As filed with the Securities and Exchange Commission on October 1, 2004.
Registration Statement No.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------------
SPACEDEV, INC.
(Exact name of registrant as specified in its charter)
COLORADO 3761 84-1374613
------------------------------- ------ ----------------------
(State or other (Primary standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
13855 STOWE DRIVE
POWAY, CALIFORNIA 92064
(858) 375-2000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-------------------------
JAMES W. BENSON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
SPACEDEV, INC.
13855 STOWE DRIVE
POWAY, CALIFORNIA 92064
(858) 375-2020
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
-------------------------
Copies to:
GRETCHEN COWEN, ESQ.
WEINTRAUB DILLON PC
12520 HIGH BLUFF DRIVE, SUITE 260
SAN DIEGO, CALIFORNIA 92130
(858) 259-2529
Approximate date of commencement of proposed sale to public: FROM TIME TO TIME
AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
PAGE
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: | |
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box: |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: | |
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: | |
If delivery of the prospectus is expected to be made pursuant to Rule 434 under
the Securities Act, please check the following box: | |
CALCULATION OF REGISTRATION FEE
-------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF. . . . . AMOUNT TO OFFERING PRICE AGGREGA REGISTRATION
SECURITIES TO BE REGISTERED . . BE REGISTERED (1) PER SHARE OFFERING PRICE FEE
------------------------------- ----------------- ----------------- --------------- --------------
Common Stock, $0.0001 par value,
underlying Preferred Stock & Dividends 1,845,779 1.5400(3) 2,842,500 $360.14
Common Stock, $0.0001 par value,
underlying Warrants. . . . . . . . . . 487,000 1.7700(4) 861,990 $109.21
Common Stock, $0.0001 par value,
underlying Convertible Note. . . . . . 1,000,000(2) 1.0000(5) 1,000,000 $126.70
Common Stock, $0.0001 par value,
underlying Warrants. . . . . . . . . . 50,000 1.9250(6) 96,250 $12.19
------------------------------- ----------------- ----------------- --------------- ----------------
Total. . . . . . . . . . . . . . . . . 3,382,779 4,800,250 $608.19
------------------------------- ----------------- ----------------- --------------- ----------------
------------------------------- ----------------- ----------------- --------------- ----------------
(1) In the event of a stock split, stock dividend, or similar transaction
involving common stock of the registrant, in order to prevent dilution, the
number of shares registered shall be automatically increased to cover the
additional shares in accordance with Rule 416(a) under the Securities Act.
This registration statement covers an aggregate of 4,635,867 shares.
(2) Represents 100% of the good faith estimate of the number of shares that are
issuable to the selling security holder following the conversion of
interest on and/or principal of a convertible note held by the selling
ii
PAGE
security holder. If our good faith estimate is incorrect and we determine
that additional common stock will be required to cover all principal and
interest payments, we will be required to file a new registration statement
to register any such additional shares.
(3) On August 25, 2004, we entered into a Securities Purchase Agreement with
the Laurus Master Fund, Ltd. whereby SpaceDev issued 250,000 shares of its
Series C Convertible Preferred Stock (the "Preferred Stock"), par value
$0.001 per share, to Laurus for an aggregate purchase price of $2,500,000
or $10.00 per share. The Preferred Shares are convertible into the $0.0001
par value Common Stock of the Company at a rate of $1.54 per share (or
1,623,377 shares) at any time after the date of issuance, and pay
quarterly, cumulative dividends at a rate of 6.85% with the first payment
due on January 1, 2005. Dividends are payable in cash or shares of Common
Stock at the holder's option with the exception that dividends must be paid
in shares of Common Stock for up to 25% of the aggregate dollar trading
volume if the fair market value of the Common Stock for the 20-days
preceding the conversion date exceeds 120% of the Conversion Rate. The
1,845,779 shares represents 100% of the good faith estimate of the number
of shares that are issuable to the selling preferred security holder
following the payment of stock dividends (222,402) on and/or conversion of
the preferred stock (1,623,377 shares) held by the selling preferred
security holder. If our good faith estimate is incorrect and we determine
that additional common stock will be required to cover all principal and
dividend payments, we will be required to file a new registration statement
or a post-effective amendment to register any such additional shares.
(4) In conjunction with the Preferred Shares, we issued a five-year common
stock purchase warrant to Laurus for the purchase of 487,000 shares of
Common Stock at an exercise price of $1.77.
(5) Also in conjunction with the preferred stock financing, Laurus has agreed
to extend our current revolving credit facility reported on Form 8-K filed
June 18, 2003 from $1.0 million to $1.5 million. The first $1,000,000
converted under the revolving credit facility was converted last year and
earlier this year at a rate of $0.55 per share. On March 31, 2004, the
conversion price for the next $500,000 under the revolving credit facility
was set at $0.85 per share and is represented by the 588,235 shares listed
above. The next $1 million under the revolving credit facility will be
convertible by Laurus at a rate of $1.00 per share.
(6) In conjunction with the Laurus revolving credit facility, we are required
to register a final warrant of 50,000 shares at an exercise price of $1.925
per share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING UNDER SECTION 8(a), MAY
DETERMINE.
iii
PAGE
SUBJECT TO COMPLETION, DATED OCTOBER 1, 2004.
PROSPECTUS
SPACEDEV, INC.
3,382,779 SHARES OF COMMON STOCK
This prospectus relates to the resale by security holders of up to
3,382,779 shares of our common stock underlying (1) convertible preferred
stock and estimated accrued dividends thereon for up to 1,845,779 shares, (2) a
common stock purchase warrant for up to 487,000 shares issued to Laurus on
August 25, 2004, (3) a three-year secured convertible note, or the Convertible
Note, issued to Laurus in the principal amount of $1,000,000 representing
1,000,000 shares, and (4) a common stock purchase warrant for up to 50,000
shares issued to Laurus on August 25, 2004. We will not receive any of the
proceeds from the sale of the shares by the selling security holder. We have
not retained any underwriter in connection with the sale of the securities. We
have paid, on behalf of the selling security holder, the expenses of the
offering estimated to be approximately $32,000.
Our common stock trades on the Over-the-Counter Bulletin Board under the
symbol "SPDV." The last reported sale price of our common stock on September
29, 2004, was $2.18 per share.
Our principal offices are located at 13855 Stowe Drive, Poway, California
92064, and our telephone number is (858) 375-2030.
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. AS YOU REVIEW THE PROSPECTUS, YOU
SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER "RISK FACTORS" BEGINNING
ON PAGE 7.
-------------------------
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING
AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
The date of this prospectus is October 1, 2004.
PAGE 1
TABLE OF CONTENTS
Page
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PROSPECTUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
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TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
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PROSPECTUS SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
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Our Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
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The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
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Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . 6
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RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . 16
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SELLING SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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PLAN OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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Forward Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
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Business Strategy . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . 27
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Products and Services; Market. . . . . . . . . . . . . . . . . . . . . . . . . . 28
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Components and Raw Materials.. . . . . . . . . . . . . . . . . . . . . . . . . . 31
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Competition . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . 31
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The Laurus Master Fund, Ltd. Revolving Credit Facility . . . . . . . . . . . . . 32
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Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
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Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
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Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 36
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Results Of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
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Liquidity And Capital Resources. . . . . . . . . . . . . . . . . . . . . . . . . 47
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Critical Accounting Standards. . . . . . . . . . . . . . . . . . . . . . . . . . 51
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Recent Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . 51
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Forward-Looking Statements And Risk Analysis . . . . . . . . . . . . . . . . . . 51
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DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . . . . . . . . . . 54
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MARKET FOR COMMON EQUITY & RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . 55
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Market Information. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
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Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
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Dividends . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 56
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PAGE 2
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS & CONTROL PERSONS. . . . . . . . . . . . . . 57
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EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
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Remuneration Paid To Executives .. . . . . . . . . . . . . . . . . . . . . . . . 62
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Remuneration Paid To Directors. .. . . . . . . . . . . . . . . . . . . . . . . . 63
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Director Committees . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 64
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Employment Agreements . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 64
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Employee Benefits . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 65
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . . 67
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DESCRIPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
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Common Stock. . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 69
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Warrants. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 70
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Transfer Agent and Registrar. . .. . . . . . . . . . . . . . . . . . . . . . . . 71
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DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES . 71
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . 71
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EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
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LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
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WHERE YOU CAN FIND MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 74
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FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F1-F44
PAGE 3
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because it
is a summary, it necessarily does not contain all of the information necessary
to your investment decision. To understand this offering fully, you should read
carefully the entire prospectus, especially the risks of investing in our common
stock discussed under "Risk Factors."
In connection with a strategic financing with the Laurus Master Fund, Ltd.,
or simply Laurus, this prospectus covers the resale of up to: 1) 1,845,779
shares of our common stock that are issuable upon conversion of convertible
preferred stock and accrued dividends thereon; and 2) 1,000,000 shares of our
common stock that are issuable upon conversion of a three-year Secured
Convertible Note, in the principal amount of $1,000,000. In addition, this
prospectus covers the resale of up to: (1) 537,000 shares of common stock
issuable upon exercise of outstanding warrants to Laurus (collectively referred
to as the "Laurus Warrant").
OUR COMPANY
We are engaged in the conception, design, development, manufacture,
integration and operations of space technology systems, products and services.
We are currently focused on the commercial development of low-cost
microsatellites, nanosatellites and related subsystems, and hybrid rocket
propulsion as well as the associated engineering technical services to
government, aerospace and other commercial enterprises. Our products and
solutions are sold directly to these customers and include sophisticated micro-
and nanosatellites, hybrid rocket-based orbital Maneuvering and orbital Transfer
Vehicles as well as safe sub-orbital and orbital hybrid rocket-based propulsion
systems. We are also developing commercial hybrid rocket motors and small high
performance space vehicles and subsystems. See "Description of Business" for
more information.
THE OFFERING
Common stock underlying the
interest and/or principal of the
Convertible Note 1,000,000 shares
Common stock underlying the Laurus Warrants 537,000 shares
Common stock underlying the
dividend and/or principal of the
Preferred Stock 1,845,779 shares
Common Stock Outstanding after
Exercise of outstanding Warrants, the
Laurus Warrant, the Preferred Stock and the
Convertible Note based on shares outstanding on
September 1, 2004 23,782,527 shares
PAGE 4
Termination of the Offering The offering will conclude upon the
earlier of the sale of all
3,382,779 shares of common stock
registered, the date the shares no
longer need to be registered to be sold
or the three- year anniversary of the
effective date of the registration
statement of which this prospectus is a
part.
Use of Proceeds All proceeds from the sale of shares
underlying the Convertible Note and the
Laurus Warrant will be received by the
selling security holders for their own
accounts. See "Use of Proceeds."
Risk Factors You should read the "Risk Factors"
beginning on page 7, as well as other
cautionary statements throughout this
prospectus, before investing in shares
of our common stock.
PAGE 5
SELECTED CONSOLIDATED FINANCIAL DATA
The following financial data is provided as of and for the fiscal years
ended December 31, 2003 and 2002 and as of and for the six-months ending June
30, 2004 and 2003. The financial data as of and for the fiscal years ending
December 31, 2003 and 2002 is derived from, and is qualified by reference to,
the audited consolidated financial statements and the notes to those
consolidated financial statements which are a part of this prospectus. The
financial data as of and for the six-months ending June 30, 2004 and 2003
is derived from, and is qualified by reference to, unaudited consolidated
financial statements, which are a part of this prospectus. In the opinion of
our management, those unaudited consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial data as of and for the six-months ending June
30, 2004 and 2003. Our historical results are not necessarily indicative of
results to be expected for any future periods.
SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
YEARS ENDING SIX MONTHS ENDING
DECEMBER 31, JUNE 30,
(Audited) (Unaudited)
2003 2002 2004 2003
-------------- ------------------- ------------ ------------
Net revenues . . . . . . . . . . . . . . . . . . . . $ 2,956,322 $ 3,370,118 $ 2,215,443 $ 1,286,795
Profit (Loss) from operations. . . . . . . . . . . . $ (890,092) $ 13,920 $ 44,785 $ (728,641)
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (1,246,067) $ (376,160) $(1,729,416) $ (917,840)
Basic loss per share . . . . . . . . . . . . . . . . $ (0.08) $ (0.03) $ (0.09) ($0.06)
Weighted average shares outstanding, basic . . . . . 16,092,292 14,744,423 17,410,651 15,092,489
-------------- ------------------- ------------ ------------
SELECTED CONSOLIDATED BALANCE SHEET DATA:
AT DECEMBER 31, AT JUNE 30,
(Audited) (Unaudited)
2003 2002 2004 2003
-------------- ------------- ---------- -----------
Cash and cash equivalents. . . . . . . . . $ 592,006 $ 27,648 $1,226,529 $80,734
Working capital amount/(deficit) . . . . . ($630,805) ($197,381) $685,834 ($736,244)
Total assets . . . . . . . . . . . . . . . $ 1,084,819 $ 3,811,957 $2,054,566 $418,684
Long-term debt, net of current portion . . $ 556,902 $ 661,314 $147,911 $589,448
Stockholders' Deficit. . . . . . . . . . . ($2,072,628) ($1,767,459) ($258,092) ($2,259,358)
-------------- ------------- ----------- ------------
PAGE 6
RISK FACTORS
AN INVESTMENT IN SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE DECIDING TO INVEST OR
MAINTAIN AN INVESTMENT IN SHARES OF OUR COMMON STOCK. THIS PROSPECTUS CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCURS, IT IS LIKELY THAT OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS WOULD BE HARMED. AS A RESULT, THE TRADING PRICE
OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE PART OR ALL OF YOUR
INVESTMENT.
OUR PLAN TO REMAIN CASH FLOW POSITIVE AND BECOME PROFITABLE DEPENDS ON OUR
ABILITY TO INCREASE REVENUES, WHILE CONTROLLING COSTS IN A VARIETY OF AREAS, AS
WELL AS, IMPROVE OUR PROJECT MANAGEMENT EXPERTISE.
Our auditors, PKF, expressed in their formal auditors' opinion dated
February 11, 2004 (except for Note 11 as to which the date is April 2,
2004) that in their opinion, based on their audit, our consolidated financial
statements referred to herein present fairly, in all material respects, the
consolidated financial position of SpaceDev, Inc. and its subsidiary as of
December 31, 2003, and the consolidated results of our operations and our cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. In addition, we have
recorded three consecutive quarters of positive cash flow and two consecutive
quarters of operating profit. However, in previous years, including the
opinion of Nation Smith dated February 13, 2003 herein, our auditors expressed
an opinion that our financial position raised substantial doubt about our
ability to continue as a going concern.
After an analysis of our newly awarded $43,362,271 contract from the
Missile Defense Agency, our projections (including revenue projections) for the
next several quarters and other relevant factors, our auditors concluded there
is no longer substantial doubt as to the Company's ability to continue as a
going concern, and has, therefore, not included the going concern language in
its report dated February 11, 2004 (except for Note 11 as to which the date is
April 2, 2004) for the year ended December 31, 2003. We believe that this was
appropriate and reflects our improved financial condition, our ability to
forecast more accurately and further validation of customer demand for our
technology, products and services. However, our ability to continue as a going
concern depends upon our ability to ultimately implement our plans, which
includes (but is not limited to) generating substantial new revenue from the
Missile Defense Agency by successfully performing under the newly awarded
contract and continuing to attract and successfully complete other government
and commercial contracts, development of a project management expertise to
profitably execute on new business contracts and reduce the working capital
deficit by raising additional capital.
PAGE 7
We recently concluded a preferred stock financing and expanded credit
facility with Laurus in order to raise additional capital to further support
operations as new contracts and business opportunities materialize. Our new
business opportunities, can come from a variety of sources, including state and
federal grants and government and commercial customer programs. However, if we
are in need of further funding, there can be no assurance that we will be
able to obtain such funding or contracts as needed or, if such funding or
contracts are available, that we can obtain then on terms favorable to the
Company. The likelihood of our success must be considered in light of the
expenses, difficulties and delays frequently encountered in connection with the
developing businesses, those historically encountered by us, and the competitive
environment in which we operate.
IF WE ARE UNABLE TO RAISE CAPITAL IN THE FUTURE, WE MAY BE UNABLE TO FUND
OPERATING CASH SHORTFALLS.
Our future capital requirements will depend upon many factors, including
but not limited to sales and marketing efforts, the development of new products
and services, the successful completion of existing projects, possible future
strategic acquisitions, the progress of our research and development efforts,
and the status of competitive products and services. As of June 30, 2004,
December 31, 2003 and 2002, we had working capital of $685,834,and a working
capital deficit of $630,805 and $197,381, respectively, and an accumulated
deficit of $13,547,192, $11,817,776, and $10,571,709, respectively. As of those
dates, we had $1,226,529, $592,006 and $27,648, respectively, in cash and cash
equivalents and $602,151, $187,062 and $82,325, respectively, of accounts
receivable, net of allowance for doubtful accounts.
We believe that current and future available capital resources will be
adequate to fund our operations for the next twelve (12) months. However,
historically we have not been able to generate sufficient cash from our
operating activities and have relied upon cash from financing activities to fund
part of the cash requirements of our operating and investing activities. To the
extent we are in need of any additional financing, it may not be available to us
on acceptable terms, or at all. Our inability to obtain any needed financing
could result in a significant loss of ownership and/or control of our
proprietary technology and other important assets and could also hinder our
ability to fund our continued operations and our product development efforts
that historically have contributed significantly to our competitiveness.
Any financing may cause significant dilution to existing stockholders. Any
debt financing or other financing of securities senior to common stock likely
will include financial and other covenants that will restrict our flexibility.
At a minimum, we expect these covenants to include restrictions on our ability
to pay dividends on our common stock.
SOME OF OUR GOVERNMENT CONTRACTS ARE STAGED AND WE CANNOT GUARANTEE THAT
ALL STAGES OF THE CONTRACTS WILL BE AWARDED TO US OR AT ALL.
Some of our government contracts, including the $43,362,271 MDA
contract awarded on March 31, 2004 , are phased contracts, in which the
customer may determine to terminate the contract between phases for any reason.
We can give no assurance that, as to any such agreement, the entire contract
will be realized by us. In the event that subsequent phases of some of our
government contracts, including but not limited to the MDA contract, are not
awarded to us, it would have a material adverse effect on our business
operations and financial condition, unless equivalent contracts were
simultaneously awarded to us.
PAGE 8
IF A SIGNIFICANT PORTION OF THE CONVERTIBLE NOTE OR THE PREFERRED STOCK OR
THE LAURUS WARRANTS WERE CONVERTED INTO SHARES OF OUR COMMON STOCK, THE VOTING
POWER OF YOUR INVESTMENT AND OUR EARNINGS PER SHARE COULD BE DILUTED.
The Convertible Note in the amount of $1,000,000, that we issued to Laurus,
on June 3, 2003 and subsequently increased to $1,500,000 on August 25, 2004, was
converted by Laurus into 1,818,182 shares of our common stock at an initial
fixed conversion price of $0.55 per share. The next $500,000 of the Convertible
Note may be converted into up to 588,235 shares of our common stock at a fixed
conversion price of $0.85 per share, to the extent that we draw funds on the
credit facility and have not repaid those funds. Thereafter, the next $1,000,000
of the Convertible Note may be converted into up to 1,000,000 shares of our
common stock at a fixed conversion price of $1.00 per share, to the extent that
we draw funds on the credit facility and have not repaid those funds. Finally,
the $2,500,000 of the Preferred Stock and accrued dividends may be converted
into up to 1,845,779 shares of our common stock at a fixed conversion price of
$1.54 per share. The 588,235 shares represent approximately 3% of the 19,146,660
shares of our common stock outstanding on September 1, 2004, the 1,000,000
shares represent approximately 5% of the 19,146,660 shares of our common stock
outstanding on September 1, 2004 and 1,845,779 shares represent approximately 9%
of the 19,146,660 shares of our common stock outstanding on September 1, 2004.
As a result, if the 1,588,235 shares underlying the Convertible Note and
1,845,779 shares underlying the Preferred Stock were converted at the fixed
conversion prices stated above, dilution of the voting power of your investment
and of our earnings per share could continue to occur. Furthermore, after the
conversion by Laurus of the $500,000, or 588,235 shares, plus $1,000,000, or
1,000,000 shares, Laurus has a continuing right to convert, to the extent that
we draw funds on the credit facility and have not repaid those funds, at a fixed
conversion price based on a fair market value formula specified in the
agreement.
In addition, the Laurus Warrant may be exercised for a per share price that
is lower than the current fair market value of our common stock as traded on the
Over-The-Counter Bulletin Board. Although the exercise of those warrants will
result in proceeds to the Company, significant dilution of the voting power of
your investment and of our earnings per share could occur.
THE MARKET PRICE OF OUR COMMON STOCK AND THE VALUE OF YOUR INVESTMENT COULD
SUBSTANTIALLY DECLINE IF ALL OR A SIGNIFICANT PORTION OF THE CONVERTIBLE NOTE
WERE CONVERTED INTO COMMON SHARES WHICH WERE RESOLD INTO THE MARKET, OR IF A
PERCEPTION EXISTS THAT SUCH SALES COULD OCCUR.
If the conversion prices at which the Convertible Note or Preferred Stock,
including stock dividends, is converted, or the exercise price at which the
Laurus Warrant is exercised, are lower than the price at which you made your
investment, immediate dilution of the value of your investment will occur. In
addition, sales of a substantial number of shares of common stock issued upon
conversion of the Convertible Note or exercise of the warrants, or the Preferred
Stock or even the perception that such sales could occur, could adversely affect
the market price of our common stock. You could, therefore, experience a decline
in the value of your investment as a result of both the actual and potential
conversion of Convertible Note and/or the exercise of the Laurus Warrants.
NO ASSURANCE OF SUCCESSFUL OR TIMELY DEVELOPMENT OF PRODUCTS.
Despite our success in designing, launching and monitoring our first
microsatellite and the initial flight of SpaceShipOne, our products and
technologies (including our hybrid rocket technology)_are currently under
various stages of development. Further development and testing will be
required to prove additional performance capability beyond current tests and
commercial viability. Additionally, the final cost of development cannot be
PAGE 9
determined until development is complete. The success, if any, will depend on
the ability to timely complete our projects within estimated cost parameters and
ultimately deploy the product in a cost-effective manner.
THE MARKETPLACE FOR OUR TECHNOLOGY AND PRODUCTS IS UNCERTAIN.
There can be no assurance that there will be a demand for our technology,
products and services or that we will be successful in obtaining a sufficient
market share to sustain our business or to achieve profitable operations. Our
business plan is based on the assumption that significant revenues will be
generated in connection with the government being early adopters and deploying
microsatellites in the near-term with a long-term commercial market developing
for private manned and unmanned space exploration. Because microsatellites and
commercial space exploration are still relatively new concepts, it is difficult
to accurately predict the ultimate size of the market. We have a limited prior
operating history, and there can be no assurance that we will increase our
revenues and become profitable. Additionally, if either the demand for our
products produced or services rendered or if general economic conditions
deteriorate significantly, our business could be impacted to a substantial
degree resulting in lower profitability or losses as a direct result. Many of
our products and services are new and unproven, and the true level of consumer
demand is uncertain. Lack of significant market acceptance of our products and
services, delays in such acceptance, or failure of markets to develop could
negatively affect our business, financial condition, and results of operations.
Many of the factors, which affect us, and our business, are dictated by the
marketplace and are beyond our control.
CONTRACTUAL LIMITATIONS THAT RESTRICT LAURUS' ABILITY TO CONVERT THE
CONVERTIBLE NOTE AND/OR PREFERRED STOCK MAY NOT NECESSARILY PREVENT
SUBSTANTIAL DILUTION OF THE VOTING POWER AND VALUE OF YOUR INVESTMENT.
Laurus may convert the Convertible Note into shares of our common stock to
the extent that a balance exists on the revolving credit facility. Currently,
there is no balance on the revolving credit facility and we have sufficient cash
to fund operations; however, the contractual limitations that restrict Laurus'
ability to convert the Convertible Note into shares of our common stock are
limited in their application and effect and may not prevent dilution of your
investment and we cannot be assured that additional draws on the revolving
credit facility will not be required in the future. Laurus is subject to a
contractual 4.99% beneficial ownership limitation that prohibits Laurus from
converting the Note if and to the extent that the conversion would result
in Laurus, together with its affiliates, beneficially owning more than 4.99% of
our outstanding common stock. However, this 4.99% limitation automatically
becomes void upon an event of default under the Note and can be waived at
any time by Laurus upon 75 days' advance notice to us. In addition, this
4.99% limitation does not prevent Laurus from converting the Note into
shares of common stock and then reselling those shares in stages over time where
Laurus and its affiliates do not, at any given time, beneficially own shares in
excess of the 4.99% limitation. The 4.99% limitation with respect to the
Preferred Stock will be waived if we request redemption of the Preferred Stock
and Laurus chooses to convert the remaining balance of Preferred Stock.
Consequently, these limitations will not necessarily prevent dilution of the
voting power and value of your investment.
BECAUSE OUR STOCK IS SUBJECT TO THE SEC'S PENNY STOCK RULES, BROKER-DEALERS
MAY EXPERIENCE DIFFICULTY IN COMPLETING CUSTOMER TRANSACTIONS AND TRADING
ACTIVITY IN OUR SECURITIES MAY BE ADVERSELY AFFECTED.
Because we currently have less than $5,000,000 in net tangible assets and
the market price of our common stock is less than $5.00 per share, transactions
in our common stock are subject to the "penny stock" rules promulgated under the
Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend
our securities to persons other than institutional accredited investors:
PAGE 10
- must make a special written suitability determination for the purchaser;
- receive the purchaser's written agreement to a transaction prior to sale;
- provide the purchaser with risk disclosure documents which identify
certain risks associated with investing in "penny stocks" and which
describe the market for these "penny stocks" as well as a purchaser's
legal remedies; and
- obtain a signed and dated acknowledgment from the purchaser demonstrating
that the purchaser has actually received the required risk disclosure
document before a transaction in a "penny stock" can be completed.
As a result of these rules, broker-dealers may find it difficult to
effectuate customer transactions and trading activity in our securities may be
adversely affected. As a result, the market price of our securities may be
depressed, and you may find it more difficult to sell our securities.
IF WE ARE UNSUCCESSFUL IN ACHIEVING AND MAINTAINING COMPLIANCE WITH OUR
REGISTRATION OBLIGATIONS WITH REGARD TO THE CONVERTIBLE NOTE PREFERRED STOCK
AND LAURUS WARRANT, WE MAY INCUR SUBSTANTIAL MONETARY PENALTIES.
The agreements we entered into in connection with our issuance of the
Convertible Note, Preferred Stock and the Laurus Warrant require us to,
among other things, register for resale the shares of common stock issued or
issuable under the note, preferred stock and the accompanying warrant and
maintain the effectiveness of the registration statement for an extended period
of time. We are subject to liquidated damage assessment of 2% of the outstanding
principal amount of the Convertible Note and 1.5% of the stated value of the
outstanding Preferred Stock for each thirty (30) days of non-compliance
thereafter, subject to pro ration for partial months. If we are unable to obtain
and maintain effectiveness of the required registration statement, then we may
be required to pay additional liquidated damages, to the extent that any amounts
are drawn under the Convertible Note, which could adversely affect our business,
operating results, financial condition, and ability to service our other
indebtedness by negatively impacting our cash flows.
OUR LIMITED OPERATING HISTORY AND LACK OF EXPERIENCE IN OUR NEW OR PROPOSED
LINES OF BUSINESS MAKES IT DIFFICULT TO PREDICT OUR FUTURE SUCCESS.
We launched our first microsatellite, CHIPSat, in January 2003 and, on
June 21, 2004, our hybrid rocket technology was used to propel SpaceShipOne to
over 50 miles above the earth. We continue to develop other applications
for our other technologies and products. We intend to provide microsatellites to
early adopters, primarily the U.S. military (e.g., the Missile Defense Agency),
and hybrid rocket motors to government and commercial customers (e.g., the Air
Force Research Laboratory and Scaled Composites). However, we have
limited or no operating histories in each of these new or proposed lines of
business. Therefore, our historical financial information is of limited value in
projecting our future success in these markets.
OUR PRODUCTS AND SERVICES ARE TECHNOLOGICALLY ADVANCED AND MAY NOT FUNCTION
UNDER CERTAIN CONDITIONS.
Most of our products are technologically advanced and sometimes novel
systems that must function under demanding operating conditions. Even though we
believe that we employ sophisticated design, manufacturing, and testing
practices, there can be no assurance that our products will be successfully
launched or operated or that they will be developed or will perform as intended.
Like most organizations that have launched satellite programs, we will likely
experience some product and service failures, schedule delays, and other
PAGE 11
problems in connection with our products in the future. Our products and
services are and will continue to be subject to significant technological change
and innovation. Our success will generally depend on our ability to penetrate
and retain markets for our existing products and services and to continue to
conceive, design, manufacture and market new products and services on a
cost-effective and timely basis. We anticipate that we will incur significant
expenses in the design and initial manufacture and marketing of new products and
services. There can be no assurance that we will be able to achieve the
technological advances necessary to remain competitive and profitable, that new
products and services will be developed and manufactured on schedule and on a
cost-effective basis, that anticipated markets will exist or develop for new
products or services, or that our existing products and services will not become
technologically obsolete.
OUR FAILURE TO LAUNCH COULD CAUSE SERIOUS ADVERSE AFFECTS.
Although our current $43 million contract to provide up to six
microsatellites to the Missile Defense Agency is a cost-plus agreement, which
shifts the risk of failure to the buyer, a launch failure could adversely affect
our cash flow in other instances, since a large portion of customer payments may
sometimes be contingent upon a successful launch. Microsatellite launches are
subject to significant risks, including causing disabling damage to or loss of a
microsatellite. Delays in the launch could also adversely affect our revenues as
the customer may have timing requirements for milestone payments or we may have
guarantee requirements. Delays could be caused by a number of factors, including
designing, constructing, integrating, or testing the microsatellite,
microsatellite components, or related ground systems; delays in receiving the
license necessary to operate the microsatellite systems; delays in obtaining the
customer's payload; delays related to the launch vehicle; weather; and other
events beyond our control. Delays and the perception of potential delay could
negatively affect our marketing efforts. There is no assurance that we will be
able to launch microsatellites on a timely basis and any delays in the launch
could have a material adverse effect on our financial position.
OUR EXPANSION INTO OTHER NEW LINES OF BUSINESS MAY DIVERT MANAGEMENT'S
ATTENTION FROM OUR EXISTING OPERATIONS AND PROVE TO BE TOO COSTLY.
We will migrate our technology from projects into products for
microsatellites and hybrid rocket motors over the next several years. In the
meantime, we are investigating other applications of our technology and other
markets for our technologies and prospective products. Our expansion into new
lines of business may be difficult for us to manage because they may involve
different disciplines and require different expertise than our core businesses.
Consequently, this expansion may detract management's time and attention away
from our core business, and we may need to incur significant expenses in order
to develop the expertise including hiring of additional personnel, and
reputation we desire, which could prevent us from generating revenues from these
lines of business in amounts sufficient to justify the expenses we incur in
operating them.
OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR KEY PERSONNEL.
Our success is dependent upon the efforts of certain key members of our
management and engineering team, including our chief executive officer, James W.
Benson, our chief financial officer, Richard B. Slansky, our vice president of
engineering, Frank Macklin and our vice president of business development,
Randall K. Simpson. Each of these individuals has substantial prior
business experience and we have added other experienced key personnel to our
staff. The loss of any of these persons could have a material adverse effect on
us if suitable replacements are not found. Our future success is likely to
depend substantially on our continued ability to attract and retain highly
qualified personnel. The competition for such personnel is intense, and our
inability to attract and retain such personnel could have a material adverse
effect on us. We do not have current key man life insurance on any of our key
personnel.
PAGE 12
THE U.S. FEDERAL GOVERNMENT MAY INCREASE REGULATION, WHICH COULD CAUSE OUR
BUSINESS TO HAVE SERIOUS ADVERSE EFFECTS.
Our business activities are regulated by various agencies and departments
of the U.S. federal government and, in certain circumstances, the governments of
other countries. Several government agencies, including NASA and the U.S. Air
Force, maintain Export Control Offices to ensure that any disclosure of
scientific and technical information complies with the Export Administration
Regulations and the International Traffic in Arms Regulations ("ITAR"). Exports
of our products, services and technical information require either Technical
Assistance Agreements or licenses from the U.S. Department of State depending on
the level of technology being transferred. This includes recently published
regulations restricting the ability of U.S. based companies to complete offshore
launches, or to export certain satellite components and technical data to any
country outside the United States. The export of information with respect to
ground-based sensors, detectors, high-speed computers, and national security and
missile technology items are controlled by the Department of Commerce. The
government is very strict with respect to compliance and has served notice that
failure to comply with the ITAR and/or the Commerce Department regulations may
subject guilty parties to fines of up to US$1 million and/or up to 10 years
imprisonment per violation. Failure to comply with any of the above mentioned
regulations could have serious adverse effects as dictated by the rules
associated with compliance to the ITAR regulations. Our conservative position is
to consider any material beyond standard marketing material to be regulated by
ITAR regulations.
In addition to the standard local, state and national government
regulations that all businesses must adhere to, the space industry has specific
regulations. Command and telemetry frequency assignments for space missions are
regulated internationally by the International Telecommunications Union ("ITU").
In the United States, the Federal Communications Commission ("FCC") and the
National Telecommunications Information Agency ("NTIA") regulate command and
telemetry frequency assignments. All launch vehicles that are launched from a
launch site in the United States must pass certain launch range safety
regulations that are administered by the U.S. Air Force. In addition, all
commercial space launches that we would perform require a license from the
Department of Transportation. Satellites that are launched must obtain approvals
for command and frequency assignments. For international approvals, the FCC and
NTIA obtain these approvals from the ITU. These regulations have been in place
for a number of years to cover the large number of non-government commercial
space missions that have been launched and put into orbit in the last 15 to 20
years. Any commercial deep space mission that we would perform would be subject
to these regulations. At the present time, we are not aware of any additional or
unique government regulations related to commercial space missions.
We are required to obtain permits, licenses, and other authorizations under
federal, state, local and foreign statutes, laws or regulations or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the clean-up or other
remediation thereof. At the present time, we do not have a requirement to obtain
any special environmental licenses or permits.
Our failure to comply with any of the above-mentioned regulations could
have serious adverse effects.
PAGE 13
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE, WHICH COULD
RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES OF OUR COMMON
STOCK.
The market prices of securities of technology-based companies like ours are
highly volatile. The market price of our common stock has fluctuated
significantly in the past. In fact, during the 52-week period ended September 1,
2004, the high and low closing price of a share of our common stock was $2.01
and $0.75, respectively. Our market price may continue to exhibit significant
fluctuations in response to a variety of factors, many of which are beyond our
control. These factors include, among others, deviations in our results of
operations from estimates, changes in estimates of our financial performance,
changes in market valuations of similar companies and stock market price and
volume fluctuations generally. Additionally, until the full effects of our cost
reduction efforts become clear, including whether those cuts have a long-term
negative impact on revenues, it is likely that our quarter-to-quarter
performance will be unpredictable and our stock price particularly volatile.
OUR NET OPERATING LOSS CARRYFORWARDS MAY BE SUBJECT TO AN ANNUAL LIMITATION
ON THEIR UTILIZATION, WHICH MAY INCREASE OUR TAXES AND DECREASE AFTER-TAX INCOME
AND CASH FLOWS.
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes.
The deferred tax asset of approximately $2,855,000 and $2,190,000 as of June 30,
2004 and December 31, 2003, respectively, consisted primarily of the income
tax benefits from net operating loss and capital loss carryforwards,
amortization of goodwill and research and development credits. A valuation
allowance has been recorded to fully offset the deferred tax asset as it is more
likely than not that the assets will not be utilized. The valuation allowance
increased approximately $665,000 in 2004 from $2,190,000 at December 31,
2003 to approximately $2,855,000 at June 30, 2004.
At December 31, 2003 and June 30, 2004, the Company has federal and
state tax net operating loss and capital loss carryforwards of approximately
$4,230,000 and $5,973,000, respectively. The federal and state tax loss
carryforwards will expire in 2023 and 2013, respectively, unless previously
utilized. The State of California suspended the utilization of net operating
loss for 2002 and 2003.
THE CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK GIVES A FEW INDIVIDUALS
SIGNIFICANT CONTROL OVER IMPORTANT POLICY DECISIONS AND COULD DELAY OR PREVENT
CHANGES IN CONTROL.
As of September 1, 2004, our executive officers and directors and their
family members together beneficially owned approximately 56.7% of the
issued and outstanding shares of our common stock. As a result, these persons
could have the ability to exert significant influential control over matters
that could include the election of directors, changes in the size and
composition of the board of directors, and mergers and other business
combinations involving us. In addition, through control of the board of
directors and voting power, they may be able to control certain decisions,
including decisions regarding the qualification and appointment of officers,
dividend policy, access to capital (including borrowing from third-party lenders
and the issuance of additional equity securities), and the acquisition or
disposition of our assets. In addition, the concentration of voting power in the
hands of those individuals could have the effect of delaying or preventing a
change in control of our company, even if the change in control would benefit
our stockholders. A perception in the investment community of an anti-takeover
environment at our company could cause investors to value our stock lower than
in the absence of such a perception.
PAGE 14
OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY IS ESSENTIAL TO THE GROWTH
AND DEVELOPMENT OF OUR PRODUCTS AND SERVICES.
We rely, in part, on patents, trade secrets and know-how to develop and
maintain our competitive position and technological advantage. We have a program
and plan to protect our intellectual property through a combination of license
agreements, patents, trademarks, service marks, copyrights, trade secrets and
other methods of restricting disclosure and transferring title. There is no
guarantee that such applications will be granted. We have and intend to continue
entering into confidentiality agreements with our employees, consultants and
vendors; entering into license agreements with third parties; and generally
seeking to control access to and distribution of our intellectual property.
OUR ABILITY TO SOURCE AND OBTAIN COMPONENTS AND RAW MATERIALS COULD AFFECT
OUR ABILITY TO SATISFY CUSTOMER ORDERS OR CONTRACTS.
We purchase a significant percentage of our components, including
structural assemblies, electronic equipment, and computer chips, from third
parties. We also occasionally obtain from the U.S. Government parts and
equipment that are used in our projects or in the provision of our services. To
date, we have not experienced material difficulty in obtaining product
components or necessary parts and equipment. While we believe that alternative
sources of supply would be available, we may experience increased costs and
possible delays in securing alternative sources of supply. We cannot guarantee
that alternative sources of supply would be available if and when required by
us.
OUR ABILITY TO OBTAIN ONLY LIMITED INSURANCE MAY NOT COVER ALL RISKS.
We may find it difficult to insure certain risks involved in our
operations. Insurance market conditions or factors outside of our control at the
time the insurance is purchased could cause premiums to be significantly higher
than current estimates. Additionally, the U.S. Department of State has published
regulations which could significantly affect the ability of brokers and
underwriters to place insurance for certain launches. These factors could cause
other terms to be significantly less favorable than those currently available,
may result in limits on amounts of coverage that we can obtain, or may prevent
us from obtaining insurance at all. Furthermore, there is no assurance that
proceeds from insurance that we are able to purchase will be sufficient to cover
losses.
OUR GROWTH MAY NOT BE MANAGEABLE.
Even if we are successful in obtaining new business, failure to manage the
growth could adversely affect our condition. We may experience extended periods
of very rapid growth. This growth could place a significant strain on our
management, operating, financial and other resources. Our future performance
will depend in part on our ability to manage growth effectively. We must develop
management information systems, including operating, financial, and accounting
systems and expand, train, and manage employees to keep pace with growth. Our
inability to manage growth effectively could negatively affect results of
operations and the ability to meet obligations as they come due.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY TERRORIST ATTACKS.
Our business partially depends on activities regulated by various agencies
and departments of the U.S. government and other companies that rely on the
government. In the recent past, in response to terrorists' activities and
threats aimed at the United States, transportation, mail, financial, and other
services have been slowed or stopped altogether. Further delays or stoppages in
transportation, mail, financial, or other services could have a material adverse
effect on our business, results of operations, and financial condition.
Furthermore, we may experience a small increase in operating costs, such as
PAGE 15
costs for transportation, insurance, and security as a result of the activities
and potential activities. The U.S. economy in general has been adversely
affected by the terrorist activities and potential activities, and any economic
downturn could adversely impact our results of operations, impair our ability to
raise capital, or otherwise adversely affect our ability to grow our business.
Conversely, because of the nature of our products and services, there may be
opportunities for us to offer solutions to the government that may address some
of the problems that the country faces at this time.
OUR COMMON STOCK INVESTORS MAY NOT RECEIVE DIVIDENDS.
We have not paid common stock dividends since our inception and do not
anticipate issuing them in the foreseeable future. There can be no guarantee or
assurance that common stock dividends will ever be paid. In fact, our goal
is to reinvest earnings in an effort to complete development of our technologies
and products, and to increase sales and long-term profitability and value. In
addition, the revolving credit facility with Laurus, our newly issued
Preferred Stock or other bank lines of credit, which we may establish in the
future or other credit or borrowing arrangements may significantly impact our
ability to pay common stock dividends to our shareholders.
OUR COMMON STOCKHOLDERS MAY EXPERIENCE DILUTION IF OUR PREFERRED STOCK
IS CONVERTED OR OUR OUTSTANDING WARRANTS AND OPTIONS ARE
EXERCISED
As of September 1, 2004, we are obligated to issue 1,776,827 shares Of our
common stock if all of our outstanding warrants, outside of the shares
underlying our preferred stock and warrant in this offering, are exercised. In
addition, as of September 1, 2004, we have outstanding stock options to purchase
an aggregate of 6,351,266 shares of our common stock, including 2,000,000
unvested options issued to our Chief Executive Officer. The total number of
shares, which could be issued upon the exercise of currently vested warrants,
options and preferred stock (5,764,607 shares) represents approximately 29% of
our issued and outstanding shares of common stock as of September 1, 2004.
Shares of common stock issued as a result of the exercise of stock options will
have a dilutive effect, which could be substantial, on the currently and then
outstanding shares of common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. We intend that those forward-looking statements be
subject to the safe harbors created by those sections. These forward-looking
statements generally include the plans and objectives of management for future
operations, including plans and objectives relating to our future economic
performance, and can generally be identified by the use of the words "believe,"
"intend," "plan," "expect," "forecast," "project," "may," "should," "could,"
"seek," "pro forma," "estimates," "continues," "anticipate" and similar words.
