcharges. As of December 31, 2008, the Company had no outstandingreceivables on such executive credit cards.

 

### **R. Scott Nieboer**

### ** **

On October 31, 2008, (see Note 14) CurtiswoodCapital LLC sold $1,750,000 principal amount of the Company’s 5.5% convertiblenotes due October 2010 to the Company for $1,085,000 plus accruedinterest. Mr. Nieboer was a beneficial owner of the repurchased notes.

 

### **James D. Royston**

### ** **

Effective December 1, 2008, the Company enteredinto a seven month lease agreement with Mr. Royston to lease a houselocated in Melbourne Florida to be used by employees of the Company whileconducting business on behalf of the Company. The lease provides for monthlyrental payments of $2,900 to Mr. Royston with expenses of utilities andconsumables to be paid by the Company.

 

### **11.  Recent Accounting Pronouncement**

### ** **

As of July 1, 2008, the Company implemented FAS No. 157,*Fair Value Measurements* (“FAS 157”)for its financial assets

and liabilities that are remeasured and reported atfair value at each reporting period and non-financial assets 

 

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and liabilities that are remeasured and reported atfair value at least annually. In accordance with the provisions of FSP No. FAS157-2, *Effective Date of FASB Statement No. 157*,the Company elected to defer implementation of FAS 157 as it relates to itsnon-financial assets and non-financial liabilities that are recognized anddisclosed at fair value in the consolidated financial statements on anonrecurring basis until its fiscal year beginning July 1, 2009.

 

In general, fair values determined by Level 1 inputsutilize quoted prices (unadjusted) in active markets for identical assets orliabilities. Fair values determined by Level 2 inputs utilize observable inputsother than Level 1 prices, such as quoted prices for similar assets or liabilities,quoted prices in markets that are not active or other inputs that areobservable or can be corroborated by observable market data for substantiallythe full term of the related assets or liabilities. Fair values determined byLevel 3 inputs are unobservable data points for the asset or liability, andinclude situations where there is little, if any, market activity for the assetor liability.

 

### **12.  RestrictedCash, Advances on Construction Contract, and Contingency**

### ** **

In December 2006, our Astrotech subsidiary wasawarded a contract with a governmental agency to modify one of our payloadprocessing facilities to specific requirements of a programmed mission. Underthe terms of this $20.0 million fixed-price contract, which has subsequentlybeen increased to $35.2 million, we will own the improvements after completionof the contract obligations. We have entered into a firm fixed priceconstruction subcontract with J. P. Donovan Construction, Inc. toprovide a significant portion of the design and construction work that will berequired under our contract. The contract requires us to complete theconstruction on the facility by September 30, 2009 and contains penaltiesif we do not meet the contracted completion date. As a result we have acontingency of up to $3.0 million in penalties. In accordance with ourcontracts, payments will be received from our customer on a milestone schedulethat generally provides receipt of cash before payments are required to thecontractor under their milestone schedule. Receipts in advance of disbursementsare retained in a restricted cash account within our subsidiary company andused exclusively for purposes of the contract obligations. As of December 31,2008, net cash receipts of $6.5 million have been designated as restricted cashfor this. A liability of $4.0 million is recognized on the balance sheet as of December 31,2008, for accrued obligations under this contract relating to such advances. Inaddition, $0.6 million of cash is held as restricted to comply with bank covenantson our term note and revolving credit facility.

 

### **13.  EarlyTermination of Cost Plus Award Fee Contract**

### ** **

On May 7, 2008, the Company received a letterfrom ARES Corporation notifying the Company of ARES’s intent to terminate itsCost Plus Award Fee Subcontract with the Company. The Company continued underopen task orders relevant to the subcontract until June 5, 2008. TheCompany and ARES have not resolved certain issues relative to the earlytermination of the subcontract, including, but not limited to certain accountsreceivable from ARES under this subcontract totaling $1.4 million. ARES doesnot dispute the amount or validity of accounts receivable. The Company isevaluating its contractual rights and other options, including damages, with respectto ARES’s actions.

 

### **14.  Purchase ofCommon Stock and Convertible Notes**

### ** **

### **Common Stock and Convertible Note Repurchase Program**

### ** **

On March 25, 2003 the Board of Directorsauthorized us to repurchase up to $1.0 million of our outstanding common stockat market prices. On September 25, 2008, the Board of Directors authorizedthe repurchase of up to an additional $6.0 million of the Company’s commonstock and outstanding convertible notes due October 2010 (see Repurchaseof Outstanding Notes below). Any purchases under SPACEHAB’s security repurchaseprogram may be made from time-to-time, in the open market, through block tradesor otherwise in accordance with applicable regulations of the Securities andExchange Commission. Depending on market conditions and other factors, thesepurchases may be commenced or suspended at any time or from time-to-timewithout prior notice. Additionally, the timing of such transactions will dependon other corporate strategies and will be at the discretion of the managementof the Company. As of December 31, 2008, we had repurchased 11,660 sharesof common stock at a cost of $117,320 under the program, which represents anaverage cost of $10.06 per share. The Company has made no purchases of commonstock under the program in fiscal years 2008 or 2009. In October 2008, asdescribed below, the Company purchased $1,750,000 principle amount of itsoutstanding convertible notes at a price of $1,085,000 plus accrued interest.

