U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission file number 000-28947
SPACEDEV, INC.
(Name of small business issuer in its charter)
Colorado 84-1374613
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification number)
13855 Stowe Drive, Poway, California
92064
(Address of principal executive offices)
(Zip Code)
Issuer's telephone number, including area code: (858) 375-2030
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
each class is registered
None. None.
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $2,956,322
The aggregate market value of the voting stock held by non affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock as of March 4, 2004 was $1.10, based on the last sale
price of $1.14 as reported by the NASD Over the Counter Bulletin Board.
As of March 4, 2004, Registrant had outstanding 17,023,704 shares of common
stock, its only class of common equity outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]
TABLE OF CONTENTS
PART I 1
ITEM 1. DESCRIPTION OF BUSINESS 1
Forward Looking Statements 1
General 1
Business Strategy 4
Products and Services; Market 5
Components and Raw Materials 8
Competition 8
Regulation 9
Employees 10
Intellectual Property 10
ITEM 2. DESCRIPTION OF PROPERTY 11
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
PART II 13
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 13
Market Information 13
Holders 13
Dividends 14
Equity Compensation Plan Information 14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
Overview 15
Selection of Significant Contracts 16
Results of Operations 20
Liquidity and Capital Resources 28
Critical Accounting Standards 29
Cash Position and Removal of Going Concern 30
Recent Accounting Pronouncements 32
Forward-Looking Statements and Risk Analysis 34
ITEM 7. FINANCIAL STATEMENTS 37
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 37
ITEM 8A. CONTROLS AND PROCEDURES 38
PART III 39
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT 39
Significant Employees 43
Committees Of The Board Of Directors And Meeting Attendance 43
ITEM 10. EXECUTIVE COMPENSATION 44
Executive Officer Compensation 44
Director Compensation 45
Employment Agreements 46
Employee Benefits 47
Section 16(A) Beneficial Ownership Reporting Compliance 47
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 49
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 51
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 52
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 54
SIGNATURES 55
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 57
CERTIFICATION OF CHIEF FINANCIAL OFFICER 59
CONSOLIDATED FINANCIAL STATEMENTS F-1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
FORWARD LOOKING STATEMENTS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without limitation 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 report to conform such
statements to actual results or to changes in our expectations.
Actual results could differ materially from those anticipated by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the level of sales to key
customers; the economic conditions affecting our industry; actions by
competitors; fluctuations in the price of raw materials; the availability of
outside contractors at prices favorable to the Company; our dependence on
single-source or a limited number of suppliers; our ability to protect our
proprietary technology; market conditions influencing prices or pricing; an
adverse outcome in potential litigation, claims and other actions by or against
us, technological changes and introductions of new competing products;
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.
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 micro-satellites,
nano-satellites 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 nano-satellites, hybrid rocket-based launch vehicles, orbital Maneuvering
and orbital Transfer Vehicles ("MoTVs") 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.
1
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 ("AFRL"), Boeing, the California Space
Authority ("CSA"), the Defense Advanced Research Projects Agency ("DARPA"),
NASA's Jet Propulsion Laboratory ("JPL"), Lockheed Martin, the Lunar Enterprise
Corporation, Malin Space Science Systems, the Missile Defense Agency ("MDA"
formerly "BMDO"), the National Reconnaissance Office ("NRO"), Scaled Composites
and the University of California at Berkeley ("UCB") 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 ("ISS"), in San Diego.
ISS was fully integrated into SpaceDev. Most of the ISS 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.
In August 1998, we acquired the patents and intellectual property produced by
American Rocket Company ("AMROC"). The acquisition 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.
2
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 JPL to perform a mission and spacecraft feasibility assessment
study for the proposed 200-kg Mars MicroMissions. The final report was delivered
to JPL 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 NRO 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 ("MoTV") development
programs.
In November 1999, we won a $4.9 million mission contract by the Space Sciences
Laboratory ("SSL") at UCB. 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 NRO 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 NRO has helped fund two innovative
hybrid rocket motor products:
- a family of small versatile orbital Maneuver and orbit Transfer Vehicles
("MoTVs") using clean, safe hybrid rocket propulsion technology; and,
- a protoflight hybrid propulsion module for a 50-kg class micro-satellite.
Both of those contracts were successfully completed.