The forward-looking statements and associated risks may include, relate to, or
be qualified by other important factors, including, without limitation:
our ability to be profitable and obtain additional working capital, if
required;
our ability to successfully implement our future business plans;
our ability to attract strategic partners, alliances and advertisers;
our ability to hire and retain qualified personnel;
the risks of uncertainty of trademark protection;
risks associated with existing and future governmental regulation to which
we are subject; and,
PAGE 16
uncertainties relating to economic conditions in the markets in which we
currently operate and in which we intend to operate in the future.
These forward-looking statements necessarily depend upon assumptions and
estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the
forward-looking statements. We do not undertake to update, revise or correct any
forward-looking statements.
Any of the factors described above or in the "Risk Factors" section above
could cause our financial results, including our net income (loss) or growth in
net income (loss) to differ materially from prior results, which in turn could,
among other things, cause the price of our common stock to fluctuate
substantially.
SELLING SECURITY HOLDERS
Laurus may sell, from time to time, under this prospectus, 1,000,000 shares
of our common stock, representing 100% of the shares that may become issuable
upon conversion of the principal of and interest on the Convertible Note at the
fixed conversion price of $1.00 per share for the remaining 1,000,000 shares.
Laurus may sell, from time to time, under this prospectus, up to 1,845,779
shares of our common stock at a fixed conversion price of $1.54 per share upon
conversion of the$2,500,000 in Preferred Stock and accrued dividends. Laurus may
also exercise and sell, from time to time, under this prospectus, 537,000 shares
of our common stock underlying the Laurus Warrants. Laurus may also convert
principal and interest on the Convertible Note into our common stock only to the
extent that there are amounts outstanding under the revolving credit facility
described under "Description of Business - The Laurus Master Fund Ltd. Revolving
Credit Facility" below and only if we have not repaid the outstanding amounts
before Laurus exercises its conversion rights; however, Laurus has committed to
convert up to $1,500,000, representing 1,588,235 shares, on or before December
31, 2004.
The following table sets forth, to our knowledge, certain information about
Laurus as of September 1, 2004. Beneficial ownership is determined in accordance
with the rules of the Commission, and includes voting or investment power with
respect to the securities. In computing the number of shares beneficially owned
by a holder and the percentage ownership of that holder, shares of common stock
subject to options or warrants or underlying convertible notes held by that
holder that are currently exercisable or convertible or are exercisable or
convertible within 60 days after the date of the table are deemed outstanding.
To our knowledge, Laurus has sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by it, except that Laurus
Capital Management, LLC, a Delaware limited liability company, may be deemed a
control person of the shares owned by Laurus. David Grin and Eugene Grin are the
principals of Laurus Capital Management, LLC. The address for Messrs. David Grin
and Eugene Grin is 152 West 57th Street, New York, NY 10019.
PAGE 17
Percentage of beneficial ownership is based on presumed ownership of
19,146,660 shares of common stock outstanding as of September 1, 2004 Actual
ownership of the shares is subject to conversion of the Convertible Note and
exercise of the Warrants.
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY SHARES OF STOCK BENEFICIALLY
OWNED PRIOR COMMON STOCK OWNED AFTER
TO OFFERING BEING OFFERING (1)
------------------ ------------------ -------------------
SELLING SECURITY HOLDER. NUMBER PERCENTAGE REGISTERED NUMBER PERCENTAGE
------------------------ ------------- ------------ ------------------- --------- ------------
LAURUS MASTER FUND, LTD. 787,000(2) 3.94% 4,021,014 787,000 3.30%
(1) The amount assumes the sale of all shares being offered under this
prospectus.
(2) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rule, beneficial ownership includes any shares as
to which the selling security holder has sole or shared voting power or
investment power and also any shares, which the selling stockholder has the
right to acquire within 60 days. The actual number of shares of common
stock issuable upon the conversion or payment of the Convertible Note is
subject to the amount drawn under the note. Furthermore, the selling
stockholder has contractually agreed, absent an event of default under the
revolving credit facility, to restrict its ability to convert the
convertible note or exercise its warrants and receive shares of our common
stock if the number of shares of common stock held by it and its affiliates
after such conversion or exercise does not exceed 4.99% of the then issued
and outstanding shares of common stock. Laurus may void this restriction
upon seventy-five days prior written notice to us.
PAGE 18
All costs, expenses and fees incurred in connection with the registration
of the selling security holders' shares will be borne by us. All brokerage
commissions, if any, attributable to the sale of shares by selling security
holders will be borne by selling security holders.
PAGE 19
PLAN OF DISTRIBUTION
The selling security holder, and any of its donees, pledgees, assignees and
other successors-in-interest, may, from time to time, sell any or all of their
shares of common stock being offered under this prospectus on any stock
exchange, market or trading facility on which the shares are traded or in
private transactions. These sales, which may include block transactions, may be
at fixed or negotiated prices. The selling security holder may use any one or
more of the following methods when selling shares:
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as principal to
facilitate the transaction;
- purchases by a broker-dealer as principal and resales by the
broker-dealer for its own account;
- an exchange distribution in accordance with the rules of the applicable
exchange;
- privately negotiated transactions;
- broker-dealers may agree with the selling security holder to sell a
specified number of shares at a stipulated price per share;
- a combination of any of these methods of sale; or
- any other method permitted by applicable law, except (a) that Laurus has
agreed that it has not engaged and will not engage or cause, advise, ask or
assist any person or entity, directly or indirectly, or engage, in short sales
or our common stock, which are contracts for the sale of shares of stock that
the seller does not own, or certificates which are not within the seller's
control, so as to be available for delivery at the time when, under applicable
rules, delivery must be made, and (b) that selling shareholders who also qualify
as insiders of the Company are restricted from engaging in short sales and other
trading transactions specified in our internal insider trading policy.
The sale price to the public may be:
- the market price prevailing at the time of sale;
- a price related to the prevailing market price;
- at negotiated prices; or
- a price the selling security holder determines from time to time.
Laurus has agreed, with respect to both the Convertible Note and the
Preferred Stock, pursuant to the Securities Purchase Agreement, that it has not
engaged and will not engage or cause, advise, ask or assist any person or
entity, directly or indirectly, to engage, in short sales of our common stock.
Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holder (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. The selling security holder does not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
PAGE 20
The selling security holder and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales. Commissions
received by these broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Any broker-dealers or agents that are not
deemed to be underwriters may not sell shares offered under this prospectus
unless and until we set forth the names of the underwriters and the material
details of their underwriting arrangements in a supplement to this prospectus
or, if required, in a replacement prospectus included in a post-effective
amendment to the registration statement of which this prospectus is a part.
In the event sales are made to broker-dealers as principals, we would be
required to file a post-effective amendment to the registration statement of
which the prospectus forms a part. In such post-effective amendment, we would
be required to disclose the names of any participating broker-dealers and the
compensation arrangements relating to such sales. In addition, if any shares of
common stock or warrants offered for sale pursuant to this prospectus are
transferred, subsequent holders could not use this prospectus until a
post-effective amendment is filed, naming such holder.
The selling security holders, alternatively, may sell all or any part of
the shares offered under this prospectus through an underwriter. To our
knowledge, the selling security holder has not entered into any agreement with a
prospective underwriter, and we cannot assure you as to whether any such
agreement will be entered into. If the selling security holder informs us that
it has entered into such an agreement or agreements, any material details will
be set forth in a supplement to this prospectus or, if required, in a
replacement prospectus included in a post -effective amendment to the
registration statement of which this prospectus is a part.
This prospectus does not cover the sale or other transfer of the
Convertible Note, the Preferred Stock, or the Laurus Warrants or the Warrants.
If the selling security holder transfers any such securities prior to conversion
or exercise, the transferee of those derivative securities may not sell the
shares of common stock issuable upon conversion or exercise of those derivative
securities under the terms of this prospectus unless we amend or supplement this
prospectus to cover such sales.
For the period a holder holds the Convertible Note, Preferred Stock and/or
the Laurus Warrant the holder has the opportunity to profit from a rise in the
market price of our common stock. The terms on which we could obtain additional
capital during the period in which those derivative securities remain
outstanding may be adversely affected. The holders of the derivative securities
are most likely to voluntarily convert or exercise those derivative securities
when the conversion price or exercise price is less than the market price for
our common stock. However, we cannot assure you as to whether any of those
derivative securities will be converted or exercised.
We have agreed with Laurus to keep the registration statement of which this
prospectus constitutes a part effective until the earlier of three years or the
termination of the Securities Purchase Agreement for the Convertible Note, as
amended, and the earlier of (i) the sale of all registered shares underlying the
Preferred Stock, dividends and Laurus Warrant for 487,000 shares or (ii) the
date when all such securities may be sold immediately without registration under
the Securities Act and without volume restrictions pursuant to Rule 144(k).
PAGE 21
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our common
stock offered by Laurus under this prospectus. Upon exercise of the Laurus
Warrants, we will receive proceeds from the warrant holder; however, upon
selling the common stock underlying the Secured Convertible Note and/or the
Preferred Stock and/or the Laurus Warrant, the selling security holder will
receive all proceeds directly.
DESCRIPTION OF BUSINESS
FORWARD LOOKING STATEMENTS
The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without limitation the disclosures made under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," in
our General Registration Statement on Form 10SB12G/A filed January 28, 2000 and
in our other periodic reports (e.g., Form 10-KSB, Form 10-QSB and Form 8-K).
In addition to historical information, the following discussion and other
parts of this document may contain forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We undertake no obligation to publicly update any
of the forward-looking statements after the date of this prospectus to conform
such statements to actual results or to changes in our expectations.
Actual results could differ materially from those anticipated by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the level of sales to key
customers; the economic conditions affecting our industry; actions by
competitors; fluctuations in the price of raw materials; the availability of
outside contractors at prices favorable to us; our dependence on single-source
or a limited number of suppliers; our ability to protect our proprietary
technology; market conditions influencing prices or pricing; an adverse outcome
in potential litigation, claims and other actions by or against us,
technological changes and introductions of new competing products; fluctuations
in economic conditions; terrorist attacks or acts of war, particularly given the
acts of terrorism against the United States on September 11, 2001 and subsequent
military responses by the United States in Afghanistan and Iraq; mission
disasters such as the loss of the space shuttle Columbia on February 1, 2003
during its re-entry into earth's atmosphere; ability to retain key personnel;
changes in market demand; exchange rates; productivity; weather; and market and
economic conditions in the areas of the world in which we operate and market our
products. These are factors that we think could cause our actual results to
differ materially from expected and historical events.
PAGE 22
GENERAL
SpaceDev, Inc. (the "Company," "SpaceDev," "we," "us" or "our") is engaged
in the conception, design, development, manufacture, integration and operations
of space technology subsystems, systems, products and services. We are
currently focused on the commercial and military development of low-cost
microsatellites, nanosatellites and related subsystems, hybrid rocket propulsion
for space and launch vehicles, as well as the associated engineering technical
services to government, aerospace and other commercial enterprises. Our
products and solutions are sold directly to these customers and include
sophisticated micro- and nanosatellites, hybrid rocket-based launch vehicles,
orbital Maneuvering and orbital Transfer Vehicles as well as safe sub-orbital
and orbital hybrid rocket-based propulsion systems. We are also developing
commercial hybrid rocket motors for possible use in small launch vehicles,
targets and sounding rockets, and small high performance space vehicles and
subsystems.
Our approach is to provide smaller spacecraft - generally 250 kg (550
pounds) mass and less - and cleaner, safer hybrid propulsion systems to
commercial, international and government customers. We are developing smaller
spacecraft and miniaturized subsystems using proven, lower cost, high-quality
off-the-shelf components. Our space products are modular and reproducible, which
allows us to create affordable space solutions for our customers. By utilizing
our innovative technology and experience, and space-qualifying commercial
industry-standard hardware, software and interfaces, we provide increased
reliability with reduced costs and risks.
We have been awarded, have successfully concluded or are successfully
concluding contracts from such esteemed government, university and commercial
customers as the Air Force Research Laboratory, Boeing, the California Space
Authority, the Defense Advanced Research Projects Agency, National Aeronautics
and Space Administration's Jet Propulsion Laboratory, Lockheed Martin, the Lunar
Enterprise Corporation, Malin Space Science Systems, the Missile Defense Agency
(formerly the Ballistic Missile Defense Organization), the National
Reconnaissance Office, Scaled Composites and the University of California at
Berkeley via NASA.
We were incorporated under the laws of the State of Colorado on December
23, 1996 as Pegasus Development Group, Inc. ("PDGI"). SpaceDev, LLC of Colorado
was originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed on August 22, 1997. On October 22, 1997, PDGI issued 8,245,000 of its
$.0001 par value common stock for 100 percent (1,000,000 shares) of SpaceDev's
common stock owned by SpaceDev, LLC. Upon the acquisition of the SpaceDev
stock, SpaceDev was merged into PDGI and, on December 17, 1997, PDGI changed its
name to SPACEDEV, INC. After the merger, SpaceDev, LLC, changed its name to SD
Holdings, LLC on December 17, 1997. We became a publicly traded company in
October 1997 and are trading on the Nasdaq Over-the-Counter Bulletin Board
("OTCBB") under the symbol of "SPDV."
In February 1998, we acquired Integrated Space Systems, in San Diego.
Integrated Space Systems was fully integrated into SpaceDev. Most of the
Integrated Space Systems employees were former commercial Atlas launch vehicle
engineers and managers who worked for General Dynamics in San Diego. As SpaceDev
employees, they primarily develop systems and products based on hybrid rocket
motor technology and launch vehicle systems.
PAGE 23
In August 1998, we acquired a license to the patents and intellectual
property produced by American Rocket Company ("AMROC"). The license provided us
access to a large cache of hybrid rocket documents, designs and test results.
AMROC specialized in the design, development and testing of hybrid rocket
technology (solid fuel plus liquid oxidizer) for small sounding rockets and
launch vehicles.
In late 1998, we bid and won a government-sponsored research and
development contract, which was directly related to our strategic commercial
space interests. We competed with seven other industry teams and we were one of
five firms selected by Jet Propulsion Laboratory to perform a mission and
spacecraft feasibility assessment study for the proposed 200-kg Mars
MicroMissions. The final report was delivered to Jet Propulsion Laboratory in
March 1999 and, as a result, we now offer lunar and Mars commercial deep-space
missions based on this and subsequent innovative space system designs.
In mid-1999, we won an R&D contract from the National Reconnaissance Office
to study small hybrid-based "micro" kick-motors for small-satellite orbital
transfer applications. During the contract, we successfully developed three
Secondary Payload Orbital Transfer Vehicle ("SPOTV") design concepts. We
subsequently created a prototype, which led to the development of our capability
to apply the SPOTV concept to our subsequent Maneuvering and orbit Transfer
Vehicles development programs.
In November 1999, we won a $4.9 million mission contract by the Space
Sciences Laboratory ("SSL") at the University of California at Berkeley. We
were competitively selected to design, build, integrate, test and operate, for
one year, a small NASA-sponsored scientific, Earth-orbiting spacecraft called
CHIPSat. CHIPSat is the first and only successful mission of NASA's low-cost
University-Class Explorer ("UNEX") series to date. Due to additional NASA and
customer reviews, additional work and schedule extensions, the CHIPSat contract
award was increased by $600,000 on June 15, 2001 and again by $1.2 million on
November 28, 2001, bringing the total contract value for design and build to
approximately $6.8 million. An extension of the original contract based on our
successful launch and orbit status in the amount of approximately $400,000 was
awarded to us for one year of satellite operations. CHIPSat launched as a
secondary payload on a Delta-II rocket on January 12, 2003. The satellite, the
world's first orbiting Internet node, achieved 3-axis stabilization, meaning it
was pointing and tracking properly, with all individual components and systems
successfully operating, and is continuing to work well in orbit after more than
a year. The CHIPSat program generated approximately $2.1 million, $3.2 million,
$1.7 million and $0.4 million of revenue in 2000, 2001, 2002 and 2003,
respectively.
On March 22, 2000, the California Spaceport Authority and the California
Space and Technology Alliance ("CSTA") awarded us a grant of approximately
$100,000 to be used for test firing our hybrid rocket motors. California's
Western Commercial Space Center also awarded us approximately $200,000 to help
build and equip its satellite and space vehicle manufacturing facilities. These
capabilities are being used to expand our current project and technology base.
In July 2000, the National Reconnaissance Office granted us two separate
follow-on competitive awards of approximately $400,000 each for further hybrid
rocket engine design, test, evaluation, and development. Our work for the
National Reconnaissance Office has helped fund two innovative hybrid rocket
motor products:
- a family of small versatile orbital Maneuver and orbit Transfer Vehicles
using clean, safe hybrid rocket propulsion technology; and,
- a protoflight hybrid propulsion module for a 50-kg class microsatellite.
Both of those contracts were successfully completed.
PAGE 24
In September 2001, Scaled Composites awarded us a contract for a
proprietary hybrid propulsion development program for Scaled's "SpaceShipOne,"
valued in excess of $1 million. As a part of that program, we competed with
another party to design a space propulsion system. The entire contract, awarded
upon the submitted designs, was valued at approximately $2.2 million. The
contract was indicative of an increased demand for our hybrid motor technology
and expertise in the space industry. Work on this project generated
approximately $1.2 million and $397,000 of revenue in 2002 and 2003,
respectively. In September of 2003, SpaceDev was selected by Scaled Composites
as the sole supplier of hybrid propulsions systems, and was awarded the
follow-on SpaceShipOne propulsion contract. We generated approximately $115,000
of revenue in 2003 from this new contract and related engineering change orders.
On December 17, 2003, which corresponded with the 100th anniversary of the
Wright Brothers flight, our hybrid propulsion system, which we believe is the
world's largest of its kind, aboard SpaceShipOne, successfully powered a pilot
toward space on its historic first powered supersonic flight. After being
released by the White Knight, a carrier aircraft, the SpaceShipOne Test Pilot
flew the ship to a stable 0.55 mach gliding flight condition, started a pull-up
and fired our hybrid rocket motor. Nine seconds later, SpaceShipOne broke the
sound barrier and continued its steep powered ascent. The climb was very
aggressive, accelerating forward at more than 3-g while pulling upward at more
than 2.5-g. At motor shutdown, 15 seconds after ignition, SpaceShipOne was
climbing at a 60-degree angle and flying near 1.2 Mach (930 mph). The test
pilot then continued the maneuver to a vertical climb, achieving zero speed at
an altitude of 68,000 feet. This is important because we are showing that the
private sector can perform human space flight in a rapid, safe and inexpensive
manner.
In addition, our rocket motor technology successfully propelled
SpaceShipOne on its second historic manned powered flight on April 8, 2004,
achieving a speed of 1.6 Mach and altitude of 105,000 feet, in Scaled
Composites' goal to win the $10 million X-Prize for stimulating the development
of a private sector human space flight industry. On May 13, 2004, our
hybrid rocket motor technology successfully propelled SpaceShipOne on its third
manned flight accelerating to 2.5 Mach and setting an altitude record of 211,400
feet. Finally, on June 21, 2004, our hybrid rocket motor technology
successfully powered SpaceShipOne on its fourth manned flight propelling Mike
Melvill to over 328,000 feet and created the world's first private sector
astronaut. These historic flights are the first human flights ever powered
by hybrid rocket technology, and we provided the critical hybrid motor
components and technology to make it happen.
On April 4, 2002, SpaceDev, Inc., an Oklahoma corporation, was formed for
the purpose of investigating and developing commercial space products in the
state of Oklahoma. We currently have no plans to develop this business in
Oklahoma.
On April 30, 2002, we were awarded Phase I of a contract to develop a
Shuttle-compatible propulsion module for AFRL. We received an award for Phase II
of the contract on March 28, 2003. We are using the project to further expand
our Maneuvering and orbital Transfer Vehicles technology and product line to
satisfy government space transportation requirements. The first two phases of
the contract have an estimated value of approximately $2.5 million, of which
$100,000 was awarded for Phase I. Phase II was expanded on May 3, 2004 with the
exercise of an option, which was at the discretion of AFRL, for an additional $1
million.
On July 9, 2003, we were awarded a Phase I contract to develop micro- and
nano satellite bus and subsystem designs. This AFRL SBIR contract, valued at
approximately $100,000, will enable us to explore the further miniaturization of
our unique and innovative microsat subsystems. It will also enable us to explore
ways to reduce the time and cost to build small satellites through further
standardization in order to help define de facto standards for payload hardware
PAGE 25
and software interfaces. The contract is fixed price, milestone-based and should
be completed within one year. On August 23, 2004, this SBIR moved into Phase
II valued at approximately $750,000 of carry-forward work for us and is expected
to be completed by May 2006.
On July 9, 2003, we were awarded a Phase I Small Business Innovation
Research ("SBIR") contract by Air Force Research Lab ("AFRL") to design and
begin the development of the SpaceDev Streaker(TM) small launch vehicle ("SLV").
SpaceDev Streaker(TM) will be designed to responsively and affordably lift up to
1,000 pounds to Low Earth Orbit ("LEO"). The SpaceDev Streaker(TM) SLV concept
is based on a proprietary combination of technologies to increase the
performance of hybrid rocket motor technology. Hybrid rocket motors are a
combination of solid fuel and liquid oxidizer, and can be relatively safe,
clean, non-explosive, and storable, and can be throttled, shut down and
restarted. This contract is valued at approximately $100,000, is a fixed price,
milestone-based agreement. We believe that this SBIR will move into Phase II
valued at approximately $740,000 of carry-forward work for us, plus
approximately $800,000 of funds provided by Congress. This money will be used to
develop and test fire our large Common Core Booster for the SpaceDev
Streaker(TM) launch vehicle. On August 5, 2004, we were informed that we
received a Congressional budget award for approximately $3 million to expand and
accelerate the scope of the work on our SLV program.
Also on July 9, 2003, we were awarded a second contract by the Missile
Defense Agency ("MDA") to explore the use of micro-satellites ("microsats") in
national missile defense. Our microsats are operated over the Internet and are
capable of pointing and tracking targets in space or on the ground. This study
explored fast response microsat launch and commissioning; small, low-power
passive sensors; target acquisition and tracking; formation flying and local
area networking within a cluster of microsats; and an extension of our proven
use of the Internet for on-orbit command, control and data handling. The
contract was successfully concluded on February 27, 2004. The total contract
value was $800,000 with approximately $481,000 of revenue realized in the year
ending December 31, 2003 and approximately $319,000 of revenue realized in the
first quarter of 2004. The total value of our microsatellite studies for MDA
was over $1 million in 2003.
On July 24, 2003, we were awarded a contract by Lunar Enterprise of
California ("LEC") for a first phase project to begin developing a conceptual
mission and spacecraft design for a lunar lander program. The unmanned mission
will be designed to put a small dish antenna near the south pole of the Moon.
From that location it will be in near-constant sunlight for solar power
generation, and should be able to perform multi-wavelength astronomy while
communicating with ground stations on Earth. The contract value was $100,000 and
was completed by November 2003. We were awarded a follow-on phase to further
analyze launch opportunities, spacecraft design, trajectory possibilities,
potential landing areas, available technologies for a small radio astronomy
system, and communications and data handling requirements on July 20, 2004 in
the amount of $150,000. Although this project is currently unfunded, if the
project were to proceed past the analysis stage, the total mission cost could
exceed $50-$75 million. Again, we can give no assurance that any additional
contracts will be awarded to us from this contract. Revenues for the year ending
December 31, 2003 were approximately $70,000.
On October 2, 2003, we were awarded an exclusive, follow-on contract to
provide the hybrid rocket motor systems and components for SpaceShipOne. We
provide our facilities, resources and a team of launch vehicle and hybrid
propulsion engineers & technical personnel in continued support of the
SpaceShipOne program. The contract calls for us to use our best efforts to
satisfy the requirements of the SpaceShipOne program, based on our experience
with the prior phases. We are to provide two sets of re-usable flight test
hardware, including a bulkhead, commonly known as the SpaceDev bulkhead,
machined in the flight configuration, a main oxidizer valve of the current
design and associated interfaces and plumbing to the SpaceDev bulkhead, a motor
control system, igniter housings, pressure transducers, and thermocouples as
PAGE 26
required for input to the motor control system. In addition, we are to produce
and assemble test motors, including but not limited to, all expendable or
semi-reusable materials as defined by our baseline design motor. We are also to
provide on-site engineering test support and post-test analysis. Provisions are
made in the contract for minimum monthly payments in the event of customer
schedule slippage as well as additional levels of support via engineering change
orders, if required. The total contract value is estimated at $429,000.
On March 31, 2004, we were awarded a $43,362,271, five-year,
cost-plus-fixed fee indefinite delivery/indefinite quantity contract to conduct
a microsatellite distributed sensing experiment, an option for a laser
communications experiment, and other micro satellite studies and experiments as
required in support of the Advanced Systems Deputate of the Missile Defense
Agency. This effort will be accomplished in a phased approach. The total
five-year contract has a ceiling amount of $43,362,271. The principal place of
performance will be Poway, California. We expect to complete the work under the
contract before February 2009. Government contract funds will not expire at the
end of the current government fiscal year. The microsatellite distributed
sensing experiment is intended to design and build up to six responsive,
affordable, high performance microsatellites to support national missile
defense. The milestone-based, multiyear, multiphase contract has an effective
start date of March 1, 2004. The first phase is expected to be completed this
year and will result in detailed mission and microsat designs. The estimated
first phase revenue is $1.1 million. The overall contract calls for us to
analyze, design, develop, fabricate, integrate, test, operate and support a
networked cluster of three formation-flying boost phase and midcourse tracking
microsatellites, with an option to design, develop, fabricate, integrate, test,
operate and support a second cluster of three formation flying microsats to be
networked on-orbit with high speed laser communications technology. The second
phase is anticipated to begin October 1, 2004 and run through 2005.
BUSINESS STRATEGY
Our strategy is based on the belief that innovative advancements in
technology and the application of standard business processes and practices will
make access to space much more practical and affordable. We believe these
factors will cause growth in certain areas of space commerce and will create new
space markets and increased demand for our proprietary products.
Our business strategy is to:
- Introduce commercial business practices into the space arena, use
off-the-shelf technology in innovative ways and standardize hardware and
software to reduce costs and to increase reliability and profits;
- Start with small, practical and profitable projects, and leverage
credibility and profits into larger and ever more bold initiatives - utilizing
partnerships where appropriate;
- Bid, win and leverage government programs to fund our research and
development ("R&D") and product development efforts;
- Integrate our smaller, low cost commercial spacecraft and hybrid space
transportation systems to provide one-stop turnkey payload and/or data delivery
services to target customers;
- Apply our low cost space products to new applications and to create new
users, new markets and new revenue streams;
- Produce and fly commercial missions, in conjunction with partners and
PAGE 27
investors, throughout the inner solar system in the commercial beyond earth
orbit "space"; and
- Join or establish a team to build a safe, affordable sub-orbital, passenger
space plane to help initiate the space tourism business.
We believe that our business model, emphasizing smaller satellites,
commercial approaches, technological simplicity, architectural and interface
standardization and horizontal integration (i.e., "whole product"), provides the
following advantages:
- Enables small-space customers to contract for end-to-end mission
solutions, reducing the need for and complexity of finding other contractors for
different project tasks;
- Decreases schedule time and lowers total project costs, thereby providing
greater value and increases return on investment for us and our customers; and
- Creates barriers to entry by and competition from competitors.
PRODUCTS AND SERVICES; MARKET
We currently have three primary lines of space products and services on
which we believe a sound foundation and profitable, cash generating business can
be built:
- Our Products - Microsatellites & Nanosatellites, BD-II Spacecraft Bus,
Maneuvering and orbital Transfer Vehicle and Hybrid Propulsion and Launch
Vehicle Systems;
- Our Subsystem Products - Miniature Flight Computer, Micro-Space Vehicle
Operating System (micro space vehicle operating system), PC-DS (power
conditioning and distribution system) and Miniature S-Band Transmitter; and,
- Our Services - Mission Analysis and Design, Spacecraft and Subsystem
Design, Microsatellite and Nanosatellite Launches and Mission Control and
Operations.
These products and services are being marketed and sold directly into
primarily domestic government, university, military and commercial markets. Our
business is not seasonal to any significant extent; however, our business
follows normal industry trends such as increased demand during bullish economic
periods, or slow-downs in demand during periods of recession.
In addition, we are working with partners to create new markets that can
generate new space-related service, media, tourism and commercial revenue
streams. While we believe that certain space market opportunities are still
several years away, we are currently working with industry-leading partners to
develop unique enabling technology for the potentially very large sub-orbital
manned space plane tourism market; and, creating a new unmanned Beyond Earth
Orbit commercial market with spacecraft derived from our NASA Jet Propulsion
Laboratory Mars MicroMission and Boeing Lunar Orbiter mission design contracts.
Our Products
-------------
Microsatellites & Nanosatellites - We design and build small, light,
high-performance, reliable and affordable micro- and nanosatellites. The
primary benefit of micro- and nanosatellites is lower cost and weight. Since we
can dramatically reduce manufacturing costs and the costs to launch the
satellites to earth-orbit and deep space, we can pass those cost savings on to
PAGE 28
our customers. Small, inexpensive satellites were once the exclusive domain of
scientific and amateur groups; however, smaller satellites are now a viable
alternative to larger, more expensive ones, as they provide cost-effective
solutions to traditional problems. We design and build low cost, high
performance space-mission solutions involving microsatellites (generally less
than 100 kg) and even smaller satellites (less than 50 kg). Our approach is to
provide smaller spacecraft and compatible low cost, safe hybrid propulsion space
systems to a growing market of commercial, government and potentially
international customers.
BD-II (Boeing Delta-II compatible) spacecraft bus - We have a qualified
microsatellite bus available to sell as a standard, fixed-price product to
government and commercial customers needing an affordable satellite for small
payloads. We began developing this product in 1999, when we were selected as
the mission designer, spacecraft bus provider, integrator and mission operator
of CHIPSat. CHIPSat was launched at 4:45 PM PST on January 12, 2003 from
Vandenberg Air Force Base in California.
Maneuvering and orbital Transfer Vehicle - Our Maneuvering and orbital
Transfer Vehicles system is a family of small, affordable, elegantly simple,
throttleable, and restartable propulsion and integrated satellite products. Our
Maneuvering and orbital Transfer Vehicles can be used as a standard propulsion
module to transport a customer's payload to different orbits. The Maneuvering
and orbital Transfer Vehicles provide the change in velocity and maneuvering
capabilities to support a wide variety of applications for on-orbit maneuvering,
proximity operations, rendezvous, inspection, docking, surveillance, protection,
inclination changes and orbital transfers.
Hybrid Rocket Propulsion and Launch Vehicle System - We provide a wide
variety of safe, clean, simple, reliable, cost-effective hybrid propulsion
systems to safely and inexpensively enable satellites and on-orbit delivery
systems to rendezvous and maneuver on-orbit and deliver payloads to sub-orbital
altitudes. Hybrid rocket propulsion is a safe and low-cost technology that has
tremendous benefits for current and future space missions. Our hybrid rocket
propulsion technology features a simple design, is restartable, is throttleable
and is easy to transport, handle and store. We acquired some of our expertise in
hybrid propulsion technology from AMROC. We are using this base technology,
as modified by SpaceDev, to develop the responsive, affordable SpaceDev
Streaker(TM) small launch vehicle under an Air Force contract.
Our Subsystem Products
------------------------
Miniature Flight Computer - Our Miniature Flight Computer is a high
performance 300 million instructions per second general-purpose space-qualified
flight computer for a wide variety of space vehicles. It is cost-effective, has
about ten times the performance-to-power ratio of current flight computers and
only uses 0.5 to 6 watts of power, depending on its tasks. Our Miniature Flight
Computer has successfully passed manufacturing and environmental testing and
over 14 months of reliable operations in low earth orbit ("LEO"), and is ready
for civil, military and commercial spacecraft and launch vehicle applications.
Micro Space Vehicle Operating System - Our Micro-Space Vehicle Operating
System is a small, fast, modular and layered operating system, similar to the
operating systems of microcomputers. The modular nature of our Micro-Space
Vehicle Operating System and our other space products allow us to design and
build affordable space solutions for our customers. We use industry-standard
interfaces to increase reliability while reducing cost. Our Micro-Space Vehicle
Operating System combines standard protocols like TCP/IP, software components
like VxWorks(R) and application software to effect real time command and
control, scriptable autonomous vehicle control, scriptable data acquisition and
telemetry.
PAGE 29
Mission Control and Operations Software ("MC-OS") - Our MC-OS performs
satellite command and control and data acquisition. This general purpose
software permits direct command, control and data operations from any laptop
computer anywhere in the world. The MC-OS satellite command and control is
managed via user commands, batched command scripts and timed command scripts.
MC-OS components include direct, real-time interactive Telnet communications
with the satellite, file transfer protocol ("FTP") for file transfer between the
ground station and satellite, a system security module which assigns users a
password, command level and logs all user commands to disk, and a status window
for monitoring MC-OS status.
Power Conditioning and Distribution System ("PC-DS") - Our PC-DS controls
critical failsafe spacecraft functions, including battery charge control, bus
voltage regulation, load power switching, current monitoring & limiting for the
spacecraft and individual loads, and hardware load-shedding protection for
spacecraft contingency management, and allows direct ground control of power
switches. Our PC-DS is capable of keeping the spacecraft alive independent of
any other spacecraft computers.
Our Miniature S-Band Transmitter and Miniature S-Band Receiver are
cost-effective solutions for low cost and low mass spacecraft. The Miniature
S-Band Transmitter and the Miniature S-Band Receiver feature lightweight
state-of-the-art electronic circuitry designed to meet today's requirements for
power efficient space-based communications hardware. The weight of the
transmitter and receiver are 2.5-oz and 32-oz, respectively. These units
leverage years of communications design heritage and have been operating
on-orbit since the January 12, 2003 launch of CHIPSat, the first mission to be
funded through NASA's University Explorer Program and the first and only
successful University Explorer mission to date. The Miniature S-Band
Transmitter and the Miniature S-Band Receiver designs provide flexibility to
meet customer requirements and options. Both units are designed to operate in
most present day thermal, launch, and on-station LEO spacecraft environments.
Our Services
-------------
Mission Analysis and Design - We can provide end-to-end mission design and
analysis, including the design of the mission and its science, commerce or
technology demonstration goals, the design of an appropriate space vehicle
(satellite or spacecraft), prototype development, construction and testing of
the spacecraft, integration of one or more payloads (instruments, experiments or
technologies) into the spacecraft, integration of the spacecraft onto the launch
vehicle (rocket), the launch and the mission control and operations during the
life of the mission.
Spacecraft and Subsystem Design - We also provide reliable, affordable
access to space through innovative solutions currently lacking in the
marketplace. Our approach is to provide smaller spacecraft - generally 250 kg
mass and less - and compatible hybrid propulsion space systems to commercial,
university and government customers. The small spacecraft market is supported by
the evolution and enabling of microelectronics, common hardware & software
interface standards, and smaller launch vehicles. Reduction of the size and mass
of traditional spacecraft electronics has reduced the overall spacecraft size,
mass, and volume over the past 10 to 15 years. For example, our Miniature Flight
Computer is only 24 cubic inches and provides 300 million instructions per
second of processing power versus a competitor's more "traditional" solution
that requires about 63 cubic inches and only provides 10 million instructions
per second.
Microsatellite & Nanosatellite Launches - To support the growth in customer
demand within the small satellite market, we work with launch providers to
identify and market affordable launch opportunities and to provide customers
with a complete on-orbit data delivery service that combines our spacecraft and
hybrid propulsion products. These innovative, low-cost, turnkey launch solutions
will allow us to provide one-stop shopping for launch services, spacecraft,
PAGE 30
payload accommodation, total flight system integration and test and mission
operations. The customer only needs to provide the payload, and we are capable
to perform all the tasks required for the customer to get to orbit and to begin
collecting their data.
Mission Control and Operations - Our mission control and operations center,
located in our headquarters building near San Diego, coupled with our mission
control and operations package, is uniquely Internet-based and allows for the
operation and control of missions from anywhere in the world that has access to
the Internet. CHIPSat is the first U.S. mission to use end-to-end satellite
operations with TCP/IP and FTP. While this concept has been analyzed and
demonstrated by the NASA OMNI team, CHIPSat is the first to implement the
concept as the only means of satellite communication. A formation flying
cluster or constellation of TCP/IP-based microsatellites, can be designed to
communicate directly with each other, as in a wide area network in space.
Providing any one satellite/node in this network is in line-of-sight with any
ground station at any given time, the entire constellation could always maintain
ground station connectivity, thus creating a network on-orbit and on the web, a
direct extension of CHIPSat's elegantly simple TCP/IP mission operations
architecture.
COMPONENTS AND RAW MATERIALS
Although we may experience a shortage of certain parts and components
related to our products, we have many alternative suppliers and distributors and
are not dependent on any individual supplier or distributor. We have not
experienced difficulty in our ability to obtain our parts or component materials
to date, and do not currently expect this to be an issue in the future; however,
we can provide no assurances that alternative sources would be available on
terms favorable to us or at the time we would require them.
COMPETITION
We compete for sales of our products and services based on price,
performance, technical features, contracting approach, reliability,
availability, customization, and, in some situations, geography. Our primary
competition for low-cost propulsion systems using clean, safe, commercially
available hybrid rocket motor technology comes from Cesaroni Technology
Incorporated in Canada and their affiliates. While Lockheed Martin has
demonstrated large-scale hybrid rocket capability, and there are a number of
smaller enterprises, especially academic-based organizations, in the domestic
market currently investigating various aspects of hybrid rocket technology,
to-date we have seen limited competitive pressures arising from these
organizations.
The primary domestic competition for unmanned earth-orbiting
microsatellites, unmanned deep space micro-spacecraft and microsatellite
subsystems as well as software systems comes from other small companies such as
AeroAstro, Orbital Sciences and Spectrum Astro. The most established
international competitors are Surrey Satellite Technology Limited ("SSTL") in
the United Kingdom, OHB Systems in Germany, an OHB Technology AG Company, and
EADS Astrium with locations throughout Western Europe. Swedish Space Corporation
is also able to compete in the small-satellite arena, particularly in the
European market. In addition to private companies, there are a limited number of
universities in the United States that have the capability to produce reasonably
simple microsatellites; these include, Weber State in Ogden, Utah and Colorado
University in Boulder, Colorado.
While we believe that our product and service offerings provide a wide
breadth of solutions for our customers and prospective customers, some of our
competitors compete across many of our product lines. Several of our current
and potential competitors have greater resources, including technical and
engineering resources. We are not aware of any established large companies
(e.g., Northrop Grumman, Lockheed Martin, Boeing), which have expressed
PAGE 31
corporate goals to design and build inexpensive micro-spacecraft for a mission,
which would be our direct competition.
THE LAURUS MASTER FUND, LTD. REVOLVING CREDIT FACILITY
On June 3, 2003, we entered into a Security Agreement, Secured Convertible
Note, Registration Rights Agreement and Common Stock Purchase Warrant, with
Laurus Master Fund, Ltd. ("Laurus"), which were filed on Form 8-K dated June 18,
2003. Pursuant to the agreements, we received a $1 million revolving credit
facility in the form of a three-year Convertible Note secured by its assets.
The net proceeds from the Convertible Note are used for general working capital
needs. Advances on the Convertible Note may be repaid at the our option, in
cash or through the issuance of our shares of common stock. The Convertible
Note carries an interest rate of WSJ Prime plus 0.75% on any outstanding
balance. In addition, we are required to pay a collateral management payment of
0.55% of the average aggregate outstanding balance during the month plus an
unused line payment of 0.20% per annum. Approximately $1,700 in interest and
$2,100 in fees were accrued under the revolving credit facility in the
83098478first quarter of 2004. The outstanding balance on the revolving credit
facility at June 30, 2004 was $408,003.
We filed a prior Form SB-2 on July 25, 2003 in connection with this
transaction. The shares were registered with the Securities and Exchange
Commission ("SEC") for public resale on August 6, 2003. Once the market price
exceeded 118% of the fixed conversion price, which occurred on or about July 21,
2003, we obtained the ability to pay amounts outstanding under the revolving
credit facility in cash or shares of our common stock at the fixed conversion
price of $0.55 per share on the first $1 million of principal.
The Convertible Note includes a right of conversion in favor of Laurus. If
Laurus exercises its conversion right at any time or from time to time at or
prior to maturity, on any outstanding balance at the time, the Convertible Note
is convertible into shares of our common stock at a fixed conversion price,
subject to adjustments for stock splits, combinations and dividends and for
shares of common stock issued for less than the fixed conversion price (unless
exempted pursuant to the agreements). The agreement was modified on March 31,
2004 to provide for a six-month waiver to us and a fixed conversion price to
Laurus of $0.85 per share on the first $500,000 after the first $1 million.
The agreement was modified again as part of the Preferred Stock transaction
to increase the Convertible Note from $1.0 million to $1.5 million and set the
fixed conversion price on the next $1 million at $1.00 per share and thereafter,
the fixed conversion price will be adjusted to 103% of the then fair market
value of our common stock ("Adjusted Fixed Conversion Price").
Laurus converted 1,403,182 shares to reduce the debt we owed by $771,750
for the six-months ending June 30, 2004. Laurus converted a total of 1,818,182
shares to reduce the debt by $1,000,000 since the inception of the revolving
credit facility. For the six-months ending June 30, 2004, we expensed $1,177,846
for the non-cash loan fee expense based on the fair market value of the stock
when Laurus converted and approximately $1,304,000 for the non-cash loan fee
expense since the inception of the revolving credit facility. The fair market
value used in 2003 was established using a 20% discount to the closing price on
the date of conversion based on the restricted and thinly-traded nature of the
stock in 2003 and the fair market value used in 2004 was established using the
closing price on the date of conversion with no discount taken due to the
increased volume of the stock.
Availability of funds under the revolving credit facility is based on our
accounts receivables, except as waivers are provided by Laurus. An initial
three (3) month waiver was offered by Laurus, under which Laurus permitted a
credit advance up to $300,000, which amount would otherwise have exceeded
eligible accounts receivable during the period. Laurus subsequently extended
PAGE 32
the waiver for two additional six (6) month periods, under which Laurus
permitted a credit advance up to $1 million, which amount would otherwise have
exceeded eligible accounts receivable during the period. The credit facility
was modified again in March 31, 2004, to provide additional waivers in exchange
for a fixed conversion rate of $0.85 per share on the next $500,000 converted
under the Convertible Note. The revolving credit facility is secured by all
of our assets.