 

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### **Repurchase of Outstanding Notes**

### ** **

On October 31, 2008, the Company purchased$1,750,000 principal amount of its outstanding 5.5% convertible notes due October 2010from Curtiswood Capital LLC. Mr. R. Scott Nieboer, a director of theCompany, was a beneficial owner of the repurchased securities. The repurchasednotes were acquired at an established market price on the day of trade and willbe retired by the Company. The Company has recognized a gain of $665,000 on thetransaction in the three months ended December 31, 2008.

 

### **15.  InducedConversion of Convertible Securities and Reverse Stock Split**

### ** **

On October 5, 2007, we announced the successfulclosing of our offer to exchange (the “Exchange Offer”) any and all of ouroutstanding 8.0% Convertible Subordinated Notes due 2007 (the “Junior Notes”)and any and all of our outstanding 5.5% Senior Convertible Notes due 2010 (the “SeniorNotes”). As a result of the closing of the Exchange Offer, for theapproximately $7.4 million in principal amount of Junior Notes tendered, theholders received approximately 550,000 shares of common stock and 8,927 sharesof Series C Convertible Preferred Stock on a pre reverse split basis.Following the closing of the Exchange Offer, approximately $2.9 million ofJunior Notes remained outstanding pursuant to the original terms of theindenture governing the Junior Notes. On October 15, 2007, we redeemed theoutstanding Junior Notes, including accrued interest, for cash. In addition,for the approximately $46.1 million in principal amount of outstanding SeniorNotes tendered, the holders received approximately 30.7 million shares ofcommon stock and 46,083 shares of Series C Convertible Preferred Stock ona pre reverse split basis. Following the closing of the Exchange Offer,approximately $6.9 million of Senior Notes remained outstanding pursuant to anindenture governing the Senior Notes that was amended through the eliminationof substantially all of the indenture’s restrictive covenants.

 

In addition, as a result of the closing of theRestructuring and Exchange Agreement, effective as of August 31, 2007,among the Company and certain holders of Junior Notes and Senior Notes, theCompany issued to Astrium GmbH 1,333,334 shares of common stock and 6,540shares of Series C Convertible Preferred Stock in exchange for Astrium’sexisting 1,333,334 shares of Series B Convertible Preferred Stock on a prereverse split basis.

 

As a consequence of the Exchange Transaction, werecognized non cash debt conversion expense of ($30.2) million in the threemonths ended December 31, 2007, and we increased our common stock by $98.3million.

 

In November 2007 we converted the 61,550 sharesof Series C convertible preferred stock into 89.9 million shares of commonstock on a pre reverse split basis and affected a 1 for 10 reverse stock split,reducing our issued and outstanding common stock to 13.6 million shares. Allshare amounts have been stated to reflect this split for all periods presented.

 

### **16.  EstablishNew Subsidiaries**

### ** **

On October 21, 2008, the Company formed AirWardCorporation and on November 1, 2008, the Company formed 1st Detect Corporation, each being a wholly ownedsubsidiary of the Company.

 

### **17.  Subsequent Events**

### ** **

### **NASDAQ Deficiency Letters**

### ** **

On April 6, 2008, we received a NASDAQ StaffDetermination letter indicating that we failed to comply with NASDAQMarketplace Rule 4310(c)(4) and that our securities were, therefore,subject to delisting from The NASDAQ Capital Market. Marketplace Rule 4310(c)(4) requiresthat we maintain a $1.00 bid price. Pursuant to NASDAQ rules we weregranted a grace period, which expired on October 6, 2008. On October 7,2008, we received an additional NASDAQ Staff Determination letter advising usthat because we had failed to regain compliance under the $1.00 bid price rule,our shares were to be delisted from the NASDAQ Capital Markets exchange. Wefiled for an appeal of NASDAQ’s action and were granted a hearing date in November 2008.On October 16, 2008, NASDAQ announced the suspension of Marketplace Rule 4310(c)(4) untilJanuary 16, 2009, and advised the Company that it was no longer out ofcompliance with the Marketplace Rule. On December 23, 2008, NASDAQ advisedthe Company that its suspension of Marketplace Rule 4310(c)(4) wasextended until April 20, 2009.

 

### **Renewal of Revolving Credit Facility**

### ** **

Effective February 6, 2009, we renewed ourrevolving credit facility with a bank for an additional one-year period with nomaterial changes to note.

 

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### **Table ofContents**

 

### **Director Compensation**

### ** **

On February 10, 2009, the Board of Directorsgranted annual restricted stock, stock options, and cash compensation to thedirectors of the Company. Compensation was granted in accordance with thedirector compensation program adopted by the Board of Directors at its 2007annual meeting held on March 27, 2008 and confirmed at its 2008 annualmeeting held on February 10, 2009.

 

Company non-employee directors, other than theChairman of the Audit Committee, Chairman of the Compensation Committee, andChairman of the Corporate Governance and Nominating Committee, receive anannual stipend of $30,000 paid upon the annual election of each non-employeedirector or upon joining the Board of Directors. The Chairman of the AuditCommittee receives an annual stipend of $40,000 and the Chairman of theCompensation Committee and Chairman of the Corporate Governance and NominatingCommittee receives an annual stipend of $35,000, recognizing the additionalduties and responsibilities of those roles. In addition, each non-employeedirector receives a meeting fee of $3,000 for each meeting of the Board ofDirectors attended in person and $1,000 for each such meeting attended byconference call and $500.00 for each committee meeting attended, except thatmembers of the Audit Committee are compensated at $750.00 per meeting. Alldirectors are reimbursed ordinary and reasonable expenses incurred inexercising their responsibilities in accordance the Company’s Travel andEntertainment Expense Reimbursement policy applicable to all employees of theCompany.