3
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, this historic
flight is the first human flight 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, the Company was 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 MoTV 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. In
addition, Phase II can be expanded with an option, at the discretion of AFRL,
for an additional $1 million, which we expect may be awarded by spring 2004.
Congress has already appropriated money for this project.
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;
4
- 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
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,
MoTV (Maneuvering and orbital Transfer Vehicle) and Hybrid Propulsion and Launch
Vehicle Systems;
- Our Subsystem Products - MFC (miniature flight computer), MS-VOS (micro
space vehicle operating system), PC-DS (power conditioning and distribution
system) and MST (miniature S-band transceiver); 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 JPL 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
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 micro-satellites (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.
5
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 UCB Space Sciences Laboratory's ("SSL") Cosmic Hot Interstellar Plasma
Spectrometer ("CHIPS") mission. CHIPSat was launched at 4:45 PM PST on January
12, 2003 from Vandenberg Air Force Base in California. The satellite achieved
3-axis stabilization with all individual components and systems successfully
operating and continues to work well in orbit.
Maneuvering and orbital Transfer Vehicle ("MoTV") - Our MoTV system is a family
of small, affordable, elegantly simple, throttleable, and restartable propulsion
and integrated satellite products. Our MoTV can be used as a standard propulsion
module to transport a customer's payload to different orbits. The MoTV provides
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 technology to develop the
responsive, affordable SpaceDev Streaker(TM) small launch vehicle under an Air
Force contract.
OUR SUBSYSTEM PRODUCTS
------------------------
Miniature Flight Computer ("MFC") - Our MFC is a high performance 300 million
instructions per second ("MIPS") 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 MFC 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.
6
Micro Space Vehicle Operating System ("MS-VOS") - Our MS-VOS is a small, fast,
modular and layered operating system, similar to the operating systems of
microcomputers. The modular nature of our MS-VOS 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 MS-VOS 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.
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 ("MST") and Miniature S-Band Receiver ("MSR")
are cost-effective solutions for low cost and low mass spacecraft. The MST and
MSR 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 UNEX Program and the first and only
successful UNEX mission to date. The MST and MSR 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. Many of our products and services are now qualified or are
nearing qualification to assist with missions that orbit the earth, travel to
another planetary body, or cruise through space taking measurements and
transmitting valuable data back to Earth.
7
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 ("MFC") is only 24 cubic inches and provides 300 million instructions
per second ("MIPS") of processing power versus a competitor's more "traditional"
solution that requires about 63 cubic inches and only provides 10 MIPS.
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,
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, similar to the cluster
of microsats we are developing for the Missile Defense Agency, 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. Furthermore, we have not
experienced difficulty in our ability to obtain our parts or component
materials, nor do we expect this to be an issue in the future.
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.
8
The primary domestic competition for unmanned earth-orbiting micro-satellites,
unmanned deep space micro-spacecraft and micro-satellite 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 micro-satellites;
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
corporate goals to design and build inexpensive micro-spacecraft for a mission,
which would be our direct competition.
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 the Company's
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. The failure of the Company 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.
9
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 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 deep 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
JPL. 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 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.
10
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
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.
ITEM 2. 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.] 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.
ITEM 3. 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.
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.
11
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the fourth
quarter of our fiscal year ended December 31, 2003.
12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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.
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
HOLDERS
As of March 4, 2004, there were over 200 holders of record of our common stock.
We estimate the total number of beneficial owners of our common stock to be in
excess of 2,500 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.
13
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 in
the foreseeable future.
EQUITY COMPENSATION PLAN INFORMATION
EQUITY COMPENSATION PLAN INFORMATION
(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 . . . . . . . . . 3,124,807 $ 0.93 1,022,891
approved by
security holders
Equity . . . . . . . . . . . . . . . 2,500,000 $ 2.00 0
compensation plans
not approved by
security holders
Total. . . . . . . . . . . . . . . . 5,624,807 $ 1.47 1,022,891
------------------------------------ --------------------------- ------------------- --------------------------
14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without limitation our General Registration Statement on Form 10SB12G/A filed
January 28, 2000 as well as any or all of our recent filings including prior
year 10-KSB and quarterly 10-QSB filings.
In addition to historical information, the following discussion and other parts
of this document may contain forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of the forward-looking statements. We
undertake no obligation to publicly update any of the forward-looking statements
after the date of this report to conform such statements to actual results or to
changes in our expectations.