In conjunction with this transaction, Laurus was paid a fee of $20,000 for
the first year which was expensed as additional interest expense in 2003. We
were required to pay a continuation fee of $10,000 in June 2004 and each year
thereafter. In addition, Laurus received a warrant to purchase 200,000 shares of
our common stock and two subsequent warrants to purchase 50,000 shares each, as
stated herein. The warrant exercise price is computed as follows: $0.63 per
share for the purchase of up to 125,000 shares; $0.69 per share for the purchase
of an additional 50,000 shares; and $0.80 per share for the purchase of an
additional 25,000 shares. The two additional 50,000 share warrants carry an
exercise price of $1.0625 per share and $1.9250 per share, respectively. The
warrant exercise price may be paid in cash, in shares of our common stock, or by
a combination of both. The warrant expiration dates for these warrants are June
3, 2008, June 18, 2009 and August 25, 2009, respectively. The warrant exercise
prices and the number of shares underlying the warrants are subject to
adjustments for stock splits, combinations and dividends.
We may terminate our agreements with Laurus before the end of the initial
three-year term and Laurus will release its security interests upon payment to
Laurus of all obligations, if we have: (i) provided Laurus with an executed
release of all claims which we may have under the agreements; and, (ii) paid to
Laurus an early payment fee in an amount equal to (x) four percent (4%) of the
capital availability amount if such payment occurs prior to the first
anniversary of the Initial Term (i.e., June 3, 2004); (y) three percent ( 3%) of
the capital availability amount if such payment occurs after the first
anniversary and prior to the second anniversary of the Initial Term; and, (z)
two percent (2%) of the capital availability amount if such payment occurs after
the second anniversary and prior to the end of the Initial Term. The early
payment fee is also due and payable by us to Laurus if we terminate our
Agreement after the occurrence of an Event of Default, as define in the
agreements.
On March 31, 2004, we agreed to amend our Security Agreement and Secured
Convertible Note with the Laurus Master Fund, Ltd. to change certain terms of
the conversion price to allow for the next Five Hundred Thousand Dollars
($500,000) converted under the Convertible Note to be converted at eighty-five
cents ($0.85) per share of common stock. As part of our Preferred Stock
transaction, we agreed to amend our Laurus agreements again to extend the
revolving credit facility to $1.5 million and fix the conversion price on the
next $1 million converted at $1.00 per share of common stock. Thereafter,
the fixed conversion price shall be reset to equal 103% of the volume weighted
average closing price of the common stock for the ten (10) trading days prior to
the last day on which such five hundred thousand dollars ($500,000) has been
converted. In exchange, Laurus agreed to waive certain over advance compliance
provisions for six (6) months.
THE LAURUS MASTER FUND, LTD. PREFERRED STOCK TRANSACTION
On August 25, 2004, we entered into a Securities Purchase Agreement with
the Laurus Master Fund, Ltd., whereby we issued 250,000 shares of our Series C
Convertible Preferred Stock, par value $0.001 per share (the "Preferred Stock"),
to Laurus for an aggregate purchase price of $2,500,000 or $10.00 per share (the
"Stated Value"). The preferred shares are convertible into shares of our
$0.0001 par value common stock at a rate of $1.54 per share at any time after
the date of issuance, and pay quarterly, cumulative dividends at a rate of 6.85%
with the first payment due on January 1, 2005. Dividends are payable in cash or
shares of our common stock at the holder's option with the exception that
dividends must be paid in shares of our common stock for up to 25% of the
aggregate dollar trading volume if the fair market value of our common stock for
the 20-days preceding the conversion date exceeds 120% of the conversion rate.
PAGE 33
The preferred shares are redeemable by us in whole or in part at any time after
issuance for (a) 115% of the Stated Value if the average closing price of the
common stock for the 22 days immediately preceding the date of conversion does
not exceed the conversion rate or (b) the Stated Value if the average closing
price of our common stock for the 22 days immediately preceding the date of
conversion exceeds the Stated Value. The preferred shares have a liquidation
right equal to the Stated Value upon our dissolution, liquidation or winding-up.
The preferred shares have no voting rights.
In conjunction with the Preferred Shares, we issued a five-year common
stock purchase warrant to Laurus for the purchase of 487,000 shares of our
common stock at an exercise price of $1.77 per share. We committed to register
all of the shares of our common stock underlying the Preferred Shares and the
warrant, as well as shares payable as dividends on the Preferred Shares, for
resale.
Also in conjunction with the Preferred Stock financing, Laurus agreed to
extend our current revolving credit facility reported on Form 8-K filed June 18,
2003 from $1.0 million to $1.5 million. The first $1,000,000 converted under
the revolving credit facility was converted last year and earlier this year at a
rate of $0.55 per share. On March 31, 2004, the conversion price for the next
$500,000 under the revolving credit facility was set at $0.85 per share. The
next $1 million under the revolving credit facility will be convertible by
Laurus at a rate of $1.00 per share. Laurus has committed to convert a full
$1,500,000 drawn on the Convertible Note into our common stock on or prior to
December 31, 2004.
REGULATION
Our business activities are regulated by various agencies and departments
of the U.S. government and, in certain circumstances, the governments of other
countries. Several government agencies, including NASA and the U.S. Air Force,
maintain Export Control Offices to ensure that any disclosure of scientific and
technical information complies with the Export Administration Regulations and
the International Traffic in Arms Regulations ("ITAR"). Exports of our
products, services and technical data require either Technical Assistance
Agreements ("TAAs") or licenses from the U.S. Department of State, depending on
the level of technology being transferred. This includes recently published
regulations restricting the ability of U.S.-based companies to complete offshore
launches, or to export certain satellite components and technical data to any
country outside the United States. The export of information with respect to
ground-based sensors, detectors, high-speed computers, and national security and
missile technology items are controlled by the Department of Commerce. The
government is very strict with respect to compliance and has served notice that
failure to comply with the ITAR and/or the Commerce Department regulations may
subject guilty parties to fines of up to $1 million and/or up to 10 years
imprisonment per violation. Our failure to comply with any of the foregoing
regulations could have serious adverse effects as dictated by the rules
associated with compliance to the ITAR regulations. Also, our ability to
successfully market and sell into international markets may be severely hampered
due to ITAR regulation requirements. Our conservative position is to consider
any material beyond standard marketing material to be regulated by ITAR
regulations. This year we began an active and comprehensive internal and
external ITAR training program provided by our regulatory consulting firm, Q
International Group, and the Society for International Affairs, both for our
employees and our Empowered Official, Mr. Slansky. We also introduced in 2003
an Internal Export Compliance Control Program for defense articles and defense
services controlled by the U.S. Department of State under ITAR.
In addition to the standard local, state and national government
regulations that all businesses must adhere to, the space industry has specific
regulations. In the U.S., command and telemetry frequency assignments for space
missions are primarily regulated by the Federal Communications Commission for
our domestic commercial products. Our products geared toward domestic government
customers are regulated by the National Telecommunications Information Agency
and any of our products sold internationally, if any, are regulated by the
International Telecommunications Union. All launch vehicles
PAGE 34
that are launched from a launch site in the United States must pass certain
launch range safety regulations that are administered by the U.S. Air Force. In
addition, all commercial space launches that we might perform require a license
from DOT. Satellites that are launched must obtain approvals for command and
frequency assignments. For international approvals, the FCC and NTIA obtain
these approvals from the ITU. These regulations have been in place for a number
of years to cover the large number of non-government commercial space missions
that have been launched and put into orbit in the last 15 to 20 years. Any
commercial deep space mission that we might perform would be subject to these
regulations. Presently, we are not aware of any additional or unique government
regulations related to commercial space missions.
We are also required to obtain permits, licenses, and other authorizations
under federal, state, local and foreign statutes, laws or regulations or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the clean-up or other
remediation thereof. Presently, we do not have a requirement to obtain any
special environmental licenses or permits.
We may need to utilize the Deep Space Network on some of our missions. The
DSN is a U.S. funded network of large antennas that supports interplanetary
spacecraft missions and radio and radar astronomy observations for the
exploration of the solar system and the universe. The network also supports
selected Earth-orbiting missions. The network is a facility of NASA, and is
managed and operated for NASA by the Jet Propulsion Laboratory. The
Telecommunications and Mission Operations Directorate manages the program within
Jet Propulsion Laboratory. Coordination for the use of this facility is
arranged with the Telecommunications and Mission Operations Command.
EMPLOYEES
At December 31, 2003, we employed approximately thirty (30) persons full
and part-time, most of whom are aerospace, mechanical and electrical engineers.
We expect to hire other personnel as necessary for completion of projects,
product development, quality assurance, sales and marketing, finance and
administration. In addition, due to the nature of our business, we anticipate
that it may become necessary to lay off employees whose work is no longer
required to maintain operations in order to prevent cost overruns. We do not
have any collective bargaining agreements with our employees, and we believe our
employee-relations are good.
INTELLECTUAL PROPERTY
We rely, in part, on licenses, patents, trade secrets and know-how to
develop and maintain our competitive position and technological advantage. We
intend to protect our intellectual property through a combination of patents,
license agreements, trademarks, service marks, copyrights, trade secrets and
other methods of restricting disclosure and transferring title. There can be no
assurance that such applications will be granted. We have and intend to
continue entering into confidentiality agreements with our employees,
consultants and vendors; enter into license agreements with third parties; and,
generally, seek to control access to and distribution of our intellectual
property.
In August 1998, we acquired a license to intellectual property (including
two patents and trade secrets) from an individual who had acquired them from the
former AMROC, which specialized in hybrid rocket technology. We are obligated
to issue warrants to this individual to purchase a minimum of 100,000 and a
PAGE 35
maximum of 3,000,000 shares of our common stock over ten years beginning at the
inception of the agreement, depending on our annual revenues directly related to
sales of hybrid technology-based products from the original technology
acquisition. To date, we have issued warrants to purchase a total of 100,000
shares of our common stock under the agreement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without limitation our General Registration Statement on Form 10SB12G/A filed
January 28, 2000 as well as any or all of our recent filings including prior
year 10-KSB and quarterly 10-QSB filings.
In addition to historical information, the following discussion and other
parts of this document may contain forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of the forward-looking statements. We
undertake no obligation to publicly update any of the forward-looking statements
after the date of this report to conform such statements to actual results or to
changes in our expectations.
Actual results could differ materially from those anticipated by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the level of sales to key
customers; the economic conditions affecting our industry; actions by
competitors; fluctuations in the price of raw materials; the availability of
outside contractors at prices favorable to us; our dependence on single-source
or a limited number of suppliers; our ability to protect our proprietary
technology; market conditions influencing prices or pricing; an adverse outcome
in potential litigation, claims and other actions by or against us;
technological changes and introductions of new competing products; the current
recession; terrorist attacks or acts of war, particularly given the acts of
terrorism against the United States on September 11, 2001 and subsequent
military responses by the United States and coalition forces; mission disasters
such as the loss of the space shuttle Columbia on February 1, 2003 during its
re-entry into earth's atmosphere; ability to retain key personnel; changes in
market demand; exchange rates; productivity; weather; and market and economic
conditions in the areas of the world in which we operate and market our
products. These are factors that we think could cause our actual results to
differ materially from expected and historical events.
OVERVIEW
We are engaged in the conception, design, development, manufacture,
integration and operation of space technology systems, products and services.
We are currently focused on the commercial and military development of low cost
microsatellites, nanosatellites and related subsystems, and hybrid rocket
propulsion for space, launch and human flight vehicles as well as associated
PAGE 36
engineering and technical services primarily to government agencies, and
specifically the Department of Defense. Our products and solutions are sold,
mainly on a project-basis, directly to these customers and include sophisticated
micro- and nanosatellites, hybrid rocket-based launch vehicles, Maneuvering and
orbital Transfer Vehicles as well as safe sub-orbital and orbital hybrid
rocket-based propulsion systems. Although we believe there will be a commercial
market for our microsatellite and nanosatellite products and services in the
long-term, the early adopters of this technology appears to be government
military agencies and our "products" are considered to be the outcome of
specific "projects." We are also developing commercial hybrid rocket motors for
possible use in small launch vehicles, targets and sounding rockets and small
high performance space vehicles and subsystems for commercial customers.
We were incorporated under the laws of the State of Colorado on December
23, 1996 as Pegasus Development Group, Inc. ("PDGI"). SpaceDev, LLC of Colorado
was originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed on August 22, 1997. On October 22, 1997, PDGI issued 8,245,000 of its
$.0001 par value common stock for 100 percent (1,000,000 shares) of SpaceDev's
common stock owned by SpaceDev, LLC. Upon the acquisition of the SpaceDev
stock, SpaceDev was merged into PDGI and, on December 17, 1997, PDGI changed its
name to SPACEDEV, INC. After the merger, SpaceDev, LLC, changed its name to SD
Holdings, LLC on December 17, 1997. We became a publicly traded company in
October 1997 and are trading on the Nasdaq Over-the-Counter Bulletin Board
("OTCBB") under the symbol of "SPDV."
SELECTION OF SIGNIFICANT CONTRACTS
On March 31, 2004, we were awarded a five-year, cost-plus-fixed fee
indefinite delivery/indefinite quantity contract for up to $43,362,271 to
conduct a microsatellite distributed sensing experiment, an option for a laser
communications experiment, and other micro satellite studies and experiments as
required in support of the Advanced Systems Deputate of the Missile Defense
Agency. This effort will be accomplished in a phased approach, with the
first task order awarded April 1, 2004. The total five-year contract has a
ceiling amount of $43,362,271. The principal place of performance will be
Poway, California. We expect to complete the work under the contract before
March 2009. Government contract funds will not expire at the end of the current
government fiscal year. The microsatellite distributed sensing experiment is
intended to design and build up to six responsive, affordable, high performance
microsatellites to support national missile defense. The milestone-based,
multiyear, multiphase contract has an effective start date of March 1, 2004.
Approximately $557,000 of revenue has been generated since the beginning of
this contract through June 30, 2004, of which $62,000 was accrued for work
preformed in March 2004 but not invoiced until April 2004 due to the late
execution date of the contract. The first phase is expected to be completed
this year and will result in detailed mission and microsat designs. The
estimated first phase revenue is $1.1 million. The overall contract calls for
us to analyze, design, develop, fabricate, integrate, test, operate and support
a networked cluster of three formation-flying boost phase and midcourse tracking
microsatellites, with an option to design, develop, fabricate, integrate, test,
operate and support a second cluster of three formation flying microsats to be
networked on-orbit with high speed laser communications technology. The second
phase is anticipated to begin on or before October 1, 2004 and run through 2005.
On October 2, 2003, we were awarded an exclusive, follow-on contract to
provide the hybrid rocket motor systems and components for SpaceShipOne. We
provide our facilities, resources and a team of launch vehicle and hybrid
propulsion engineers and technical personnel in continued support of the
SpaceShipOne program. The contract called for us to use our best efforts to
satisfy the requirements of the SpaceShipOne program, based on our experience
with the prior phases. We are to provide two sets of re-usable flight test
hardware, including a bulkhead, commonly known as the SpaceDev bulkhead,
machined in the flight configuration, a main oxidizer valve of the current
design and associated interfaces and plumbing to the SpaceDev bulkhead, a motor
control system, igniter housings, pressure transducers, and thermocouples as
required for input to the motor control system. In addition, we will produce
and assemble test motors, including but not limited to, all expendable or
PAGE 37
semi-reusable materials as defined by our baseline design motor. We are also
required to provide on-site engineering test support and post-test analysis.
Provisions are made in the contract for minimum monthly payments in the event of
customer schedule slippage as well as additional levels of support via
engineering change orders, if required. The total contract value is estimated
at $429,000. Approximately $115,000 of revenue was realized in the year ending
December 31, 2003, with approximately $35,000 from engineering change orders and
the remaining $80,000 from the contract. Approximately $394,000 of revenue
was realized in the six-months ending June 30, 2004, with approximately $98,000
from engineering change orders and the remaining $296,000 from the contract.
On July 24, 2003, we were awarded a contract by Lunar Enterprise of
California ("LEC") for a first phase project to begin developing a conceptual
mission and spacecraft design for a lunar lander program. The unmanned mission
will be designed to put a small dish antenna near the south pole of the Moon.
From that location it will be in near-constant sunlight for solar power
generation, and should be able to perform multi-wavelength astronomy while
communicating with ground stations on Earth. The contract value was $100,000 and
was completed by November 2003. We were awarded a follow-on phase of $140,000 to
further analyze launch opportunities, spacecraft design, trajectory
possibilities, potential landing areas, available technologies for a small radio
astronomy system, and communications and data handling requirements on July 20,
2004 in the amount of $150,000. This phase is targeted for a late-2004
completion. Although this project is currently unfunded, if the project were to
proceed past the analysis stage, the total mission cost could exceed $50-$75
million. Again, we can give no assurance that any additional contracts will be
awarded to us. Revenues for the year ending December 31, 2003 were approximately
$70,000.
On July 9, 2003, we were awarded a contract by the Missile Defense Agency
("MDA") to explore the use of microsatellites in national missile defense. It
was a precursor contract to the approximately $43 million contract mentioned
above. Our microsatellites are operated over the Internet and are capable of
pointing and tracking targets in space or on the ground. This study explored
fast response micro satellite launch and commissioning; small, low-power passive
sensors; target acquisition and tracking; formation flying and local area
networking within a cluster of micro satellites; and an extension of our proven
use of the Internet for on-orbit command, control and data handling. The
contract was successfully concluded on February 27, 2004. The total contract
value was $800,000 with approximately $481,000 and $319,000 of revenue realized
in the twelve-months ending December 31, 2003 and the six-month period ending
June 30, 2004, respectively. The total value of our micro satellite studies for
MDA was over $1 million in 2003. This second contract was considered an
investigatory phase by MDA.
Also on July 9, 2003, we were awarded a Phase I Small Business
Innovation Research ("SBIR") contract by Air Force Research Lab ("AFRL") to
design and begin the development of the SpaceDev Streaker(TM) small launch
vehicle ("SLV"). SpaceDev Streaker(TM) will be designed to responsively and
affordably lift up to 1,000 pounds to Low Earth Orbit ("LEO"). The SpaceDev
Streaker(TM) SLV concept is based on a proprietary combination of technologies
to increase the performance of hybrid rocket motor technology. Hybrid rocket
motors are a combination of solid fuel and liquid oxidizer, and can be
relatively safe, clean, non-explosive, and storable, and can be throttled, shut
down and restarted. This contract is valued at approximately $100,000, is a
fixed price, milestone-based agreement, which should be completed within one
year. We believe that this SBIR will move into Phase II valued at approximately
$750,000 of carry-forward work for us, plus an additional $750,000 of funds
provided by Congress based on discussions with the Air Force Research Laboratory
technical personnel. This money will be used to develop and test fire our large
Common Core Booster for the SpaceDev Streaker(TM) launch vehicle. We believe
that there may be some interest by Congress in providing additional matching
funding to expand and accelerate the scope of the work; however, there can be no
assurance that such work will be awarded to us. Revenues for the year ending
December 31, 2003 were approximately $50,000. Revenues for the six-month
period ending June 30, 2004 were approximately $48,000.
PAGE 38
Finally, on July 9, 2003, we were awarded a Phase I contract to develop
micro- and nanosatellite bus and subsystem designs. This AFRL SBIR contract,
valued at approximately $100,000, will enable us to explore the further
miniaturization of our unique and innovative microsatellite subsystems. It will
also enable us to explore ways to reduce the time and cost to build small
satellites through further standardization in order to help define de facto
standards for payload hardware and software interfaces. The contract is fixed
price, milestone-based and should be completed within one year. On August 23,
2004 we were awarded a Phase II contract valued at approximately $740,000 of
carry-forward work . Revenues for the year ending December 31, 2003 were
approximately $40,000. Revenues for the six-month period ending June 30, 2004
were approximately $32,000.
On December 18, 2003, we were awarded a contract by the Defense Advanced
Research Projects Agency ("DARPA")for the study of Novel Satcom Microsat
Constellation Deployment. The contract is a milestone-based, fixed price
contract with total consideration of approximately $200,000. There were no
revenues for the year ending December 31, 2003. Revenues for the six-month
period ending June 30, 2004 were approximately $136,000. We were awarded
approximately an additional $40,000 on this program on August 6, 2004 bringing
the contract total to approximately $240,000.
On April 30, 2002, we were awarded Phase I of a contract to develop a
Shuttle-compatible propulsion module for the AFRL. We received an award for
Phase II of the contract on March 28, 2003, and will use the project to further
expand our product line to satisfy commercial and government space
transportation requirements. The first two phases of the contract (including an
additional add-on option) are worth up to approximately $2.5 million, of which
$100,000 was awarded for Phase I, and approximately $1.4 million was awarded for
Phase II. AFRL Phase II is a cost-plus fixed fee contract. In order to complete
AFRL Phase II, we requested and were granted approximately four months of
additional time and approximately $240,000 of additional funding, memorialized
by a contract amendment executed on July 7, 2004. In addition to the Phase I and
Phase II awards, there is an option worth approximately $800,000, which was
initiated on May 3, 2004. The additional funding to complete AFRL Phase II came
in part from the original $1 million option; thereby reducing the option to
approximately $800,000. Revenues for the twelve-months ending December 31, 2003
and the six-month period ending June 30, 2004 were approximately $997,000 and
$663,000 for AFRL Phase II, including the exercised option.
In November 1999, we won a $4.9 million turnkey mission contract by the
Space Sciences Laboratory ("SSL") at UCB. We were competitively selected by
UCB/SSL to design, build, integrate, test and operate, for one year, a small
NASA-sponsored scientific, Earth-orbiting spacecraft called CHIPSat. CHIPSat is
the first and only successful mission of NASA's low-cost University-Class
Explorer ("UNEX") series to date. CHIPSat launched as a secondary payload on a
Delta-II rocket on January 12, 2003. The satellite achieved 3-axis
stabilization, meaning it was pointing and tracking properly, with all
individual components and systems successfully operating, and is continuing to
work well in orbit after one year. In 2000, we reviewed the contract status at
year-end and determined that the total estimated costs at the end of the program
would exceed the likely revenue. As a result, we accrued a loss of approximately
$860,000 based on the expected contract modification of $600,000, which was
approved on June 15, 2001. On November 28, 2001, a second contract modification
was signed with UCB, which added approximately $1.2 million to the contract as
well as an increase in contract scope. This increased the total contract revenue
to approximately $6.8 million and reduced the total expected loss on the
contract to approximately $460,000. During 2002, an additional contract
modification for approximately $400,000 was signed, which also increased the
contract value and increased the scope of the contract to the current value of
the CHIPSat project of approximately $7.4 million, thereby increasing the total
expected loss to approximately $514,000. In retrospect, some of the CHIPSat
expenses creating the loss could have been recorded as research and development
costs associated with our ongoing satellite design and development programs. As
of December 31, 2003, the total contract costs were
PAGE 39
expended, mainly as cost of goods sold. The original support contract expired on
December 31, 2003. CHIPSat is still operating successfully and providing UCB
with new and interesting data. UCB requested to extend the program and we
negotiated a new time and materials contract in the first quarter of 2004 in the
form of a purchase order with UCB for continuing support of this project. The
contract will continue until UCB decides that no further relevant information is
forthcoming or funding is terminated, at which time the use of the mirco
satellite will revert to NASA and then to us. Revenue for the year ending
December 31, 2003 was approximately $356,000. Revenue for the six-month periods
ending June 30, 2004 and 2003 were approximately $22,000 and $331,000,
respectively.
On June 18, 2001, we entered into a relationship with two individuals
(doing business as EMC Holdings Corporation ("EMC")) whereby EMC was to provide
certain consulting and advisory services to us. EMC received the first
installment of 500,000 shares of our common stock on June 26, 2001. Total
expense for the initial stock issuance through September 30, 2001 was
approximately $455,000. Pursuant to a demand for arbitration filed by us on
November 7, 2001, we sought the return of all or a portion of the shares issued
to EMC. Following a three-day arbitration in May and June 2002, on July 17,
2002, an interim award was issued in favor of us against EMC, ordering the
return of the initial installment of our 500,000 shares and denying EMC's own
claim for $118,000. On October 22, 2002, a tentative final award was issued in
our favor including an award of approximately $83,000 in attorney and
arbitration fees to us. The tentative final ruling became effective on October
29, 2002, and has been submitted to the Superior Court of California, Orange
County, for entry of judgment. Because collection of the attorney and
arbitration fees award is not assured, we expensed all of our fees related to
this matter. Any recovery of the fees will be recorded as income in the period
they are received; however, at this time, we do not expect any recovery and in
June 2003, we ceased efforts to recover the awarded fees, as it was determined
that the cost to pursue collection exceeded the likelihood of collection. The
return of our 500,000 shares, as provided in the interim award issued on July
17, 2002, was recorded in the third quarter of 2002 as a reversal of the
original expense recorded. Because the original expense was not recorded as an
extraordinary item, the reversal of the expense did not qualify as an
extraordinary item.
RESULTS OF OPERATIONS
Please refer to the consolidated financial statements, which are a part of
this prospectus for further information regarding the results of operations.
YEAR ENDED DECEMBER 31, 2003 -VS.- YEAR ENDED DECEMBER 31, 2002
During the year ending December 31, 2003, we had net sales of approximately
$2,960,000 as compared to net sales of approximately $3,370,000 for the same
period in 2002. Sales declined primarily due to government delays in finalizing
the follow-on contracts for AFRL and MDA and to customer delays on SpaceShipOne.
Sales in 2003 reflected the substantial completion of CHIPSat and the completion
of the original SpaceShipOne contract, AFRL Phase I and MDA Phase I, while a new
exclusive proprietary propulsion contract (SpaceShipOne), began on October 2,
2003, a new contract with MDA began on July 9, 2003, a new contract with AFRL
began on July 9, 2003 and a new contract with Lunar Enterprises began on July
24, 2003. The total value of the MDA, AFRL and Lunar Enterprises contracts were
$800,000, $1.4 million and $100,000, respectively. Revenues for the year ending
December 31, 2003 were comprised of approximately $29,600 and $997,000 from AFRL
Phase I and II, respectively, $397,000 and $115,000 from the original and new
exclusive proprietary propulsion contracts (SpaceShipOne), respectively,
$250,000 and $481,000 from MDA Phase I and II, respectively, $356,000 from the
CHIPSat program, $100,000 from the contract by Lunar Enterprises of California
and approximately $220,400 from all other programs. During the same period of
2002, sales were comprised of approximately $1.7 million from the CHIPSat
program, approximately $1.2 million from the original SpaceShipOne propulsion
development program, approximately $300,000 from the completion of our
PAGE 40
outstanding government grants, approximately $70,000 from Phase I of the AFRL
project and approximately $130,000 from all other programs.
For the year ending December 31, 2003, we had costs of sales (direct and
allocated costs associated with individual contracts) of approximately
$2,415,000, or 82% of net sales, as compared to approximately $3,348,000 or 99%
of net sales, during the same period in 2002. The decrease in cost of sales was
primarily due to a lower overall cost structure, combined with the
implementation of stronger cost controls and project monitoring. Also, we
altered our cost allocation method in the second quarter of 2003 as we completed
CHIPSat, our main fixed price contract at the time, and began work on our new
AFRL and MDA cost plus contracts. We continue to focus efforts on developing
project management skills and reports to assist in the efficient and effective
management of our projects. The gross margin percentage for the year ending
December 31, 2003 was 18% of net sales, an increase of 16% of net sales, as
compared to 2% of net sales for the period in 2002.
We experienced an increase of approximately $1,364,000 in operating
expenses from approximately $66,000, or 2% of net sales, in the year ending
December 31, 2002 to approximately $1,430,000, or 48% of net sales, for the year
ending December 31, 2003. Operating expenses include general and administrative
expenses ("G&A"), marketing and sales expenses and research and development
expenses as well as stock and stock option based compensation expenses. In
2002, we experienced a one-time reversal for the EMC transaction (see EMC
Holdings Corporation transaction in MD&A Overview Section above). The increase
in operating expenses for the year ending would have been approximately
$905,000, rather than the stated $1,360,000 increase, without the one-time EMC
reversal. The following comparisons are based on total operating expenses
excluding the effects of the one-time EMC reversal.
- Marketing and sales expenses accounted for approximately 15% of the
increase in operating expenses, from approximately $258,000, or 8% of net sales,
for the year ending December 31, 2002, to approximately $395,000, or 13% of net
sales, during the same period in 2003, mainly due to our decision to expand our
marketing and sales department and add a Vice President of Marketing and Product
Development. Although our Vice President of Marketing and Product Development
is no longer with us, our CEO, Mr. Benson is leading our marketing & sales
efforts and most of his related expenses are being charged to this
department.
- Research and development ("R&D") expenses accounted for approximately 31%
of the increase in operating expenses. We began incurring R&D expenses of
approximately $281,000, or 10% of net sales, during the year ending December 31,
2003. Approximately $192,000 of R&D was in connection with our hybrid rocket
propulsion design system and technologies and the remaining $89,000 was part of
our satellite bus design and development. Approximately 1% of the increase in
operating expenses came from stock and stock option-based compensation expense.
During the year ending December 31, 2003, we had an increase in stock and stock
option based compensation expense from approximately ($452,000), or 14% of net
sales, in 2002 to approximately $9,000 or 0% of net sales during the same period
in 2003. This increase was mainly due to the reversal of stock compensation from
the EMC arbitration ruling as noted above.
- G&A expenses accounted for approximately 53% of the increase in operating
expenses. The increase in G&A expenses from approximately $261,000 for the year
ending December 31, 2002 to approximately $746,000 for the same period in 2003
was primarily due to new rent charges of approximately $291,000 (we owned the
building in 2002 and incurred interest expense on loans but not rental payments)
plus one-time revolving credit facility expenses of approximately $42,000 and an
increase in G&A labor expense with the hiring of our Chief Financial Officer,
PAGE 41
offset by a reduction in G&A labor expense of $92,000 primarily due to the loss
of our Vice President of Operations.
Non-operating expense/(income) consists of interest expense, non-cash debt
discount expense and deferred gain on the sale of our building, as well as other
loan fees and expenses.
- Interest expense for the year ending December 31, 2003 and 2002 was
approximately $91,000, or 3% of net sales, and $263,000, or 8% of net sales,
respectively. The decrease was due to the building sale on January 31, 2003,
which eliminated building debt and reduced overall interest on the notes
associated with the building. We continue to pay interest expense on certain
capital leases and settlement notes. In addition, we accrued interest expense
related to our related party note, convertible debentures and our revolving
credit facility. In the years ending December 31, 2003 and 2002, the accrued
interest on our related party note was approximately $47,000 and $45,000
respectively. We also accrued and paid approximately $18,000 of interest on our
convertible notes and accrued approximately $14,000 of interest, $42,000 of fees
and $126,000 of non-cash loan fees on our revolving credit facility with Laurus
for the year ending December 31, 2003.
- In conjunction with our convertible notes, we recorded a convertible note
debt discount of $475,000 related to warrants that accompanied the convertible
debt issue in 2002; however, since we made a partial repayment and the note
holders converted the remaining balance and forfeited half of their warrants,
the debt discount amount was reduced from $475,000 to $237,500. The reduction
is exclusively attributable to forfeiture of half of the original warrants.
During the year ending December 31, 2003, the convertible debt was eliminated.
A debt discount adjustment of approximately $234,000 was made and the ending
balance of $112,500 was recorded on the statement of operations for the year.
- We recognized approximately $107,500 of the deferred gain on the sale of
the building during the year ending December 31, 2003 and we will continue to
amortize the remaining deferred gain of approximately $1,065,000 into
non-operating income over the remainder of the lease. In relation to the gain
we received on the building, we also accrued an income tax payable expense of
$40,000 at March 31, 2003 of which none remained at December 31, 2003. The
reduction of the income tax payable was due to a change in estimate based on the
loss we experienced during the year.
- We realized loan fees related to our revolving credit facility and
expenses related to the conversion of notes to common stock below fair market
value of approximately $258,000 for the year ending December 31, 2003. We
anticipate additional expenses related to similar note to equity conversions in
the quarters ahead.
During the year ending December 31, 2003, we incurred a net loss of
approximately $1,246,000, or 42% of net sales, compared to a net loss of
approximately $376,000, or 11% of net sales, for the same period in 2002.
During the year ending December 31, 2003, we incurred an EBITDA (earnings before
interest taxes depreciation and amortization) of approximately <$723,000>, or
<24 %> of net sales, compared to an EBITDA of approximately $372,000, or 10 % of
net sales, for the year ending in 2002.
PAGE 42
The following table reconciles EBITDA to net loss for the twelve-months
ending December 31,
2003 and 2002, respectively:
FOR THE YEAR ENDING. . . . . . . . . . DECEMBER 31, 2003 December 31, 2002
(UNAUDITED) (Unaudited)
------------------- -------------------
NET LOSS . . . . . . . . . . . . . . . $ (1,246,067) $ (376,160)
-------------------------------------- ------------------- -------------------
Interest Expense . . . . . . . . . . . 91,493 263,480
Non-Cash Interest exp. (Debt Discount) 112,500 125,000
Gain on Building Sale. . . . . . . . . (107,498) 0
Loan Fee - Equity Compensation. . . . 257,882 0
Provision for income taxes . . . . . . 1,600 1,600
Depreciation and Amortization. . . . . 166,971 357,692
-------------------------------------- ------------------- -------------------
EBITDA . . . . . . . . . . . . . . . . $ (723,119) $ 371,612
-------------------------------------- ------------------- -------------------
PAGE 43
EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations). We believe that
EBITDA provides an important additional perspective on our operating results,
our ability to service our long-term obligations, our ability to fund continuing
growth, and our ability to continue as a going concern. The increase in the net
loss was mainly due to our quarterly losses in the first and second quarters of
2003 and less depreciation on our building, which we sold in January 2003. The
first two quarterly losses were spurred by reductions in revenues due to the
substantial completion of CHIPSat and the delay in starting our new AFRL and MDA
projects; however, revenues for the four quarters in 2003 showed continued
progress, as did the loss by quarter.
SIX MONTHS ENDING JUNE 30, 2004 -VS- SIX-MONTHS ENDING JUNE 30, 2003
During the six-months ending June 30, 2004, we had net sales of
approximately $2,215,000 as compared to net sales of approximately $1,287,000
for the same six-month period in 2003, an increase of over 65%. Sales increased
primarily due to the addition and expansion of government contacts, e.g., AFRL
and MDA, which created new revenue opportunities for us. Revenues in the
six-month period ending June 30, 2004 were comprised of approximately $663,000
from AFRL Phase II, $557,000 from MDA Phase I, $318,000 from the MDA Phase 0,
$394,000 from SpaceShipOne, $136,000 from our DARPA contract, $80,000 from the
two SBIR contracts listed above and $66,000 from all other programs. During the
same period of 2003, sales were comprised of approximately $397,000 from
SpaceShipOne, $250,000 from the MDA projects, $331,000 from the CHIPSat program,
$242,000 from Phase I and Phase II of the AFRL project and approximately $67,000
from all other programs.
For the six-month period ending June 30, 2004, we had costs of sales
(direct and allocated costs associated with individual contracts) of
approximately $1,749,000, or 79.0% of net sales, as compared to approximately
$1,039,000, or 80.8% of net sales, during the same period in 2003. The increase
in cost of sales was primarily due to higher revenues since the majority of our
current contracts are cost plus fixed fee contracts. We continue to focus
efforts on developing project management skills and reports to assist in the
efficient and effective management of our projects. The gross margin percentage
for the six-month period ending June 30, 2004 was 21.0% of net sales, an
increase of 1.8% of net sales, as compared to 19.2% of net sales for the same
six-month period in 2003.
We experienced a decrease of approximately $555,000 in operating expenses
from approximately $976,000, or 75.8% of net sales, for the six-month period
ending June 30, 2003 to approximately $421,000 or 19.0% of net sales, for the
six-month period ending June 30, 2004. Operating expenses include general and
administrative expenses ("G&A"), marketing and sales expenses and research and
development expenses as well as stock and stock option-based compensation
expenses. Fluctuations in operating expenses for 2004 from 2003 are primarily
attributable to the following:
- Marketing and sales expenses increased during the first six-months of 2004
compared to the same period in 2003. The increase in marketing and sales
expense, from approximately $199,000, or 15.5% of net sales, for the six-month
period ending June 30, 2003, to approximately $215,000, or 9.7% of net sales,
during the same period in 2004, are mainly due to personnel expenses related to
our decision to expand the marketing and sales department.
- Research and development ("R&D") expenses decreased during the first
six-months of 2004 from approximately $252,000 or 19.6% of net sales in 2003 to
approximately $35,000 or 1.6% of net sales for the six-month period ending June
30, 2004, mainly due to our decision to focus our limited resources on billable
projects and develop new technologies under existing contracts.
PAGE 44
- The decrease of approximately $354,000 in G&A expenses from approximately
$525,000 for the six-month period ending June 30, 2003 to approximately $171,000
for the same six-month period in 2004 was primarily due to software amortization
expense of $69,000, which is no longer present in 2004 as well as refinement of
our allocation model to appropriately classify certain expenses as cost of goods
sold rather than G&A.
Non-operating expense (income) consists of interest expense, non-cash debt
discount expense and deferred gain on the sale of our building, as well as,
other loan fees and expenses.
- Interest expense for the six-month period ending June 30, 2004 and 2003
was approximately $39,500, or 1.8% of net sales, and $34,600, or 2.7% of net
sales, respectively. The slight increase was due to accrued interest on our
revolving credit facility. Interest expense is comprised of interest on our
note to our CEO, interest on our revolving credit facility/convertible debt and
interest on our settlement notes/capital leases. For the six-month period
ending June 30, 2004 and 2003, interest expense on our note to our CEO was
approximately $25,900 and $24,000, respectively. For the six-month period
ending June 30, 2004 and 2003, interest expense on our revolving credit
facility/convertible debt was $11,900 and $4,900, respectively. And interest
expense on our settlement notes/capital leases for the six-month period ending
June 30, 2004 and 2003 were approximately $1,800 and $2,700, respectively.
- We recognized approximately $58,600 and $48,900 of the deferred gain on
the sale of the building during the six-month periods ending June 30, 2004 and
2003, respectively, and we will continue to amortize the remaining deferred gain
of approximately $1,006,600 into non-operating income over the remainder of the
lease. In relation to the gain we received on the building, we also accrued an
income tax payable expense of $2,526 at June 30, 2003 of which none remained at
December 31, 2003. The reduction of the income tax payable was due to a change
in estimate based on the loss we experienced during the year.
- During the six-month period ending June 30, 2003, we expensed in
conjunction with our convertible notes, part of the existing convertible debt
discount related to warrants that accompanied the convertible debt issue in 2002
of approximately $475,000, of which approximately $201,000 was expensed during
the six-months ended June 30, 2003 and paid or converted in September 2003.
There was no debt discount for the first six-months of 2004.
- We realized $1,793,000 in loan fees of which approximately $1,178,000 was
related to our revolving credit facility and approximately $615,000 was related
to the conversion of notes to common stock below fair market value for the
six-month period ending June 30, 2004. We accrued approximately $11,900 of
interest for the six-month period ending June 30, 2004. We anticipate
additional expenses related to similar note to equity conversions in the future.
During the six-month period ending June 30, 2004, we incurred a net loss of
approximately $1,729,000, or 78.1% of net sales, compared to a net loss of
approximately $918,000, or 71.3% of net sales, for the same six-month period in
2003. During the six-month period ending June 30, 2004, we incurred an EBITDA
(earnings before interest taxes depreciation and amortization) of approximately
$77,000, or 3.5% of net sales, compared to an EBITDA loss of approximately
<$622,000>, or <48.4> % of net sales, for the six-month period ending June 30,
2003.
PAGE 45
The following table reconciles EBITDA to net loss for the six-month period
ending June 30, 2004 and 2003, respectively:
FOR THE SIX-MONTHS ENDING. . . . . . . JUNE 30, 2004 June 30, 2003
(UNAUDITED) (Unaudited)
NET LOSS . . . . . . . . . . . . . . . ($1,729,416) ($917,840)
-------------------------------------- --------------- --------------
Interest Expense . . . . . . . . . . . 39,524 34,628
Non-Cash Interest exp. (Debt Discount) - 200,908
Gain on Building Sale. . . . . . . . . (58,636) (48,863)
Loan Fee - Equity Conversion. . . . . 1,793,313 0
Provision for income taxes . . . . . . - 2,526
Depreciation and Amortization. . . . . 32,487 106,201
-------------------------------------- --------------- --------------
EBITDA . . . . . . . . . . . . . . . . $ 77,272 ($622,440)
-------------------------------------- --------------- --------------
EBITDA should not be considered as an alternative to net income or loss (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations). We believe that
EBITDA provides an important additional perspective on our operating results,
our ability to service our long-term obligations, our ability to fund continuing
growth, and our ability to continue as a going concern.
PAGE 46
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, we believe that the opinion our auditors expressed in
their formal auditors' opinion dated February 11, 2004 (except for Note 11 as to
which the date is April 2, 2004) is still accurate. PKF stated, that in their
opinion, based on their audit, our consolidated financial statements referred to
herein present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiary as of December 31, 2003, and our
consolidated results of operations and cash flows for the year then ended are in
conformity with accounting principles generally accepted in the United States of
America. Our ability to continue as a going concern depends upon our ability to
ultimately implement our plan, which includes (but is not limited to) generation
of substantial new revenue from MDA by successfully performing under the newly
awarded contract and continuing to attract and successfully complete other
government and commercial contracts, development of a project management
expertise to profitably execute on new business contracts and reduction of the
working capital deficit by raising additional capital. We are working with
Laurus on our revolving credit facility to further support operations as new
contracts and business opportunities materialize. The prospective funding, as
well as new business opportunities, can come from a variety of sources,
including public or private equity markets, state and federal grants and
government and commercial customer program funding. However, there can be no
assurance that we will be able to obtain such funding or contracts as needed or,
if such funding or contracts are available, that we can obtain them on terms
favorable to us. The likelihood of our success must be considered in light of
the expenses, difficulties and delays frequently encountered in connection with
the developing businesses, those historically encountered by us, and the
competitive environment and industry in which we operate.
On January 31, 2003, we closed escrow on the sale of our facility in Poway,
California and entered into a ten-year leaseback. The selling price of the
facility was $3.2 million. The total debt repayment from the transaction was
approximately $2.4 million. The net proceeds to us for working capital purposes
was approximately $636,000.