 

Under provisions adopted by the Board of Directors,each non-employee director receives 25,000 shares of restricted common stockissued upon his or her first election to the Board of Directors and an optionto purchase an additional 20,000 shares of common stock upon each annualre-election to the Board of Directors. Stock options granted under the plan arepriced at the closing market price of the Company’s stock on the day of grant.Restricted stock and stock options granted under the plan vest 25% annually,beginning after 1 year, and terminate in 10 years.

 

The 25,000 shares of restricted stock and the 80,000options to purchase stock granted to directors on February 10, 2009, werevalued based on $0.32 per share, the closing bid price of the Company’s stockon February 10, 2009. The equity grants were made from the Company’s 2008Stock Incentive Plan. Total director compensation expense of $30,016 will berecognized over the vesting periods of grants.

 

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# **Tableof Contents**

 

# **ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

# ** **

*You should read the following discussion andanalysis together with our consolidated financial statements and notes theretoand the discussion “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and Item 1A. — “Risk Factors” included in our 2008Annual Report Form 10-K. The following information containsforward-looking statements, which are subject to risks and uncertainties.Should one or more of these risks or uncertainties materialize, our actualresults may differ from those expressed or implied by the forward-lookingstatements.*

 

**OVERVIEW**

** **

### **Forward Looking Statements**

### ** **

This document may contain “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934, including (without limitation)statements under “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and “Liquidity and Capital Resources.” Suchstatements are subject to risks and uncertainties that could cause actualresults to differ materially from those projected in the statements. Inaddition to those risks and uncertainties discussed herein, such risks anduncertainties include, but are not limited to, whether we will fully realizethe economic benefits under our NASA and other customer contracts, completionof the International Space Station, continued availability and use of the U.S.space shuttle system, technological difficulties, product demand, marketacceptance risks, the effect of economic conditions, uncertainty in governmentfunding, and the impact of competition, delays, and uncertainties in futurespace shuttle and ISS programs.

 

### **Financial Summary**

### ** **

SPACEHAB’s first six months operating results forfiscal year 2009 reflected net loss of ($1.5) million. For the first six monthsof fiscal year 2008 we recorded a net loss of ($33.7) million.

 

The following table illustrates financial highlightsfor the six months ended December 31, 2008 and December 31, 2007 (inmillions):

 
| **For the Six Months Ended** | ** ** | **2008** | ** ** | **2007** | ** ** | **Percent   Change** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|---------------------------|------------|
| December 31:                                |       |     |       |     |       |                      |       |
| Revenue                                          |       | $        | 9.8        |     | $          | 12.9                      |       | (24 | )% |
| Net Loss                                         |       | $        | (1.5       | )        | $          | (33.7                     | )          | (96 | )% |
| Diluted EPS                                      |       | $        | (0.09      | )        | $          | (7.72                     | )          | (99 | )% |
| As of  December 31:                         |       |     |       |     |       |                      |       |
| Cash and Cash  Equivalents                       |       | $        | 1.2        |     | $          | 0.3                       |       | 300 | % |
| Restricted Cash                                  |       | $        | 6.1        |     | $          | 10.2                      |       | (40 | )% |
| Total Debt                                       |       | $        | 8.8        |     | $          | 6.9                       |       | 28 | % |
| Stockholders’  Equity                       |       | $        | 34.3       |     | $          | 36.2                      |       | (5 | )% |

### ** **

### **Business Segments**

### ** **

For the first six months of fiscal year 2009, ourCompany was comprised of three primary business segments. The following is abrief discussion of each of these segments, including a list of key factorsthat have affected, and are expected to continue to affect, their respectiveearnings and cash flows. We also present a brief discussion of ourcorporate-level expenses along with a summary of our current liquidity positionand items that could impact our liquidity position in fiscal year 2009 andbeyond.

 

### **Astrotech Space Operations, Inc.**

### ** **

Astrotech Space Operations provides all supportnecessary for its government and commercial customers to successfully processcomplex communication, Earth observation and deep space satellites inpreparation for their launch on a variety of domestic and foreign launchvehicles. Processing activities include satellite ground transportation;pre-launch hardware integration and testing; satellite encapsulation, fueling,launch pad delivery; and communication linked launch control. Our Astrotechfacilities can accommodate five meter class satellites with

 

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weights of 11,000 kilograms, encompassing the majorityof U.S. based satellite preparation services. During the quarters ended December 31,2008 and December 31, 2007, Astrotech accounted for 97% and 48%,respectively, of our consolidated revenues.

 

Revenue for our Astrotech business unit is generatedfrom various fixed-priced contracts with launch service providers in both thecommercial and government markets. The services and facilities we provide toour customers support the final assembly, checkout, and countdown functionsassociated with preparing a spacecraft for launch. The earnings and cash flowsgenerated from our Astrotech operations are related to the number of commercialspacecraft launches, which reflects the growth in the satellite-based communicationsindustries; and, the replacement requirements inherent in aging satellites.Other factors that have impacted, and are expected to continue to impactearnings and cash flows for this business include:

 

·                  Our ability to control our capitalexpenditures, which are primarily limited to modifications to accommodatepayload processing for new launch vehicles, upgrading communicationsinfrastructure, maintenance and safety, environmental and reliability projects,and other costs, through disciplined management and safe, efficient operations;

·                  The continuing limited availabilityof competing facilities at the major domestic launch sites that can offercompatible services, leading to an increase in government use of our services;and

·                  Our ability to complete customerspecified facility modifications within budgeted costs and time commitments.