Actual results could differ materially from those anticipated by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the level of sales to key
customers; the economic conditions affecting our industry; actions by
competitors; fluctuations in the price of raw materials; the availability of
outside contractors at prices favorable to the Company; our dependence on
single-source or a limited number of suppliers; our ability to protect our
proprietary technology; market conditions influencing prices or pricing; an
adverse outcome in potential litigation, claims and other actions by or against
us; technological changes and introductions of new competing products; the
current recession; terrorist attacks or acts of war, particularly given the acts
of terrorism against the United States on September 11, 2001 and subsequent
military responses by the United States and coalition forces; mission disasters
such as the loss of the space shuttle Columbia on February 1, 2003 during its
re-entry into earth's atmosphere; ability to retain key personnel; changes in
market demand; exchange rates; productivity; weather; and market and economic
conditions in the areas of the world in which we operate and market our
products. These are factors that we think could cause our actual results to
differ materially from expected and historical events.
OVERVIEW
We are engaged in the conception, design, development, manufacture, integration
and operations of space technology systems, products and services. We are
currently focused on the commercial and military development of low-cost
micro-satellites, nano-satellites and related subsystems, hybrid rocket
propulsion for space, launch and human flight vehicles as well as associated
engineering and technical services primarily to government agencies, and
specifically the Department of Defense. Our products and solutions are sold,
mainly on a project-basis, directly to these customers and include sophisticated
micro- and nano-satellites, hybrid rocket-based launch vehicles, Maneuvering and
orbital Transfer Vehicles ("MoTVs") as well as safe sub-orbital and orbital
hybrid rocket-based propulsion systems. Although we believe there will be a
commercial market for our micro-satellite and nano-satellite products and
services in the long-term, the early adopters of this technology appears to be
the military and our "products" are considered to be the outcome of specific
projects. We are also developing commercial hybrid rocket motors for possible
use in small launch vehicles, targets and sounding rockets and small high
performance space vehicles and subsystems for commercial customers.
15
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 $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. 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 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 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 September 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 & 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 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. 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.
16
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 believe that there is a possibility for 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. This
phase, if awarded, would be targeted for a mid-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 the contract will be awarded to us. Revenues for the year
ending December 31, 2003 were approximately $70,000.
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. This second contract is being considered an investigatory
phase by MDA. (See Note 11. Subsequent Events to the Consolidated Financial
Statements.)
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. 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.
17
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 and software interfaces. The contract is fixed price, milestone-based
and should be completed within one year. We believe that this SBIR will move
into Phase II valued at approximately $750,000 of carry-forward work for us;
however, there can be no assurance that such work will be awarded to us.
Revenues for the year ending December 31, 2003 were approximately $40,000.
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 contract. We anticipate that to
complete AFRL Phase II, additional time and funding will be required. We are
currently negotiating with the AFRL for a small extension of Phase II in order
to complete the work, which we anticipate will be granted in the second quarter
of 2004. In addition to the Phase I and Phase II awards, there is an option
worth approximately $1 million pending initiation. The option has been awarded
and work will begin once certain milestones are met to the satisfaction of the
AFRL project manager. The additional funding to complete AFRL Phase II may come
from the $1 million option; thereby, requiring a reduction in the original scope
of the option. We anticipate a successful resolution to the AFRL II contract
extension. Revenues for the year ending December 31, 2003 were approximately
$29,600 for Phase I and $997,000 for Phase II.
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.
18
In September 2001, we were awarded a contract for a proprietary propulsion
research program (for what is now called Scaled Composites' SpaceShipOne) valued
at approximately $1.6 million. Total revenue was extended to $1.8 million in
April 2002 and the contract expired on July 31, 2003, after all work on Phase II
was completed. As a part of this commercial propulsion program, we competed
with another vendor to design a hybrid propulsion system. On September 19,
2003, we won the competition and were awarded an exclusive contract for the
proprietary components and technology to power the hybrid rocket motor. The new
total contract value is estimated to be approximately $650,000. Revenues from
this contract during the year ending December 31, 2003 were approximately
$80,000 and we anticipate that the contract will continue providing revenue
opportunity for us through 2004. In addition, there have been several time and
materials engineering work orders issued to support the ongoing program, during
2003 we received approximately $35,000 in revenue from these work orders and
expect continuation of this work during 2004.