At the end of 2002, we raised $475,000 from certain of our directors and
officers by issuing 2.03% convertible debentures. The convertible debentures
entitled the holder to convert the principal and unpaid accrued interest into
our common stock when the note matured. The original maturity on the notes was
six (6) months from issue date; however, on March 19, 2003, the maturity date
was extended to twelve (12) months from issue date. The convertible debentures
were exercisable into common shares at a conversion price that equals the 20-day
average asking price less 10%, which was established when the debentures were
issued, or the initial conversion price. Concurrent with the issuance of the
convertible debentures, we issued warrants to purchase up to 1,229,705 shares of
our common stock to the subscribers. These warrants are exercisable for three
(3) years from the date of issuance at the initial exercise price, or the
initial conversion price on the debentures. On September 5, 2003, we repaid
one-half of the convertible notes, with the condition that the note holders
would convert the other half. Also, as a condition of the partial repayment,
the note holders were required to relinquish one-half of the 1,229,705 warrants
previously issued. As additional consideration for the transaction, the note
holders were offered 5% interest on their notes, rather than the stated 2.03%.
All the note holders accepted the offer and the convertible notes were retired
in 2003. Each of the note holders is a selling security holder under this
prospectus.
During the six-month period ending June 30,, 2003, we raised approximately
$426,000 from accredited investors by selling 861,267 units of our common stock
and common stock purchase warrants under a private placement offering ("PPO")
made under Section 4(2) of the Securities Act of 1933, and Rule 506, to
accredited investors only. We subsequently closed the PPO.
PAGE 47
We have sustained ourselves over the last few years with a mixture of
government and commercial contracts and capital raised in the private market. In
particular, we anticipated and received awards for AFRL Phase II on March 28,
2003 and MDA on March 31, 2004. The AFRL and MDA contracts are cost-plus
contracts, which have required us to incur certain costs in advance of regular
contract reimbursements from our customers. Although we have needed a certain
amount of cash to fund advance payments on the contract, we have been entitled,
as a small business concern, to recover our costs on a weekly basis and we
established the Laurus Master Fund revolving credit facility at the end of the
second quarter of 2003, in part, to support our advance payment needs.
On March 31, 2004, we negotiated an amendment to our Secured Convertible
Note dated June 3, 2003 with the Laurus Master Fund to add a fixed conversion
price at $0.85 per share for the next $500,000 converted under the revolving
credit facility, after the initial $1 million conversion. In exchange for the
amendment, Laurus granted us a six-month waiver to utilize the full revolving
credit facility in advance of eligible accounts. At June 30, 2004, Laurus
had converted 1,403,182 shares under the revolving credit facility, which
represented approximately $772,000 of debt converted to equity. The agreement
was modified again as part of the Preferred Stock transaction to increase the
revolving credit facility from $1.0 million to $1.5 million and set the fixed
conversion price on the next $1 million at $1.00 per share and, thereafter, the
fixed conversion price will be adjusted to 103% of the then fair market value of
our common stock.
We recorded our third consecutive quarter of positive cash flow. We
realized a small positive cash flow from operations during the fourth quarter of
2003 and first and second quarters of 2004. Our improving EBITDA is an
indicator of our financial performance. We expect to continue realizing
positive cash flow as well as net losses in 2004. The continued net losses are
primarily due to non-cash interest expense and other fees related to our
revolving credit facility and debt related warrant conversion. While EBITDA
should not be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), we believe that by using
EBITDA as a measure of performance, we can illustrate the improving results of
our core business, despite the net losses derived from financing activities.
Our EBITDA was approximately $77,000 for the six-month period ending June 30,
2004, compared to a negative EBITDA of $622,000 for the same period in 2003, an
improvement of approximately $699,000.
We recored our second consecutive quarter of profit from operation,
which is a significant indicator of our improving financial performance.
Operating results are an important measure of the performance of our core
business. We recorded a profit from operations of approximately $12,000 in the
first quarter of 2004, compared to a loss from operations of $364,000 in the
first quarter of 2003. We recorded a profit from operations of approximately
$33,000 in the second quarter of 2004, compared to a loss from operations of
$365,000 in the second quarter of 2003. Profits or losses from operations are
derived from all expenses excluding interest, taxes, non-cash expenses related
to our revolving credit facility and other non-cash financing activities.
We expect to continue showing a positive trend in cash flow and operating
profits in 2004. We anticipate that with the projected increase in revenue and
backorders from near term contracts, combined with our fiscally responsible
budget and project controls and borrowings under our revolving credit facility,
that net positive cash flow from operations will be sufficient to fund both
operations and capital expenditures in 2004. There is no assurance, however,
that we will achieve or sustain any positive cash flow or profitability now or
thereafter.
PAGE 48
CASH POSITION FOR YEAR ENDED DECEMBER 31, 2003 -VS.- YEAR ENDED DECEMBER 31,
2002
Net increase in cash during the year ending December 31, 2003 was
approximately $565,000, compared to a net decrease of approximately $184,000 for
the same period in 2002. Net cash used in operating activities totaled
approximately $1,029,000 for the year ending December 31, 2003, an increase of
approximately $323,000 as compared to approximately $707,000 used in operating
activities during the same period in 2002, mainly due to the increase in our net
loss.
Net cash provided by investing activities totaled approximately $3,111,000
for the year ending December 31, 2003, compared to $48,000 provided by investing
activities during the same period in 2002. The increase in cash provided by
investing activities is attributable to the sale of the building on January 31,
2003.
Net cash used in financing activities totaled approximately $1,517,000 for
the year ending December 31, 2003, which is a decrease of approximately
$1,992,000 from the approximately $475,000 provided by financing activities
during the same period in 2002. This is primarily attributable to the repayment
of notes payable associated with the building sale and advances on our new
revolving credit facility.
At December 31, 2003, our cash, which includes cash reserves and cash
available for investment, was approximately $592,000, as compared to
approximately $28,000 at December 31, 2002, an increase of approximately
$564,000, mainly due to advances on our revolving credit facility.
As of December 31, 2003, our backlog of funded and non-funded business was
approximately $2.0 million, as opposed to approximately $4.0 million as of
December 31, 2002. As of March 31, 2004, our backlog of funded and non-funded
business grew to approximately $45 million due to the follow-on, five-year
contract from MDA for up to $43,362,271. We expect approximately $2 million in
revenue from the MDA program in 2004. Although the MDA contract was awarded to
us, there can be no assurance that the contract will be continued through all
phases, and/or, if continued, that it will generate the amounts anticipated.
During the year ending December 31, 2003, we won the AFRL Phase II contract
worth approximately $1.4 million, negotiated increases of approximately $1.0
million to the AFRL Phase II Contract as a deferred option still open, completed
our first proprietary propulsion contract (SpaceShipOne) and was awarded a new
exclusive proprietary propulsion contract for SpaceShipOne, completed
significant milestones on CHIPSat, completed MDA's Phase I project and obtained
a new contract for a new $800,000 project, obtained two AFRL SBIR Phase I grants
and were awarded a $100,000 contract by Lunar Enterprises.
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
deferred tax asset of $2,190,000 and $1,372,000 as of December 31, 2003 and
2002, respectively, consisted primarily of the income tax benefits from net
operating loss and capital loss carryforwards, amortization of goodwill and
research and development credits. A valuation allowance has been recorded to
fully offset the deferred tax asset as it is more likely than not that the
assets will not be utilized. The valuation allowance increased approximately
$818,000 in 2003 from $1,372,000 at December 31, 2002 to $2,190,000 at December
31, 2003.
At December 31, 2003, we had federal and state tax net operating loss and
capital loss carryforwards of approximately $4,230,000 and $1,847,000,
respectively. The federal and state tax loss carryforwards will expire in 2023
and 2013, respectively, unless previously utilized. The State of California has
suspended the utilization of net operating loss for 2002 and 2003.
PAGE 49
CASH POSITION FOR SIX-MONTHS ENDING JUNE 30, 2004 -VS.- SIX-MONTHS ENDING JUNE
30, 2003
Net cash increased during the six-months ending June 30, 2004 by
approximately $634,500 to $1,226,500, compared to an increase of approximately
$53,000 to $80,700 for the same six-month period in 2003. Net cash used in
operating activities totaled approximately $237,000 for the six-months ending
June 30, 2004, a decrease of approximately $582,000 as compared to approximately
$819,000 used in operating activities during the same six-month period in 2003,
mainly due to the decrease in operating expenses for the first six-months of
2004 compared to the same period in 2003.
Net cash used in investing activities totaled approximately $80,000 for the
six-months ending June 30, 2004, compared to $3,147,000 provided by investing
activities during the same six-month period in 2003. The decrease in cash
provided by investing activities is attributable to the sale of the building on
January 31, 2003 and no comparable transaction in 2004. During the first
six-month period in 2004, we invested approximately $80,000 in specialized
software and certain upgrades to computer hardware for our engineering team.
Net cash provided by financing activities totaled approximately $951,000
for the six-month period ending June 30, 2004, which is an increase of
approximately $3,226,000 from the approximately $2,275,000 used in financing
activities during the same period in 2003. This is primarily attributable to
the repayment of notes payable associated with the building sale in 2003,
payments on related party notes in 2004, conversions under our revolving credit
facility in 2004, as well as an increase in issuance of common stock from the
exercise of stock options and warrants.
At June 30, 2004, our cash was approximately $1,227,000, as compared to
approximately $81,000 at June 30, 2003, an increase of approximately $1,146,000,
mainly due to conversions under our revolving credit facility and the exercise
of stock options and warrants.
As of June 30, 2004, our backlog of funded and non-funded business was
approximately $44 million due to the follow-on, five-year contract from MDA for
up to $43,362,271. We expect approximately $2 million in revenue from the MDA
program in 2004. Although the MDA contract was awarded to us and the first task
order was issued to us on April 1, 2004, there can be no assurance that the
contract will be continued through all phases, and if continued, that it will
generate the amounts anticipated. Backlog as of June 30, 2003 was $3.2 million.
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
deferred tax asset of approximately $2,808,000 and $2,190,000 as of June 30,
2004 and December 31, 2003, respectively, consisted primarily of the income tax
benefits from net operating loss and capital loss carryforwards, amortization of
goodwill and research and development credits. A valuation allowance has been
recorded to fully offset the deferred tax asset as it is more likely than not
that the assets will not be utilized. The valuation allowance increased
approximately $665,000 in 2004 from $2,190,000 at December 31, 2003 to
$2,855,000 at June 30, 2004.
At June 30, 2004, we had federal and state tax net operating loss and
capital loss carryforwards of approximately $5,973,000 and $3,651,000,
respectively. The federal and state tax loss carryforwards will expire in 2023
and 2013, respectively, unless previously utilized. The State of California has
suspended the utilization of net operating loss for 2002 and 2003.
PAGE 50
CRITICAL ACCOUNTING STANDARDS
Our revenues transitioned in 2003 and early 2004 from being based primarily
from fixed-price contracts, where revenues are recognized using the
percentage-of-completion method of contract accounting based on the ratio of
total costs incurred to total estimated costs, to primarily cost-plus fixed fee
contracts, where revenues are recognized as costs are incurred and services are
performed. Losses on contracts are recognized when they become known and
reasonably estimable (see Notes to the Consolidated Financial Statements).
Actual results of contracts may differ from management's estimates and such
differences could be material to the consolidated financial statements.
Professional fees are billed to customers on a time-and-materials basis, a
fixed-price basis or a per-transaction basis. Time-and-materials revenues are
recognized as services are performed. Deferred revenue represents amounts
collected from customers for services to be provided at a future date. Research
and development costs are expensed as incurred.
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based Compensation." We adopted SFAS No.
123 in 1997. We have elected to measure compensation expense for our
stock-based employee compensation plans using the intrinsic value method
prescribed by APB Opinion 25, "Accounting for Stock Issued to Employees," and
have provided pro forma disclosures as if the fair value based method prescribed
in SFAS No. 123 has been utilized. (See Notes to the Consolidated Financial
Statements.) We have valued our stock, stock options and warrants issued to
non-employees at fair value in accordance with the accounting prescribed in SFAS
No. 123, which states that all transactions in which goods or services are
received for the issuance of equity instruments shall be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation,
was published by Financial Accounting Standards Board on December 31, 2002. The
effective date of FASB No. 148 is December 15, 2002. SFAS No. 123 prescribes a
"fair value" methodology to measure the cost of stock options and other equity
awards. Companies may elect either to recognize fair value stock-based
compensation costs in their financial statements or to disclose the pro forma
impact of those costs in the footnotes. We have chosen the latter approach.
The immediate impact of SFAS No. 148 is more frequent and prominent disclosure
of stock-based compensation costs, starting with financial statements for the
year ended December 31, 2002 for companies whose fiscal year is the calendar
year. SFAS No. 148 also provides some flexibility for the transition, if a
company chooses the fair-value cost recognition of employee stock options.
RECENT ACCOUNTING PRONOUNCEMENTS
There were no recent Accounting Pronouncements that affected us during the
second quarter of 2004. For past pronouncements please refer our 10-KSB filed on
April 6, 2004.
FORWARD-LOOKING STATEMENTS AND RISK ANALYSIS
During the first six-months of 2004, we submitted two bids for government
programs, continued our work with the US Congress to identify directed funding
for our programs and are actively working to win several significant commercial
programs. We believe that we will win some of these programs, which would enable
us to continue to grow and broaden our business base, although there can be no
assurance that these contracts will be awarded to us.
PAGE 51
To date, we have maintained a mix of government and commercial business.
In 2003, we had about 82% government or government-related work. In 2002, we
had about 64% government and government-related work. In 2004, we expect the
ratio to be about 90% government or government-related work. We will continue
to do both government and commercial business and anticipate the mix of
government revenues to continue to be above 70% for the next several years as we
increase our government and commercial marketing efforts for both of our product
lines. Currently, we are focusing on the domestic U.S. government market, which
we believe is only about one-half of the global government market for our
technology, products and services. Although we are interested in exploring
international revenue and contract opportunities, we are restricted by export
control regulations, e.g., International Traffic in Arms Regulations ("ITAR"),
which may limit our ability to develop market opportunities outside the United
States.
While we do not expect a reduction of government sales, a majority of our
government work is contract related and could be affected by political and
budget changes. We are beginning to develop commercial products with the
long-term idea and vision of becoming a product-oriented company; however, in
the short-term, a majority of our revenue is expected to come from government
cost plus fixed fee and firm fixed price contracts. Our definition of
short-term is the next three to five years and long-term is five to ten years
and beyond. We anticipate winning contracts in both the government and
commercial market segments, although there can be no assurance that the
contracts will be awarded to us. If they are not awarded to us, based on
current trends and proposals, we believe that we can offset fluctuations in one
market segment with contracts from the other; however, our inability to win
business in both markets would have a negative effect on our business operations
and financial condition.
We believe that we will experience an accelerated growth in sales over the
next few years. At this time, over 90% of the forecasted sales for 2004 are
under contract or near contract award. There is no guarantee and there can be
no assurance that we will win enough new business to achieve our targeted growth
projection or to maintain our positive cash flow position. Additionally, there
is no guarantee that awarded contracts will not be altered or terminated prior
to us recognizing our projected revenue from them. Many contracts have "exit
ramps," i.e., provides the customer the right to terminate the contract for any
of a variety of reasons, including but not limited to non-performance by us. We
do not believe that any of our contracts will be terminated early; however,
there can be no assurance that they will not be terminated early in the future.
Finally, we do not believe that significant capital expenditures will be
required to achieve this increase in sales; however, additional capital will be
required to support and sustain our growth.
During the six month period ending June 30, 2004, we raised approximately
$1,751,000 through a combination of conversions on our revolving credit facility
(approximately $772,000), exercises of warrants previously issued (approximately
$276,000), from participants in our employee stock purchase plan (approximately
$6,000) and from exercises of employee stock options, mainly from Mr. Lloyd, our
former Chief Financial Officer (approximately $697,000). During the year ended
December 31, 2003, we raised approximately $654,000 through a combination of
private sales of our stock (approximately $426,000) and conversions on our
revolving credit facility (approximately $228,000). During the year ended
December 31, 2002, we raised approximately $475,000 from our convertible debt
offering, of which $237,500 plus interest was repaid in 2003. To execute our
strategy of growing our Company with small, capable, low-cost micro and
nanosatellites, hybrid propulsion products and new commercial revenue sources,
we require additional funding and/or the win of both significant government and
commercial programs. We believe investor or customer funding of $5 to $15
million may be required, which could come from a combination of private and/or
public equity placements or government and commercial customers.
The amount of capital we need to raise is dependent upon many factors. The
need for additional capital will be greater if (i) we do not enter into
PAGE 52
agreements with our customers on the terms we anticipate; (ii) our net operating
deficit increases because we incur significant unanticipated expenses; or (iii)
we incur additional costs from modifying our microsatellite products or our
hybrid-related propulsion systems to meet changed or unanticipated market,
regulatory, or technical requirements. If these or other events occur, there is
no assurance that we could raise additional capital on favorable terms, on a
timely basis or at all. If additional capital is not raised, it could have a
significant negative effect on our business operations and financial condition.
Our ability to execute a public offering or otherwise obtain funds is
subject to numerous factors beyond our control, including, without limitation, a
receptive securities market and appropriate governmental clearances. No
assurances can be given that we will maintain operating profitability and
positive cash flow, or that any additional public offering will occur, that we
will be successful in obtaining additional funds from any source or be
successful in implementing an acceptable exit strategy on behalf of our
investors. Moreover, additional funds, if obtainable at all, may not be
available on terms acceptable to us when such funds are needed or may be on
terms which are significantly adverse to our current shareholders.
Our business partially depends on activities regulated by various agencies
and departments of the U.S. government and other companies and agencies that
rely on the federal government. Recently, in response to terrorists' activities
and threats aimed at the United States, transportation, mail, financial, and
other services have been slowed or stopped altogether. Further delays or
stoppages in transportation, mail, financial, or other services could have a
material adverse effect on our business, results of operations, and financial
condition. Furthermore, we may experience a small increase in operating costs,
such as costs for transportation, insurance, and security as a result of the
activities and potential activities. The U.S. economy in general is being
adversely affected by the terrorist activities and potential activities, and any
economic downturn could adversely impact our results of operations, impair our
ability to raise capital, or otherwise adversely affect our ability to grow our
business. Conversely, because of the nature of our products, there may be
opportunities for us to offer solutions to the government that may address some
of the problems that the country faces at this time.
DESCRIPTION OF PROPERTY
In January 2003, we entered into a sale and leaseback of our 25,000 square
foot facility in Poway, California. Our facility includes a small Spacecraft
Assembly and Test facility ("SAT") with an 1,800 square foot Class 100,000 clean
room, avionics development lab, machine shop with rocket motor casting
capability, mechanical assembly lab, and mission control and operations center.
Key uses of our California facility are program and project conferences and
meetings, engineering design, engineering analysis, spacecraft assembly,
avionics labs and software labs and media outreach. We also have an
Internet-based Mission Control and Operations Center in our building. Our
facility allows for efficient design, assembly and test of our products and
technologies.
We originally purchased our headquarter facility in December 1998, and as
noted above we sold the facility and entered into a sale-leaseback in January
2003. The rent is approximately $25,700 per month with a 3.5% COLA increase
annually. We are responsible for property tax and liability insurance on the
facility. We were required to make an advance payment in the form of a security
deposit of approximately $25,700, which we carry as an asset on our balance
sheet. Our Chief Executive Officer, Mr. Benson, provided a guarantee for the
leaseback. [See Notes 2 and 9(c) to our consolidated financial statements for
additional information, and "Certain Relationships And Related Transactions"
below.] The original purchase price of the facility was $1.1 million, and
the selling price of the facility was $3.2 million. The total debt repayment
from the transaction was approximately $2,407,000. The approximate net proceeds
to us for working capital purposes was $636,000.
PAGE 53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
James W. Benson, our Chief Executive Officer and Chairman of the Board of
Directors, and Susan Benson, our former Corporate Secretary, are husband and
wife. Mr. Benson has personally guaranteed the building lease on our facility.
One of our independent directors, Robert S. Walker, is a principal of
Wexler & Walker Public Policy Associates, a Washington-based, full-service
government relations firm founded in 1981. Wexler & Walker principals have
served in Congress, in the White House and federal agencies, as congressional
staff, in state and local governments and in political campaigns. Wexler &
Walker is a leader on the technology issues of the twenty-first century. During
2003 and 2002, we incurred consulting fees with Hill and Knowlton, Inc., an
affiliate of Wexler & Walker, in an aggregate amount of approximately $0 and
$56,000, respectively.
In December 2001, we entered into a consulting agreement with one of our
independent directors, Curt D. Blake, pursuant to which Mr. Blake agreed to
perform certain services for us and identify and qualify significant investors
and potential acquisition targets for us. Under the agreement, Mr. Blake was to
receive compensation, in cash and non-statutory stock options, for his services.
In addition, Mr. Blake was to receive a cash finder's fee plus a common stock
grant for all monies raised as a result of introductions made by him. However,
as a result of the independence rules imposed by the Sarbanes-Oxley Act of 2002,
Mr. Blake voluntarily terminated his agreement with us on November 25, 2002. We
made no payments to Mr. Blake in 2003 and 2002, other than reimbursement of
Board-related travel expenses.
In September and October 2002, certain of our officers provided personal
interest-free short-term loans to support our working capital needs. The
officer loans were paid with the proceeds from imminently pending contract
payments and the proceeds of the convertible note program sales.
From October 14, 2002 through November 14, 2002, we sold an aggregate of
$475,000 of 2.03% convertible debentures to two of our directors, officers and
Mr. Skarupa, a former officer. Mr. Benson purchased $375,000 of Series A
Subordinated Convertible Notes and Mr. Shaffer purchased $50,000. The total
funding was completed on November 14, 2002. The convertible debentures entitled
the holder to convert the principal and unpaid accrued interest into our common
stock when the note matured. The notes originally were set to mature six (6)
months from issue date and were subsequently extended to twelve (12) months from
issue date on March 19, 2003. Unless paid, extended or re-negotiated, the
convertible debentures were exercisable into a number of our common shares at a
conversion price that equals the 20-day average asking price less 10%, which was
established when the note was issued, or the initial conversion price.
Concurrent with the issuance of the convertible debentures, we issued to the
subscribers, warrants to purchase up to 1,229,705 shares of our common stock.
These warrants are exercisable for three (3) years from the date of issuance at
the initial exercise price, which equals to the 20-day average asking price less
10% which was established when the note was issued, or the initial conversion
price. Upon issuance, the warrants were valued using the Black-Scholes pricing
model based on the expected fair value at issuance and the estimated fair value
was recorded as debt discount. See Note 8(c) to our Consolidated Financial
Statements for discussion of the terms of the warrants. The debt discount was
being amortized as additional interest expense over the term of the convertible
debentures.
On September 5, 2003, we repaid one-half of the convertible notes, with the
condition that the note holders would convert the other half. Also, as a
condition of the partial repayment, the note holders were required to relinquish
one-half of the previously issued warrants. Finally, as additional consideration
for the transaction, the note holders were offered 5% interest on
PAGE 54
their notes, rather than the stated 2.03% for a total of $18,161 of interest
expense. All the note holders accepted the offer and the convertible notes were
retired. In order for Mr. Skarupa, our former Vice President of Operations, to
accept the offer, he entered into a private transaction with Mr. Slansky, our
Chief Financial Officer. Mr. Slansky purchased 60% of Mr. Skarupa's note
conversion for $15,000 in cash and received 38,462 shares of SpaceDev common
stock and warrants on 38,462 shares of SpaceDev common stock. As of December
31, 2003, we recorded a credit of $88,408, as debt discount recovery; therefore,
for the year ending December 31, 2003, the debt discount expense was $112,500.
We also expensed $131,411 for non-cash loan fee expense related to the
convertible note. Fair market value of the stock was determined by discounting
the closing market price on the date of the transaction by 20%, based on the
nature of the restricted securities.
MARKET FOR COMMON EQUITY & RELATED STOCKHOLDER MATTERS
(a) (b) (c)
--------------------------- ------------------- --------------------------
Plan category. . . Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding outstanding future issuance under
issuance options, warrants options, warrants equity compensation plans
and rights and rights (excluding securities
reflected in column (a))
Equity
compensation plans 3,184,231 $ 0.89 2,263,432
approved by
security holders
Equity . . . . . . 2,500,000 $ 2.00 0
compensation plans
not approved by
security holders
------------------ --------------------------- ------------------- --------------------------
Total. . . . . . . 5,684,231 $ 1.45 2,263,432
------------------ --------------------------- ------------------- --------------------------
MARKET INFORMATION
Our common stock has been traded on the Over-the-Counter Bulletin Board
("OTCBB") since August 1998 under the symbol "SPDV" or "SPDV.OB." The following
table sets forth the trading history of our common stock on the OTCBB for each
quarter as reported by Yahoo Finance Historical Prices (www.finance.yahoo.com).
The quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions.
PAGE 55
QUARTERLY QUARTERLY
QUARTER ENDING HIGH LOW
-------------- ---------- ----------
3/31/2002. . . $ 0.65 $ 0.48
-------------- ---------- ----------
6/30/2002. . . $ 0.64 $ 0.43
9/30/2002. . . $ 0.52 $ 0.30
12/31/2002 . . $ 0.50 $ 0.29
3/31/2003. . . $ 0.55 $ 0.41
6/30/2003. . . $ 0.75 $ 0.33
9/30/2003. . . $ 1.80 $ 0.55
12/31/2003 . . $ 1.15 $ 0.81
3/31/2004. . . $ 1.85 $ 0.92
6/30/2004 . $ 2.01 $ 1.04
9/30/2004. . . $ 2.38 $ 1.46
HOLDERS
As of September 1, 2004, there were over 600 holders of record of our
common stock. We estimate the total number of beneficial owners of our common
stock to be in excess of 4,500 holders. We believe that the number of beneficial
owners is substantially greater than the number of record holders because a
significant portion of our outstanding common stock is held in broker "street
names" for the benefit of individual investors.
DIVIDENDS
We have never paid a cash dividend on our Common Stock. Payment of
dividends is at the discretion of the Board of Directors. The Board of
Directors plans to retain earnings, if any, for operations and does not intend
to pay dividends on Common Stock in the foreseeable future.
PAGE 56
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS & CONTROL PERSONS
Our management and directors' business activities are under the control of
our Board of Directors. Our Chief Executive Officer, James W. Benson, Chief
Financial Officer, Richard B. Slansky, Vice President of Engineering, Frank
Macklin and Vice President of New Business Development, Randall K. Simpson,
manage our daily operations. Our Board currently consists of seven directors.
Stuart Schaffer and Scott McClendon were added to the Board of Directors in
2002. J. Mark Grosvenor was added and resigned from the Board of Directors in
2003. Below are our current executive officers and directors.
NAME POSITION HELD
---- --------------
James W. Benson Chief Executive Officer,
13855 Stowe Drive Director, Chairman of the Board
Poway, California 92064
Richard B. Slansky Corporate Secretary, Chief Financial
13855 Stowe Drive Officer
Poway, CA 92064
Frank Macklin Vice President, Engineering
13855 Stowe Drive
Poway, CA 92064
Randall K. Simpson Vice President, New Business
13855 Stowe Drive Development
Poway, California 92064
Stuart Schaffer Director
13855 Stowe Drive
Poway, CA 92064
Wesley T. Huntress* Director
13855 Stowe Drive
Poway, California 92064
Curt Dean Blake* Director
13855 Stowe Drive
Poway, California 92064
General Howell M. Estes, III (USAF Retired)* Director
13855 Stowe Drive
Poway, California 92064
Robert S. Walker* Director
13855 Stowe Drive
Poway, California 92064
PAGE 57
Scott McClendon * Director
13855 Stowe Drive
Poway, California 92064
* Denotes Independent Director
The following is a summary of the business experience of our officers and
directors.
James W. Benson, age 59, is our founder and has served as our Chief
Executive Officer and Chairman of the Board since inception, and started the
trend of successful computer entrepreneurs moving into the entrepreneurial space
arena. In 1984, Mr. Benson founded Compusearch Corporation (later renamed
Compusearch Software Systems), in McLean, Virginia. Compusearch was based on
the first development of software algorithms and applications for personal
computers and networked servers to create full text indexes of massive
government procurement regulations and to provide instant full text searches for
any word or phrase; the first instance of large scale, commercial implementation
of PC-based full text searching, which later grew to encompass such systems as
worldwide web search engines. Seeing related opportunities in document and
image management, Mr. Benson started the award-winning ImageFast Software
Systems in 1989, which later merged with Compusearch. In 1995, Mr. Benson sold
Compusearch and ImageFast, and retired at age fifty. After months of research,
Mr. Benson started SpaceDev, Inc., a Nevada corporation, which was acquired by
us in October 1997. Mr. Benson holds a Bachelor of Science degree in Geology
from the University of Missouri. He founded the non-profit Space Development
Institute, and introduced the $5,000 Benson Prize for Amateur Discovery of Near
Earth Objects. He is also Vice-Chairman and private sector representative on
NASA's national Space Grant Review Panel, and is a member of the American
Society of Civil Engineers subcommittee on Near Earth Object Impact Prevention
and Mitigation.
Richard B. Slansky, age 47, is our Chief Financial Officer and Corporate
Secretary and joined us on February 10, 2003. Mr. Slansky served as interim
Chief Executive Officer and Chief Financial Officer of Quick Strike Resources,
Inc., an IT training, services and consulting firm, from July 2002 to February
2003. Previously, Mr. Slansky served as Chief Financial Officer, Vice President
of Finance, Administration and Operations and Corporate Secretary for Path 1
Network Technologies, Inc., a company focused on merging broadcast and cable
quality video transport with IP networks from May 2000 to July 2002. Before his
tenure at Path 1, Mr. Slansky served as President, Chief Financial Officer and
member of the Board of Directors of Nautronix, Inc., a marine
electronics/engineering services company, from January 1999 to May 2000. Prior
to Nautronix, Mr. Slansky served as Chief Financial Officer of Alexis
Corporation, an international pharmaceutical research products technology
company, from August 1995 to January 1999. He also served as President and Chief
Financial Officer of C-N Biosciences, formerly Calbiochem, from July 1989 to
July 1995. Mr. Slansky is currently serving on the Board of Directors of two
privately held high technology companies and one closely held, private real
estate company. Mr. Slansky earned a bachelor's degree in economics and science
from the University of Pennsylvania's Wharton School of Business and a master's
degree in business administration in finance and accounting from the University
of Arizona.
Frank Macklin, age 47, was appointed as our Vice President of
Engineering on September 17, 2004. Mr. Macklin has been our chief engineer of
hybrid propulsion systems and the technical leader for our NRO funded SPOTV
Hybrid System Definition study, and is acting chief engineer for our orbital
Maneuvering and Transfer Vehicle Hybrid Technology Development and X-Motor
Development. Mr. Macklin was a founder of Integrated Space Systems, Inc., which
was acquired by SpaceDev in 1998. Prior to his work at ISS, Mr. Macklin worked
at the General Dynamics Space Systems Division in San Diego from January 1987 to
December 1994. During his tenure at General Dynamics, Mr. Macklin integrated a
new guidance system onto the new generation of Atlas launch vehicles and became
PAGE 58
intimately familiar with all aspects of vehicle flight software and hardware. He
also designed and implemented diverse ground guidance performance and analysis
software systems, became a complete end-to-end systems expert, and served as the
guidance system expert on the elite "tiger team" sent to support all launches.
Prior to General Dynamics, Mr. Macklin served as a member of the Peacekeeper
developmental launch team at Vandenberg Air Force Base from March 1984 to
December 1986, where he was responsible for the $30M guidance and control
system, led a group of 30 industry engineers and gave the final guidance system
go/no-go for launch. Mr. Macklin is a California State registered professional
electrical engineer with more than 20 years of experience with launch vehicles,
ground launch control systems, launch sites and launch teams. Mr. Macklin
received his BSEE from San Diego State Univeristy and is a California Board
Certified Professional Engineer.
Randall K. Simpson, age 57, is our Vice President of Engineering and New
Business Development and joined us in January 2004. Mr. Simpson has over 30
years of diversified experience in business development, product definition,
engineering development and support for aerospace, commercial and international
customers. From October 2000 to January 2004, Mr. Simpson served as AVP of
Program Management for Alvarion, Inc., a high technology commercial
communications firm. From March 1997 to September 2000, Mr. Simpson was Vice
President of Engineering for Cubic Defense Systems, an engineering and
production company providing military training ranges, laser instrumentation
products, space avionics and battlefield communications equipment. From
November 1992 to February 1997, Mr. Simpson was Program Director for Advanced
Test Systems and Engineering Director for GDE Systems, which develops,
integrates and produces test equipment for advanced electronic aircraft,
munitions, space launch, satellite and telecommunications systems. Mr. Simpson
began his career at General Dynamics/Convair where he held various positions.
Mr. Simpson received both his BSEE and MSEE from San Diego State University.
Stuart Schaffer, age 44, was appointed to our Board of Directors on May 17,
2002. Mr. Schaffer is currently VP of Marketing, for Overture Performance
Marketing -- a business unit of Overture Services, which is a subsidiary of
Yahoo! Mr. Schaffer was our vice president of product development and marketing
from May 2002 to August 2003. From 1998 to 2001, Mr. Schaffer acted as vice
president of marketing for Infocus Corporation, a fully reporting company, where
he managed all aspects of the marketing mix for market-share leading digital
projection business throughout the Americas region. In that position, Mr.
Schaffer revitalized the Proxima brand, managed a multi-million dollar annual
advertising, communications and program budget, directed multiple outside and
in-house agencies, led product marketing teams in defining and delivering both
mobile and conference room digital projector product lines, developed channel
strategies and programs for both value-added and volume channels, served as
primary company press spokesperson, established a market intelligence structure
focused on developing customer and industry knowledge and spearheaded merger
teams to ensure the smooth transition of the merger between the Infocus and
Proxima marketing organizations. Prior to Infocus, Mr. Schaffer worked for the
Hewlett-Packard Company from 1985 to 1998, where he held various positions in
Business Development, Marketing and Business Planning. Mr. Schaffer has worked
with the Leukemia & Lymphoma Society, on a volunteer basis, as an Assistant
Coach and Mentor. Mr. Schaffer has an MBA from Harvard University and a BS
degree in physics from Harvey Mudd College.
Wesley T. Huntress, age 62, was elected to our Board of Directors as an
independent director at our annual shareholder meeting held June 30, 1999. Dr.
Huntress is currently Director of the Geophysical Laboratory at the Carnegie
Institution of Washington in Washington, DC, where he leads an interdisciplinary
group of scientists in the fields of high-pressure science, astrobiology,
petrology and biogeochemistry. Prior to his appointment at Carnegie, Dr.
Huntress served the Nation's space program as the Associate Administrator for
Space Science at NASA from October 1993 through September 1998, where he was
responsible for NASA's programs in astrophysics, planetary exploration, and
space physics. During his tenure, NASA space science produced numerous major
discoveries, and greatly increased the launch rate of missions. These
discoveries include the discovery of possible ancient microbial life in a Mars
meteorite; a possible subsurface ocean on Jupiter's moon Europa; the finding
PAGE 59
that gamma ray bursts originate at vast distances from the Milky Way and are
extraordinarily powerful; discovery of massive rivers of plasma inside the Sun;
and a wealth of announcements and images from the Hubble Space Telescope, which
have revolutionized astronomy as well as increased public interest in the
cosmos. Dr. Huntress also served as a Director of NASA's Solar System
Exploration Division from 1990 to 1993, and as special assistant to NASA's
Director of the Earth Science and Applications from 1988 to 1990. Dr. Huntress
came to NASA Headquarters from Caltech's Jet Propulsion Laboratory. Dr.
Huntress joined the Jet Propulsion Laboratory as a National Research Council
resident associate after receiving is B.S. in Chemistry from Brown University in
1964 and his Ph.D. in Chemical Physics from Stanford in 1968. He became a
permanent research scientist at the Jet Propulsion Laboratory in 1969. He and
his Jet Propulsion Laboratory team gained an international reputation for their
pioneering studies of chemical evolution in interstellar clouds, comets and
planetary atmospheres. At the Jet Propulsion Laboratory, Dr. Huntress served as
co-investigator for the ion mass spectrometer experiment in the Giotto Halley's
Comet mission, and as an interdisciplinary scientist for the Upper Atmosphere
Research Satellite and Cassini missions. He also assumed a number of line and
research program management assignments while at the Jet Propulsion Laboratory,
and spent a year as a visiting professor in the Department of Planetary Science
and Geophysics at Caltech.
Curt Dean Blake, age 47, was appointed to our Board of Directors as an
independent director on September 5, 2000. Mr. Blake is CEO of GotVoice, Inc.,
a startup company in the voicemail consolidation and messaging business. From
1999 to 2002, Mr. Blake provided consulting services to various technology
companies, including Apex Digital, Inc. and SceneIt.com. Mr. Blake acted as the
Chief Operating Officer of the Starwave Corporation from 1993 until 1999, where
he managed business development, finance, legal and business affairs, and
operations for the world's most successful collection of content sites on the
Internet. During that time, he developed business strategies, financial models,
and structured and negotiated venture agreements for Starwave's flagship site,
ESPN Sportszone, at that time the highest traffic destination site on the
Internet. He also developed and negotiated venture agreements with the NBA, NFL,
Outside Magazine and NASCAR to create sites around these brands. Mr. Blake
negotiated sale of controlling interest in Starwave Corporation to Disney/ABC.
Prior to Starwave, Mr. Blake worked at Corbis from 1992 to 1993, where he led
the acquisitions and licensing effort to fulfill Bill Gates' vision of creating
the largest taxonomic database of digital images in the world. Mr. Blake acted
as General Counsel to Aldus Corporation from 1989 to 1992, where he was
responsible for all legal matters of the $125 million public corporation and its
subsidiaries. Prior to that, Mr. Blake was an attorney at Shidler, McBroom,
Gates and Lucas, during which time he was assigned as onsite counsel to the
Microsoft Corporation, where he was primarily responsible for the domestic
OEM/Product Support and Systems Software divisions. Mr. Blake has an MBA and JD
from the University of Washington.
General Howell M. Estes, III (USAF Retired), age 63, was appointed to our
Board of Directors as an independent director on April 2, 2001. General Estes
retired from the United States Air Force in 1998 after serving for 33 years. At
that time he was the Commander-in-Chief of the North American Aerospace Defense
Command ("CINCNORAD") and the United States Space Command ("CINCSPACE"), and the
Commander of the Air Force Space Command ("COMAFSPC") headquartered at Peterson
AFB, Colorado. In addition to a Bachelor of Science Degree from the Air Force
Academy, he holds a Master of Arts Degree in Public Administration from Auburn
University and is a graduate of the Program for Senior Managers in Government at
Harvard's JFK School of Government. Gen. Howell Estes is the President of Howell
Estes & Associates, Inc., a wholly owned consulting firm to CEOs, Presidents and
General Managers of aerospace and telecommunications companies worldwide. He
serves as Vice Chairman of the Board of Trustees at The Aerospace Corporation.
He served as a consultant to the Defense Science Board Task Force on SPACE
SUPERIORITY and more recently as a commissioner on the U.S. Congressional
Commission to Assess United States National Security Space Management and
Organization (the "Rumsfeld Commission").
PAGE 60
Robert S. Walker, age 62, was appointed to our Board of Directors as an
independent director on April 2, 2001. Mr. Walker has acted as Chairman of
Wexler & Walker Public Policy Associates in Washington, D.C. since January 1997.
As a former Congressman (1977-1997), Chairman of the House Science Committee,
Vice Chairman of the Budget Committee, and a long-time member of the House
Republican leadership, Walker became a leader in advancing the nation's space
program, especially the arena of commercial space, for which he was the first
sitting House Member to be awarded NASA's highest honor, the Distinguished
Service Medal. Bob Walker is a frequent speaker at conferences and forums. His
main issues include the breadth and scope of space regulation today, and how
deregulation could unleash the telecommunications, space tourism, broadcast and
Internet industries. Mr. Walker currently sits on the boards of directors of
Aerospace Corporation, a position he has held since March 1997. Wexler & Walker
is a Washington-based, full-service government relations firm founded in 1981.
Wexler & Walker principals have served in Congress, in the White House and
federal agencies, as congressional staff, in state and local governments and in
political campaigns. Wexler & Walker is a leader on the technology issues of the
twenty-first century. During 2002, we incurred consulting fees with Hill and
Knowlton, Inc., an affiliate of Wexler & Walker, in an aggregate amount of
approximately $56,000. No fees were paid to Hill and Knowlton in 2003.
Scott McClendon, age 65, was appointed to our Board of Directors as an
independent director on July 19, 2002. McClendon currently sits on the Board of
Directors for Overland Storage, Inc., a public company, where he acts as
chairman of the Board. He became the chairman after serving as president and
chief executive officer from October 1991 to March 2001. Prior to joining
Overland Storage, Inc., Mr. McClendon was employed by Hewlett-Packard Company
for over 32 years in various positions of engineering, manufacturing, sales and
marketing. In addition to SpaceDev and Overland Storage, Mr. McClendon is
currently serving on the Board of Directors of Procera Networks, Inc., a public
company, and Sicommnet, Inc., privately held high technology company. Mr.
McClendon received a Bachelor of Science degree in electrical engineering in
June 1960, and a Master of Science degree in electrical engineering in June 1962
from Stanford University School of Engineering.