 

### **Astrotech Engineering Services, Inc.**

### ** **

Formerly SPACEHAB Government Services, AstrotechEngineering Services provides large scale program technical support andspecialized engineering analysis, products and services, and configuration anddata management support to NASA and other government customers. Through thesecond quarter of fiscal year 2008, Engineering Services derived most of itsrevenue from NASA’s Program Integration and Control (“PI&C”) contract forthe International Space Station. The Company’s role in the PI&C contractwas terminated in June of 2008. During the quarters ended December 31,2008 and December 31, 2007, our Engineering Services business unitaccounted for 3% and 32%, respectively, of our consolidated revenues.

 

Earnings from Engineering Services are dependent uponour ability to continue to win contracts with NASA, aerospace and defensecontractors, or other government entities through the competitive biddingprocess; and, our ability to sustain exemplary performance scores in order toachieve performance bonuses. Other factors that have impacted, and are expectedto continue to impact earnings and cash flows for this business include:

 

·                  The termination of the PI&Ccontract with the International Space Station program;

·                  Our ability to maintain smallbusiness qualification for the Engineering Services business unit under NASAand Department of Defense contracting rules;

·                  Our ability to secure otherengineering services contracts with public or private sector entities; and

·                  Our ability to control costs withinour budget commitments.

 

### **SPACEHAB Orbital Transportation Services, Inc. (“SOTS”)**

### ** **

Historically called SPACEHAB Flight Services, SOTSoffered a range of engineering, research, logistics, integration, operations,and ground support services supporting our space shuttle module and palletassets, and spacecraft owned by other entities. At this time, there are no morescheduled missions to be performed under this business segment as the shuttlespace transportation system nears retirement in 2010. During the fiscal year2008, the Company completed space shuttle mission STS-118, its last contractedmodule mission, and recognized residual SOTS activity from previous missions. Wecontinue to retain our space shuttle module assets to be available for futureopportunities should they arise. During the quarters ended December 31,2008 and December 31, 2007, our Flight Services business accounted for 0%and 2%, respectively, of our consolidated revenues.

 

The primary factors impacting our Flight Servicesbusiness unit earnings and cash flows are the number of space shuttle missionsflown, the requirements for use of our space shuttle hardware and theconfiguration of the cargo handling and research logistics required for eachmission. Other factors that have impacted, and are expected to continue toimpact earnings and cash flows for this business unit include:

 

·                  NASA’s use of our space shuttlemodules and related space assets that utilize our competencies in configurationand cargo handling;

 

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·                  Commercial demand for access to spacelaunch capability and need for research cargo logistics; and

·                  Space shuttle mission requirementsfor the manufacture of specialized cargo handling equipment.

 

**Corporate and Other**

** **

Significant items impacting future corporate expenses,earnings, and cash flow includes:

 

·                  Our ability to control sales, generaland administrative costs in a period of economic uncertainty and pursuit of newbusiness opportunities.

·                  Interest costs on our variable ratebank financings and interest earnings on our declining restricted cashbalances.

·                  Income taxes and our ability toutilize net operating loss carry forwards to offset future taxes, state incometaxes, and the Texas margin tax.

 

**NEW BUSINESS INITIATIVES**

** **

Our identified new business initiatives are focused onspace-based life sciences, end-to-end space mission assurance services, andcommercialization of space-based technologies, which are natural extensions ofour 23 years of space industry experience and our core capabilities in thesefields. These new business initiatives will require large investments ofcapital and technical expertise. As of December 31, 2008, we have recordedno revenue from these new business initiatives.

 

**Astrogenetix, Inc. formerly BioSpaceTechnologies, Inc.**

** **

Through Astrogenetix, a natural extension of SPACEHAB’smany years of experience preparing, launching, and operating over 1,500 sciencepayloads in space, the Company is transitioning from supportinggovernment-sponsored basic research into producing commercial products from themicrogravity discoveries. This new business initiative involves the use ofmicrogravity platforms, such as the Space Shuttle and the ISS, for thedevelopment of space-made products that are to be sold on Earth. Astrogenetixhas successfully processed vaccine samples in space on Space Shuttle Flights,STS-118, STS-123, and STS-124, which have resulted in preliminary salmonellavaccine production data.

 

**SPACETECH, Inc.**

** **

SPACETECH is an incubator envisioned to commercializespace-industry technologies into real-world applications to be sold toconsumers and industry. The 1st Detect mini-massspectrometer and the AirWard hazardous cargo containers, both developed bySPACEHAB engineers, are being positioned for entry into the commercialmarketplace. AirWard is a shipping container designed to meet the specificrequirements of the U.S. Department of Transportation for all commercial airlinesin U.S. airspace to protect pressurized oxygen bottles from flame and heatduring flight. The 1st Detect mini-mass spectrometer offers a lowpower, portable detection device with potential applications in homelandsecurity, medical, and defense industries. 1st Detect has been awarded a DevelopmentalTesting and Evaluation designation from the U.S. Department of HomelandSecurity as a “promising anti-terrorism technology.”