In April 2001, we were awarded one of four $1.0 million contracts from NASA's
Jet Propulsion Laboratory in Pasadena, California. As part of a Boeing-led team,
we participated in a study of the options for a potential Mars sample return
mission in 2011. The contract ran from April through October 2001. Our revenue
from this contract in 2002 was approximately $7,000 and there was no revenue
from this contract in 2003.
In November 1999, we won a $4.9 million turnkey mission contract by the Space
Sciences Laboratory ("SSL") at UCB. We were competitively selected by UCB/SSL
to design, build, integrate, test and operate, for one year, a small
NASA-sponsored scientific, Earth-orbiting spacecraft called CHIPSat. CHIPSat is
the first and only successful mission of NASA's low-cost University-Class
Explorer ("UNEX") series to date. CHIPSat launched as a secondary payload on a
Delta-II rocket on January 12, 2003. The satellite achieved 3-axis
stabilization, meaning it was pointing and tracking properly, with all
individual components and systems successfully operating and is continuing to
work well in orbit after one year. In 2000, we reviewed the contract status at
year-end and determined that the total estimated costs at the end of the program
would exceed the likely revenue. As a result, we accrued a loss of
approximately $860,000 based on the expected contract modification of $600,000,
which was approved on June 15, 2001. On November 28, 2001, a second contract
modification was signed with UCB, which added approximately $1.2 million to the
contract as well as an increase in contract scope. This increased the total
contract revenue to approximately $6.8 million and reduced the total expected
loss on the contract to approximately $460,000. During 2002, an additional
contract modification for approximately $400,000 was signed, which also
increased the contract value and increased the scope of the contract to the
current value of the CHIPSat project of approximately $7.4 million, thereby
increasing the total expected loss to approximately $514,000. In retrospect,
some of the CHIPSat expenses creating the loss could have been recorded as
research and development costs associated with our ongoing satellite design and
development programs. As of December 31, 2003, the total contract costs were
expended. Revenues for the years ending 2003 and 2002 were approximately
$356,000 and $1.7 million, respectively. 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
recently negotiated a new time and materials contract in the form of a purchase
order with UCB for continuing support of this project.
19
In February 1998, our operations were expanded with the acquisition of
Integrated Space Systems, Inc. ("ISS"), a California corporation founded for the
purpose of providing engineering and technical services related to space-based
systems. The ISS employee base, acquired upon acquisition, largely consisted of
former commercial Atlas launch vehicle engineers and managers who worked for
General Dynamics and expanded our then current employee base to 20 employees.
ISS was purchased for approximately $3.6 million, paid in Rule 144 restricted
common shares of SpaceDev. Goodwill of approximately $3.5 million was
capitalized and was to be amortized over a period of 60 months, based on the
purchase price exceeding the net asset value of approximately $164,000. As a
result of a change in corporate focus, on November 15, 2001, we determined that
the unamortized balance of goodwill from ISS, which was approximately $923,000,
had become impaired and it was written off. While the ISS segment did provide
small hybrid propulsion space systems and engineering services on separate
contracts (mainly with government agencies), the engineering service contracts
had expired and, therefore, would not be producing revenue or cash flow to
support future operations. We determined that all future business, contracts
and proposals would be sought after only in the SpaceDev name, making it a more
efficient way for us to manage and track multiple contracts and work on many
different business ventures at the same time within the same operating segment.
All activities have been integrated into SpaceDev, Inc. and we filed for
dissolution of ISS in December 2003.
RESULTS OF OPERATIONS
Please refer to the consolidated financial statements, which are a part of this
report, for further information regarding the results of operations.
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
outstanding government grants, approximately $70,000 from Phase I of the AFRL
project and approximately $130,000 from all other programs.
20
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 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,
offset by a reduction in G&A labor expense of $92,000 primarily due to the loss
of our Vice President of Operations.
21
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 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.
22
The following table reconciles EBITDA to net loss for the twelve-months ending
December 31, 2003 and 2002, respectively:
FOR THE TWLEVE-MONTHS ENDING DECEMBER 31, 2003 DECEMBER 31, 2002
(UNAUDITED) (UNAUDITED)
------------------ ------------------
NET LOSS (INCOME). . . . . . . . . . . (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
-------------------------------------- ------------------ ------------------
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.