One of our independent directors currently sits on the board of directors
of another Reporting Company. "Reporting Companies" include companies with a
class of securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934, as amended (the "1934 Act") or subject to the requirements of
Section 15(d) of the 1934 Act, or any company registered as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
PAGE 61
EXECUTIVE COMPENSATION
REMUNERATION PAID TO EXECUTIVES
The following table sets forth the remuneration to our executive officers
for the past three fiscal years:
SUMMARY COMPENSATION TABLE
Annual Compensation Awards Payouts Long Term Compensation
---------------------- ---------- --------- ----------------------
Name and Principal Position(1) Restricted Stock Award(s) ($)
Name and Principal Position(1) Year Salary Bonus Other Annual Restricted Securities LTIP Payouts All Other
($) ($) Compensation Stock Award(s) Underlying ($) Compensation
($) ($) Options/ SARs # ($)
------------------------------ ---- ------- ----- ------------- -------------- ------------ ------------ ------------
James W. Benson, CEO (2) . . . 2001 147,923 - - - - - -
.. . . . . . . . . . . . . . . 2002 141,325 - - - 10,000(2) - -
.. . . . . . . . . . . . . . . 2003 150,000 - - - - - -
Richard B. Slansky, CFO. . . . 2001 - - - - - - -
.. . . . . . . . . . . . . . . 2002 - - - - - - -
.. . . . . . . . . . . . . . . 2003 94,625 - 1,183 - 355,000(3) - -
------------------------------ ---- ------- ----- ------------- -------------- ------------ ------------ ------------
------------------------------ ---- ------- ----- ------------- -------------- ------------ ------------ ------------
(1) The table includes information as to the Chief Executive Officer and our
highest paid officers for the last fiscal year, including persons whose
information would have been required but for the fact that they were not serving
as our officers at its fiscal year end. For purposes of the table, only persons
whose total annual salary and bonus exceeded $100,000 have been included.
(2) Mr. Benson was awarded 10,000 options in 2001 as a part of an annual
award of options to our employees.
(3) Mr. Slansky was awarded up to 385,000 options in 2003 as part of his
employment agreement, with 25,000 vested immediately, 180,000 vesting in
six-month increments over five years and the remaining based on performance
criteria established by the CEO. The timeframe for certain performance criteria
lapsed in 2003 and 30,000 options not earned were forfeited; thereby, reducing
Mr. Slansky's potential securities underlying options to a maximum of 355,000,
as illustrated above.
During the last fiscal year and as of December 31, 2003, we granted stock
options to executive officers as set forth in the following table:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
------------------
Name . . . . . . . Number of Securities % of Total Options/SARs Exercise of Base Expiration
Underlying Granted to Employees in Price ($/Sh) Date
Options/SARs Fiscal Year
Granted (#)
------------------ -------------------- ----------------------- ---------------- ------------
James W. Benson 0 0 0 0
Richard B. Slansky 355,000 29% 0.51 2/10/2009
PAGE 62
As of December 31, 2003, we had vested and unvested securities underlying
stock options to executive officers as set forth in the following table:
Option/SAR Grants Ended December 31, 2003
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SARs at FY-End (#) Options/SARs at FY- End ($)
-------------------------------------- ---------------------------------
Exercisable/ Exercisable/
Name . . . . . . . Shares Acquired on Value Realized Unexercisable Unexercisable(1)
Exercise (#) ($)
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
James W. Benson. . 0 0 506,666/ 506,312/
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
2,003,334 3,157
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
Richard B. Slansky 0 0 83,000/ 42,330/
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
272,000 138,720
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
(1) For purposes of determining whether options are "in-the-money," we
defined fair market value as the five-day weighted average of the closing price
of our common stock on the Over-The-Counter Bulletin Board as of March 4, 2004,
or $1.05 per share. All the options listed on the table are "in-the-money,"
except unvested options on 2,000,000 of Mr. Benson's shares.
REMUNERATION PAID TO DIRECTORS
At our annual meeting on July 16, 2000, our Board of Directors adopted a
compensation plan for independent directors whereby they received options for
attending meetings of the Board as follows: each such director received an
option to purchase 5,000 shares for each of two telephonic meetings attended per
year, and an option to purchase 10,000 shares for each of two meetings attended
in person per year. These directors did not receive additional compensation for
attending meetings in excess of those described above. In addition to the
above, independent directors received $5,000 in options on the date of election
or appointment. All such options were issued pursuant to our 1999 Incentive
Stock Option Plan at fair market value as of the date of the meeting attended,
were set up to vest 50% on the first anniversary date of the date of grant and
50% on the second anniversary date of the date of grant and expire on the
five-year anniversary of the grant date. The following table sets forth the
remuneration paid to our directors during the fiscal year ended December 31,
2003 under this compensation plan. We do not pay directors, who are also our
officers, additional compensation for their service as directors.
Cash Compensation Security Grants
--------------------------------- ---------------
Annual Meeting Consulting Number of Number of
Retainer Fees Fees/Other Shares Securities
Fees Fees Underlying
Options/SARs
----------------------------- -------- ------- ---------- --------- ------------
Name
----------------------------- -------- ------- ---------- --------- ------------
James W. Benson . . . . . . . - - - - -
----------------------------- -------- ------- ---------- --------- ------------
J. Mark Grosvenor (1) . . . . - - - - -
----------------------------- -------- ------- ---------- --------- ------------
Stuart Schaffer . . . . . . . - - - - -
----------------------------- -------- ------- ---------- --------- ------------
Wesley T. Huntress. . . . . . - - - - 30,000
----------------------------- -------- ------- ---------- --------- ------------
Curt Dean Blake . . . . . . . - - - - 20,000
----------------------------- -------- ------- ---------- --------- ------------
General Howell M. Estes, III. - - - - 30,000
----------------------------- -------- ------- ---------- --------- ------------
Robert S. Walker. . . . . . . - - - - 30,000
----------------------------- -------- ------- ---------- --------- ------------
Scott McClendon . . . . . . . - - - - 30,000
----------------------------- -------- ------- ---------- --------- ------------
PAGE 63
(1) Mr. Grosvenor was issued options to purchase 19,615 shares of our common
stock upon joining the Board of Directors on May 6, 2003. Mr. Grosvenor
forfeited the right to those options when he resigned from the Board on
September 15, 2003. Mr. Grosvenor continues to be one of our investors with
ownership of 665,188 shares and warrants to purchase 665,188 shares.
On March 25, 2004, our Board of Directors modified our compensation plan
for independent directors. Under the modified plan, independent directors will
receive options for attending meetings of the Board as follows: each director
shall receive an option to purchase 6,000 shares for each telephonic meeting
attended and an option to purchase 12,000 shares for each meeting attended in
person, with a cap of options on 36,000 shares per year. Our directors will
also receive compensation for attending committee meetings as follows: each
director shall receive an option to purchase 5,000 shares for each Audit
Committee meeting attended, each director shall receive an option to purchase
2,500 shares for each Compensation Committee meeting attended and each director
shall receive an option to purchase 2,500 shares for each Nominating/Governance
Committee meeting attended, which options shall not be subject to a cap. In
addition to the above, independent directors will receive 5,000 options on the
date of election or appointment. All such options will be issued pursuant to the
Plan at fair market value as of the date of the meeting attended, will vest 50%
on the first anniversary date of the date of grant and 50% on the second
anniversary date of the date of grant and will expire on the
three-year anniversary of the grant date.
DIRECTOR COMMITTEES
We have a standing audit committee comprised of Messrs. Blake, McClendon
and Dr. Huntress. In 2004, we established a nominating and governance committee
comprised of Messrs. Estes, Walker and Dr. Huntress and a compensation committee
comprised of Messrs. Blake, Estes and McClendon. The Company does not maintain
any pension, retirement or other arrangements other than as disclosed in the
following table for compensating its Directors. Our Board of Directors took
action eight (8) times during the last fiscal year: seven (7) times at regular
or special meetings attended by all of the members of the Board either
personally or telephonically, and one (1) time by unanimous written consent. Our
Audit Committee took separate action four (4) times during the last fiscal year,
each time at a regular or special meeting attended by all of the members of the
committee either personally or telephonically.
On March 25, 2004, the Board established two new committees of the Board of
Directors: the Compensation Committee and the Nominating and Governance
Committee. Mr. McClendon chairs the Compensation Committee with General Estes
and Mr. Blake as members. General Estes chairs the Nominating and Governance
Committee with Dr. Huntress and Mr. Walker as members.
EMPLOYMENT AGREEMENTS
On November 21, 1997, we entered into a five-year employment agreement with
our CEO, Mr. Benson. This agreement provides for compensation of salary and
stock as well as stock options. This agreement also prohibits Mr. Benson from
competing with us, disclosing any confidential information, or soliciting any of
our employees or customers for one year after termination of employment. Our
Board of Directors revised Mr. Benson's employment agreement at its meeting on
July 16, 2000. This employment contract supercedes the previous agreement. The
term of this revised employment contract is for a period of five (5) years from
July 16, 2000. The revised agreement provides for the grant of options to
purchase up to 4,000,000 shares of our common stock upon the occurrence of
certain events, of which options to purchase 500,000 shares are currently
vested.
PAGE 64
On May 17, 2002, we entered into an "at-will" employment agreement with Mr.
Schaffer. The agreement provided for Mr. Schaffer's compensation of salary,
benefits and options to purchase up to 450,000 shares of our common stock. On
July 2, 2003, we entered into a Confidential Separation Agreement and General
Release with Mr. Schaffer. The agreement provided for Mr. Schaffer to receive
salary and benefits until August 8, 2003 and for the resignation of Mr. Schaffer
as an officer, but not as a director. In exchange for a release of claims and
other promises set forth in the agreement, Mr. Schaffer retained certain
exercise rights on his vested options of 90,000 shares until the earlier of (i)
eighteen (18) months from his resignation as a member of our Board of Directors
or other subsequent consulting relationship with us, or (ii) July 19, 2008.
On May 31, 2002, we entered into a Confidential Separation Agreement and
General Release of Claims with Mr. Lloyd, our former Chief Operating Officer and
Chief Financial Officer. The agreement provided for the resignation of Mr.
Lloyd as an officer and director of SpaceDev, Inc. and Integrated Space Systems,
Inc., effective June 14, 2002. In exchange for a release of claims and other
promises set forth in the agreement, Mr. Lloyd received $36,000 and an extension
of the exercise period of each of his non-statutory stock options for a
five-year period from the original date of grant. Until May 31, 2003, the
agreement also prohibits Mr. Lloyd from soliciting our employees, inducing any
customer away from us or representing himself on our behalf.
On February 14, 2003, we entered into an "at-will" employment agreement
with Mr. Slansky. The agreement provided for Mr. Slansky's compensation of
salary, benefits and options to purchase up to 385,000 shares of our common
stock. The agreement also provided for severance under certain termination
provisions and prohibits Mr. Slansky from soliciting our employees or competing
with us, if he were to leave us.
On November 17, 2003, we entered into an "at-will" employment relationship
with Mr. Dario ("Dan") DaPra to become our Vice President of Engineering. Our
offer letter provided for Mr. DaPra's compensation of salary, benefits and
options to purchase up to 250,000 shares of our common stock. The offer letter
also provided for severance under certain termination provisions and prohibits
Mr. DaPra from soliciting our employees or competing with us. Mr. DaPra
resigned on March 5, 2004 and subsequently entered into a Confidential
Separation Agreement and General Release with us. The Agreement provides for
Mr. DaPra to receive one-half pay through April 30, 2004 in lieu of severance,
and to retain options on 40,000 shares of our stock with the ability to exercise
those options until October 31, 2004.
EMPLOYEE BENEFITS
At our 1999 Annual Stockholder Meeting, the shareholders adopted an
Incentive Employee Stock Option Plan under which its Board of Directors may
grant our employees, directors and affiliates Incentive Stock Options,
Supplemental Stock Options and other forms of stock-based compensation,
including bonuses or stock purchase rights. Incentive Stock Options, which
provide for preferential tax treatment, are only available to employees,
including officers and affiliates, and may not be issued to non-employee
directors. The exercise price of the Incentive Stock Options must be 100% of the
fair market value of the stock on the date the option is granted. Pursuant to
our plan, the exercise price for the Supplemental Stock Options will not be less
than 85% of the fair market value of the stock on the date the option is
granted. We are required to reserve an amount of common shares equal to the
number of shares, which may be purchased as a result of awards made under the
Plan at any time.
At the 2000 Annual Stockholder Meeting, the shareholders approved an
amendment to the Stock Option Plan of 1999, increasing the number of shares
eligible for issuance under the Plan to 30% of the then outstanding common stock
PAGE 65
and allowing the Board of Directors to make annual adjustments to the Plan to
maintain a 30% ratio to outstanding common stock at each annual meeting of the
Board of Directors. The Board, at its annual meetings in 2001 and 2002, made no
adjustment, as a determination was made that the number of shares then available
under the Plan was sufficient to meet our needs. As of December 31, 2003,
4,184,698 shares were authorized for issuance under the Plan, 3,124,807 of which
are currently subject to outstanding options and awards and options on 37,000
shares were exercised in 2003. The Stock Option Plan of 1999 was registered
with the U.S. Securities & Exchange Commission on Form S-8.
During 2003, we issued non-statutory options to purchase 140,000 shares to
our independent directors for attendance at our 2003 Board of Directors
meetings. In addition to the Stock Option Plan of 1999, our shareholders
adopted the 1999 Employee Stock Purchase Plan, which authorized our Board of
Directors to make twelve consecutive offerings of our common stock to our
employees. The 1999 Employee Stock Purchase Plan has been instituted and the
first employees enrolled in the plan in August 2003. The first shares of common
stock were issued under the Plan in February 2004. We also offer a variety of
health, dental, vision, 401(k) and life insurance benefits to our employees in
conjunction with our co-employment partner, Administaff.
At the 2004 Annual Stockholders Meeting, the shareholders approved our
2004 Equity Incentive Plan, which incentive plan authorized and reserved for
issuance under the Plan 2,000,000 shares of our common stock. We have used our
1999 plan to provide employees, directors and consultants an incentive for
continued and future service. The 2004 Equity Incentive Plan is an important
part of our total compensation program as competitive benefit programs are a
critical component of our efforts to attract and retain qualified employees,
directors and consultants. The purpose of our 2004 Equity Incentive Plan is to
provide selected eligible employees, directors and certain types of consultants
an opportunity to participate in our future by offering them an opportunity to
acquire our stock so as to retain, attract and motivate them. Options granted
under the Plan may be Incentive Stock Options or Non-statutory Stock Options, as
determined by our Board of Directors or a committee appointed by our Board of
Directors at the time of grant. Limited rights and stock awards may also be
granted under the Plan. On September 1, 2004, we had 333,432 options available
under our 1999 Stock Option Plan and 2,000,000 options available under our 2004
Equity Incentive Plan.
PAGE 66
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of September 1, 2004
concerning the beneficial ownership of our common stock by (i) each director,
(ii) each named executive officer, (iii) each shareholder known by us to be the
beneficial owner of more than 5% of our outstanding Common Stock, and (iv) the
directors and officers as a group. Except as otherwise indicated, the persons
named in the table have sole voting and investing power with respect to all
shares of Common Stock owned by them.
Title of Name and Address of Amount and Percent of
Class Beneficial Owner Nature of Class(1)
Beneficial
Ownership(1)
---------- ---------------------- ---------------- -----------
..0001 par James W. Benson, CEO 9,751,707(2) 49.61%
value and Chairman
common 13855 Stowe Drive
stock Poway, California 92064
..0001 par Richard B. Slansky 358,184(3) 1.84%
value 13855 Stowe Drive
common Poway, California 92064
stock
..0001 par Frank Macklin 230,073(4) 1.20%
value 13855 Stowe Drive
common Poway, California 92064
stock
..0001 par Randall K. Simpson 12,500(5) 0.07%
value 13855 Stowe Drive
common Poway, California 92064
stock
..0001 par J. Mark Grosvenor 1,330,376(6) 6.72%
value 13855 Stowe Drive
common Poway, California 92064
stock
..0001 par Curt Dean Blake 135,930(7) 0.71%
value Director
common 13855 Stowe Drive
stock Poway, California 92064
..0001 par Wesley T. Huntress Jr. 90,515(8) 0.47%
value Director
common 13855 Stowe Drive
stock Poway, California 92064
PAGE 67
..0001 par General Howell M. 69,167(9) 0.36%
value Estes III, Director
common 13855 Stowe Drive
stock Poway, California 92064
..0001 par Robert S. Walker 61,667(10) 0.32%
value Director
common 13855 Stowe Drive
stock Poway, California 92064
PAGE 69
..0001 par Stuart Schaffer, Director 218,206(11) 1.13%
value 13855 Stowe Drive
common Poway, California 92064
stock
..0001 par Scott McClendon 27,960(12) 0.15%
value Director
common 13855 Stowe Drive
stock Poway, California 92064
---------- ---------------------- ---------------- -----------
..0001 par Officers and Directors as 10,955,909(13) 53.73%(1)
value a group (10 Persons)
common
stock
---------- ---------------------- ---------------- -----------
---------- ---------------------- ---------------- -----------
(1) Where persons listed on this table have the right to obtain additional
shares of our common stock through the exercise of outstanding options or
warrants or the conversion of convertible securities within 60 days from
September 1, 2004, these additional shares are deemed to be beneficially
owned for the purpose of computing the amount and percentage of common stock
owned by such persons. Percentages are based on total outstanding shares on
September 1, 2004 plus options and warrants that will become exercisable
for that individual within 60 days of September 1, 2004.
(2) Represents 8,257,647 shares held directly by Mr. Benson and his wife,
Susan Benson, (including 486,647 shares as part of our convertible debt
repayment when he converted $187,500 of his debt into shares in 2003); 497,413
shares transferred from SD Holdings, LLC to Space Development Institute, a
501(c)(3) corporation; plus vested options on 510,000 shares; and, warrants
on 486,647 shares, which were exercised on June 22, 2004 (Mr. Benson
forgave half of his warrants on 973,294 shares as part of the convertible debt
repayment). In addition, Mr. Benson has unvested options on 2,000,000 shares.
In 2003, 8,245,000 shares were transferred from SD Holdings, LLC, an entity
previously controlled by Mr. Benson, directly to Mr. Benson and his children.
Mr. Benson's children now hold 1,312,000 shares. Mr. Benson disclaims ownership
of shares held by his children.
(3) Mr. Slansky owns 43,472 shares of which 38,462 shares he purchased
for cash in a private transaction with Mr. Skarupa, our former Vice President of
Operations; 38,462 warrants which were also purchased from Mr. Skarupa and were
registered and exercised; and, vested options on 276,250 shares. Mr. Slansky
also holds 473,750 unvested options.
(4) Mr. Macklin owns 222,073 shares of our common stock plus 8,000 vested
options. Mr. Macklin also owns 45,000 unvested options.
(5) Mr. Simpson owns 12,500 vested options and 237,500 unvested options.
PAGE 68
(6) Mr. Grosvenor owns 665,188 shares of our common stock plus 665,188 vested
warrants that he purchased in our private placement. On May 6, 2003, Mr.
Grosvenor was granted options on 19,615 shares, which he forfeited upon his
resignation from the Board on September 15, 2003, and as a result, is not
included in the calculation of officer and directors above.
(7) Mr. Blake owns 30,612 shares of our common stock plus 30,612 vested
warrants that he purchased in our private placement. Mr. Blake also owns
74,706 vested options, which he received as compensation for his
participation on our Board of Directors. In addition, Mr. Blake has unvested
options on 84,000 shares.
(8) Mr. Huntress owns 8,868 shares of our common stock. Mr. Huntress also
owns 81,647 vested options, which he received as compensation for his
participation on our Board of Directors. In addition, Mr. Huntress has unvested
options on 90,000 shares.
(9) General Estes III owns 69,167 vested options, which he received
as compensation for his participation on our Board of Directors. In addition,
General Estes III has unvested options on 47,500 shares.
(10) Mr. Walker owns 61,667 vested options, which he received as compensation
for his participation on our Board of Directors. In addition, Mr. Walker has
unvested options on 38,000 shares.
(11) Mr. Schaffer owns 128,206 shares of our common stock. Mr.
Schaffer also owns 90,000 vested options, which he received as part of his
compensation package as Vice President of Product Development and Marketing.
(12) Mr. McClendon owns 27,960 vested options, which he received as compensation
for his participation on our Board of Directors. In addition, Mr. McClendon has
unvested options on 92,500 shares.
(13) Officers and directors as a group include our seven Board members, one
of whom is also an officer of the Company, Messrs. Slansky, Macklin
and Simpson.
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 50,000,000 shares of our $.0001 par value
common stock, of which 19,146,660 shares are issued and outstanding as of
September 1, 2004. The Board of Directors may issue additional shares
of Common Stock without the consent of the holders of Common Stock.
VOTING RIGHTS
Each outstanding share of Common Stock is entitled to one vote. The
holders of Common Stock do not have cumulative voting rights, which means that
the holders of more than 50% of such outstanding shares voting for the election
of directors can elect all of our directors, if they so choose.
NO PREEMPTIVE RIGHTS
Holders of Common Stock are not entitled to any preemptive rights.
DIVIDENDS AND DISTRIBUTIONS
Holders of Common Stock are entitled to receive such dividends as may be
declared by the directors out of funds legally available therefore and to share
pro rata in any distributions to holders of Common Stock upon liquidation or
otherwise. However, we have not paid cash dividends on our Common Stock, and do
not expect to pay such dividends in the foreseeable future. No dividends may
PAGE 69
be paid on our Common Stock unless all dividends due on our outstanding Series C
Convertible Cumulative Preferred Stock (described below) have been paid.
PREFERRED STOCK
We are authorized to issue up to 10,000,000 shares of our $0.001 par value
preferred stock, of which 250,000 shares have been designated Series C
Convertible Cumulative Preferred Shares (referred to in this section as the
"Series C Shares") issued to Laurus on August 25, 2004 at a stated value of $10
per share, for an aggregate purchase price of $2,500,000 and are currently
outstanding. No other series of preferred shares is currently outstanding. The
Board of Directors may designate additional series of preferred stock ranking on
parity with or subordinate to the Series C Shares.
VOTING RIGHTS
The Series C Shares have no voting rights.
LIQUIDATION RIGHTS
The Series C Shares carry a liquidation preference equal to the then stated
value ($10.00 per share) of the then outstanding Series C Shares. As a result,
the holders of the Series C Shares will receive a distribution out of the assets
of the Company upon liquidation equal to the number of Series C Shares then
outstanding multiplied by $10.00 before the holders of our Common Stock will be
entitled to any distribution.
DIVIDENDS
The Series C Shares pay quarterly, cumulative dividends at a rate of 6.85%
with the first payment due on January 1, 2005. Dividends are payable in cash
or shares of Common Stock at the holder's option with the exception that
dividends must be paid in shares of Common Stock for up to 25% of the aggregate
dollar trading volume if the fair market value of the Common Stock for the
20-days preceding the conversion date exceeds 120% of the Conversion Rate.
CONVERSION
The Series C Shares are convertible into the $0.0001 par value Common Stock
of the Company at a rate of $1.54 per share (the "Conversion Rate") at any time
after the date of issuance, subject to adjustments for stock splits,
combinations and dividends and for shares of common stock issued for less than
the fixed conversion price (unless exempted pursuant to the agreements).
REDEMPTION
We may redeem the Series C Shares in whole or in part at any time after
issuance for (a) 115% of the stated value if the average closing price of the
Common Stock for the 22 days immediately preceding the date of conversion does
not exceed the Conversion Rate or (b) the stated value if the average closing
price of the Common Stock for the 22 days immediately preceding the date of
conversion exceeds the stated value.
WARRANTS
The warrants are exercisable immediately upon issuance for the purchase of
one additional share of Common Stock at an exercise price equal to the price
paid for the Common Stock, and expire on the
PAGE 70
third anniversary date of the date of issuance. In conjunction with the sale
of the Series C Shares, on August 25, 2004, we issued a five-year warrant to
Laurus for the purchase of 487,000 shares of our Common Stock at an exercise
price equal to $1.77 per share. In addition, Laurus holds a warrant to purchase
50,000 shares of our Common Stock at an exercise price of $1.925 per share which
expires on August 25, 2009, a warrant to purchase 50,000 shares of our Common
Stock at an exercise price of $1.0625 per share which expires on June 18, 2009,
and a warrant to purchase shares of our Common Stock as follows, which expires
on June 3, 2008 $0.63 per share for the purchase of up to 125,000 shares, $0.69
per share for the purchase of an additional 50,000 shares, and $0.80 per share
for the purchase of an additional 25,000 shares. The exercise price on all
warrants is subject to adjustments for stock splits, combinations and dividends
and for shares of common stock issued for less than the fixed conversion price
(unless exempted pursuant to the warrant agreements).
TRANSFER AGENT AND REGISTRAR
We use Continental Stock Transfer and Trust, 17 Battery Place, 8th Floor,
New York, NY 10004, as our transfer agent for our Common Stock. Corporate Stock
Transfer can be contacted via telephone at (212) 845-3215.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Our Articles of Incorporation provide that our directors, officers,
employees or agents shall be indemnified as to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, as long as the director, officer, employee or agent acted in good
faith and in a manner reasonably believed to be in the best interests of the
corporation. No indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his/her duty.
In addition, our Articles of Incorporation and Bylaws obligate us to
indemnify our directors and officers against expenses and other amounts
reasonably incurred in connection with any proceeding arising from the fact that
such person is or was an agent of ours. Our Articles of Incorporation and
Bylaws also authorize us to purchase and maintain insurance on behalf of any of
our directors or officers against any liability asserted against that person in
that capacity, whether or not we would have the power to indemnify that person.
We have been advised that in the opinion of the Securities and Exchange
Commission indemnification for liabilities arising under the Securities Act is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities is asserted by one of our directors, officers, or controlling
persons in connection with the securities being registered, we will, unless in
the opinion of our legal counsel the matter has been settled by controlling
precedent, submit the question of whether such indemnification is against public
policy to court of appropriate jurisdiction. We will then be governed by the
court's decision.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The Sarbanes-Oxley Act of 2002 ("Act") established the Public Company
Accounting Oversight Board ("PCAOB") and charged it with the responsibility of
overseeing the audits of public companies that are subject to the federal
securities laws. Under the Act, the PCAOB's duties included the establishment of
a registration system for public accounting firms. The PCAOB has proposed rules
for the registration process, which would require approval of the U.S.
Securities Commission ("SEC") prior to enforcement. Within 180 days after SEC
PAGE 71
approval, all public accounting firms would be required to register with the
PCAOB if they wished to prepare or issue audit reports on U.S. public companies,
or to play a substantial role in the preparation or issuance of such reports.
Once registered, public accounting firms are required to file periodic reports
with the PCAOB. Prior to adoption of the registration process, the cost of
compliance with these new rules could not be determined, and, as a result of the
legislation, it appeared that the cost of professional liability insurance for
public accounting firms would be dramatically increased. We were informed by our
independent auditor, Nation Smith Hermes Diamond, Accountants and Consultants,
P.C. ("Nation Smith"), that it did not intend register with the PCAOB at that
time, and, as a result, would not be able to continue to act as our independent
auditor once the rules were in effect. Nation Smith did not resign its position
as a result of any disagreements with us on accounting or financial disclosure
issues.
Effective June 2, 2003, we confirmed with our auditors, Nation Smith Hermes
Diamond, P.C., "Nation Smith"), that Nation Smith would no longer be
representing us as our accountants, except to provide consent herein. As of
that date, we informed Nation Smith that we were engaging a new audit firm as
our accountants.
Nation Smith last reported on Registrant's financial statements as of
February 13, 2003. The report, which covered the two fiscal years ended
December 31, 2002, was an unqualified report modified for going concern. While
Nation Smith expressed concern as to the Registrant's ability to remain a going
concern, neither the report nor the financial statements for the periods
contained any other adverse opinion or disclaimer of opinion, nor were they
modified as to audit scope or accounting principles.
Our Board of Directors ratified the change of independent accountants on June 3,
2003.
During our fiscal year 2002 and the subsequent interim period through July
25, 2003, there were no disagreements with Nation Smith on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved, to Nation Smith's satisfaction,
would have caused it to make reference to the subject matter of the disagreement
in connection with its report.
During fiscal year 2002 and the subsequent interim period through July 25,
2003, there have been no reportable events (as defined in Regulation S-B Item
304(a)(1)(v)).
During fiscal year 2002 and the subsequent interim period through July 25,
2003, Nation Smith did not advise us that the internal controls necessary for us
to develop reliable financial statements do not exist.
During fiscal year 2002 and the subsequent interim period through July 25,
2003, Nation Smith did not advise us that any information had come to their
attention which had led them to no longer be able to rely on management's
representation, or that had made Nation Smith unwilling to be associated with
the financial statements prepared by management.
During fiscal year 2002 and the subsequent interim period through July 25,
2003, Nation Smith did not advise us that the scope of any audit needed to be
expanded significantly or that more investigation was necessary.
During fiscal year 2002 and the subsequent interim period through July 25,
2003, Nation Smith did not advise us that there was any information which the
accountants concluded would materially impact the fairness and reliability of
either (i) a previously issued audit report or the underlying financial
statements, or (ii) the financial statements issued or to be issued covering
the fiscal period(s) subsequent to the date of the most recent financial
PAGE 72
statements covered by an audit report (including information that, unless
resolved to the accountant's satisfaction, would prevent it from rendering an
unqualified audit report on those financial statements.
We requested that Nation Smith furnish us with a letter addressed to the
SEC stating whether or not it agrees with the above statements. A copy of such
letter, dated June 4, 2003, was filed as Exhibit 16.1 to our Form 8-K filing of
the same date.
We engaged PKF, Certified Public Accountants, A Professional Corporation
("PKF"), as our new independent accountants on June 2, 2003 for the fiscal year
ending December 31, 2003, and to review our quarterly financial statements for
the periods ending June 30, 2003 and September 30, 2003. Prior to June 2, 2003,
we had not consulted with PKF regarding (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our financial statements, and no
written report or oral advice was provided to us by PKF concluding there was an
important factor to be considered by us in reaching a decision as to an
accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304 of
Regulation S-B, or a reportable event, as that term is defined in Item
304(a)(1)(iv) of Regulation S-B.
EXPERTS
The financial statements included in this prospectus have been audited by
PKF, certified public accountants, a professional corporation for the year
ending December 31, 2003 and Nation Smith Hermes Diamond, P.C., independent
certified public accountants for the year ending December 31, 2002, to the
extent and for the periods set forth in their report (which contains an
explanatory paragraph regarding our ability to continue as a going concern)
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.
Weintraub Dillon PC, our independent legal counsel, has provided an opinion
on the validity of our common stock underlying the Convertible Note,
Preferred Stock, and Laurus Warrants..
LEGAL PROCEEDINGS
On June 18, 2001, we entered into a relationship with two individuals
(doing business as EMC Holdings Corporation ("EMC")), whereby EMC was to provide
certain consulting and advisory services to us in exchange for our common stock.
EMC received the first installment of 500,000 shares of our common stock on June
26, 2001. Total expense for the initial stock issuance through September 30,
2001 was valued at approximately $455,000. Pursuant to a demand for arbitration
filed by us on November 7, 2001, we sought the return of all or a portion of the
shares issued to EMC. EMC filed its own claim with the American Arbitration
Association on November 13, 2001, alleging that we owed EMC $118,000 in fees,
plus damages.
PAGE 73
A three-day arbitration hearing was held in May and June 2002 with respect
to claims arising out of consulting and advisory service agreements between EMC
and us. On July 17, 2002, an interim award was issued in favor of us against
EMC, ordering the return of the initial installment of 500,000 shares and
denying EMC's claim for $118,000. On October 22, 2002, a status conference was
held and a tentative final award was issued again in the favor of us. Included
in this tentative final ruling was an award of approximately $83,000 in attorney
and arbitration fees to us. The tentative final ruling became effective on
October 29, 2002, and was submitted to the Superior Court of California, Orange
County, for entry of judgment.
Because collection of the attorney and arbitration fees award is not
assured, we expensed all of our fees related to this matter. Any recovery of
fees will be recorded as income in the period they are received. The return of
the 500,000 shares, as provided in the interim award issued on July 17, 2002,
was recorded in the third quarter of 2002 as a reversal of the original expense
recorded. See "Results of Operations" below. In June 2003, we ceased efforts
to recover the awarded fees, as it was determined that the cost to pursue
collection exceeded the likelihood of collection.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Commission. You may read and copy any document we file at
the Commission's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the Commission at 1-800-SEC-0330 for information on the
operation of the Public Reference Room. Our filings with the Commission are also
available to the public at the Commission's Web site at http://www.sec.gov. Our
common stock is quoted on The Over-the-Counter Bulletin Board (OTCBB). Our
reports, proxy statements and other information are also available to the public
on the OTCBB's Web site at http://www.otcbb.com.
This prospectus is part of a registration statement on Form SB-2 filed
with the Commission under the Securities Act. This prospectus may omit some of
the information contained in the registration statement. You should refer to
the registration statement for further information with respect to our company
and the securities offered under this prospectus. Any statement contained in
this prospectus concerning the provisions of any document filed as an exhibit
to the registration statement or otherwise filed with the Commission is not
necessarily complete, and in each case you should refer to the copy of the
document filed for more complete information.
PAGE 74
SPACEDEV, INC.
AND SUBSIDIARIES
CONTENTS
REPORT OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . F-2 to F-3
FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 2003 and 2002. . . . . F-4 to F-5
Consolidated Statements of Operations for the Years Ending
December 31, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Stockholders' Deficit for the Years
Ending December 31, 2003 and 2002. . . . . . . . . . . . . . . . . F-7 to F-9
Consolidated Statements of Cash Flows for the Years Ending
December 31, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . F-10 to F-11
Notes to Consolidated Financial Statements for the Years Ending
December 31, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . F-12 to F-31
Unaudited Consolidated Balance Sheets at
June 30, 2004 and 2003 . . . . . . . . . . . . . . F-32 to F-33
Unaudited Consolidated Statements of Operations for the Quarters
Ending June 30, 2004 and 2003. . . . . . . . . . . . . . . . . . . F-34
Unaudited Consolidated Statements of Cash Flows for the Quarters
Ending June 30, 2004 and 2003 . . . . . . . . . . . . . . . . . . F-35 to F-36
Notes to Consolidated Financial Statements for the Six-Month
Periods ending June 30, 2004 and 2003. . . . . . . . . . . . . . . F-37 to F-44
PAGE F-1
Report of Independent Auditors
Board of Directors and Stockholders
SPACEDEV, INC.
We have audited the accompanying consolidated balance sheet of SPACEDEV, INC.
AND SUBSIDIARIES (see Note 1(c) to the consolidated financial statements) as of
December 31, 2003, and the related consolidated statements of operations,
stockholders' deficit and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
SPACEDEV, INC. AND SUBSIDIARIES as of December 31, 2003, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ PKF
San Diego, California
February 11, 2004 (except for Note 11 for which the date is April 2, 2004)
PAGE F-2
Report of Independent Auditors
Board of Directors and Stockholders
SPACEDEV, INC.
We have audited the accompanying consolidated balance sheet of SPACEDEV, INC.
AND SUBSIDIARIES (see Note 1(c) to the consolidated financial statements) as of
December 31, 2002, and the related consolidated statements of operations,
stockholders' deficit and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of SPACEDEV, INC. AND SUBSIDIARIES as of December 31, 2002,
and the consolidated results of their operations and their cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1(b) to
the consolidated financial statements, the Company incurred a net loss of
$376,160 for the year ended December 31, 2002, and had a working capital deficit
of $197,381 as of December 31, 2002. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1(b). The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Nation Smith Hermes Diamond P.C.
/s/ Nation Smith Hermes Diamond
San Diego, California
February 13, 2003
PAGE F-3
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, . . . . . . . . . . . . . . . . . . . . . 2003 2002
------------------------------------------------------- ---------------------------- ----------
ASSETS
------------------------------------------------------- ---------------------------- ----------
CURRENT ASSETS
Cash (Note 10(a)) . . . . . . . . . . . . . . . . . $ 592,006 $ 27,648
Accounts receivable (Note 10(b)). . . . . . . . . . 187,062 82,325
Inventory . . . . . . . . . . . . . . . . . . . . . 9,961 1,729
Receivable for assets held for sale (Note 2). . . . - 3,150,124
Costs in excess of billings and estimated earnings. - 281,175
Work in Progress. . . . . . . . . . . . . . . . . . 110,490 -
------------------------------------------------------- ---------------------------- ----------
Total current assets . . . . . . . . . . . . . . . . . 899,519 3,543,001
------------------------------------------------------- ---------------------------- ----------
FIXED ASSETs - Net (Notes 1(g) and 2). . . . . . . . . 137,532 141,488
CAPITALIZED SOFTWARE COSTS. . . . . . . . . . . . . . - 103,508
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . 47,768 23,960
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $ 1,084,819 $3,811,957
------------------------------------------------------- ---------------------------- ----------
------------------------------------------------------- ---------------------------- ----------
The accompanying notes are an integral part of these consolidated financial
Statements
PAGE F-4
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 2002
--------------------------------------------------------------------- ---------------------- -------------
LIABILITIES AND STOCKHOLDERSDEFICIT
CURRENT LIABILITIES
Current portion of notes payable (Note 4(a)). . . . . . . . . . . $ 41,464 $ 2,431,134
Current portion of capitalized lease obligations (Note 9(a)). . . 10,332 32,783
Notes payable - related party (Note 4(b)) . . . . . . . . . . . . 80,000 174,665
Convertible debt notes payable (Note 5) . . . . . . . . . . . . . - 127,075
Accounts payable and accrued expenses . . . . . . . . . . . . . . 311,606 598,480
Accrued payroll, vacation and related taxes . . . . . . . . . . . 84,001 174,188
Customer deposits and deferred revenue (Note 1(f)). . . . . . . . - 69,402
Revolving line of credit (Note 4(c)). . . . . . . . . . . . . . . 748,893
Provision for anticipated loss (Note 10(c)) . . . . . . . . . . . - 11,044
Employee Stock Purchase Plan (Note (7(b)) . . . . . . . . . . . . 5,498 -
Other accrued liabilities (Note 9(b)) . . . . . . . . . . . . . . 248,530 121,611
--------------------------------------------------------------------- ---------------------- -------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . 1,530,324 3,740,382
--------------------------------------------------------------------- ---------------------- -------------
NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 4(A)) . . . . . . . . . 46,127 89,052
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES (NOTE 9(A)) . 5,253 8,431
NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES (NOTE 4(B)) . 505,522 563,831
DEFERRED GAIN - ASSETS HELD FOR SALE (NOTE 2). . . . . . . . . . . . 1,065,221 1,172,720
DEFERRED REVENUE (NOTE 1(F)) . . . . . . . . . . . . . . . . . . . . 5,000 5,000
--------------------------------------------------------------------- ---------------------- -------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . 3,157,447 5,579,416
--------------------------------------------------------------------- ---------------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTES 9)
--------------------------------------------------------------------- ---------------------- -------------
STOCKHOLDERSDEFICIT
Convertible preferred stock, $.001 par value, 10,000,000 shares
authorized, no shares issued or outstanding (Note 8(a)). . . . . - -
Common stock, $.0001 par value; 50,000,000 shares authorized, and
16,413,260 and 14,447,640 shares issued and outstanding,
respectively (Note 8(b)) . . . . . . . . . . . . . . . . . . . . 1,641 1,447
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 9,243,507 8,302,803
Additional paid-in capital - stock options (Note 8(d)) . . . . . . 750,000 750,000
Deferred compensation (Note 8(d)). . . . . . . . . . . . . . . . . (250,000) (250,000)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . (11,817,776) (10,571,709)
--------------------------------------------------------------------- ---------------------- -------------
TOTAL STOCKHOLDERSDEFICIT. . . . . . . . . . . . . . . . . . . . . . (2,072,628) (1,767,459)
--------------------------------------------------------------------- ---------------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT. . . . . . . . . . . . . $ 1,084,819 $ 3,811,957
--------------------------------------------------------------------- ---------------------- -------------
--------------------------------------------------------------------- ---------------------- -------------
The accompanying notes are an integral part of these consolidated financial
Statements
PAGE F-5
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,. . . . . . . . . . . . . . . 2003 2002
------------------------------------------------------ -------------- ------------ ----------- ------------
NET SALES . . . . . . . . . . . . . . . . . . . . . . $ 2,956,322 100% $3,370,118 100%
------------------------------------------------------ -------------- ------------ ----------- ------------
Cost of sales . . . . . . . . . . . . . . . . . . . . 2,414,997 82% 3,348,671 99%
Anticipated loss on uncompleted contract (Note 10(c)) - - (58,941) -2%
------------------------------------------------------ -------------- ------------ ----------- ------------
TOTAL COST OF SALES . . . . . . . . . . . . . . . . . 2,414,997 82% 3,289,730 98%
------------------------------------------------------ -------------- ------------ ----------- ------------
GROSS MARGIN. . . . . . . . . . . . . . . . . . . . 541,325 18% 80,388 2%
------------------------------------------------------ -------------- ------------ ----------- ------------
OPERATING EXPENSES
Marketing and sales expense. . . . . . . . . . . . 394,974 13% 257,648 8%
Research and development . . . . . . . . . . . . . 281,280 10% - 0%
Stock and stock option based compensation. . . . . 9,170 0% 2,938 0%
General and administrative . . . . . . . . . . . . 745,993 25% 260,882 8%
EMC - stock based compensation (Note 8(b)) . . . . - 0% (455,000) -14%
------------------------------------------------------ -------------- ------------ ----------- ------------
TOTAL OPERATING EXPENSES. . . . . . . . . . . . . . . 1,431,417 48% 66,468 2%
------------------------------------------------------ -------------- ------------ ----------- ------------
INCOME/(LOSS) FROM OPERATIONS . . . . . . . . . . . . (890,092) -30% 13,920 0%
------------------------------------------------------ -------------- ------------ ----------- ------------
NON-OPERATING EXPENSE/(INCOME)
Interest expense . . . . . . . . . . . . . . . . . 91,492 3% 263,480 8%
Non-cash interest expense debt discount (Note 5) . 112,500 4% 125,000 4%
Gain on Building Sale (Note 4(a)). . . . . . . . . (107,499) -4% - 0%
Loan Fee - Equity Compensation (Note 4(c) & 5) . . 257,882 9% - 0%
------------------------------------------------------ -------------- ------------ ----------- ------------
TOTAL NON-OPERATING EXPENSE/(INCOME). . . . . . . . . 354,375 12% 388,480 12%
------------------------------------------------------ -------------- ------------ ----------- ------------
LOSS BEFORE INCOME TAXES. . . . . . . . . . . . . . . (1,244,467) -42% (374,560) -11%
Income tax provision (Notes 1(j) and 6) . . . . . . . 1,600 0% 1,600 0%
------------------------------------------------------ -------------- ------------ ----------- ------------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . $ (1,246,067) -42% $ (376,160) -11%
------------------------------------------------------ -------------- ------------ ----------- ------------
NET LOSS PER SHARE:
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (0.08) $ (0.03)
------------------------------------------------------ -------------- ------------ ----------- ------------
Weighted-Average Shares Outstanding . . . . . . . . . 16,092,292 14,744,423
------------------------------------------------------ -------------- ------------ ----------- ------------
------------------------------------------------------ -------------- ------------ ----------- ------------
The accompanying notes are an integral part of these consolidated financial
Statements
PAGE F-6
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Common Stock
-------------------------------------------------
Shares Amount
----------------------------------------------------------------------- ---------------------------- -----------------
BALANCE AT JANUARY 1, 2002. . . . . . . . . . . . . . . . . . . . . . . 14,817,580 $ 1,481
Common stock issued for cash (Note 8(b)). . . . . . . . . . . . . . . . 153,060 15
Reversal of common stock issued for services (Note 8 (b)) . . . . . . . (493,000) (49)
Warrants issued for convertible debt program (Note 5 and 8(c)). . . . . - -
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
----------------------------------------------------------------------- ---------------------------- ---------------
BALANCE AT DECEMBER 31, 2002. . . . . . . . . . . . . . . . . . . . . . 14,477,640 1,447
Common stock issued for cash (Note 8(b)). . . . . . . . . . . . . . . . 861,267 86
Common stock issued from notes on revolving credit facility (Note 4(c)) 415,000 42
Common stock issued for services (Note 8 (b)) . . . . . . . . . . . . . 7,500 1
Common stock issued from convertible debt program (Note 5 and 8(c)) . . 614,853 61
Common stock issued from employee stock options (Note 7(b)) . . . . . . 37,000 4
Warrants issued for convertible debt program (Note 5 and 8(c)). . . . . - -
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
----------------------------------------------------------------------- ---------------------------- ---------------
BALANCE AT DECEMBER 31, 2003. . . . . . . . . . . . . . . . . . . . . . $ 16,413,260 $ 1,641
----------------------------------------------------------------------- ---------------------------- ---------------
----------------------------------------------------------------------- ---------------------------- ---------------
The accompanying notes are an integral part of these consolidated financial
Statements
PAGE F-7
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Additional
Additional Paid-In
Paid-in Capital - Deferred
Capital Stock Options Compensation
------------------------------------------------------------------------ ------------ ------------- --------------
BALANCE AT JANUARY 1, 2002 . . . . . . . . . . . . . . . . . . . . . . . $ 8,204,831 750,000 $(250,000)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . 74,985 - -
Reversal of common stock issued for services (Note 8 (b)). . . . . . . . (452,013) - -
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . 475,000 - -
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
------------------------------------------------------------------------ ------------ ------------- ---------
BALANCE AT DECEMBER 31, 2002 . . . . . . . . . . . . . . . . . . . . . . 8,302,803 750,000 (250,000)
------------------------------------------------------------------------ ------------ ------------- ---------
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . 425,856 - -
Common stock issued from notes on revolving credit facility (Note 4( c)) 354,679 - -
Common stock issued for services (Note 8 (b)). . . . . . . . . . . . . . 9,169 - -
Common stock issued from convertible debt program (Note 5 and 8(c)). . . 368,850 - -
Common stock issued from employee stock options (Note 7(b)). . . . . . . 19,650 - -
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . (237,500) - -
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
-
------------------------------------------------------------------------ ------------ ------------- ---------
BALANCE AT DECEMBER 31, 2003 . . . . . . . . . . . . . . . . . . . . . . $ 9,243,507 750,000 (250,000)
------------------------------------------------------------------------ ------------ ------------- ---------
------------------------------------------------------------------------ ------------ ------------- ---------
The accompanying notes are an integral part of these consolidated financial
Statements
PAGE F-8
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Accumulated Deficit Total
----------------------------------------------------------------------- ---------------------------- ---------------
BALANCE AT JANUARY 1, 2002. . . . . . . . . . . . . . . . . . . . . . . $ (10,195,549) $ (1,489,237)
Common stock issued for cash (Note 8(b)). . . . . . . . . . . . . . . . - 75,000
Reversal of common stock issued for services (Note 8 (b)) . . . . . . . - (452,062)
Warrants issued for convertible debt program (Note 5 and 8(c)). . . . . - 475,000
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (376,160) (376,160)
----------------------------------------------------------------------- ---------------------------- ---------------
BALANCE AT DECEMBER 31, 2002. . . . . . . . . . . . . . . . . . . . . . (10,571,709) (1,767,459)
Common stock issued for cash (Note 8(b)). . . . . . . . . . . . . . . . - 425,942
Common stock issued from notes on revolving credit facility (Note 4(c)) - 354,721
Common stock issued for services (Note 8 (b)) . . . . . . . . . . . . . - 9,170
Common stock issued from convertible debt program (Note 5 and 8(c)) . . - 368,911
Common stock issued from employee stock options (Note 7(b)) . . . . . . - 19,654
Warrants issued for convertible debt program (Note 5 and 8(c)). . . . . - (237,500)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,246,067) (1,246,067)
----------------------------------------------------------------------- ---------------------------- ---------------
BALANCE AT DECEMBER 31, 2003. . . . . . . . . . . . . . . . . . . . . . $ (11,817,776) $(2,072,628)
----------------------------------------------------------------------- ---------------------------- ---------------
----------------------------------------------------------------------- ---------------------------- ---------------
The accompanying notes are an integral part of these consolidated financial
Statements
PAGE F-9
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,. . . . . . . . . . . . . . . . . . . . . . 2003 2002
-------------------------------------------------------------------- --------------------------------------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,246,067) $(376,160)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 166,971 357,692
Contributed assets. . . . . . . . . . . . . . . . . . . . . . - (16,251)
(Gain) loss on disposal of assets . . . . . . . . . . . . . . (107,499) 7,410
Non-cash interest expense - convertible debt program. . . . . 131,411 125,000
Non-cash loan fees. . . . . . . . . . . . . . . . . . . . . . 126,471
Common stock issued for compensation and services . . . . . . 9,170 (452,062)
Change in operating assets and liabilities: . . . . . . . . .