 

**RESULTS OF OPERATIONS**

** **

*For the three months ended December 31, 2008,as compared to the three months ended December 31, 2007.*

 

Revenue. Revenue decreasedapproximately 12% to $3.8 million for the three months ended December 31,2008, as compared to $4.3 million for the three months ended December 31,2007 (in millions).

 
| ** **            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-----------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **            | ** ** | **December 31,**            | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **            | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| Flight Services       |       | $                                | —     |       | $          | 0.5         |       | $ | (0.5 | ) | 100 | % |
| Astrotech             |       | 3.7                              |       | 2.4        |       | 1.3         |       | 54 | % |
| Engineering  Services |       | 0.1                              |       | 1.4        |       | (1.3        | )          | (93 | )% |
| Other                 |       | 0.0                              |       | 0.0        |       | —      |       | — |   |
|                  |       | $                                | 3.8        |       | $          | 4.3         |       | $ | (0.5 | ) | (12 | )% |

 

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·                  Revenue from our SFS business unitdecreased by $0.5 million for the period ended December 31, 2008, ascompared to the same period ended December 31, 2007, as a result of thecompletion of the EVA and PFIP flight hardware produced in the quarter ended December 2007.

 

Revenue from our Astrotech business unit increased by$1.3 million for the three months ended December 31, 2008, as compared tothe three month period ended December 31, 2007. The following summarizessignificant items that affected the three months ended December 31, 2008,as compared to the same period ended December 31, 2007:

 

·                  Increase of $0.3 million a result ofrevenue earned on construction of the high-bay project in Vandenberg, CA.

·                  Increase of $1.0 million over theprior year quarter ended December 31, 2007, a result of the processing ofall or part of six missions as compared to only one mission in the prior fiscalyear.

 

Revenue from our SGS business unit decreased by $1.3million for the period ended December 31, 2008, as compared to the sameperiod ended December 31, 2007, as a result of the termination of thesubcontract with ARES on the PI&C contract of $1.3 million. The contractwas completed in June 2008.

 

Cost of Revenue. Cost of revenue forthe three months ended December 31, 2008, decreased by 29% toapproximately $3.3 million, as compared to $4.5 million for the same period ofthe prior year (in millions).

 
| ** **            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-----------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **            | ** ** | **December 31,**            | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **            | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| Flight Services       |       | $                                | 0.5        |       | $          | 1.1         |       | $ | (0.6 | ) | (55 | )% |
| Astrotech             |       | 2.6                              |       | 2.2        |       | 0.4         |       | 18 | % |
| Engineering  Services |       | 0.2                              |       | 1.2        |       | (1.0        | )          | (83 | )% |
| Other                 |       | 0.0                              |       | 0.0        |       | —      |       | — |   |
|                  |       | $                                | 3.3        |       | $          | 4.5         |       | $ | (1.2 | ) | (27 | )% |

 

The following summarizessignificant items that affected the three months ended December 31, 2008,as compared to the same period ended December 31, 2007 for SFS:

 

·                  Decrease in cost of revenue relatedto the completion of the EVA and PFIP flight hardware contracts amounted toapproximately $0.3 million.

·                  Decrease in cost of revenue relatedto further reductions in work force was $0.3 million as the Company had no futurespace shuttle missions manifested to utilize its modules.

 

The increase in cost of revenue from our Astrotechbusiness unit of $0.4 million is attributed to the increased number of missionsprocessed in the three months ended December 31, 2008, as compared to thethree months ended December 31, 2007.

 

The decrease in cost of revenue of $1.1 million in ourSGS business unit is primarily resulting from the elimination of labor costassociated with the PI&C contract that terminated in June 2008.

 

Operating Expenses. Operatingexpenses were $2.7 million for the three months ended December 31, 2008,approximately the same as for the three months ended December 31, 2007.The following summarizes the significant differences between the two periods:

 

·                  Selling, general and administrativeexpenses were unchanged for the three months ended December 31, 2008, ascompared to the three months ended December 31, 2007, as the cost of theCompany’s Austin, Texas administrative office and personnel off-set staffreductions and relocation of the Houston, Texas administrative office.

·                  R&D expenses increasedapproximately $0.1 million for the three months ended December 31, 2008,as compared to the three months ended December 31, 2007, as the Companyincreased its R&D of its mini-mass spectrometer and BioSpace vaccineprogram.

 

Interest Expense. Interest expensewas approximately $0.2 million for the three months ended December 31,2008, as compared to approximately $46,000 for the three months ended December 31,2007. The increase in interest expense is primarily due to the Company’s $4.0million term note closed in February 2008 and advances, since repaid, onthe Company’s revolving credit facility.

 

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Interest and Other Income. Interestincome is earned on our mortgage receivable due to the sale of our payloadprocessing facility in our SFS segment and on investment of our restrictedcash. For the three months ended December 31, 2008, we earned $0.1 millionon our investment of restricted cash compared to $0.2 million for the threemonths ended December 31, 2007. The change was a result of higher cashbalances and interest rates for the three months ended December 31, 2007as compared to the three months ended December 31, 2008. We recognized aloss of ($30.2) million from the conversion of Junior and Senior Notes tocommon stock in the three months ended December 31, 2007, and a gain of$0.7 million on repurchase of $1.8 million of our notes in the three monthsended December 31, 2008.

 

Income Taxes. Based on our projectedeffective tax rate for fiscal year 2008 and 2007, we recorded no tax expense.

 

Net Loss. Net Loss for the threemonths ended December 31, 2008, was approximately ($1.6) million or($0.09) per share as compared to net loss of approximately ($32.8) million or($4.36) per share for the three months ended December 31, 2007.