23
[GRAPHIC OMITED]
24
QUARTER ENDED DECEMBER 31, 2003 -VS.- QUARTER ENDED DECEMBER 31, 2002
SPACEDEV, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-MONTHS ENDING
(UNAUDITED)
THREE-MONTHS ENDING DECEMBER 31,. . . . . . . . . . . 2003 % 2002 %
--------------------------------------------------------------------------------------------------------------
NET SALES . . . . . . . . . . . . . . . . . . . . . . $ 901,746 100% $ 800,594 100%
--------------------------------------------------------------------------------------------------------------
Cost of sales . . . . . . . . . . . . . . . . . . . . 732,573 81% 1,197,675 150%
Anticipated loss on uncompleted contract (Note 10(c)) - (58,941) -7%
--------------------------------------------------------------------------------------------------------------
TOTAL COST OF SALES . . . . . . . . . . . . . . . . . 732,573 81% 1,138,734 142%
GROSS MARGIN. . . . . . . . . . . . . . . . . . . . . 169,173 19% (338,140) -42%
OPERATING EXPENSES
Marketing and sales expense. . . . . . . . . . . . 83,606 9% 99,114 12%
Research and development . . . . . . . . . . . . . 8,743 1% - 0%
Stock and stock option based compensation. . . . . 4,485 0% 457,000 57%
General and administrative . . . . . . . . . . . . 84,050 9% (285,813) -36%
EMC - stock based compensation (Note 8(b)) . . . . - 0% (455,000) -57%
--------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES. . . . . . . . . . . . . . . 180,884 20% (184,699) -23%
INCOME/(LOSS) FROM OPERATIONS . . . . . . . . . . . . (11,711) -1% (153,441) -19%
NON-OPERATING EXPENSE/(INCOME)
Interest expense . . . . . . . . . . . . . . . . . 26,809 3% 78,375 10%
Non-cash interest expense debt discount (Note 5) . - 0% 125,000 16%
Gain on Building Sale (Note 4(a)). . . . . . . . . (29,318) -3% - 0%
Loan Fee - Equity Compensation (Note 4(c) & 5) . . 109,470 12% - 0%
--------------------------------------------------------------------------------------------------------------
TOTAL NON-OPERATING EXPENSE/(INCOME). . . . . . . . . 106,961 12% 203,375 25%
LOSS BEFORE INCOME TAXES. . . . . . . . . . . . . . . (118,672) -13% (356,816) -45%
Income tax provision (Notes 1(j) and 6) . . . . . . . 1,600 0% 1,600 0%
--------------------------------------------------------------------------------------------------------------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . $ (120,272) -13% $ (358,416) -45%
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE:
Net loss. . . . . . . . . . . . . . . . . . . . . . $ (0.01) $ (0.03)
--------------------------------------------------------------------------------------------------------------
Weighted-Average Shares Outstanding . . . . . . . . 16,282,485 14,394,183
--------------------------------------------------------------------------------------------------------------
NOTE: THE NUMBERS PRESENTED IN THE CHART ABOVE WERE NOT AUDITED OR REVIEWED FOR
THE THREE-MONTH PERIODS ENDING DECEMBER 31, 2003 AND 2002, RESPECTIVELY. WE,
AND NOT OUR AUDITORS, ARE RESPONSIBLE FOR THEIR FAIR PRESENTATION IN CONFORMITY
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
25
During the three-months ending December 31, 2003, we had net sales of
approximately $902,000 as compared to net sales of approximately $801,000 for
the same three-month period in 2002. Sales increased primarily due to the
follow-on contracts for AFRL, MDA and SpaceShipOne being implemented during this
period. Sales in the fourth quarter 2003 reflected the next phases of the
exclusive proprietary propulsion contract (SpaceShipOne), as well as, MDA, AFRL
and the completion of the Lunar Enterprises project. Revenues for the
three-months ending December 31, 2003 were comprised of approximately $336,000
from MDA Phase II, $321,000 from AFRL Phase II, $102,000 from our new
SpaceShipOne contract, approximately $54,000 from two AFRL SBIR projects,
approximately $30,000 form the contract by Lunar Enterprises of California,
approximately $24,000 from the completion of the CHIPSat program and
approximately $35,000 from all other programs. In the three-months ended
December 31, 2002, sales were comprised of approximately $490,000 from the
CHIPSat program, approximately $145,000 from the original SpaceShipOne
propulsion development program, approximately $129,000 from the completion of
our outstanding government grants, approximately $30,000 from Phase I of the
AFRL project and approximately $7,000 from all other programs.