-------------------------------------------------------------------- --------------------------------------- ---------
Accounts receivable . . . . . . . . . . . . . . . . . . . . (104,737) 208,290
Work in Progress. . . . . . . . . . . . . . . . . . . . . . (110,490) -
Prepaid and other current assets. . . . . . . . . . . . . . (33,888) 10,168
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . (8,232) (1,729)
Convertible debt notes payable. . . . . . . . . . . . . . . 130,661 -
Costs in excess of billings and estimated earnings. . . . . 281,175 (281,175)
Accrued interest revolving line of credit . . . . . . . . . 13,601 -
Accounts payable and accrued expenses . . . . . . . . . . . (286,874) 202,641
Accrued payroll, vacation and related taxes . . . . . . . . (90,187) 15,936
Customer deposits and deferred revenue. . . . . . . . . . . (69,402) (158,319)
Employee Stock Purchase Plan. . . . . . . . . . . . . . . . 5,498 -
Billings in excess of costs incurred and estimated earnings - (302,553)
Provision for anticipated loss. . . . . . . . . . . . . . . (11,044) (91,241)
Accrued interest - related party. . . . . . . . . . . . . . 47,023 45,265
Other accrued liabilities . . . . . . . . . . . . . . . . . 126,919 115
-------------------------------------------------------------------- --------------------------------------- ---------
NET CASH (USED IN) OPERATING ACTIVITIES . . . . . . . . . . . . . . (1,029,520) (706,973)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of building. . . . . . . . . . . . . . . . . 3,150,124 50,000
Purchases of fixed assets. . . . . . . . . . . . . . . . . . . . (39,292) (1,900)
-------------------------------------------------------------------- --------------------------------------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. . . . . . . . . 3,110,832 48,100
-------------------------------------------------------------------- --------------------------------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payments) from convertible debt program. . . . . . . (257,736) 475,000
Principle payments on notes payable. . . . . . . . . . . . . . (2,432,595) (65,785)
Principal payments on capitalized lease obligations. . . . . . (35,764) (37,330)
Payments on notes payable - related party. . . . . . . . . . . (199,997) (66,667)
Proceeds from revolving credit facility. . . . . . . . . . . . 963,542 -
Proceeds on notes payable - related party. . . . . . . . . . . - 94,666
Proceeds from issuance of common stock . . . . . . . . . . . . 445,596 75,000
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES . . . . . . . . (1,516,954) 474,884
-------------------------------------------------------------------- --------------------------------------- ---------
Net increase/(decrease) in cash . . . . . . . . . . . . . . . . . . 564,358 (183,989)
CASH AT BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . 27,648 211,637
-------------------------------------------------------------------- --------------------------------------- ----------
CASH AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . $ 592,006 $ 27,648
-------------------------------------------------------------------- --------------------------------------- ---------
-------------------------------------------------------------------- --------------------------------------- ---------
The accompanying notes are an integral part of these consolidated financial
Statements
PAGE F-10
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, . . . . . . . . . . . . . 2003 2002
--------------------------------------------------- -------------------------------------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . $ 41,726 $310,821
Income Taxes . . . . . . . . . . . . . . . . . $ 1,600 $ 1,600
NONCASH INVESTING AND FINANCING ACTIVITIES:
During 2003 and 2002, the Company issued 7,500 and 7,000 shares of
restricted shares of stock for employee awards and services and for summer &
student interns and recorded expenses of $9,170 and $2,900, respectively.
During 2003 and 2002, the Company issued 861,267 and 153,060 shares of
restricted shares of stock under the Company's Private Placement Memorandum for
cash of $425,942 and $75,000, respectively.
During 2003, the Company eliminated its convertible debt by repaying half
of the notes in cash ($237,500) and having the note holders convert the other
half into 614,853 shares of the Company's common stock. The Company recorded
additional loan fees of $131,411 and charged these fees to equity.
During 2003, the Company issued 415,000 shares of its common stock to the
Laurus Master Fund from conversions of its convertible debt notes under its
revolving credit facility with Laurus; thereby realizing a corresponding
reduction in debt of $228,250. The Company recorded additional loan fees of
$126,471 and charged these fees to equity.
During 2003, the Company issued 37,000 shares of stock converted from
employee stock options for $19,654 in cash.
During 2002, the Company recovered 500,000 shares of stock for a credit of
$455,000 upon final judgment of the outstanding litigation against EMC Holdings,
Inc. The expense for this matter was recorded during 2001.
During 2003 and 2002, the Company financed $10,135 and $20,472,
respectively, in fixed assets through various capital lease obligations.
The accompanying notes are an integral part of these consolidated financial
Statements
PAGE F-11
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows.
(a) Nature of operations
SPACEDEV, INC. (the "Company") is engaged in the conception, design,
development, manufacture, integration and operations of SPACE TECHNOLOGY
SYSTEMS, products and services. The Company is currently focused on the
development of low-cost microsatellites, nanosatellites and related subsystems,
hybrid rocket propulsion as well as associated engineering and technical
services, primarily to government agencies, and specifically to the United
States Department of Defense. The Company's products and solutions are sold,
mainly on a project-basis, directly to these customers and include sophisticated
micro- and nanosatellites, hybrid rocket-based orbital Maneuvering and orbital
Transfer Vehicles as well as safe sub-orbital and orbital hybrid rocket-based
propulsion systems. The Company believes there will be an evolving and
developing commercial market for its space technology systems (e.g., its
microsatellite and nanosatellite products and services) in the long-term. In
the short-term, the early adopters of this technology appear to be in the United
States Department of Defense and the Company's "products" are considered to be
the outcome of specific projects. The Company is also designing and developing
commercial hybrid rocket motors and small high performance space vehicles and
subsystems for commercial customers (e.g., Scaled Composites' SpaceShipOne) and
military customers (e.g., the Air Force Research Laboratory.
The Company was incorporated under the laws of the State of Colorado on December
23, 1996 as Pegasus Development Group, Inc. ("PDGI"). SpaceDev, LLC of Colorado
was originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed on August 22, 1997. On October 22, 1997, PDGI issued 8,245,000 of its
$.0001 par value common stock for 100 percent (1,000,000 shares) of SpaceDev's
common stock owned by SpaceDev, LLC. Upon the acquisition of the SpaceDev
stock, SpaceDev was merged into PDGI and, on December 17, 1997, PDGI changed its
name to SPACEDEV, INC. After the merger, SpaceDev, LLC, changed its name to SD
Holdings, LLC on December 17, 1997. (See Notes 8(a) and 8(b).) For accounting
purposes, the transaction was accounted for as a reverse merger with the Company
as the acquirer. Since SpaceDev had minimal assets prior to the merger, the
transaction was accounted for as the sale of the Company's common stock for net
assets of $1,232. The Company became publicly traded in October 1997 and is
currently trading on the Over-the-Counter Bulletin Board ("OTCBB") under the
symbol of "SPDV."
In February 1998, the Company's operations were expanded with the acquisition of
Integrated Space Systems, Inc., a California corporation founded for the purpose
of providing engineering and technical services related to space-based systems.
The Integrated Space Systems employee base, acquired upon acquisition, largely
consisted of former Atlas and General Dynamics personnel and enlarged its then
current employee base to 20 employees. Integrated Space Systems was purchased
PAGE F-12
for approximately $3.6 million, paid in Rule 144 restricted common shares of
SpaceDev. Goodwill of approximately $3.5 million was capitalized and was to be
amortized over a period of sixty (60) months, based on the purchase price
exceeding the net asset value of approximately $164,000. As a result of a
change in corporate focus, on November 15, 2001, the Company determined that the
unamortized balance of goodwill from Integrated Space Systems, which was
approximately $923,000, had become impaired and it was written-off. While the
Integrated Space Systems segment did provide small hybrid propulsion space
systems and engineering services on separate contracts (mainly with government
agencies), the engineering service contracts had expired and, therefore, would
not be producing revenue or cash flow to support future operations. The Company
determined that all future business, contracts and proposals would be sought
after only in the SpaceDev name, making it a more efficient way for it to manage
and track multiple contracts and work on many different business ventures at the
same time within the same operating segment. The Company filed for dissolution
of Integrated Space Systems in December 2003, since all activities have been
integrated into SpaceDev, Inc.
(b) Prior year going concern
The Company's auditors, PKF, expressed in their formal auditors' opinion dated
February 11, 2004 (except for Note 11 as to which the date is April 2, 2004),
that in their opinion, based on their audit, the Company's consolidated
financial statements referred to herein present fairly, in all material
respects, the consolidated financial position of SPACEDEV, INC. AND SUBSIDIARIES
as of December 31, 2003, and the consolidated results of our operations and our
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. In previous years,
including the opinion issued by the Company's previous auditors, Nation Smith,
dated February 13, 2003, they expressed an opinion that our financial position
raised substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements as of December 31,
2003 have been prepared assuming the Company will continue as a going concern.
However, in 2002, the Company had a working capital deficit of $197,381 and
incurred a net loss of $376,160 for the year ended December 31, 2002. The
working capital deficit, together with the total net loss, raised, at that time,
substantial doubt about the Company's ability to continue as a going concern.
Subsequent to December 2003, the Company was awarded a $43,362,271 contract from
MDA and after analysis of the Company's projections (including revenue
projections) for the next several quarters and other relevant factors, the
Company's current auditors, PKF, concluded there is no longer substantial doubt
as to the Company's ability to continue as a gong concern, and has, therefore,
not included the going concern language in its report dated February 11, 2004
(except for Note 11 as to which the date is April 2, 2004) for the year ended
December 31, 2003. Management believes that this was appropriate and reflects
the Company's improved financial condition, its ability to forecast more
accurately and further validate customer demand for the Company's technology,
products and services. Management still intends to obtain new commercial and
government contracts, continue to utilize (and possibly expand) its revolving
credit facility and possibly raise some additional equity capital in a public or
private offering or fund-raising effort. Regardless, management may seek
additional capital through a combination of public and private debt or equity
placements in the future. There can be no assurance that existing contracts
will be completed successfully or that new contracts or additional debt or
equity financing that may be needed to fund operations will be available or, if
available, obtained in sufficient amounts necessary to meet the Company's needs.
Management does believe that current contracts will be sufficient to fund the
Company through 2004.
The accompanying consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the possible inability of the Company to continue as a going
concern.
PAGE F-13
(c) Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned inactive subsidiary SpaceDev Oklahoma and former wholly-owned
inactive subsidiary Integrated Space Systems, Inc., a California corporation.
The Company filed for dissolution of Integrated Space Systems in December 2003,
since all activities have been integrated into SpaceDev, Inc.
(d) Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions, including estimates of anticipated contract costs and
revenues utilized in the earnings recognition process, that affect the reported
amounts in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
(e) Software Development Costs
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes the direct costs and allocated overhead
associated with the development of software products. Initial costs are
capitalized as development costs prior to the design of a detailed program or
working model. Costs incurred subsequent to the product release and development
costs performed under contract are charged to operations. Beginning in the
second quarter 2002, and completing in 2003, capitalized software costs were
being amortized over their estimated useful life of eighteen months using the
straight-line method. Periodically and at least annually, management performs a
review for impairment in accordance with SFAS No. 144. As of December 31, 2003,
the Company had fully amortized the capitalized software costs.
(f) Revenue recognition
The Company's revenues in 2003 were derived primarily from United States
government cost plus fixed fee (CPFF) contracts compared to a predominance of
fixed price contracts in 2002. Revenues from the CPFF contracts during 2003 are
recognized as expenses are incurred compared to revenues from fixed price
contracts in 2002, which were recognized using the percentage-of-completion
method. Estimated contract profits are taken into earnings in proportion to
revenues recorded. Revenues under certain long-term fixed price contracts,
which provide for the delivery of minimal quantities or require significant
amounts of development effort in relation to total contract value, are recorded
upon achievement of performance milestones or using the cost-to-cost method of
accounting where revenues and profits are recorded based on the ratio of costs
incurred to estimated total costs at completion. Losses on contracts are
recognized when estimated costs are reasonably determined. Actual results of
contracts may differ from management's estimates and such differences could be
material to the consolidated financial statements. Professional fees are billed
to customers on a time and materials basis, a fixed price basis or a
per-transaction basis depending on the terms and conditions of the specific
contract. Time and material revenues are recognized as services are performed
and costs incurred.
In 2002, billings in excess of costs incurred and estimated earnings represent
the excess of amounts billed in accordance with the contractual billing terms.
Costs in excess of billings represent the excess of actual costs incurred to the
amount that is billed to date.
Deferred revenue represents amounts collected from customers for projects,
products or services to be provided at a future date.
PAGE F-14
(g) Depreciation and amortization
Fixed assets are depreciated over their estimated useful lives of three-to-five
years using the straight-line method of accounting.
In December 2002, the Company entered an agreement to sell its interest in its
only facility, which closed in January 2003. The escrow transaction included
the sale of the land and building at 13855 Stowe Drive, Poway, CA 92064. In
conjunction with the sale of its only facility in December 2002, the Company
entered into a non-cancelable operating lease with the buyer to lease-back its
facilities for ten years (see Note 2). The base rent shall increase by 3.5% per
year (see Notes 2 and 9(c)).
(h) Research and development
The Company is actively engaged in design and development activities with its
commercial propulsion systems as well as its new projects with the Missile
Defense Agency and the Air Force Research Laboratory. The Company has several
SBIR (Small Business Innovation Research) grants from the government and
continues to seek new SBIR opportunities. Cost incurred under SBIR grants are
charged against revenues received under SBIR grants. Non-reimbursable research
and development expenditures relating to possible future products are expensed
as incurred. The Company incurred $281,280 in non-reimbursable research and
development costs during 2003 as compared to no recorded research and
development costs during 2002.
(i) Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense was approximately $1,460 and $900 in 2003 and
2002, respectively.
(j) Income taxes
Deferred income taxes are recognized for the tax consequences in future years of
the differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the years in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the combination of the tax payable for the year and the
change during the year in deferred tax assets and liabilities.
PAGE F-15
(k) Stock-based compensation
In October 1995, the FASB (Financial Accounting Standards Board) issued SFAS
(Statements of Financial Accounting Standards) No. 123, "Accounting for
Stock-Based Compensation." The Company adopted SFAS No. 123 in 1997. The Company
has elected to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB
(Accounting Principles Board) Opinion No. 25, "Accounting for Stock Issued to
Employees," and has provided pro forma disclosures as if the fair value based
method prescribed in SFAS No. 123 has been utilized. See Note 8(d). During
December 2002, FASB issued SFAS No. 148 "Accounting for Stock Based Compensation
- Transition and Disclosure", which amends SFAS No. 123 to require companies to
elect to recognize fair value stock based compensation costs in their financial
statements or to disclose the pro forma impact of those costs in the footnotes.
If the Company had accounted for these options in accordance with SFAS No. 123,
the total value of options granted during 2003 and 2002 would be amortized on a
pro forma basis over the vesting period of the options. Thus, the Company's
consolidated net loss would have been as follows:
Years Ended December 31, 2003 2002
------------------------ ------------ ----------
Net loss:
As reported. . . . . . . $(1,246,067) ($376,160)
Pro forma. . . . . . . . $(1,480,592) ($604,395)
------------------------ ------------ ----------
Loss per Share:
As reported. . . . . . . $ (0.08) ($0.03)
Pro forma. . . . . . . . $ (0.09) ($0.04)
------------------------ ------------ ----------
(l) Common stock, stock options and warrants to non-employees
The Company has valued its stock, stock options and warrants issued to
non-employees at fair value in accordance with the accounting prescribed in SFAS
No. 123, which states that all transactions in which goods or services are
received for the issuance of equity instruments shall be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
(m) Net loss per common share
Net loss per common share has been computed on the basis of the weighted average
number of shares outstanding, according to the rules of SFAS No. 128, "Earnings
per Share." Diluted net loss per share has not been presented, as the
computation would result in anti-dilution.
(n) Financial instruments
The Company's financial instruments consist primarily of cash, accounts
receivable, capital leases and notes payable. These financial instruments are
stated at their respective carrying values, which approximate their fair values.
(o) Segment reporting
The Company merged its Space Missions Division business segment and Integrated
Space Systems business segment in 2002. The Company has one other inactive
PAGE F-16
subsidiary, SpaceDev Oklahoma. The Company follows the requirement of SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information" ("SFAS
No. 131").
(p) New accounting standards
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS
No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," and an amendment of that SFAS, SFAS No. 64, "Extinguishment of Debt Made
to Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." Further, SFAS No. 145
amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or described their applicability under changed conditions. This
pronouncement requires gains and losses from extinguishment of debt to be
classified as an extraordinary item only if the criteria in Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," have been met. Further,
lease modifications with economic effects similar to sale-leaseback transactions
must be accounted for in the same manner as sale-leaseback transactions. The
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 shall be
applied in fiscal years beginning after May 15, 2002. The provisions of SFAS No.
145 related to Statement 13 shall be effective for transactions occurring after
May 15, 2002, with early application encouraged. The adoption of SFAS No. 145
did not have a material impact on our consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. SFAS
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS 146 did not have a material impact on
our consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS No. 123." SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
adoption of this Statement did not have a material effect on the consolidated
financial statements of the Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 requires that contracts with comparable characteristics be accounted for
similarly. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of this Statement did not have a material effect on the
consolidated financial statements of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
PAGE F-17
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this Statement did not have a material
effect on the consolidated financial statements of the Company.
2. FIXED ASSETS
In December 2002, the Company entered an agreement to sell its interest in its
only facility. As of December 31, 2002 the Company listed a receivable held for
sale of $3,150,124 which was realized when the transaction closed in January
2003. The escrow transaction included the sale of the land and building at
13855 Stowe Drive, Poway, CA 92064.
In conjunction with the sale, the Company entered into a lease agreement with
the buyer to lease-back its facilities (see Note 9(c)). The gain on the sale of
the facility was deferred and will be amortized in proportion to the gross
rental charged to expense over the lease term. Deferred gain of $1,172,720 will
be amortized over ten (10) years beginning February 2003 and ending in February
2013. This amortization will be included in the Company's non-operating income
and expense.
Fixed assets consisted of the following:
December 31, . . . . . . . . . . . . . . 2003 2002
---------------------------------------- ---------- ----------
Capital leases . . . . . . . . . . . . . $ 155,802 $ 145,365
Computer equipment . . . . . . . . . . . 163,721 124,429
Building improvements. . . . . . . . . . 9,488 9,488
Furniture and fixtures . . . . . . . . . 5,271 5,271
---------------------------------------- ---------- ----------
334,282 284,553
Less accumulated depreciation
and amortization. . . . . . . . . . . (196,750) (143,065)
---------------------------------------- ---------- ----------
$ 137,532 $ 141,488
---------- ----------
Depreciation and amortization expense for fixed assets was approximately $53,000
and $164,000 for the years ending December 31, 2003 and 2002, respectively.
Depreciation and amortization expense was significantly less during 2003 due to
the sale of our facility in January 2003 and the full amortization of the AMROC
technology. (See Note 3(a).)
3. ACQUISITIONS
All acquisitions have been accounted for using the purchase method of accounting
and intangible assets were amortized using the straight-line method. Initial
purchase price included stock issued at the date of acquisition, direct
acquisition costs and any guaranteed future consideration.
(a) AMROC
On August 14, 1998, the Company entered an Agreement for License and Purchase of
Technology from American Rocket Company (AMROC) with an unrelated individual who
had obtained ownership of such technology from AMROC. The intellectual property
acquired was hybrid rocket technology that may be modified and used in the
future operations of the Company. Upon execution of the Agreement, the Company
issued the seller a warrant to purchase 25,000 shares of restricted common stock
at a strike price equal to 50% of the market price of the common stock on the
issuance date. This warrant expired in 2003 having been unexercised.
PAGE F-18
For each of the three years following the Agreement date, the licensor received
warrants to purchase 25,000 shares of restricted common stock. In the fourth
through tenth year following the Agreement date, the licensor will receive a
warrant to purchase a number of shares based on the amount of revenue generated
from the acquired technology. All revenue based warrants are earned at a rate
of one share per $125 of revenue generated from the technology acquired. Under
the terms of the Agreement, the minimum number of shares to be issued is 100,000
and the maximum consideration shall not exceed warrants to purchase 3,000,000
shares of common stock or $6,000,000 in recognized value. Recognized value is
the sum of (a) the cumulative difference between the market price of the common
stock and the strike price and (b) the cumulative difference between the market
price on the date of exercise and the strike price for each warrant previously
exercised. To date, no revenue has been generated from the acquired technology.
The Company valued the warrants using the fair value method as prescribed by
SFAS No. 123. Under this method, the Company used the risk-free interest rate
at the date of grant, the expected volatility of the stock, the expected
dividend yield on the stock and the expected life of the warrants to determine
the fair value of the warrants. The risk-free rate of interest used to value
the initial issuance was 5.4 percent, a zero percent dividend yield was assumed
and the expected life of the warrants was five years from the date of issuance.
This calculation resulted in a fair value of $24,500 and was used as the value
of the intangible assets acquired. All warrants are immediately exercisable
after issuance and expire on the fifth anniversary of their issuance.
Other intangible assets consisted of the following:
December 31,. . . . . . . . . . . . . . . . . . . . 2003 2002
--------------------------------------------------- ---------- ----------
Other intangibles . . . . . . . . . . . . . . . . . $ 116,292 $ 116,292
Less accumulated amortization . . . . . . . . . . . (116,292) (105,736)
--------------------------------------------------- ---------- ----------
$ 0 $ 10,556
---------- ----------
The Company's intangible assets were fully amortized in 2003. Amortization
expense was approximately $11,000 and $40,000 for 2003 and 2002, respectively.
4. NOTES PAYABLE
(a) Building and settlement notes
In December 2002, the Company entered into an agreement to sell its interest in
its only facility. The transaction closed in January 2003. The escrow
transaction included the sale of the land and building at 13855 Stowe Drive,
Poway, CA 92064. Net fixed assets were reduced by approximately $1.9 million
and notes payable were reduced by approximately $2.4 million while a deferred
gain was recorded. In conjunction with the sale, the Company entered into a
lease agreement with the buyer to leaseback its facilities. The Company's Chief
Executive Officer provided a guarantee for the leaseback. The gain on the sale
of the facility was deferred and amortized on a straight-line basis over the ten
(10) year term of the lease. Deferred gain of $1,172,720 is being amortized at
the rate of $117,272 per year for ten (10) years ending in January 2013. As of
December 31, 2003, the deferred gain was $1,065,221. This amortization will be
included in the Company's non-operating income and expense and totaled $107,499
in 2003.
PAGE F-19
Deferred Gain consisted of the following:
December 31,. . . . . . . 2003 2002
------------------------- ----------- -----
Deferred Gain . . . . . . $1,172,720 $ -
Less Amortization to date (107,499) -
------------------------- ----------- -----
$1,065,221 $ -
----------- -----
In 2001, the Company entered into three settlement loan agreements with various
vendors. The total of $171,402 for all three loans called for payment between
24 and 50 months with interest that ranged from 0% to 8%. At December 31, 2003
and 2002, the outstanding balances on these notes were $87,591 and $146,527,
with interest expense of $4,956 and $4,782, respectively.
Future minimum principal payments on notes payable are as follows:
Year Ending December 31,
2004 . . . . . . . . . . $41,464
2005 . . . . . . . . . . 36,670
2006 . . . . . . . . . . 9,457
-------
Total Settlement Notes . $87,591
------------------------ -------
(b) Related parties
The Company has a note payable to its CEO. At December 31, 2003 and 2002, the
balances were $585,522 and $738,496, respectively, with accrued interest of 10%.
The note was amended on March 20, 2000 to call for annual payments of not less
than $80,000 per year with interest at 10%.
Future minimum principal payments on notes payable, related parties are as
follows:
Year Ended December 31,
-----------------------
2004. . . . . . . . . . 80,000
2005. . . . . . . . . . 80,000
2006. . . . . . . . . . 80,000
2007. . . . . . . . . . 80,000
2008. . . . . . . . . . 80,000
Thereafter. . . . . . . $185,522
----------------------- --------
$585,522
-----------------------
Accrued interest expense on this note was $47,023 and $45,265 for 2003 and 2002,
respectively.
(c) Revolving Credit Facility.
On June 3, 2003, the Company entered into a Security Agreement, Secured
Convertible Note, Registration Rights Agreement and Common Stock Purchase
Warrant, with Laurus Master Fund, Ltd. ("Laurus"), which were filed on Form 8-K
dated June 18, 2003. Pursuant to the agreements, the Company received a $1
million revolving credit facility in the form of a three-year Convertible Note
secured by its assets. The net proceeds from the Convertible Note are for
general working capital needs. Advances on the Convertible Note may be repaid
PAGE F-20
at the Company's option, in cash or through the issuance of the Company's shares
of common stock. The Convertible Note carries an interest rate of WSJ Prime
plus 0.75% on any outstanding balance. In addition, the Company is required to
pay a collateral management payment of 0.55% of the average aggregate
outstanding balance during the month plus an unused line payment of 0.20% per
annum. The outstanding balance on the revolving credit facility at December 31,
2003 was $748,893, of which approximately $13,600 had been accrued for interest.
The Company filed a registration statement on Form SB-2 on July 25, 2003 in
connection with this transaction. The Form SB-2 was declared effective on
August 6, 2003. With the securities registered for public resale, the Company
has an option to pay amounts outstanding under the revolving credit facility by
converting shares of its common stock at the fixed conversion price of $0.55
per share on the first $1 million of principal, as long as the then current
market price is more than 118% of the fixed conversion price.
The Convertible Note includes a right of conversion in favor of Laurus. If
Laurus exercises its conversion right at any time or from time to time at or
prior to maturity, on any outstanding balance at the time, the Convertible Note
will be convertible into shares of the Company's common stock at a fixed
conversion price, subject to adjustments for stock splits, combinations and
dividends and for shares of common stock issued for less than the fixed
conversion price (unless exempted pursuant to the agreements). The fixed
conversion price will be adjusted after conversion of the first $1 million to
103% of the then fair market value of our common stock ("Adjusted Fixed
Conversion Price"). As of December 31, 2003, Laurus had converted 415,000
shares to reduce the amount borrowed under the revolving credit facility by
$228,250. The Company expensed approximately $126,500 for non-cash loan fee
expenses in 2003. Fair market value of the stock was determined by discounting
the closing market price on the date of the conversion by 20%.
Availability of funds under the revolving credit facility will be based on our
accounts receivables, except as waivers are provided by Laurus. An initial
three (3) month waiver was offered by Laurus, under which Laurus permitted a
credit advance up to $300,000, which amount might otherwise exceed eligible
accounts receivable during the period. Laurus subsequently extended the waiver
for an additional six (6) months, under which Laurus permitted a credit advance
up to $1 million, which amount might otherwise exceed eligible accounts
receivable during the period. The revolving credit facility is secured by all
of the assets of the Company.
In conjunction with this transaction, Laurus was paid a fee of $20,000 for the
first year (and the Company will be required to pay a continuation fee of
$10,000 for each year thereafter), which fee was expensed as additional interest
expense. In addition, Laurus received a warrant to purchase 200,000 shares of
the Company's common stock, as stated herein. The warrant exercise price is
computed as follows: $0.63 per share for the purchase of up to 125,000 shares;
$0.69 per share for the purchase of an additional 50,000 shares; and $0.80 per
share for the purchase of an additional 25,000 shares. The warrant exercise
price may be paid in cash, in shares of the Company's common stock, or by a
combination of both. The warrant expiration date is June 3, 2008. The warrant
exercise price and the number of shares underlying the warrant are subject to
adjustments for stock splits, combinations and dividends.
In addition to the initial warrant, the Company is obligated to issue an
additional five-year warrant to Laurus to purchase one share of common stock at
an exercise price equal to 125% of the Adjusted Fixed Conversion Price for every
ten dollars ($10) in principal of the Convertible Note converted into common
stock, if and when over $1 million is converted under the revolving credit
facility. The value of the warrant will be determined, if and when issued, and
will be treated as additional interest expense and will be amortized over the
remaining term of the Convertible Note, unless sooner terminated. No more than
PAGE F-21
an aggregate of 100,000 shares of the Company's common stock may be purchased by
Laurus under such additional warrants.
5. CONVERTIBLE DEBENTURES
From October 14, 2002 through November 14, 2002, the Company sold an aggregate
of $475,000 of 2.03% convertible debentures to various directors and officers of
the Company. The total funding was completed on November 14, 2002. The
convertible debentures entitled the holder to convert the principal and unpaid
accrued interest into the Company's common stock when the note matures. The
maturity on the notes was six (6) months from issue date. On March 25, 2003, an
amendment was executed which extended these notes an additional six (6) months.
The convertible debentures were exercisable into a number of the Company's
common shares at a conversion price that equals the 20-day average ask price
less 10%, which was, established when the note was issued, or the initial
conversion price.
Concurrent with the issuance of the convertible debentures, the Company issued
warrants to purchase up to 1,229,705 shares of the Company's common stock to the
subscribers. These warrants are exercisable for three (3) years from the date
of issuance at the initial exercise price which is equal to the 20-day average
ask price less 10%, which was established when the note was issued, or the
initial conversion price of the notes. Upon issuance, the issued warrants were
valued using the Black-Scholes pricing model based on the expected fair value at
issuance and the estimated fair value was recorded as debt discount. As a
result of the change to the maturity date of the convertible debt, the
amortization period for the debt discounts was also extended during the first
quarter in 2003.
On September 5, 2003, the Company repaid one-half of the convertible notes, with
the condition that the note holders convert the other half. Also, as a condition
of the partial repayment, the note holders were required to relinquish one-half
of the previously issued warrants. Finally, as additional consideration for the
transaction, the note holders were offered 5% interest on their notes, rather
than the stated 2.03%. All the note holders accepted the offer and the
convertible notes were retired. As of December 31, 2003, the Company recorded a
credit of $88,408, as debt discount recovery; therefore, for the year ending
December 31, 2003, the debt discount expense was $112,500. The Company also
expensed $131,411 for non-cash loan fee expense. Fair market value of the stock
was determined by discounting the closing market price on the date of the
transaction by 20%, based on the nature of the restricted securities.
PAGE F-22
Convertible debentures - beginning balance . $ 475,000
Total interest expense incurred . . . . $ 20,236
Accrued interest paid - current year. . $ (18,161)
Accrued interest paid - prior year. . . $ (2,075)
Convertible debtures paid . . . . . . . $(237,500)
Convertible debtures converted. . . . . $(237,500)
-------------------------------------------------------
$(475,000)
-------------------------------------------------------
Convertible debentures - ending balance. . . $ 0
-------------------------------------------- ----------
Debt discount (Warrants) - beginning balance $ 475,000
Amount forfeited. . . . . . . . . . . . $(237,500)
Amount expensed prior year. . . . . . . $(125,000)
Amount expensed current year. . . . . . $(267,879)
Current year - adjustment . . . . . . . $ 155,379
-------------------------------------------------------
$(475,000)
-------------------------------------------------------
Debt discount (Warrants) - ending balance. . $ 0
-------------------------------------------- ----------
6. INCOME TAXES
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
deferred tax asset of $2,190,000 and $1,372,000 as of December 31, 2003 and
2002, respectively, consisted primarily of the income tax benefits from net
operating loss and capital loss carryforwards, amortization of goodwill and
research and development credits. A valuation allowance has been recorded to
fully offset the deferred tax asset as it is more likely than not that the
assets will not be utilized. The valuation allowance increased approximately
$818,000 in 2003 from $1,372,000 at December 31, 2002 to $2,190,000 at December
31, 2003.
At December 31, 2003, the Company has federal and state tax net operating loss
and capital loss carryforwards of approximately $4,229,589 and $1,846,945,
respectively. The federal and state tax loss carryforwards will expire in 2023
and 2013, respectively, unless previously utilized. The State of California has
suspended the utilization of net operating loss for 2002 and 2003.
A reconciliation of the statutory income tax rates and the Company's effective
tax rate is as follows:
Years Ended December 31,. . . . . . . . . . 2003 2002
--------------------------------------------- ----- -----
Statutory U.S. federal rate . . . . . . . . 34% 34%
--------------------------------------------- ----- -----
State income taxes - net of federal benefit 5% 5%
Net operating loss for which no tax
Benefit is currently available . . . . . . (39%) (39%)
- -
----- -----
PAGE F-23
The tax effects of temporary differences and carryforwards that give rise to
--------------------------------------------------------------------------------
deferred tax assets consist of the following:
---------------------------------------------------
December 31,. . . . . . . . . . . . . 2003 2002
--------------------------------------- ------------ ------------
Deferred tax assets:
---------------------------------------
Loss carryforwards . . . . . . . . . $ 1,588,000 $ 1,262,000
Deferred gain on sale of building 435,000 -
Temporary differences. . . . . . . . 127,000 100,000
Research and development credits . . 40,000 10,000
Gross deferred tax assets . . . . . . 2,190,000 1,372,000
--------------------------------------- ------------ ------------
Valuation allowance . . . . . . . . . (2,190,000) (1,372,000)
$ - $ -
------------ ------------
7. EMPLOYEE BENEFIT PLAN
(a) Profit sharing 401(k) plan
During 1997, the Company adopted a 401(k) retirement savings plan for its
employees, which allows each eligible employee to voluntarily make pre-tax
salary contributions up to 15% of their compensation. The Company may elect to
make a matching contribution. The total Company contribution and participant
salary reduction may not exceed 25% of the compensation of eligible
participants. During 2003 and 2002, the Company did not contribute to the Plan.
(b)Incentive stock option and employee stock purchase plans
At its 1999 Annual Stockholder Meeting, the shareholders adopted an Incentive
Employee Stock Option Plan under which its Board of Directors may grant its
employees, directors and affiliates Incentive Stock Options, Supplemental Stock
Options and other forms of stock-based compensation, including bonuses or stock
purchase rights. Incentive Stock Options, which provide for preferential tax
treatment, are only available to employees, including officers and affiliates,
and may not be issued to non-employee directors. The exercise price of the
Incentive Stock Options must be 100% of the fair market value of the stock on
the date the option is granted. Pursuant to our plan, the exercise price for
the Supplemental Stock Options will not be less than 85% of the fair market
value of the stock on the date the option is granted. The Company is required
to reserve an amount of common shares equal to the number of shares, which may
be purchased as a result of awards made under the Plan at any time.
At the 2000 Annual Stockholder Meeting, the shareholders approved an amendment
to the Stock Option Plan of 1999, increasing the number of shares eligible for
issuance under the Plan to 30% of the then outstanding common stock and allowing
the Board of Directors to make annual adjustments to the Plan to maintain a 30%
ratio to outstanding common stock at each annual meeting of the Board of
Directors. The Board, at its annual meetings in 2002 and 2003, made no
adjustment, as a determination was made that the number of shares then available
under the Plan was sufficient to meet the Company's needs. As of December 31,
2003, 4,184,698 shares were authorized for issuance under the Plan, 3,124,807 of
which are currently subject to outstanding options and awards. The Stock Option
Plan of 1999 was registered with the U.S. Securities & Exchange Commission on
Form S-8.
During 2003, the Company issued non-statutory options to purchase 140,000 shares
to its independent directors for attendance at its 2003 Board of Directors
meetings. In addition to the Stock Option Plan of 1999, its shareholders
adopted the 1999 Employee Stock Purchase Plan with 1,000,000 shares reserved
PAGE F-24
under the plan and authorized its Board of Directors to make twelve consecutive
offerings of our common stock to its employees. The 1999 Employee Stock
Purchase Plan has been instituted and the first employees enrolled in the plan
in August 2003. The first shares of common stock were issued under the Plan in
February 2004. The exercise price for the Stock Purchase Plan will not be less
than 85% of the fair market value of the stock on the date the stock is
purchased. During 2003 employees contributed $5,498 to the employee stock
purchase plan; however, no shares were issued under the plan as of December 31,
2003.
8. STOCKHOLDERS' EQUITY
(a) Convertible preferred stock
On November 4, 1997, 82,450 shares of $.001 par value convertible preferred
stock were issued to SD Holdings, LLC in exchange for 8,245,000 common shares of
the Company that were issued on October 22, 1997 (see Notes 1(a) and 8(b)).
Each share of convertible preferred stock was convertible, at the option of the
holder, into 100 shares of common stock. The conversion ratio was subject to
certain anti-dilution adjustments, and the holder of each share of preferred
stock was entitled to one vote for each share of common stock into which it
would convert. These shares were converted into 8,245,000 shares of the
Company's common stock on May 11, 1999.
(b) Common stock
On October 22, 1997, PDGI issued 8,245,000 of its $.0001 par value common stock
for 100 percent (1,000,000 shares) of SpaceDev's common stock owned by SpaceDev,
LLC, a Nevada corporation. Upon the acquisition of the SpaceDev stock, SpaceDev
was merged into PDGI and, on December 17, 1997, the name of the Company was
changed to SPACEDEV, INC. On November 4, 1997, these common shares were
exchanged for 82,450 shares of convertible preferred stock. See Note 8(a). On
May 11, 1999, the Company issued 8,245,000 shares of common stock upon the
conversion of the preferred shares.