 

*For the six months ended December 31, 2008, ascompared to the six months ended December 31, 2007.*

 

Revenue. Revenue decreasedapproximately 24% to $9.8 million for the six months ended December 31,2008, as compared to $12.9 million for the six months ended December 31,2007 (in millions).

 
| ** **            | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-----------------------|------------|--------------------------------|------------|------------|------------|-------------|------------|
| ** **            | ** ** | **December 31,**          | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **            | ** ** | **2008**                       | ** ** | **2007**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| Flight Services       |       | $                              | 0.2        |       | $          | 4.1         |       | $ | (3.9 | ) | (95 | )% |
| Astrotech             |       | 9.4                            |       | 6.1        |       | 3.3         |       | 54 | % |
| Engineering  Services |       | 0.2                            |       | 2.7        |       | (2.5        | )          | (93 | )% |
| Other                 |       | 0.0                            |       | 0.0        |       | —      |       | — |   |
|                  |       | $                              | 9.8        |       | $          | 12.9        |       | $ | (3.1 | ) | (24 | )% |

 

Revenue from our SFS business unit decreased by $3.9million for the period ended December 31, 2008, as compared to the sameperiod ended December 31, 2007. The following summarizes the significantitems that affected the period ended December 31, 2008, as compared to theperiod ended December 31, 2007:

 

·                  Decrease in revenue of $3.3 million aresult of the mission work for the STS-118 under the Lockheed Martin CMCcontract that was completed in September 2007.

·                  The remaining decrease of $0.6million due to the completion and delivery of the EVA and PFIP flight hardwarein November 2007.

 

Revenue from our Astrotech business unit increased by$3.3 million for the six months ended December 31, 2008, as compared tothe six month period ended December 31, 2007. The following summarizessignificant items that affected the six months ended December 31, 2008, ascompared to the same period ended December 31, 2007:

 

·                  Increase in revenue of $1.5 milliondue to the processing of all or part of eight missions at our Florida andCalifornia facilities whereas only four were processed for the six months endedDecember 31, 2007.

·                  Increase of $1.0 million a result oftwo Sea Launch missions processed and launched during the six months ended December 31,2008, as compared to no missions for this same period ended December 31,2007.

·                  Revenue recognized on the Californiahigh-bay facility resulted in a $0.8 million increase over the six months endedDecember 31, 2007, where none of this revenue was recognized.

 

Revenue from our SGS business unit decreased by $2.5million for the period ended December 31, 2008, as compared to the sameperiod ended December 31, 2007, due to our subcontract with ARES on thePI&C contract being terminated in June 2008.

 

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Cost of Revenue. Cost of revenue forthe six months ended December 31, 2008, decreased by 38% to approximately$6.8 million, as compared to $10.9 million for the same period of the prioryear (in millions).

 
| ** **            | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-----------------------|------------|--------------------------------|------------|------------|------------|-------------|------------|
| ** **            | ** ** | **December 31,**          | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **            | ** ** | **2008**                       | ** ** | **2007**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| Flight Services       |       | $                              | 1.0        |       | $          | 4.1         |       | $ | (3.1 | ) | (76 | )% |
| Astrotech             |       | 5.6                            |       | 4.6        |       | 1.0         |       | 22 | % |
| Engineering  Services |       | 0.2                            |       | 2.2        |       | (2.0        | )          | (91 | )% |
| Other                 |       | 0.0                            |       | 0.0        |       | —      |       | — |   |
|                  |       | $                              | 6.8        |       | $          | 10.9        |       | $ | (4.1 | ) | (38 | )% |

 

The following summarizes significant items that affectedthe six months ended December 31, 2008, as compared to the same periodended December 31, 2007 for SFS:

 

·                  Decrease in cost of revenue of $1.0million due to the lease payments on the ICC/VCC assets that ceased as theLockheed Martin CMC contract ended with the STS-118 mission in September 2007.

·                  Decrease of depreciation expense of$0.4 million due to the further write down of flight assets in September 2007.

·                  Decrease of direct labor associatedwith reductions in the work force amounted to approximately $1.5 million.

·                  Decrease in R&D labor attributedto the ARCTUS bid and proposal effort of approximately $0.2 million.

 

The followingsummarizes significant items that affected the six months ended December 31,2008, as compared to the same period ended December 31, 2007 forAstrotech:

 

·                  Cost recorded for the Californiahigh-bay construction contract excluding the subcontract cost was $0.3 millionand was not present for the period ended December 31, 2007.

·                  Increased cost associated with theprocessing of eight missions for the period ended December 31, 2008, asopposed to four for the period ended December 31, 2007, was approximately$0.7 million.

 

The decrease of $2.0 million in our SGS business unitis primarily due to the termination of the PI&C contract in June 2008that resulted in a significant reduction in associated labor cost.

 

Operating Expenses. Operatingexpenses increased to $4.9 million for the six months ended December 31,2008, as compared to approximately $4.8 million for the six months ended December 31,2007. The following summarizes the significant differences between the twoperiods:

 

·                  Selling, general and administrativeexpenses were $3.8 million for the six months ended December 31, 2008, ascompared to $4.0 million for the six months ended December 31, 2007, asthe cost of the Company’s Austin, Texas administrative office and personneloffset staff reductions and relocation of the Houston, Texas administrativeoffice.

·                  R&D expenses increasedapproximately $0.3 million for the six months ended December 31, 2008, ascompared to the six months ended December 31, 2007, as the Companyincreased its R&D of its mini-mass spectrometer and BioSpace vaccineprogram.

 

Interest Expense. Interest expensewas approximately $0.4 million for the six months ended December 31, 2008,as compared to approximately $1.1 million for the six months ended December 31,2007. The decrease in interest expense is primarily due to the conversion of$7.4 million of 8.0% convertible subordinated notes due October 2007 and$46.1 million of our 5.5% senior convertible notes due October 2010 intocommon and convertible preferred stock on October 5, 2007, and repaymentof the remaining $2.9 million of 8.0% convertible subordinated notes on October 15,2007. Interest expense in the six months ended December 31, 2008, includesinterest on our $4.0 million term note and advances on our revolving creditfacility that have been since repaid.

 

Interest and Other Income. Interestincome is earned on our mortgage receivable due to the sale of our payloadprocessing facility in our SFS segment and on our restricted cash. We earnedinterest income of $0.2 million over the six month period ended December 31,2008, from interest of our restricted cash which resulted from higher cashbalances and interest rates. We recognized non cash debt conversion expense of($30.2) million from the conversion of Junior and Senior Notes to common stockin the six months ended December 31, 2007, and a gain of $0.7 million onthe repurchase of $1.8 million principal amount of our notes in the six monthsended December 31, 2008.

 

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Income Taxes. Based on our projectedeffective tax rate for fiscal year 2008 and 2007, we recorded no tax expense.

 

Net Loss. Net Loss for the sixmonths ended December 31, 2008, was approximately ($1.5) million or($0.09) per share as compared to net loss of approximately ($33.7) million or($7.72) per share for the six months ended December 31, 2007. The net lossfor the six months ended December 31, 2008, includes a non cash gain of$0.7 million for the note repurchase. The net loss for the six months ended December 31,2007, included a non cash debt conversion expense of ($30.2) million from ourinduced conversion of convertible securities.

 

**Liquidity and Capital Resources**

** **

Our primary source of liquidity is cash flow fromoperations. The principal uses of cash flow that affect our liquidity positioninclude both operational expenditures and debt service payments. Management isfocused on increasing cash flow and on managing cash effectively throughlimiting cash investments in long-term assets and reducing overhead expenses.

 

*Cash Flows From Operating Activities.*Cashused in operations for the six months ended December 31, 2008, was approximately $0.3 million. During thesix months ended December 31, 2007, cash used in operations was ($6.4)million. The significant items affecting the differences in cash flowsfrom operating activities for the six months ended December 31, 2008, ascompared to the six months ended December 31, 2007, are discussed below:

 

·                  Net loss for the six months ended December 31, 2008, was ($1.5) million as comparedto net loss for the six months ended December 31,2007, of ($33.7) million. Included in the net loss for the six months ended December 31,2007, is ($30.2) million of debt conversion expense recognized as a result ofthe bond exchange transaction in October 2007. The net loss for the sixmonths ended December 31, 2008, included a non cash gain of $0.7 millionon the purchase of $1.8 million of the Company’s notes on the open market.

·                  Depreciation and amortization for thesix months ended December 31, 2008,was $1.2 million as compared to $1.7 million for the six months ended December 31, 2007, reflecting completion ofthe Company’s last module mission in October 2007 and ending of depreciationon the module assets.

·                  Stock based compensation increasedfrom $0.1 million in the six months ended December 31, 2007, to $0.2million in the six months ended December 31, 2008, due to special stock,restricted stock, and option grants in the six months ended December 31,2008.

·                  Restricted cash decreased in the sixmonths ended December 31, 2008, by $1.3 million while advances on theconstruction contract related to the restricted cash decreased by $1.0 millionresulting in a net increase in net cash used by operations of $0.3 millionwhile restricted cash and advances on the construction contract increased by anet amount using $2.4 million in the six months ended December 31, 2007.

·                  Accounts receivable increased by $1.0million in the six months ended December 31, 2008, compared to a decreaseof $3.4 million in the six months ended December 31, 2007, as the finalmodule mission was completed in October 2007. The increase in accountsreceivable for the six months ended December 31, 2008, includes $1.4million held in dispute by a customer.

·                  Deferred revenue increased by $1.6million in the six months ended December 31, 2008, reflecting advancedeposits on scheduled but delayed ground processing missions. In the six monthsended December 31, 2007, deferred revenue decreased by $0.6 million as thefinal space shuttle mission was completed.

·                  Accounts payable decreased by $1.1million in the six months ended December 31, 2008, as the PI&Ccontract was completed. In the six months ended December 31, 2007,accounts payable increased $2.0 million upon conclusion of the final modulemission and settlement of lease and subcontracted work on the module missionswith Astrium.

·                  A deposit of $3.1 million on thefinal space shuttle mission and accrued subcontracted services on the modulemission were paid in the six months ended December 31, 2007.

 

*Cash Flows From Investing Activities*.For the six months ended December 31, 2008 and 2007, cash flows used ininvesting activities were $0.2 million and $0.1 million, respectively,reflecting routine capital expenditures.

 

*Cash Flows From Financing Activities.*Forthe six months ended December 31, 2008 and 2007, cash flows used infinancing activities were $1.2 million and $2.9 million, respectively. Thesignificant items affecting the differences in cash flows from financingactivities for the six months ended December 31, 2008, as compared to thesix months ended December 31, 2007, are discussed below:

 

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·                  As part of the bond conversion, wepaid off the $2.9 million principal balance of the 8.0% junior subordinatednotes payable to bondholders not participating in the exchange for stock duringthe period ended December 31, 2007. In the six months ended December 31,2008, we purchased $1.8 million principal amount of our notes on the openmarket for $1.1 million.