During 2003 and 2002, the Company issued 7,500 and 7,000, shares of its common
stock for employee awards and services and for summer & student interns and
recorded expenses of $9,170 and $2,900, respectively. The fair value of the
shares issued was calculated using the closing price on the date of issuance.
During 2002, the Company recovered 500,000 shares of stock for a credit of
$455,000 during 2002 pursuant to an arbitration award issued against EMC
Holdings, Inc. The Company recorded the credit during 2002 to offset the
expense that was recorded during 2001. On June 18, 2001, SpaceDev entered into
a relationship with two individuals (doing business as EMC Holdings Corporation
("EMC")) whereby EMC was to provide certain consulting and advisory services to
the Company. EMC received the first installment of 500,000 shares of common
stock on June 26, 2001. Total expense for the initial stock issuance through
September 30, 2001 was $455,000. Pursuant to a demand for arbitration filed on
November 7, 2001, the Company sought the return of all or a portion of the
shares issued to EMC. EMC filed its own claim with the American Arbitration
Association on November 13, 2001, alleging that the Company owed EMC $118,000 in
fees, plus damages to be proven at arbitration.
A three-day arbitration hearing was held in May and June 2002 with respect to
claims arising out of consulting and advisory service agreements between the
Company and EMC. On July 17, 2002, an interim award was issued in favor of the
Company against EMC, ordering the return of the initial installment of 500,000
shares and denying EMC's claim for $118,000. On October 22, 2002, a status
conference was held and a tentative final award was issued again in the favor of
PAGE F-25
the Company. Included in this tentative final ruling was an award of
approximately $83,000 in attorney and arbitration fees to the Company. The
tentative final ruling became effective on October 29, 2002, and was submitted
to the Superior Court of California, Orange County, for entry of judgment.
Because collection of the attorney and arbitration fees award is not assured,
the Company has expensed all of its fees related to this matter, any recovery of
the fees will be recorded as income in the period they are received; however, at
this time, the Company does not expect any recovery, and in June 2003, the
Company ceased efforts to recover the awarded fees, as it was determined that
the cost to pursue collection exceeded the likelihood of collection. The return
of the 500,000 shares, as provided in the interim award issued on July 17, 2002,
was recorded in the third quarter of 2002 as a reversal of the original expense
recorded. Because the original expense was not recorded as an extraordinary
item, the reversal of the expense did not qualify as an extraordinary item.
In connection with the signing of the agreement, the Company's majority
shareholder issued 50,000 shares of common stock to EMC with a fair value of
approximately $45,000. The shares were recorded as a contribution of capital
and additional expense related to the EMC agreement in accordance with the SEC's
Staff Accounting Bulletin number 79.
In June 2003, the Company ceased its efforts to recover the awarded fees, as it
determined the cost to pursue collection exceeded the likelihood of collection.
On November 5, 2000, the Company commenced a private placement offering (PPO)
for a maximum of 1,000,000 shares of the Company's $0.0001 par value common
stock and warrants to purchase an additional 1,000,000 shares of common stock
(the "Units"). The offering price of the Unit(s) was the five-day average of
the bid and ask price for the Company's common stock on the date of issuance,
with a minimum per Unit price of $1.00. The warrants allowed the holder to
acquire additional shares at $0.50 above the offering price of the shares. The
Company sold to one related-party investor under these terms.
On March 2, 2001, the PPO price was amended to the average of the high bid
prices on the date of issuance and four preceding days, with no minimum per
share price, and the warrants were amended to allow the holder to acquire
additional shares at the Unit price.
The Company sold 153,060 Units under the PPO during 2002 for $75,000.
On January 16, 2003 and February 14, 2003, pursuant to an extension of the PPO,
the Company sold 665,188 and 196,079 Units, respectively. The Company received
approximately $326,000 and $100,000, respectively, for the Units sold under the
PPO during the first quarter 2003. The PPO was subsequently closed.
(c) Warrants
Concurrent with the issuance of the convertible debentures from October 2002
through November 2002, the Company issued to subscribers warrants to purchase up
to 1,229,705 shares of the Company's common stock. On September 5, 2003, the
Company repaid one-half of the convertible notes, with the condition that the
note holders would convert the other half. As a condition of the partial
repayment, the note holders were required to relinquish one-half of the
previously issued warrants reducing the total warrants issued under the
convertible debt program to 614,853. These warrants are exercisable for three
(3) years from the date of issuance at the initial exercise price, which is
equal to the 20-day average asking price less 10% established when the notes
were issued. Upon issuance the warrants were valued using the Black-Scholes
pricing model based on the expected fair value at issuance and the estimated
fair value was also recorded as debt discount. As of December 31, 2003, the
Company had other warrants outstanding issued as part of its private placement
PAGE F-26
that allow the holders to purchase up to 2,285,931 shares of common stock at
prices between $0.37 and $1.05 per share. The warrants may be exercised any
time within three (3) and five (5) years of issuance.
(d) Stock options
On November 21, 1997, the Company entered into a five (5) year employment
agreement with its CEO. As part of the employment agreement, the Company
granted options to the CEO to purchase up to 2,500,000 shares of the Company's
$.0001 par value restricted common stock.
The options are subject to the following vesting conditions, which were amended
on January 21, 2000, with an option for the board to award an additional
1,500,000 options at a later date, the exercise prices set forth:
Exercise
Number price per
Of shares Vesting Conditions share
---------------- --------- ----------------------------------------------------------- -----------------
Granted Options:
500,000. . . . . Currently vested $ 1.00
500,000. . . . . Obtaining $6,500,000 additional equity capital $ 1.50
500,000. . . . . Financing and executing a definitive space launch agreement $ .00
500,000. . . . . Launching of first lunar or deep-space mission $ 2.50
500,000. . . . . Successful completion of first lunar or deep-space mission $ 3.00
Options to be
Granted upon
the Occurrence
of Certain Events:
250,000. . . . . Upon the Company market capitalization reaching $250 million $ 5.00
500,000. . . . . Upon the Company market capitalization reaching $500 million $ 10.00
750,000. . . . . Upon the Company market capitalization reaching $1 billion $ 20.00
---------------- --------- ----------------------------------------------------------- -----------------
All options expire ten (10) years from date of amendment.
In accordance with APB 25, the Company recognized $500,000 of compensation
expense and $250,000 of deferred compensation in 1997. The options granted to
the CEO are subject to vesting conditions and have exercise prices between $1.00
and $3.00 per share.
On August 27, 2001, as part of an annual review process, an additional 10,000
options were granted to the CEO at the exercise price of $0.9469 per share with
a set vesting schedule of 3,333 shares per year after issuance with the third
year having 3,334 options vest. These options expire five years from grant
date.
PAGE F-27
The following summarizes stock option activity related to all of the option plan
and employee compensation agreements:
Weighted
Options Average
Outstanding Exercise Prices
------------ ----------------
Balance at January 1, 2002 . 4,360,162 1.67
Granted. . . . . . . . . . . 1,386,110 0.50
Exercised. . . . . . . . . . 0 -
Expired. . . . . . . . . . . (297,500) 0.88
---------------------------- ------------ ----------------
Balance at December 31, 2002 5,448,772 0.91
Granted. . . . . . . . . . . 1,219,615 0.76
Exercised. . . . . . . . . . (37,000) (0.53)
Expired. . . . . . . . . . . (1,006,580) (0.52)
---------------------------- ------------ ----------------
Balance at December 31, 2003 5,624,807 1.39
---------------------------- ------------ ----------------
The weighted average fair value of options granted to employees under the plan
during 2003 and 2002 was $0.76 and $0.50, respectively. At December 31, 2003
and 2002, there were 2,266,520 and 2,064,716 options exercisable at a weighted
average exercise price of $1.05 and $0.42 per share, respectively. The weighted
average remaining life of outstanding options under the plan at December 31,
2003 was 4.78 years.
Weighted-Average Weighted-
Remaining Contractual Averagee
Range of Number of Shares Life of Shares Number of Exercisable
Exercise Outstanding Outstanding Exercisable Price
Price
----------
0.42-0.99 1,511,954 4.34 552,001 0.61
1.00-1.99. 2,610,631 4.02 1,712,297 1.19
2.00-2.99. 1,002,222 6.54 2,222 2.25
3.00-3.50. 500,000 6.54 - -
5,624,807. 4.78 2,266,520 $ 1.05
---------- --------------------- ------------------------- ----------------- -----------
The Company has elected to account for its stock-based compensation plans under
APB 25. However, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 2003 and 2002 using the minimum value
method as prescribed by SFAS No. 123. Under this method, the Company used the
risk-free interest rate at date of grant, the expected volatility, the expected
dividend yield and the expected life of the options to determine the fair value
of options granted. The risk-free interest rates ranged from 6.0% to 6.5%;
expected volatility of 117% and the dividend yield was assumed to be zero, and
PAGE F-28
the expected life of the options was assumed to be three to five years based on
the average vesting period of options granted.
9. COMMITMENTS AND CONTINGENCIES
(a) Capital leases
The Company leases certain equipment under non-cancelable capital leases, which
are included in fixed assets as follows:
December 31,. . . . . . . . . 2003 2002
----------------------------- ---------- ---------
Computer equipment. . . . . . $ 155,802 $145,365
Less accumulated depreciation (106,562) (76,161)
$ 49,240 $ 69,204
---------- ---------
Future minimum lease payments are as follows:
Year Ending December 31, 2003
2004. . . . . . . . . . . . . . . . . . $ 11,665
2005. . . . . . . . . . . . . . . . . . $ 4,425
2006. . . . . . . . . . . . . . . . . . $ 1,526
2007. . . . . . . . . . . . . . . . . . $ -
Thereafter. . . . . . . . . . . . . . . $ -
--------------------------------------- ---------
Total minimum lease payments. . . . . . $ 17,616
Amount representing interest. . . . . . $ 2,031
--------------------------------------- ---------
Present value of minimum lease payments $ 15,585
Total obligation. . . . . . . . . . . . $ 15,585
Less current portion. . . . . . . . . . $(10,332)
--------------------------------------- ---------
Long-term portion . . . . . . . . . . . $ 5,253
--------------------------------------- ---------
(b) Other accrued liabilities
During 2003, the Company accrued expenses in connection with current projects
and commitments. The total of these accruals were $248,530 as of December 31,
2003.
In November 2002, the Company entered an agreement to sell its interest in its
only facility. The transaction closed in January 2003. The escrow transaction
included the sale of the land and building at 13855 Stowe Drive, Poway, CA
92064. The fees that were incurred for the sale of the building were $121,311
and recorded as other accrued liabilities. The fees include broker fees, escrow
and title fees and property taxes.
(c) Building lease
In conjunction with the sale of its only facility, the Company entered into a
non-cancelable operating lease with the buyer to lease-back its facilities for
ten (10) years (see Note 2). The base rent is $25,678 per month and will
increase by 3.5% per year. Mr. Benson provided a guarantee for the leaseback.
PAGE F-29
10. CONCENTRATIONS AND CONTINGENCIES
(a) Credit risk
The Company maintains cash balances at various financial institutions primarily
located in San Diego, California and New York, New York. The accounts at these
institutions are secured by the Federal Deposit Insurance Corporation up to
$100,000. The Company has not experienced any losses in such accounts.
(b) Customer
During 2002, the Company had a major customer that accounted for sales of
approximately $1,727,000 or 51% of consolidated revenue. Sales from this
customer were approximately $346,000 and the contract with this customer was
successfully completed during 2003. During 2003, the Company had three major
customers that accounted for sales of approximately $1,782,600 or 60% of
consolidated revenue. At December 31, 2003 and 2002, the amount receivable from
these customers was approximately $160,200 and $50,000, respectively.
(c) Contract
In November 1999, the Space Missions Division was awarded a turnkey mission
contract by the Space Sciences Laboratory at the University of California at
Berkeley worth as of December 31, 2002 approximately $7.2 million, including two
change orders worth approximately $412,000 June 12, 2002 and October 7, 2002.
This contract represented 51% of the Company's revenue in 2002. The contract
concluded on December 31, 2003.
11. SUBSEQUENT EVENTS
On March 31, 2004, the Company was awarded a $43,362,271, five-year,
cost-plus-fixed fee indefinite delivery/indefinite quantity contract to conduct
a micro satellite distributed sensing experiment, an option for a laser
communications experiment, and other micro satellite studies and experiments as
required in support of the Advanced Systems Deputate of the Missile Defense
Agency. This effort will be accomplished in a phased approach. The total
five-year contract has a ceiling amount of $43,362,271. The principal place of
performance will be Poway, California. The Company expects to complete the work
under the contract before February 2009. Government contract funds will not
expire at the end of the current government fiscal year. The micro satellite
distributed sensing experiment is intended to design and build up to six
responsive, affordable, high performance micro satellites to support national
missile defense. The milestone-based, multiyear, multiphase contract has an
effective start date of March 1, 2004. The first phase is expected to be
completed this year and will result in detailed mission and microsat designs.
The estimated first phase revenue is $1.1 million. The overall contract calls
for the Company to analyze, design, develop, fabricate, integrate, test, operate
and support a networked cluster of three formation-flying boost phase and
midcourse tracking microsatellites, with an option to design, develop,
fabricate, integrate, test, operate and support a second cluster of three
formation flying microsats to be networked on-orbit with high speed laser
communications technology. The second phase is anticipated to begin September
1, 2004 and run through 2005.
PAGE F-30
On March 31, 2004, the Company negotiated an amendment to its Secured
Convertible Note dated June 3, 2003 with the Laurus Master Fund to add a fixed
conversion price at $0.85 per share for the next $500,000 converted under the
revolving credit facility after the initial $1 million conversion. In exchange
for the amendment, Laurus granted the Company a six-month waiver to utilize the
full revolving credit facility in advance of eligible accounts. At December 31,
2003, Laurus had converted 415,000 shares under the revolving credit facility,
which represented approximately $228,000 of debt converted to equity.
PAGE F-31
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
At June 30,. . . . . . . . . . . .2004 2003
---------------------------- ---------- --------
ASSETS
CURRENT ASSETS
Cash . . . . . . . . . $1,226,529 $ 80,734
Accounts receivable. . 602,151 142,759
Work in Progress . . . 10,316 -
---------------------------- ---------- --------
Total current assets. . . . 1,838,996 223,493
---------------------------- ---------- --------
FIXED ASSETS - NET. . . . . 184,996 127,314
CAPITALIZED SOFTWARE COSTS - 33,375
OTHER ASSETS. . . . . . . . 30,574 34,502
---------------------------- ---------- --------
$2,054,566 $418,684
---------------------------- ---------- --------
---------------------------- ---------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-32
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
At June 30, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 2003
------------------------------------------------------------------------ ------------- -------------
LIABILITIES AND STOCKHOLDERS DEFICIT
CURRENT LIABILITIES
Current portion of notes payable . . . . . . . . . . . . . . . . . $ 35,778 $ 52,000
Current portion of capitalized lease obligations . . . . . . . . . 4,257 26,629
Note payable - related party (Note 3(b)) . . . . . . . . . . . . . 80,000 80,000
Convertible debt notes payable (Note 4). . . . . . . . . . . . . . - 332,847
Accounts payable and accrued expenses. . . . . . . . . . . . . . . 202,908 338,432
Accrued payroll, vacation and related taxes. . . . . . . . . . . . 252,221 122,129
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . 28,400 -
Provision for anticipated loss (Note 2). . . . . . . . . . . . . . - 5,174
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . - 2,526
Revolving credit facility (Note 3(c)). . . . . . . . . . . . . . . 408,003 -
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . 141,595 -
------------------------------------------------------------------------ ------------- -------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 1,153,162 959,737
------------------------------------------------------------------------ ------------- -------------
NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 3(A)). . . . . . . . . . . 28,021 65,260
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES. . . . . . . . . 3,445 6,558
NOTE PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES . . . . . . . . . 116,445 517,630
DEFERRED GAIN - ON BUILDING SALE (NOTE 3(A)). . . . . . . . . . . . . . 1,006,585 1,123,857
DEFERRED REVENUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 5,000
------------------------------------------------------------------------ ------------- -------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,312,658 2,678,042
------------------------------------------------------------------------ ------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS DEFICIT
Convertible preferred stock, $.001 par value, 10,000,000 shares
authorized no shares issued or outstanding. . . . . . . . . . - -
Common stock, $.0001 par value; 50,000,000 shares authorized, and
18,985,285 and 15,338,907 shares issued and outstanding,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . 1,898 1,533
Additional paid-in capital (Note 3(c), 4 & 5). . . . . . . . . . . 12,787,202 8,728,659
Additional paid-in capital - stock options . . . . . . . . . . . . 750,000 750,000
Deferred compensation (Note 5) . . . . . . . . . . . . . . . . . . (250,000) (250,000)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . (13,547,192) (11,489,550)
------------------------------------------------------------------------ ------------- -------------
TOTAL STOCKHOLDERS DEFICIT . . .. . . . . . . . . . . . . . . . . . . . (258,092) (2,259,358)
------------------------------------------------------------------------ ------------- -------------
$ 2,054,566 $ 418,684
------------------------------------------------------------------------ ------------- -------------
------------------------------------------------------------------------ ------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-33
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three and Six Months Ending Three-Months Ending Six-Months Ending
June 30, 2004 and 2003 2004 % 2003 % 2004 % 2003 %
--------------------------- ---- ------------ ------ ----------- ------- ------------ ------ ----------- -------
NET SALES . . . . . . . . . . $ 1,200,692 100.0% $ 753,956 100.0% $ 2,215,443 100.0% $ 1,286,795 100.0%
TOTAL COST OF SALES . . . . . 942,116 78.5% 577,874 76.6% 1,749,639 79.0% 1,039,484 80.8%
GROSS MARGIN. . . . . . . . . 258,576 21.5% 176,082 23.4% 465,804 21.0% 247,311 19.2%
-------------------------------- ----------- ------ ----------- ------- ------------ ------ ----------- -------
OPERATING EXPENSES
Marketing and sales expense. 116,132 9.7% 134,005 17.8% 215,284 9.7% 199,047 15.5%
Research and development . 19,500 1.6% 251,983 33.4% 34,804 1.6% 251,983 19.6%
General and administrative 90,079 7.5% 155,006 20.6% 170,931 7.7% 524,922 40.8%
------------------------------- ----------- ------ ----------- ------- ------------ ------ ----------- -------
TOTAL OPERATING EXPENSES. . . 225,711 18.8% 540,994 71.8% 421,019 19.0% 975,952 75.8%
------------------------------- ----------- ------ ----------- ------- ------------ ------ ----------- -------
PROFIT (LOSS) FROM OPERATIONS 32,865 2.7% (364,912) -48.4% 44,785 2.0% (728,641) -56.6%
-------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- ------
NON-OPERATING EXPENSE (INCOME)
Interest expense . . . . . . 19,736 1.6% 14,179 1.9% 39,524 1.8% 34,628 2.7%
Non-cash interest expense
debt discount (Note 4) . . - 0.0% 100,453 13.3% - 0.0% 200,908 15.6%
Gain on Building Sale(Note 3(a)) 29,318) -2.4% (29,318) -3.9% (58,636) -2.6% (48,863) -3.8%
Non-Cash Loan Fee -
Equity Conversions (Note 3(c)) 1,329,313 110.7% - 0.0% 1,793,313 80.9% - 0.0%
-------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
TOTAL NON-OPERATING EXPENSE . . 1,319,731 109.9% 85,314 11.3% 1,774,201 80.1% 186,673 14.5%
------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
LOSS BEFORE TAXES . . . .. . . (1,286,866) -107.2% (450,226) -59.7% (1,729,416) -78.1% (915,314) -71.1%
INCOME TAX PROVISION. . . . - 0.0% (37,474) -5.0% - 0.0% 2,526 0.2%
NET LOSS. . . . . . . . . . . $ (1,286,866) -107.2% $ (412,752) -54.7% $(1,729,416) -78.1% $ (917,840) -71.3%
-------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
NET LOSS PER SHARE:
Net loss . . . . . . . . . $ (0.07) $ (0.03) $ (0.09) $ (0.06)
-------------------------------- ------------ ------ ----------- ------- ------------ ------ ----------- -------
Weighted-Average Shares
Outstanding 17,986,803 15,092,489 17,410,651 15,092,489
----------------------------------- --------- ------ ----------- ------- ------------ ------ ----------- -------
----------------------------------- --------- ------ ----------- ------- ------------ ------ ----------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-34
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ending June 30, 2004 and 2003 . . . . . . . 2004 2003
--------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $(1,729,416) $ (917,840)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . . 32,487 106,201
Gain on building sale. . . . . . . . . . . . . . . . (58,636) (48,863)
Non-cash interest expense - convertible debt program - 200,908
Non-cash loan fees . . . . . . . . . . . . . . . . . 1,793,313 -
Change in operating assets and liabilities:. . . . . (274,410) (159,009)
--------------------------------------------------------------- ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . . . . . . . (236,662) (818,603)
--------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of building. . . . . . . . . . . . - 3,150,124
Purchases of fixed assets . . . . . . . . . . . . . . . . (79,951) (3,100)
--------------------------------------------------------------- ------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES . . . . . . (79,951) 3,147,024
--------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principle payments on notes payable . . . . . . . . . . . (23,792) (2,524,537)
Principal payments on capitalized lease obligations . . . (7,883) (16,741)
Payments on notes payable - related party . . . . . . . . (415,000) (159,999)
Proceeds from issuance of common stock. . . . . . . . . . 978,889 425,942
Proceeds from revolving credit facility . . . . . . . . . 418,922 -
--------------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. . . . . . 951,136 (2,275,335)
--------------------------------------------------------------- ------------ ------------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . 634,523 53,086
--------------------------------------------------------------- ------------ ------------
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . 592,006 27,648
--------------------------------------------------------------- ------------ ------------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . $ 1,226,529 $ 80,734
--------------------------------------------------------------- ------------ ------------
--------------------------------------------------------------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-35
SPACEDEV, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D.
(UNAUDITED)
For the Six Months Ending June 30, 2004 and 2003 . 2004 2003
--------------------------------------------------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . $82,614 $15,494
--------------------------------------------------- ------- -------
NONCASH INVESTING AND FINANCING ACTIVITIES:
--------------------------------------------------------------------------------
During the six-months ending June 30, 2004 the Company issued 1,403,182 shares
of its common stock to the Laurus Master Fund from conversions under its
revolving credit facility, thereby realizing a corresponding reduction in
current liabilities of approximately $772,000 The Company recorded
additional non-cash loan fees of approximately $1,178,000 and charged these
fees to expense.
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE F-36
SPACEDEV, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of SpaceDev, Inc. ("the
Company") include the accounts of the Company and its inactive subsidiary,
SpaceDev Oklahoma. In the opinion of management, the consolidated financial
statements reflect all normal and recurring adjustments, which are necessary for
a fair presentation of the Company's financial position, results of operations
and cash flows as of the dates and for the periods presented. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. Consequently, these
statements do not include all disclosures normally required by generally
accepted accounting principles of the United States of America for annual
financial statements nor those normally made in an Annual Report on Form 10-KSB.
Accordingly, reference should be made to the Company's Form 10-KSB filed on
April 6, 2004 and other reports the Company filed with the U.S. Securities and
Exchange Commission for additional disclosures, including a summary of the
Company's accounting policies, which have not materially changed. The
consolidated results of operations for the six-months ending June 30,
2004 are not necessarily indicative of results that may be expected for the
fiscal year ending December 31, 2004 or any future period, and the Company makes
no representations related thereto.
As of June 30, 2004, management continues the opinion that the Company's
auditors, PKF, expressed in their formal auditors' opinion dated February 11,
2004 (except for Note 11 as to which the date is April 2, 2004), that in
their opinion, based on their audit, the Company's consolidated financial
statements referred to herein present fairly, in all material respects, the
consolidated financial position of SPACEDEV, INC. AND SUBSIDIARY as of December
31, 2003, and the consolidated results of the Company's operations and cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. The accompanying
consolidated financial statements as of June 30, 2004 have been prepared
assuming the Company will continue as a going concern. During the first
six-months of 2004, the Company had a working capital balance of $685,834 and
incurred a net loss of $1,729,416 as compared to a working capital deficit of
$736,244 and a net loss of $917,840 for the same six-month period in 2003.
On March 31, 2004, the Company was awarded a $43,362,271 contract from the
Missile Defense Agency. The first task order was awarded on April 1,
2004. Management still intends to obtain new commercial and government
contracts, continue to utilize (and possibly expand) its revolving credit
facility and possibly raise some additional debt or equity capital in a public
or private offering or fund-raising effort. There can be no assurance that
existing contracts will be completed successfully or that new contracts or
additional debt or equity financing that may be needed to fund operations will
be available or, if available, obtained in sufficient amounts necessary to meet
the Company's needs. Management does believe that, if current contracts remain
on schedule and are funded as expected, they will be sufficient to fund the
Company through 2004.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities and the results of
PAGE F-37
operations during the reporting period. Actual results could differ materially
from those estimates.
Beginning in the second quarter of 2002, the Company's capitalized software
costs were amortized over their estimated useful lives using the straight-line
method. Periodically and at least annually, management performs a review for
impairment in accordance with SFAS No. 144. During the six-months ended June 30,
2003, these capitalized software costs were $70,133 leaving a balance of
$33,375, which was fully amortized in 2003.
2. REVENUE RECOGNITION
The Company's revenues for the six-months ended June 30, 2004 were derived
primarily from United States government cost plus fixed fee (CPFF) contracts
compared to a predominance of fixed price contracts for the same six-months in
2003. Revenues from the CPFF contracts during the first six-months of 2004 were
recognized as expenses were incurred compared to revenues from fixed price
contracts for the same period in 2003, which were recognized using the
percentage-of-completion method. Estimated contract profits are taken into
earnings in proportion to revenues recorded. Revenues under certain long-term
fixed price contracts, which provide for the delivery of minimal quantities or
require significant amounts of development effort in relation to total contract
value, are recorded upon achievement of performance milestones or using the
cost-to-cost method of accounting where revenues and profits are recorded based
on the ratio of costs incurred to estimated total costs at completion. Time and
material revenues are recognized as services are preformed and costs incurred.
Losses on contracts are recognized when estimated costs are reasonably
determined. Actual results of contracts may differ from management's estimates
and such differences could be material to the consolidated financial statements.
Professional fees are billed to customers on a time and materials basis, a fixed
price basis or a per-transaction basis depending on the terms and conditions of
the specific contract. Time and material revenues are recognized as services are
performed and costs incurred.
Deferred revenue represents amounts collected from customers for projects,
products or services to be provided at a future date. Deferred revenue for
the six-months ended June 30, 2004 and 2003 was $33,400 and $5,000,
respectively.
In November 1999, the Company was awarded a turnkey mission contract by
the Space Sciences Laboratory at the University of California at Berkeley worth,
as of December 31, 2003, approximately $7.4 million, including change
orders worth approximately $514,000. This contract represented 14% of the
Company's revenues for the year ending December 31, 2003. The contract
concluded on December 31, 2003. The micro satellite developed under this
mission, called CHIPSat, continues to operate successfully and UCB decided
to extend the mission. On February 25, 2004, a new time and materials purchase
order arrangement was initiated, on an as needed basis, between the
University of California at Berkeley and the Company.
3. NOTES PAYABLE
a) Building and Settlement Notes
In December 2002, the Company entered an agreement to sell its interest in its
facility. The transaction closed in January 2003. The escrow transaction
included the sale of the land and building. Net fixed assets were reduced by
approximately $1.9 million and notes payable were reduced by approximately $2.4
million while a deferred gain was recorded. In conjunction with the sale, the
Company entered into a lease agreement with the buyer to leaseback its
facilities. The Company's Chief Executive Officer provided a guarantee for the
leaseback. The gain on the sale of the facility was deferred and amortized in
proportion to the gross rental charged to expense over the lease term. Deferred
gain of $1,172,720 is being amortized at the rate of $117,272 per year for ten
PAGE F-38
(10) years ending in January 2013. As of June 30, 2004, the deferred gain
was $1,006,585. This amortization will be included in the Company's occupancy
and facility expense and totaled $58,636 and $48,863 for the six-months ending
June 30, 2004 and 2003, respectively.
Deferred Gain consisted of the following:
Six-Months Ending June 30, 2004
Original Deferred Gain $1,172,720
Less Amortization 2003 (107,499)
Less Amortization 2004 (58,636)
---------
$1,006,585
----------
In 2001, the Company entered into three settlement loan agreements with various
vendors. The total of $171,402 for all three loans called for payment between
24 and 50 months with interest that ranges from 0% to 8%. At June 30, 2004
and 2003, the outstanding balances on these notes were $63,799 and $117,260,
respectively, with interest expense for the six-months ending June 30, 2004 and
2003 of $1,847 and $2,685, respectively.
Future minimum principal payments on settlement notes are as follows:
Period Ended June 30,
----------------------------------
2004 $35,778
2005 28,021
2006 0
-------
Total Settlement Notes $63,799
---------------------- -------
b) Related Parties
The Company has a note payable to the CEO. At June 30, 2004 and 2003, the
balances were $196,445 and $597,630, respectively, with interest accruing at
10%. The note was amended on March 20, 2000 to call for annual payments of not
less than $80,000 per year with interest at 10%. The Company is currently making
principle and interest payments on the note.
Future minimum principal payments on note payable, related parties are as
follows:
Period Ending June 30,
----------------------------
2004 $80,000
2005 80,000
2006 36,445
2007 0
-------
$196,445
--------
Interest expense on this note was $25,923 and $23,633 for the six-month periods
ending June 30, 2004 and 2003, respectively.
PAGE F-39
c) Revolving Credit Facility.
On June 3, 2003, the Company entered into a Security Agreement, Secured
Convertible Note, Registration Rights Agreement and Common Stock Purchase
Warrant, with Laurus Master Fund, Ltd. ("Laurus"), which were filed on Form 8-K
dated June 18, 2003. Pursuant to the agreements, the Company received a $1
million revolving credit facility in the form of a three-year Convertible Note
secured by its assets. The net proceeds from the Convertible Note are used for
general working capital needs. Advances on the Convertible Note may be repaid at
the Company's option, in cash or through the issuance of the Company's shares of
common stock. The Convertible Note carries an interest rate of WSJ Prime plus
0.75% on any outstanding balance. In addition, the Company is required to pay a
collateral management payment of 0.55% of the average aggregate outstanding
balance during the month plus an unused line payment of 0.20% per annum.
Approximately $11,900 in interest and $16,255 in fees were accrued under the
revolving credit facility in the first six-months of 2004. The outstanding
balance on the revolving credit facility at June 30, 2004 was $408,003.
The Company filed Form SB-2 on July 25, 2003 in connection with this
transaction. The shares were registered with the Securities and Exchange
Commission ("SEC") for public resale on August 6, 2003. Once the market price
exceeded 118% of the fixed conversion price, which occurred on or about July 21,
2003, the Company obtained the ability to pay amounts outstanding under the
revolving credit facility in cash or shares of its common stock at the fixed
conversion price of $0.55 per share on the first $1 million of principal.
The Convertible Note includes a right of conversion in favor of Laurus. If
Laurus exercises its conversion right at any time or from time to time at or
prior to maturity, on any outstanding balance at the time, the Convertible Note
is convertible into shares of the Company's common stock at a fixed conversion
price, subject to adjustments for stock splits, combinations and dividends and
for shares of common stock issued for less than the fixed conversion price
(unless exempted pursuant to the agreements). The agreement was modified on
March 31, 2004 to provide for a six-month waiver to us and a fixed conversion
price to Laurus of $0.85 per share on the first $500,000 after the first $1
million. Thereafter, the fixed conversion price will be adjusted after
conversion of the first $1.5 million to 103% of the then fair market value of
our common stock ("Adjusted Fixed Conversion Price").
Laurus converted 1,403,182 shares to reduce the debt we owed by $771,750 for
the six-month period ending June 30, 2004. Laurus converted a total of
1,818,182 shares to reduce the debt by $1,000,000 since the inception of the
revolving credit facility. For the six-month period ending June 30, 2004, the
Company expensed $1,177,846 for the non-cash loan fee expense based on the fair
market value of the stock when Laurus converted and approximately $1,304,000 for
the non-cash loan fee expense since the inception of the revolving credit
facility. The fair market value used in 2003 was established using a 20%
discount to the closing price on the date of conversion based on the restricted
and thinly-traded nature of the Company stock in 2003 and the fair market value
used in 2004 was established using the closing price on the date of conversion
with no discount taken due to the increased volume of the Company's
stock.
Availability of funds under the revolving credit facility will be based on
the Company's accounts receivables, except as waivers are provided by
Laurus. An initial three (3) month waiver was offered by Laurus, under which
Laurus permitted a credit advance up to $300,000, which amount would have
otherwise exceeded eligible accounts receivable during the period. Laurus
subsequently extended the waiver for two additional six (6) month periods, under
which Laurus permitted a credit advance up to $1 million, which amount would
have otherwise exceeded eligible accounts receivable during the period.
The revolving credit facility is secured by all of the assets of the Company.
PAGE F-40
In conjunction with this transaction, Laurus was paid a fee of $20,000 for the
first year which was expensed as additional interest expense in 2003. The
Company is required to pay a continuation fee of $10,000 each
year thereafter. In addition, Laurus received a warrant to purchase 200,000
shares of the Company's common stock, as stated herein. The warrant exercise
price is computed as follows: $0.63 per share for the purchase of up to 125,000
shares; $0.69 per share for the purchase of an additional 50,000 shares; and
$0.80 per share for the purchase of an additional 25,000 shares. The warrant
exercise price may be paid in cash, in shares of the Company's common stock, or
by a combination of both. The warrant expiration date is June 3, 2008. The
warrant exercise price and the number of shares underlying the warrant are
subject to adjustments for stock splits, combinations and dividends.
In addition to the initial warrant, the Company is obligated to issue an
additional five-year warrant to Laurus to purchase one share of common stock at
an exercise price equal to 125% of the Adjusted Fixed Conversion Price for every
ten dollars ($10) in principal of the Convertible Note converted into common
stock if and when over $1 million is converted under the revolving credit
facility. The value of the warrant will be determined if and when issued, and
will be treated as additional interest expense and will be amortized over the
remaining term of the Convertible Note, unless sooner terminated. No more than
an aggregate of 100,000 shares of the Company's common stock may be purchased by
Laurus under such additional warrants.
The Company may terminate its agreements with Laurus before the end of the
initial three year term and Laurus will release its security interests upon
payment to Laurus of all obligations, if the Company has: (i) provided Laurus
with an executed release of all claims which the Company may have under the
agreements; and, (ii) paid to Laurus an early payment fee in an amount equal to
(x) four percent (4%) of the Capital Availability Amount if such payment occurs
prior to the first anniversary of the Initial Term (i.e., June 3, 2004); (y)
three percent ( 3%) of the Capital Availability Amount if such payment occurs
after the first anniversary and prior to the second anniversary of the Initial
Term; and, (z) two percent (2%) of the Capital Availability Amount if such
payment occurs after the second anniversary and prior to the end of the Initial
Term. The early payment fee is also due and payable by the Company to Laurus if
the Company terminates its Agreement after the occurrence of an Event of
Default, as defined in the agreements.
4. CONVERTIBLE DEBT NOTES PAYABLE
From October 14, 2002 through November 14, 2002, the Company sold an aggregate
of $475,000 of 2.03% convertible debentures to various directors and officers of
the Company. The total funding was completed on November 14, 2002. The
convertible debentures entitled the holder to convert the principal and unpaid
accrued interest into the Company's common stock when the notes matured. The
maturity on the notes was six (6) months from issue date. On March 25, 2003, an
amendment was executed which extended these notes an additional six (6) months.
The convertible debentures were exercisable into a number of the Company's
common shares at a conversion price that equals the 20-day average ask price
less 10%, which was, established when the note was issued, or the initial
conversion price.
Concurrent with the issuance of the convertible debentures, the Company issued
warrants to purchase up to 1,229,705 shares of the Company's common stock to the
subscribers. These warrants are exercisable for three (3) years from the date
of issuance at the initial exercise price, which is equal to the 20-day average
ask price less 10%, which was established when the notes were issued, or the
initial conversion price of the notes. Upon issuance, the issued warrants were
valued using the Black-Scholes pricing model based on the expected fair value at
issuance and the estimated fair value was recorded as debt discount. As a
result of the change to the maturity date of the convertible debt, the
amortization period for the debt discounts was also extended during the first
quarter in 2003.
PAGE F-41
All debt discounts are to be amortized as additional interest expense over the
term of the convertible debenture. As of June 30, 2003, $475,000 was
reflected as debt discount of which $200,908 was amortized to non-cash interest
expense for the six-months ending June 30, 2003. Fair market value of the
stock was determined by discounting the closing market price on the date of the
transaction by 20%, based on the nature of the restricted securities and thinly
traded stock.
On September 5, 2003, the Company repaid one-half of the convertible notes, with
the condition that the note holders convert the other half. Also, as a
condition of the partial repayment, the note holders were required to relinquish
one-half of the previously issued warrants. Finally, as additional
consideration for the transaction, the note holders were offered 5% interest on
their notes, rather than the stated 2.03%. All the note holders accepted the
offer and the convertible notes were retired.
Balances as of June30, 2004 were:
Convertible debentures - beginning balance . $ 475,000
Total interest expense incurred . . . . $ 20,236
Accrued interest paid - current year. . $ (18,161)
Accrued interest paid - prior year. . . $ (2,075)
Convertible debtures paid . . . . . . . $(237,500)
Convertible debtures converted. . . . . $(237,500)
----------
$(475,000)
----------
Convertible debentures - ending balance. . . $ 0
-------------------------------------------- ----------
Debt discount (Warrants) - beginning balance $ 475,000
Amount forfeited. . . . . . . . . . . . $(237,500)
Amount expensed prior year. . . . . . . $(125,000)
Amount expensed current year. . . . . . $(267,879)
Current year - adjustment . . . . . . . $ 155,379
----------
$(475,000)
----------
Debt discount (Warrants) - ending balance. . $ 0
-------------------------------------------- ----------
5. STOCKHOLDERS' EQUITY - COMMON STOCK AND WARRANTS
On November 5, 2000, the Company commenced a private placement offering ("PPO")
for a maximum of 1,000,000 shares of the Company's $0.0001 par value common
stock and warrants to purchase an additional 1,000,000 shares of common stock
(the "Units"). The offering price of the Units was the five-day average of the
bid and ask prices for the Company's common stock on the date of issuance, with
a minimum per Unit price of $1.00. The warrants allowed the holder to acquire
additional shares at $0.50 above the offering price of the shares. The Company
sold to one related-party investor under these terms.
On March 2, 2001, the PPO offering price was amended to the average of the high
bid prices on the date of issuance and four preceding days, with no minimum per
share price, and the warrants were amended to allow the holder to acquire
additional shares at the Unit price.
On January 16, 2003 and February 14, 2003, pursuant to an extension of the PPO,
the Company sold 665,188 and 196,079 Units, respectively. The Company received
approximately $326,000 and $100,000, respectively, for the Units sold under the
PPO during the first quarter 2003.
PAGE F-42
The Company has elected to account for its stock-based compensation plans under
APB 25. However, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during the period ending June 30, 2004 and
2003 using the minimum value method as prescribed by SFAS 123 and amended by
SFAS 148. Under this method, the Company used the risk-free interest rate at
the date of grant, the expected volatility, the expected dividend yield and the
expected life of the options to determine the fair value of options granted.
The risk-free interest rates ranged from 6.0% to 6.5%, expected volatility
was 117%, the dividend yield was assumed to be zero, and the expected
life of the options was assumed to be three to five years based on the average
vesting period of options granted.
If the Company had accounted for these options in accordance with SFAS 123, the
total value of options granted during the six-month period ending June 30, 2004
and 2003 would be amortized on a pro forma basis over the vesting period of the
options. Thus, the Company's consolidated net loss would have been as follows:
Six-Months Ending June 30, 2004 2003
----------------------------- -------------- ------------
Net loss:
----------------------------- -------------- ------------
As reported. . . . . . . . . $ (1,729,416) $ (917,840)
Pro forma. . . . . . . . . . $ (1,863,048) $(1,056,426)
Loss per Share:
----------------------------- -------------- ------------
As reported. . . . . . . . . $ (.09) $ (.06)
Pro forma. . . . . . . . . . $ (.10) $ (.07)
----------------------------- -------------- ------------
----------------------------- -------------- ------------
On November 21, 1997, the Company entered into a five (5) year employment
agreement with its CEO. On July 16, 2000, the Company amended the employment
agreement with its CEO extending the term until July 16, 2005. As part of the
original employment agreement, the Company granted options to the CEO to
purchase up to 2,500,000 shares of the Company's $.0001 par value restricted
common stock.
PAGE F-43
The options are subject to the following vesting conditions, which were amended
on January 21, 2000 and later ratified by the Board on July 16, 2000. The
agreement provided an option for the Board to award options on an additional
1,500,000 shares of restricted common stock at a later date. The exercise
prices are set forth in the following chart:
Exercise
Number price per
Of shares Vesting Conditions share
---------------- --------- ----------------------------------------------------------- -----------------
Granted Options:
500,000. . . . . Currently vested $ 1.00
500,000. . . . . Obtaining $6,500,000 additional equity capital $ 1.50
500,000. . . . . Financing and executing a definitive space launch agreement $ 2.00
500,000. . . . . Launching of first lunar or deep-space mission $ 2.50
500,000. . . . . Successful completion of first lunar or deep-space mission $ 3.00
Options to be
Granted upon
the Occurrence
of Certain Events:
250,000. . . . . Upon the Company market capitalization reaching $250 million $ 5.00
500,000. . . . . Upon the Company market capitalization reaching $500 million $ 10.00
750,000. . . . . Upon the Company market capitalization reaching $1 billion $ 20.00
---------------- --------- ----------------------------------------------------------- -----------------
All options expire on July 16, 2010.
In accordance with APB 25, the Company recognized $500,000 of compensation
expense and $250,000 of deferred compensation in 1997. The options granted to
the CEO are subject to vesting conditions and have exercise prices between $1.00
and $3.00 per share.