·                  For the six months ended December 31,2008, we had payments on our Astrotech payload processing facility term note of$0.1 million.

 

**Liquidity**

** **

On March 25, 2003 the Board of Directorsauthorized us to repurchase up to $1.0 million of our outstanding common stockat market prices. On September 25, 2008, the Board of Directors authorizedthe repurchase of up to an additional $6.0 million of our outstanding commonstock or our outstanding 5.5% convertible notes at market prices. Any purchasesunder our stock repurchase program may be made from time to time, in the openmarket, through block trades or otherwise in accordance with applicableregulations of the SEC. As of December 31, 2008, we had repurchased 11,660shares at a cost of $117,320 under the program, which represents an averagecost of $10.06 per share. In October 2008, the Company purchased$1,750,000 principle amount of its outstanding convertible notes at a price of$1,085,000 plus accrued interest. We will continue to evaluate the stockrepurchase program and the funds authorized for the program.

 

Management continues to focus its efforts on improvingoverall liquidity through identifying new business opportunities within theareas of our core competencies, reducing operating expenses, and limiting cashcommitments for future capital investments and new asset development.Additionally, management continues to evaluate operating expenses in an effortto reduce or eliminate costs not required to effectively operate the Company.

 

As of December 31, 2008, we had cash andrestricted cash on hand of $7.3 million and our working capital deficit was$0.3 million. Restricted cash, which consists of advance payments on agovernment contract to modify certain spacecraft processing facilities andrestricted deposits related to bank covenants, totaled $7.1 million at December 31,2008. We carry a current liability of $4.0 million for obligations under thisconstruction contract.

 

In February 2008 (see Note 5), we consummated afinancing facility with a commercial bank. This facility provides for a threeyear $4.0 million term loan, payable in monthly installments of principal inthe amount of $22,222 plus interest and a $2.0 million revolving creditfacility. The term loan is secured by the assets of our Astrotech subsidiaryand the one-year revolving credit facility is secured by Astrotech’s accountsreceivable. As of December 31, 2008, we have a balance of $3.7 millionoutstanding on the term note and nothing outstanding on the revolving creditfacility.

 

**Construction Contract Contingency**

** **

In August 2007 we entered into a $14.0 millionmodification to our existing Vandenberg construction contract, which increasedthe contract to a total of $34.0 million. Subsequent modifications to thecontract have increased the amount to $35.2 million. The modification requiresus to complete the construction on the redesigned facility by September 30,2009. The modification contains penalties if we do not meet the contractedcompletion date. As a result we have a contingency of up to $3.0 million inpenalties.

 

**Off-Balance Sheet Arrangements**

** **

We do not have any significant off-balance sheetarrangements, other than operating leases, that have, or are reasonably likelyto have, a current or future material effect on our financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

** **

We have no material changes to the disclosure maderegarding market risk in our Annual Report on Form 10-K for the year endedJune 30, 2008.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

** **

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we have evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures as of theend of the period covered by this quarterly report, and, based on ourevaluation, our 

 

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principal executive officerand principal financial officer have concluded that these controls andprocedures are effective. There have been no changes in our internal controlover financial reporting that occurred during our last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

Disclosure controls andprocedures are our controls and other procedures that are designed to ensurethat information required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized, and reportedwithin the time periods specified in the SEC’s rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to provide reasonable assurance that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isaccumulated and communicated to our management, including our principalexecutive officer and principal financial officer, as appropriate to allowtimely decisions regarding required disclosure.

 

**PART II:  OTHER INFORMATION**

** **

**ITEM 1.  LEGAL PROCEEDINGS**

** **

Currently, theCompany is not a party to any pending or threatened proceedings, which inmanagement’s opinion, would have a material adverse effect on our business,financial condition, or results of operation.

 

**ITEM 1A.  RISK FACTORS**

** **

There have been nomaterial changes in the Risk Factors disclosed in Item 1A in our Annual Reporton Form 10-K for the year ended June 30, 2008.

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

** **

During the six months ended December 31, 2008, wedid not issue any unregistered securities.

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

** **

During the six months ended December 31, 2008, wedid not have any defaults upon senior securities.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

** **

During the six months ended December 31, 2008, wedid not have any submissions of matters to a vote of security holders.

 

**ITEM 6.  EXHIBITS**

** **

The following exhibits are filed herewith:

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                         |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                    |
| 31.1             |       | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934. |
|             |       |                                                                                                                    |
| 31.2             |       | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934. |
|             |       |                                                                                                                    |
| 32               |       | Certification  pursuant to Rule 13a-14(b) of the Securities and Exchange Act of  1934.                        |

** **

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** **

**SIGNATURE**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                          | SPACEHAB, INCORPORATED                                                       |
|-------------------------------|------------------------------------------------------------------------------|
|                          |                                                                         |
|                          |                                                                         |
| Date: February 11,  2009 |   /s/Thomas  B. Pickens, III                                  |
|                          |   Thomas B. Pickens, III                                      |
|                          |   Chief  Executive Officer                                         |
|                          |                                                                         |
|                          |                                                                         |
|                          |   /s/Brian K.  Harrington                                          |
|                          |   Brian K. Harrington                                              |
|                          |   Senior Vice  President and     Chief Financial Officer |

 

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