On August 27, 2001, as part of an annual review process, an additional 10,000
options were granted to the CEO at the exercise price of $0.9469 per share with
a set vesting schedule of 3,333 shares per year after issuance with the third
year having 3,334 options vest. These options expire five years from grant
date.
6. NEW ACCOUNTING PRONOUNCEMENTS
There were no recent Accounting Pronouncements that affect the Company during
the second quarter 2004. For past pronouncements please refer the
company's 10-KSB filed on April 6, 2004.
PAGE F-44
No dealer, sales person or other SPACEDEV, INC.
individual has been authorized to
give any information or make any
representations other than those
contained in this prospectus and, if 3,382,779 SHARES
given or made, such information or
representations must not be relied OF
upon as having been authorized by
us. This prospectus does not COMMON STOCK
constitute an offer to sell, or a
solicitation of an offer to buy, the
common stock offered hereby in
any jurisdiction where, or to any
person to whom, it is unlawful to
make an offer or solicitation.
Neither the delivery of this
prospectus nor any sale made
hereunder shall, under any
circumstances, create an implication PROSPECTUS
that there has been any change in
our affairs since the date hereof or
that the information contained
herein is correct or complete as of
any time subsequent to the date
hereof.
October 1, 2004
PAGE II-1
[Outside Back Cover of Prospectus]
PAGE II-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation provide that our directors, officers,
employees or agents shall be indemnified as to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, as long as the director, officer, employee or agent acted in good
faith and in a manner reasonably believed to be in the best interests of the
corporation. No indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his/her duty.
In addition, our Articles of Incorporation and Bylaws obligate us to
indemnify our directors and officers against expenses and other amounts
reasonably incurred in connection with any proceeding arising from the fact that
such person is or was an agent of ours. Our Articles of Incorporation and
Bylaws also authorize us to purchase and maintain insurance on behalf of any of
our directors or officers against any liability asserted against that person in
that capacity, whether or not we would have the power to indemnify that person.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses payable in connection with the distribution of the securities
being registered (estimated except for the registration fee), all of which will
be borne by the registrant, are as follows:
Securities and Exchange Commission Registration Fee $ 708
Printing Expenses . . . . . . . . . . . . . . . . . $ 1,000
Legal Fees and Expenses . . . . . . . . . . . . . . $20,000
Accounting Fees . . . . . . . . . . . . . . . . . . $10,000
Miscellaneous Expenses. . . . . . . . . . . . . . . $ 292
------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . $32,000
=================================================== =======
RECENT SALES OF UNREGISTERED SECURITIES
On March 2, 2001, we issued 50,000 shares of our common stock to our former
president, Mr. Stanley W. Dubyn, according to the terms of his employment
agreement with us. The common stock was issued with restrictions pursuant to
Section 4(2) of the Securities Act. Mr. Dubyn resigned his positions as our
president, chief operating officer and director on July 6, 2001.
During the first quarter of 2001, we issued a total of 17,247 shares to
consultants in exchange for services rendered to us. The shares were issued with
restrictions pursuant to Section 4(2) of the Securities Act.
In April 2001, we issued 66,667 shares of common stock and warrants to purchase
an additional 66,667 shares of common stock at an exercise price of $0.75 per
share to an individual investor in exchange for an investment of $50,000. This
purchase was made as a part of an accredited investor only, private placement
transaction under Rule 506 of Regulation D of the Securities Act of 1933.
PAGE II-3
During the second quarter of 2001, we issued a total of 500,000 shares to EMC
Holdings Corporation pursuant to Section 4(2) of the Securities Act for certain
consulting services. Due to teh failure of performance by EMC under the
consulting and advisory agreements between EMC and the Company, EMC's engagement
was terminated in late 2001, and the shares were recovered by us in arbitration.
On June 12, 2001 we issued 33,333 shares of common stock and warrants to
purchase an additional 33,333 shares of common stock at an exercise price of
$0.75 per share to an individual investor in exchange for an investment of
$25,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.
On June 20, 2001 we issued 33,333 shares of common stock and warrants to
purchase an additional 33,333 shares of common stock at an exercise price of
$0.75 per share to an individual investor in exchange for an investment of
$25,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.
On August 11, 2001, we issued a warrant to purchase 25,000 shares of
restricted common stock pursuant to its agreement to acquire the AMROC hybrid
motor technology. The exercise price of the warrant is $.877, based on the
five-day average closing price of our common stock on the date of grant. The
warrant was issued pursuant to Section 4(2) of the Securities Act of 1933 (the
"Act").
On September 18, 2001, we issued 23,419 shares of common stock and warrants
to purchase an additional 23,419 shares of common stock at an exercise price of
$0.854 per share to an individual investor in exchange for an investment of
$20,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.
During 2001, we issued a total of 105,599 shares to consultants, employees
and summer interns in exchange for services rendered to us and awards given by
us. The shares were issued with restrictions pursuant to Section 4(2) of the
Securities Act.
On November 21, 1997, we entered into a five-year employment agreement with
its President, James W. Benson. This agreement provides for compensation of
salary and stock as well as stock options. Our Board of Directors amended the
Employment contract for Mr. Benson at its meeting on July 16, 2000. The amended
agreement provides for the grant of options to purchase up to 4,000,000 shares
of our common stock upon the occurrence of certain events. Such options would be
immediately exercisable upon grant. The options are non-statutory stock options
issued outside of our 1999 Incentive Stock Option Plan and were originally
granted to Mr. Benson pursuant to Rule 701 of the Securities Act.
On March 14, 2002, we issued 40,816 shares of common stock and warrants to
purchase an additional 40,816 shares of common stock at an exercise price of
$0.49 per share to an individual investor in exchange for an investment of
$20,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.
On August 9, 2002, we issued 30,612 shares of common stock and warrants to
purchase an additional 30,612 shares of common stock at an exercise price of
$0.49 per share to an individual investor in exchange for an investment of
$15,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.
PAGE II-4
From October 14, 2002 through November 14, 2002, we sold an aggregate of
$475,000 of 2.03% convertible debentures to three of our directors and officers
pursuant to Section 4(2) of the Securities Act. Mr. Benson purchased $375,000
of Series A Subordinated Convertible Notes and Messrs. Shaffer and Skarupa
purchased $50,000 each. The total funding was completed on November 14, 2002.
The convertible debentures entitle the holder to convert the principal and
unpaid accrued interest into our common stock when the note matures. The notes
originally were set to mature six (6) months from issue date and were
subsequently extended to twelve (12) months from issue date on March 19, 2003,
unless paid, extended or re-negotiated, the convertible debentures are
exercisable into a number of our common shares at a conversion price that equals
the 20-day average asking price less 10%, which was established when the note
was issued, or the initial conversion price. Concurrent with the issuance of the
convertible debentures, we issued to the subscribers, warrants to purchase up to
1,229,705 shares of our common stock. These warrants are exercisable for three
(3) years from the date of issuance at the initial exercise price, which equals
to the 20-day average asking price less 10% which was established when the note
was issued, or the initial conversion price.
During 2002, we issued a total of 7,000 shares to employees and summer
interns in exchange for services rendered to us and awards given by us. The
shares were issued with restrictions pursuant to Section 4(2) of the Securities
Act.
On December 2, 2002, we issued 81,632 shares of common stock and warrants
to purchase an additional 81,632 shares of common stock at an exercise price of
$0.49 per share to two individual investors in exchange for an investment of
$40,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.
On January 21, 2003, we issued 665,188 shares of common stock and warrants
to purchase an additional 665,188 shares of common stock at an exercise price of
$0.49 per share to an individual investor in exchange for an investment of
$325,942. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.
On February 14, 2003, we issued 196,079 shares of common stock and warrants
to purchase an additional 196,079 shares of common stock at an exercise price of
$0.51 per share to an individual investor in exchange for an investment of
$100,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.
On June 3, 2003, we entered into a Security Agreement, Secured Convertible
Note, Registration Rights Agreement and Common Stock Purchase Warrant, with
Laurus Master Fund, Ltd., which were filed on Form 8-K dated June 18, 2003.
Pursuant to the agreements, we received a $1 million revolving credit facility
in the form of a three-year Convertible Note secured by its assets. The net
proceeds from the Convertible Note are used for general working capital needs.
Advances on the Convertible Note may be repaid at the our option, in cash or
through the issuance of our shares of common stock. The Convertible Note
carries an interest rate of WSJ Prime plus 0.75% on any outstanding balance. In
addition, we are required to pay a collateral management payment of 0.55% of the
average aggregate outstanding balance during the month plus an unused line
payment of 0.20% per annum. There was no outstanding balance on the revolving
credit facility at June 11, 2004.
PAGE II-5
On June 3, 2003, we issued warrants to purchase 200,000 shares of common
stock to Laurus Master Fund Ltd. The warrants were issued in three tranches:
warrants on 125,000 shares of common stock at an exercise price of $0.63 per
share; warrants on 50,000 shares of common stock at an exercise price of $0.69
per share; and warrants on 25,000 shares of common stock at an exercise price of
$0.80 per share. Also on June 3, 2003, we entered into a $1 million revolving
credit facility with the Laurus Master Fund, Ltd.
In July 2003, we issued a total of 2,100 shares to employees in exchange
for services rendered to us and awards given by us. The shares were issued with
restrictions pursuant to Section 4(2) of the Securities Act.
On August 8, 2003, we issued 10,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $5,500 reduction in our revolving credit facility. As
part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on August 6, 2003.
On September 1, 2003, we issued warrants to purchase 200,000 shares of
common stock to Dian Grisel of the Investor Relations Group ("IRG"), for public
and investor relations services. The warrants will vest ratably over one year
at an exercise price of $1.05 per share.
On September 23, 2003, we issued 50,000 shares of our common stock to
Laurus, pursuant to our Security Agreement, Secured Convertible Note,
Registration Rights Agreement and Common Stock Purchase Warrant with Laurus
dated June 3, 2003, for a corresponding $27,500 reduction in our revolving
credit facility. As part of the transaction, the shares were registered with
the Securities and Exchange Commission ("SEC") for public resale on August 6,
2003.
On October 3, 2003, we issued 55,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $30,250 reduction in our revolving credit facility.
As part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on August 6, 2003.
On October 14, 2003, we issued 100,000 shares of our common stock to
Laurus, pursuant to our Security Agreement, Secured Convertible Note,
Registration Rights Agreement and Common Stock Purchase Warrant with Laurus
dated June 3, 2003, for a corresponding $55,000 reduction in our revolving
credit facility. As part of the transaction, the shares were registered with
the Securities and Exchange Commission ("SEC") for public resale on August 6,
2003.
On December 11, 2003, we issued 100,000 shares of our common stock to
Laurus, pursuant to our Security Agreement, Secured Convertible Note,
Registration Rights Agreement and Common Stock Purchase Warrant with Laurus
dated June 3, 2003, for a corresponding $55,000 reduction in our revolving
credit facility. As part of the transaction, the shares were registered with
the Securities and Exchange Commission ("SEC") for public resale on August 6,
2003.
On December 29, 2003, we issued 100,000 shares of our common stock to
Laurus, pursuant to our Security Agreement, Secured Convertible Note,
Registration Rights Agreement and Common Stock Purchase Warrant with Laurus
dated June 3, 2003, for a corresponding $55,000 reduction in our revolving
credit facility. As part of the transaction, the shares were registered with
the Securities and Exchange Commission ("SEC") for public resale on August 6,
2003.
PAGE II-6
On January 9, 2004, we issued 300,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $165,000 reduction in our revolving credit facility.
As part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on August 6, 2003.
On March 3, 2004, we issued 200,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $110,000 reduction in our revolving credit facility.
As part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on August 6, 2003.
Pursuant to our independent director compensation plan, adopted January 16,
2000 and modified March 25, 2004, we granted options to purchase 5,000 shares
each to Curt Dean Blake, Wesley T. Huntress and Scott McClendon for their
attendance and participation at the Audit Committee Meeting held on March 23,
2004. These options were issued with an exercise price of $0.92 per share,
(based on the closing price of our common stock on the date of grant), will vest
over two-years and will expire on the three-year anniversary date of the date of
grant.
On March 31, 2004, we agreed to amend our Security Agreement and Secured
Convertible Note with the Laurus Master Fund, Ltd. to change certain terms of
the conversion price to allow for the next Five Hundred Thousand Dollars
($500,000) converted under the Note to be converted at eighty-five cents ($0.85)
per share of common stock. Thereafter, the fixed conversion price shall be
reset to equal 103% of the volume weighted average closing price of the common
stock for the ten (10) trading days prior to the last day on which such five
hundred thousand dollars ($500,000) has been converted. In exchange, Laurus
agreed to waive certain over advance compliance provisions for six (6) months.
On April 1, 2004, we issued 250,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $137,500 reduction in debt on our revolving
credit facility. As part of the transaction, the shares were registered with
the Securities and Exchange Commission ("SEC") for public resale on August 6,
2003.
On April 20, 2004, we issued 300,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $165,000 reduction in debt on our revolving
credit facility. As part of the transaction, the shares were registered with
the Securities and Exchange Commission ("SEC") for public resale on August 6,
2003.
On May 17, 2004, we issued 353,182 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $194,250 reduction in debt on our revolving credit
facility. As part of the transaction, the shares were registered with the
Securities and Exchange Commission ("SEC") for public resale on August 6, 2003.
On June 18, 2004, we issued warrants to purchase 50,000 shares of common
stock to Laurus Master Fund Ltd. The warrants were issued at an exercise price
of $1.0625 per share, were immediately vested and are exercisable over a five
(5) year period. The warrants were issued pursuant to Section 4(2) of the
Securities Act. As part of this transaction, the underlying shares are being
registered with the Securities and Exchange Commission ("SEC") for public
resale.
PAGE II-7
On July 12, 2004, we issued 41,876 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $35,595 reduction in debt on our revolving credit
facility. As part of the transaction, the shares were registered with the
Securities and Exchange Commission ("SEC") for public resale on July 1, 2004.
On August 25, 2004, we issued warrants to purchase 487,000 shares of common
stock to Laurus Master Fund Ltd. The warrants were issued at an exercise price
of $1.77 per share, were immediately vested and are exercisable over a five (5)
year period. The warrants were issued pursuant to Section 4(2) of the
Securities Act and Rule 506 promulgated thereunder. As part of this transaction,
the underlying shares are being registered with the Securities and Exchange
Commission ("SEC") for public resale.. Also on June 3, 2003, we entered into a
$1 million revolving credit facility with the Laurus Master Fund, Ltd.
On August 25, 2004, we issued 250,000 shares of our Series C Convertible
Cumulative Preferred Stock, with a stated value of $10.00 per share, to Laurus
Master Fund Ltd. for a total purchase price of $2,500,000. The preferred stock
was issued pursuant to Section 4(2) of the Securities Act and Rule 506
promulgated thereunder. As part of the transaction, 1,845,779 shares of Common
Stock underlying the preferred stock and cumulative dividends are being
registered with the Securities and Exchange Commission ("SEC") for resale.
On August 25, 2004, we issued warrants to purchase 50,000 shares of common
stock to Laurus Master Fund Ltd. The warrants were issued at an exercise price
of $1.9250 per share, were immediately vested and are exercisable over a five
(5) year period. The warrants were issued pursuant to Section 4(2) of the
Securities Act.As part of this transaction, the underlying shares are being
registered with the Securities and Exchange Commission ("SEC") for public
resale.. Also on June 3, 2003, we entered into a $1 million revolving credit
facility with the Laurus Master Fund, Ltd.
On September 3, 2004, we issued 100,000 shares of our common stock to
Laurus, pursuant to our Security Agreement, Secured Convertible Note,
Registration Rights Agreement and Common Stock Purchase Warrant with Laurus
dated June 3, 2003, for a corresponding $85,000 reduction in debt on our
revolving credit facility. As part of the transaction, the shares were
registered with the Securities and Exchange Commission ("SEC") for public resale
on July 1, 2004.
On September 10, 2004, we issued 150,000 shares of our common stock to
Laurus, pursuant to our Security Agreement, Secured Convertible Note,
Registration Rights Agreement and Common Stock Purchase Warrant with Laurus
dated June 3, 2003, for a corresponding $127,500 reduction in debt on our
revolving credit facility. As part of the transaction, the shares were
registered with the Securities and Exchange Commission ("SEC") for public resale
on July 1, 2004.
On September 17, 2004, we issued 100,000 shares of our common stock to
Laurus, pursuant to our Security Agreement, Secured Convertible Note,
Registration Rights Agreement and Common Stock Purchase Warrant with Laurus
dated June 3, 2003, for a corresponding $85,000 reduction in debt on our
revolving credit facility. As part of the transaction, the shares were
registered with the Securities and Exchange Commission ("SEC") for public resale
on July 1, 2004.
On September 22, 2004, we issued 150,000 shares of our common stock to
Laurus, pursuant to our Security Agreement, Secured Convertible Note,
Registration Rights Agreement and Common Stock Purchase Warrant with Laurus
dated June 3, 2003, for a corresponding $127,500 reduction in debt on our
revolving credit facility. As part of the transaction, the shares were
registered with the Securities and Exchange Commission ("SEC") for public resale
on July 1, 2004.
On September 27, 2004, we issued 9,603 shares of our common stock to
Laurus, pursuant to our Security Agreement, Secured Convertible Note,
Registration Rights Agreement and Common Stock Purchase Warrant with Laurus
dated June 3, 2003, for a corresponding $8,163 reduction in accrued interest on
our revolving credit facility. As part of the transaction, the shares were
registered with the Securities and Exchange Commission ("SEC") for public resale
on July 1, 2004.
PAGE II-8
EXHIBITS
ITEM EXH. NO.
-----------------------------------------------------------------------------------------------------------------
SpaceDev's Articles of Incorporation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1
SpaceDev's Articles of Amendment to Articles of Incorporation dated
November 4, 1997 Authorizing Series B Preferred Stock(1). . . . . . . . . . . . . . . . . . . . . 3.2
SpaceDev's Articles of Amendment to Articles of Incorporation dated
December 17, 1997 Changing Name to SpaceDev, Inc. (1) . . . . . . . . . . . . . . . . . . . . . . 3.3
SpaceDev's Bylaws(1) . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 3.4
SpaceDev's Articles of Amendment to Articles of Incorporation dated July 21, 2003
Increasing the Authorized Shares of Common Stock(10) . . . . . . . . . . . . . . . . . . . . . . . . . 3.5
Articles of Amendment to Articles of Incorporation dated August 30, 2004(14). . . . . . . . . . 3.6
Form of Common Stock Certificate(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1
Form of Non-Qualified Stock Option(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2
Form of Incentive Stock Option(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3
Form of Re-Pricing Warrant(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4
Form of Warrant(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5
1999 Stock Option Plan(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6
First Amendment to 1999 Stock Option Plan(10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7
1999 Employee Stock Purchase Plan(10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8
Form of Warrant from November 2, 2000 Private Placement (4). . . . . . . . . . . . . . . . . . . . . . 4.9
Common Stock Purchase Warrant-Phillips Aerospace (4) . . . . . . . . . . . . . . . . . . . . . . . . . 4.10
Note Purchase Agreement for Series A Subordinated Convertible Notes (6). . . . . . . . . . . . . . . . 4.11
Form of Series A Subordinated Convertible Note (6) . . . . . . . . . . . . . . . . . . . . . . . . . . 4.12
Form of Warrant for Series A Subordinated Convertible Note Offering (6). .. . . . . . . . . . . . . . . 4.13
Form of Certificate of Series C Preferred Stock (14). . . . . . . . .. . . . . . . . . . . . . . . . . 4.14
Form of Warrant, Dated August 25, 2004, by and among SpaceDev and Laurus(14). . . . . . . . . . . . . . 4.15
Opinion of Weintraub Dillon Dated September 17, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . 5.1
Common Stock Exchange Agreement Between SpaceDev and SIL (1) .. . . . . . . . . . . . . . . . . . . . . 10.1
Mutual Rescission and Release of Share Acquisition Agreement (1). . . . . . . . . . . . . . . . . . . . 10.2
Share Exchange Agreement Between SpaceDev and Integrated Space Systems (1) . . . .. . . . . . . . . . . 10.3
Agreement of License and Purchase of Technology Between SpaceDev and AMROC (1) . .. . . . . . . . . . . 10.4
Firm Fixed Price Agreement Number 108252 Between SpaceDev and Regents
of the University of California (1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5
Employment Agreement between Integrated Space Systems and Charles H. Lloyd (1) . . . . . . . . . . . . 10.6
Employment Agreement of James W. Benson (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.7
Deed of Counter-Indemnity dated August 28, 1999 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8
PAGE II-9
Financial Advisory Services Agreement, dated June 18, 2001 (5). . . . . . . . . . . . . . . . . . . . . 10.9
Consultant/Advisory Services Agreement, dated June 18, 2001 (5). . . . . . . . . . . . . . . . . . . . 10.10
Employment Agreement between SpaceDev, Inc. and Stuart Schaffer, dated May 17, 2002(7). . . . . . . . 10.11
First Amendment to Employment Agreement with Stuart Schaffer, dated May 17, 2002(7). . . . . . . . . . 10.12
Employment Agreement between SpaceDev, Inc. and Emery Skarupa, dated May 24, 2002(7). . . . . . . . . . 10.13
Confidential Separation Agreement and General Release of Claims, dated May 31, 2002(7). . . . . . . . . 10.14
Code of Business Conduct and Ethics(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.15
Employment Agreement between SpaceDev and Richard B. Slansky, dated February 10, 2003(7) . . . . . . . 10.16
Second Amendment to Series A Subordinated Convertible Note - Benson1, dated March 25, 2003(7). . . . . 10.17
Second Amendment to Series A Subordinated Convertible Note - Benson2, dated March 25, 2003(7). . . . . 10.18
Second Amendment to Series A Subordinated Convertible Note - Benson3, dated March 25, 2003(7). . . . . 10.19
Second Amendment to Series A Subordinated Convertible Note - Benson4, dated March 25, 2003(7). . . . . 10.20
Second Amendment to Series A Subordinated Convertible Note - Skarupa, dated March 25, 2003(7). . . . . 10.21
Second Amendment to Series A Subordinated Convertible Note - Schaffer, dated March 25, 2003(7). . . . . 10.22
Security Agreement, dated as of June 3, 2003, by and between SpaceDev, Inc.
("SpaceDev") and Laurus Master Fund, Ltd. ("Laurus")(9). . . . . . . . . . . . . . . . . . . . . . 10.23
Secured Convertible Note, dated June 3, 2003, by and among SpaceDev and Laurus(9) . . . . . . . . . . . 10.24
Common Stock Purchase Warrant, dated June 3, 2003, issued by SpaceDev to Laurus(9). . . . . . . . . . . 10.25
Registration Rights Agreement, dated as of June 3, 2003, by and between SpaceDev and Laurus(9). . . . . 10.26
Waiver Letter, dated June 3, 2003, by and between SpaceDev and Laurus(9) . . . . . . . . . . . . . . . 10.27
Separation Agreement and General Release, by and between SpaceDev and
Stuart Schaffer dated July 2, 2003(10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.28
AFRL Small Vehicle Launch Technology SBIR contract(11) . . . . . . . . . . . . . . . . . . . . . . . . 10.29
AFRL Small Satellite Bus Technologies SBIR contract(11) . . . . . . . . . . . . . . . . . . . . . . . . 10.30
AFRL Small Shuttle Compatible Propulsion Module contract(11). . . . . . . . . . . . . . . . . . . . . . 10.31
MDA Advanced Systems Deputate for the Micro Satellite Experiment(11). . . . . . . . . . . . . . . . . . 10.32
PAGE II-10
MDA Advanced Systems Deputate for the Micro Satellite Experiment (Modification) (11). . . . . . . . . . 10.33
Lunar Enterprises of California contract(11). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.34
Hybrid Rocket Motor Systems and Components contract*(11). . . . . . . . . . . . . . . . . . . . . . . . 10.35
Third Amendment to Series A Subordinated Convertible Note - Benson1, dated Sept. 5, 2003(11) . . . . . 10.36
Third Amendment to Series A Subordinated Convertible Note - Benson2, dated Sept. 5, 2003(11) . . . . . 10.37
Third Amendment to Series A Subordinated Convertible Note - Benson3, dated Sept. 5, 2003(11) . . . . . 10.38
Third Amendment to Series A Subordinated Convertible Note - Benson4, dated Sept. 5, 2003(11) . . . . . 10.39
Third Amendment to Series A Subordinated Convertible Note - Skarupa, dated Sept. 5, 2003(11) . . . . . 10.40
Third Amendment to Series A Subordinated Convertible Note - Schaffer, dated Sept. 5, 2003(11) . . . . 10.41
Employment Offer between SpaceDev and Dario Emanuel DaPra, dated November 17, 2003(12). . . . . . . . . 10.42
Employment Offer between SpaceDev and Randall K. Simpson, dated Jan. 16, 2004(12). . . . . . . . . . . 10.43
Confidential Separation Agreement and General Release of Claims with Mr. DaPra,
dated March 18, 2004(12). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.47
Missile Defense Agency Contract with SpaceDev, dated March 31, 2004*(12). . . . . . . . . . . . . . . . 10.48
Amendment No. 1 to Note with the Laurus Master Fund, dated March 31, 2004(12) . . . . . . . . . . . . . 10.49
Waiver Letter from Laurus Master Fund, dated March 31, 2004(12) . . . . . . . . . . . . . . . . . . . . 10.50
First Task Order Under Missile Defense Agency Contract with SpaceDev, dated April 1, 2004. . . . . . . . 10.51
Separation Agreement and General Release, by and between SpaceDev and Jeffrey
Janicik dated June 18, 2004 (13). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.52
Modification to Small Shuttle Compatible Propulsion Module contract with AFRL dated July 7, 2004(13) . . 10.53
Lunar Enterprises of California contract with SpaceDev dated July 20, 2004(13). . . . . . . . . . . . . 10.54
Security Purchase Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(14). . . . . . . 10.55
Registration Rights Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(14). . . . . . . 10.56
Letter Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(14). . . . . . . . . . . . . 10.57
PAGE II-11
Air Force Research Laboratories contract with SpaceDev dated as of August 23, 2004(15). . . . . . . . . 10.58
Air Force Research Laboratories Statement of Work*(15). . . . . . . . . . . . . . . . . . . . . . . . . 10.59
List of Subsidiaries of the Company(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.1
Letter from Nation Smith dated June 4, 2003 (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.1
SB-2 Consent Letter from Nation Smith dated October 1, 2004. . . . . . . . . . . . . . . . . . . . . . 23.2
SB-2 Consent Letter from PKFdated October 1, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.3
Consent of Weintraub Dillon PC (included in Exhibit 5.1 hereto) . . . . . . . . . . . . . . . . . . . . 23.4
PAGE II-12
____________________
(1) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Form 10-SB (File #000-28947).
(2) Incorporated by reference to Exhibit 10.1 previously filed as an Exhibit to
Registrant's Form 10-QSB filed on August 10, 2000.
(3) Incorporated by reference to Exhibit 10.2 previously filed as an Exhibit to
Registrant's Form 8-K filed on September 20, 2000.
(4) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Form 10-KSB filed on April 2, 2001.
(5) Incorporated by reference to Exhibits 10.1 and 10.2 previously filed as an
Exhibit to Registrant's Form 8-K filed on July 19, 2001.
(6) Incorporated by reference to Exhibits 4.1, 4.2 and 4.3 previously filed as
an Exhibit to Registrant's Form 10-QSB filed on November 14, 2002.
(7) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Form 10-KSB filed on March 28, 2003.
(8) Incorporated by reference to Exhibits 16.1 previously filed as an Exhibit
to Registrant's Form 8-K filed on June 4, 2003.
(9) Incorporated by reference to Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5
previously filed as an Exhibit to Registrant's Form 8-K filed on June 18,
2003.
(10) Incorporated by reference to Exhibit 10.27 previously filed as an Exhibit
to Registrant's Form SB-2 on July 25, 2003.
(11) Incorporated by reference to Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6,
10.7, 10.8, 10.9, 10.10, 10.11, 10.12 and 10.13 previously filed as an
Exhibit to Registrant's Form 10-QSB on November 12, 2003.
(12) Incorporated by reference to Exhibits 10.37, 10.38, 10.39, 10.40, 10.41,
10.42, 10.43, and 10.44 previously filed as an Exhibit to Registrant's Form
10-KSB filed on April 6, 2004.
(13) Incorporated by reference to Exhibits 10.1, 10.2 and 10.3 previously
filed as an Exhibit to Registrant's Form 10-QSB on August 9, 2004.
(14) Incorporated by reference to Exhibits 3.1, 4.1, 4.2, 10.1, 10.2 and 10.3
previously filed as an Exhibit to Registrant's Form 8-K filed on August 30,
2004.
(15) Incorporated by reference to Exhibits 10.1 and 10.2 previously filed as an
Exhibit to Registrant's Form 8-K filed on September 1, 2004.
* Registrant requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with the
Commission.
PAGE II-13
UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) to reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) to include any additional or changed material information on the plan
of distribution.
Provided however, that paragraphs (1)(i) and (1)(ii) shall not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) For determining liability under the Securities Act of 1933, to treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or controlling
persons of the registrant pursuant to the foregoing provisions or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
PAGE II-14
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 to be signed on its
behalf by the undersigned, in the City of San Diego, California, on the 1st
day of October 2004.
SpaceDev, Inc.
By: /s/ James W. Benson
-----------------------------
James W. Benson, Chief Executive Officer
By: /s/ Richard B. Slansky
-------------------------------
Richard B. Slansky, Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and directors
of SpaceDev, Inc., a Colorado corporation that is filing a registration
statement on Form SB-2 with the Securities and Exchange Commission
under the provisions of the Securities Act of 1933, as amended, hereby
constitute and appoint James W. Benson and Richard B. Slansky, and each of them,
their true and lawful attorneys-in-fact and agents; with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign such registration statement and any or all
amendments to the registration statement, including a prospectus or an amended
prospectus therein, and all other documents in connection therewith to be filed
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all interests and purposes as they might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
PAGE II-15
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
following capacities on the dates indicated.
Name Title . . . . . . . . . . . . . . . . . . . . . . . . . . . Date
-------------------------- -------------------------------------------------------------------------- -------------
/s/ James W. Benson Chairman of the Board, Chief Executive . . .. . . . . . . . . . . . . . . October 1, 2004
-------------------------- Officer and Director (principal executive
James W. Benson officer)
/s/ Richard B. Slansky Chief Financial Officer and Corporate . . . . . . . . . . . . . . . . . . . October 1, 2004
--------------------------- Secretary
Richard B. Slansky
/s/ Curt Dean Blake Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 1, 2004
------------------------
Curt Dean Blake
/s/ Howell M. Estes, III Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 1, 2004
------------------------
Howell M. Estes, III
/s/ Wesley T. Huntress Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .October 1, 2004
----------------------------
Wesley T. Huntress
/s/ Scott McClendon Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .October 1, 2004
-------------------------
Scott McClendon
/s/ Stuart Schaffer Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 1, 2004
----------------------
Stuart Schaffer
/s/ Robert S. Walker Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 1, 2004
-------------------------
Robert S. Walker
PAGE II-16
INDEX TO EXHIBITS FILED WITH THIS REGISTRATION STATEMENT
ITEM EXH. NO.
-----------------------------------------------------------------------------------------------------------------
SpaceDev's Articles of Incorporation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1
SpaceDev's Articles of Amendment to Articles of Incorporation dated
November 4, 1997 Authorizing Series B Preferred Stock(1). . . . . . . . . . . . . . . . . . . . . 3.2
SpaceDev's Articles of Amendment to Articles of Incorporation dated
December 17, 1997 Changing Name to SpaceDev, Inc. (1) . . . . . . . . . . . . . . . . . . . . . . 3.3
SpaceDev's Bylaws(1) . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 3.4
SpaceDev's Articles of Amendment to Articles of Incorporation dated July 21, 2003
Increasing the Authorized Shares of Common Stock(10) . . . . . . . . . . . . . . . . . . . . . . . . . 3.5
Articles of Amendment to Articles of Incorporation dated August 30, 2004(14). . . . . . . . . . . . . . 3.6
Form of Common Stock Certificate(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1
Form of Non-Qualified Stock Option(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2
Form of Incentive Stock Option(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3
Form of Re-Pricing Warrant(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4
Form of Warrant(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5
1999 Stock Option Plan(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6
First Amendment to 1999 Stock Option Plan(10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7
1999 Employee Stock Purchase Plan(10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8
Form of Warrant from November 2, 2000 Private Placement (4). . . . . . . . . . . . . . . . . . . . . . 4.9
Common Stock Purchase Warrant-Phillips Aerospace (4) . . . . . . . . . . . . . . . . . . . . . . . . . 4.10
Note Purchase Agreement for Series A Subordinated Convertible Notes (6). . . . . . . . . . . . . . . . 4.11
Form of Series A Subordinated Convertible Note (6) . . . . . . . . . . . . . . . . . . . . . . . . . . 4.12
Form of Warrant for Series A Subordinated Convertible Note Offering (6). .. . . . . . . . . . . . . . . 4.13
Form of Certificate of Series C Preferred Stock (14). . . . . . . . .. . . . . . . . . . . . . . . . . 4.14
Form of Warrant, Dated August 25, 2004, by and among SpaceDev and Laurus(14). . . . . . . . . . . . . . 4.15
Opinion of Weintraub Dillon Dated September 17, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . 5.1
Common Stock Exchange Agreement Between SpaceDev and SIL (1) .. . . . . . . . . . . . . . . . . . . . . 10.1
Mutual Rescission and Release of Share Acquisition Agreement (1). . . . . . . . . . . . . . . . . . . . 10.2
Share Exchange Agreement Between SpaceDev and Integrated Space Systems (1) . . . .. . . . . . . . . . . 10.3
Agreement of License and Purchase of Technology Between SpaceDev and AMROC (1) . .. . . . . . . . . . . 10.4
Firm Fixed Price Agreement Number 108252 Between SpaceDev and Regents
of the University of California (1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5
Employment Agreement between Integrated Space Systems and Charles H. Lloyd (1) . . . . . . . . . . . . 10.6
PAGE II-17
Employment Agreement of James W. Benson (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.7
Deed of Counter-Indemnity dated August 28, 1999 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8
Financial Advisory Services Agreement, dated June 18, 2001 (5). . . . . . . . . . . . . . . . . . . . . 10.9
Consultant/Advisory Services Agreement, dated June 18, 2001 (5). . . . . . . . . . . . . . . . . . . . 10.10
Employment Agreement between SpaceDev, Inc. and Stuart Schaffer, dated May 17, 2002(7). . . . . . . . 10.11
First Amendment to Employment Agreement with Stuart Schaffer, dated May 17, 2002(7). . . . . . . . . . 10.12
Employment Agreement between SpaceDev, Inc. and Emery Skarupa, dated May 24, 2002(7). . . . . . . . . . 10.13
Confidential Separation Agreement and General Release of Claims, dated May 31, 2002(7). . . . . . . . . 10.14
Code of Business Conduct and Ethics(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.15
Employment Agreement between SpaceDev and Richard B. Slansky, dated February 10, 2003(7) . . . . . . . 10.16
Second Amendment to Series A Subordinated Convertible Note - Benson1, dated March 25, 2003(7). . . . . 10.17
Second Amendment to Series A Subordinated Convertible Note - Benson2, dated March 25, 2003(7). . . . . 10.18
Second Amendment to Series A Subordinated Convertible Note - Benson3, dated March 25, 2003(7). . . . . 10.19
Second Amendment to Series A Subordinated Convertible Note - Benson4, dated March 25, 2003(7). . . . . 10.20
Second Amendment to Series A Subordinated Convertible Note - Skarupa, dated March 25, 2003(7). . . . . 10.21
Second Amendment to Series A Subordinated Convertible Note - Schaffer, dated March 25, 2003(7). . . . . 10.22
Security Agreement, dated as of June 3, 2003, by and between SpaceDev, Inc.
("SpaceDev") and Laurus Master Fund, Ltd. ("Laurus")(9). . . . . . . . . . . . . . . . . . . . . . 10.23
Secured Convertible Note, dated June 3, 2003, by and among SpaceDev and Laurus(9) . . . . . . . . . . . 10.24
Common Stock Purchase Warrant, dated June 3, 2003, issued by SpaceDev to Laurus(9). . . . . . . . . . . 10.25
Registration Rights Agreement, dated as of June 3, 2003, by and between SpaceDev and Laurus(9). . . . . 10.26
Waiver Letter, dated June 3, 2003, by and between SpaceDev and Laurus(9) . . . . . . . . . . . . . . . 10.27
Separation Agreement and General Release, by and between SpaceDev and
Stuart Schaffer dated July 2, 2003(10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.28
AFRL Small Vehicle Launch Technology SBIR contract(11) . . . . . . . . . . . . . . . . . . . . . . . . 10.29
AFRL Small Satellite Bus Technologies SBIR contract(11) . . . . . . . . . . . . . . . . . . . . . . . . 10.30
PAGE II-18
AFRL Small Shuttle Compatible Propulsion Module contract(11). . . . . . . . . . . . . . . . . . . . . . 10.31
MDA Advanced Systems Deputate for the Micro Satellite Experiment(11). . . . . . . . . . . . . . . . . . 10.32
MDA Advanced Systems Deputate for the Micro Satellite Experiment (Modification) (11). . . . . . . . . . 10.33
Lunar Enterprises of California contract(11). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.34
Hybrid Rocket Motor Systems and Components contract*(11). . . . . . . . . . . . . . . . . . . . . . . . 10.35
Third Amendment to Series A Subordinated Convertible Note - Benson1, dated Sept. 5, 2003(11) . . . . . 10.36
Third Amendment to Series A Subordinated Convertible Note - Benson2, dated Sept. 5, 2003(11) . . . . . 10.37
Third Amendment to Series A Subordinated Convertible Note - Benson3, dated Sept. 5, 2003(11) . . . . . 10.38
Third Amendment to Series A Subordinated Convertible Note - Benson4, dated Sept. 5, 2003(11) . . . . . 10.39
Third Amendment to Series A Subordinated Convertible Note - Skarupa, dated Sept. 5, 2003(11) . . . . . 10.40
Third Amendment to Series A Subordinated Convertible Note - Schaffer, dated Sept. 5, 2003(11) . . . . 10.41
Employment Offer between SpaceDev and Dario Emanuel DaPra, dated November 17, 2003(12). . . . . . . . . 10.42
Employment Offer between SpaceDev and Randall K. Simpson, dated Jan. 16, 2004(12). . . . . . . . . . . 10.43
Confidential Separation Agreement and General Release of Claims with Mr. DaPra,
dated March 18, 2004(12). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.47
Missile Defense Agency Contract with SpaceDev, dated March 31, 2004*(12). . . . . . . . . . . . . . . . 10.48
Amendment No. 1 to Note with the Laurus Master Fund, dated March 31, 2004(12) . . . . . . . . . . . . . 10.49
Waiver Letter from Laurus Master Fund, dated March 31, 2004(12) . . . . . . . . . . . . . . . . . . . . 10.50
First Task Order Under Missile Defense Agency Contract with SpaceDev, dated April 1, 2004. . . . . . . . 10.51
Separation Agreement and General Release, by and between SpaceDev and Jeffrey
Janicik dated June 18, 2004 (13). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.52
Modification to Small Shuttle Compatible Propulsion Module contract with AFRL dated July 7, 2004(13) . . 10.53
Lunar Enterprises of California contract with SpaceDev dated July 20, 2004(13). . . . . . . . . . . . . 10.54
Security Purchase Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(14). . . . . . . 10.55
PAGE II-19
Registration Rights Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(14). . . . . . . 10.56
Letter Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(14). . . . . . . . . . . . . 10.57
Air Force Research Laboratories contract with SpaceDev dated as of August 23, 2004(15). . . . . . . . . 10.58
Air Force Research Laboratories Statement of Work*(15). . . . . . . . . . . . . . . . . . . . . . . . . 10.59
List of Subsidiaries of the Company(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.1
Letter from Nation Smith dated June 4, 2003 (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.1
SB-2 Consent Letter from Nation Smith dated October 1, 2004. . . . . . . . . . . . . . . . . . . . . . . 23.2
SB-2 Consent Letter from PKFdated October 1, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.3
Consent of Weintraub Dillon PC (included in Exhibit 5.1 hereto) . . . . . . . . . . . . . . . . . . . . 23.4
PAGE II-20
____________________
(1) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Form 10-SB (File #000-28947).
(2) Incorporated by reference to Exhibit 10.1 previously filed as an Exhibit to
Registrant's Form 10-QSB filed on August 10, 2000.
(3) Incorporated by reference to Exhibit 10.2 previously filed as an Exhibit to
Registrant's Form 8-K filed on September 20, 2000.
(4) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Form 10-KSB filed on April 2, 2001.
(5) Incorporated by reference to Exhibits 10.1 and 10.2 previously filed as an
Exhibit to Registrant's Form 8-K filed on July 19, 2001.
(6) Incorporated by reference to Exhibits 4.1, 4.2 and 4.3 previously filed as
an Exhibit to Registrant's Form 10-QSB filed on November 14, 2002.
(7) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Form 10-KSB filed on March 28, 2003.
(8) Incorporated by reference to Exhibits 16.1 previously filed as an Exhibit
to Registrant's Form 8-K filed on June 4, 2003.
(9) Incorporated by reference to Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5
previously filed as an Exhibit to Registrant's Form 8-K filed on June 18,
2003.
(10) Incorporated by reference to Exhibit 10.27 previously filed as an Exhibit
to Registrant's Form SB-2 on July 25, 2003.
(11) Incorporated by reference to Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6,
10.7, 10.8, 10.9, 10.10, 10.11, 10.12 and 10.13 previously filed as an
Exhibit to Registrant's Form 10-QSB on November 12, 2003.
(12) Incorporated by reference to Exhibits 10.37, 10.38, 10.39, 10.40, 10.41,
10.42, 10.43, and 10.44 previously filed as an Exhibit to Registrant's Form
10-KSB filed on April 6, 2004.
(13) Incorporated by reference to Exhibits 10.1, 10.2 and 10.3 previously
filed as an Exhibit to Registrant's Form 10-QSB on August 9, 2004.
(14) Incorporated by reference to Exhibits 3.1, 4.1, 4.2, 10.1, 10.2 and 10.3
previously filed as an Exhibit to Registrant's Form 8-K filed on August 30,
2004.
(15) Incorporated by reference to Exhibits 10.1 and 10.2 previously filed as an
Exhibit to Registrant's Form 8-K filed on September 1, 2004.
* Registrant requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with the
Commission.
PAGE II-21