For the three-months ending December 31, 2003, we had costs of sales (direct and
allocated costs associated with individual contracts) of approximately $723,000,
or 80% of net sales, as compared to approximately $1,139,000 or 142% of net
sales, during the same three-month period in 2002. The reduction in cost of
sales was primarily attributable to the completion of contracts with recorded
losses and the improvement in project monitoring and management. In 2002, we
recorded certain costs in the fourth quarter related to project cost overruns.
We recorded a corresponding increase in the gross margin percentage for the
three-months ending December 31, 2003, which increased to 19.8% as compared to
(42%) for the same three-month period in 2002. We also experienced a shift in
business from firm fixed price to cost-plus fixed fee projects, with the award
of AFRL Phase II in the second quarter and the start of our newest MDA project
during the third quarter of 2003. AFRL Phase II and the MDA project are both
cost-plus fixed fee programs, which lower the risk to us but limit the upside
potential. We believe most of our revenue will continue to come from projects
over the next three to five years. In the long-term, i.e., five to ten years,
we intend to develop a healthy mix of cost plus fixed fee projects as a solid
base and firm fixed price projects to generate additional margin while
transitioning us from a project-oriented company to a product-oriented company.
We experienced an increase of approximately $364,000 in operating expenses from
approximately ($183,000), or (22%) of net sales, in the three-months ending
December 31, 2002 to approximately $181,000, or 20% of net sales, for the same
three-months period in 2003. Operating expenses include general and
administrative expenses and marketing and sales expenses, as well as research
and development expenses. The following comparisons are based on total
operating expenses excluding the effects of the one-time EMC reversal.
26
- Marketing and sales expenses accounted for an increase of approximately
17% in operating expenses, from approximately $21,000, or 2% of net sales, for
the three-months ending December 31, 2002, to approximately $84,000 or 9% of net
sales, during the same period in 2003, mainly due to the decision to expand our
marketing and sales department including having our CEO, Mr. Benson, lead our
marketing & sales efforts with most of his expenses being charged to this
department.
- Research and development expenses accounted for an increase of
approximately 3% in operating expenses from no recorded R&D expenses during the
three-months ending December 31, 2002 to approximately $9,000 during the same
three-month period in 2003. We are beginning to separate investments in
technology development (i.e., general R&D for the future advancement of our
technology) from direct costs on current projects (i.e., specific R&D related to
the current contract and projects at hand).
- G&A expenses accounted for an approximately 80% increase in operating
expenses. G&A expenses consist primarily of salaries for administrative
personnel, fees for outside consultants, rent, insurance, legal and accounting
fees and other overhead expenses. We experienced an increase of approximately
$292,000 in G&A expenses from approximately ($204,000) for the three-months
ending December 31, 2002 to approximately $88,500 for the same three-month
period in 2003. This increase was due to a number of factors, including a
one-time re-classification and allocation of certain overhead costs into costs
of goods sold in order to move more toward full absorption costing and more
accurately reflect costs in excess of billing during the final quarter of 2002.
Non-operating expense/(income) consists of interest expense, non-cash debt
discount expenses, deferred gain on the sale of our building, other loan fees
and expenses.
- Interest expense for the three-months ending December 31, 2003 and 2002
was approximately $27,000, or 2% of net sales, and $78,000, or 9% 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 and paid interest
expense related to our related party note and convertible debentures. In the
three-month period ending December 31, 2003 and 2002, the accrued interest on
our related party note was $19,000 and $11,000 respectively. We also paid
approximately $18,000 in interest on our convertible notes for the three-months
ending December 31, 2003. We also accrued approximately $7,000 of interest and
$109,000 of non-cash loan fees on our revolving credit facility for the
three-month period 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 was reduced to $237,500. The reduction is exclusively
attributable to forfeiture of half of the original warrants. During the
three-month period ending December 31, 2002, a debt discount of $125,000 was
recorded where no debt discount remained for the three-month period ending
December 31, 2003.
- We recognized approximately $29,000 of the deferred gain on the sale of
the building during the three-months 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. 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
$109,000 for the three-month period ending December 31, 2003. We anticipate
additional expenses related to similar note to equity conversions in the
quarters ahead.
27
During the three-month period ending December 31, 2003, we incurred a net loss
of approximately $120,000, or 12% of net sales, compared to a loss of
approximately $358,000, or 44% of net sales, for the same three-months ending in
2002. During the three-month period ending December 31, 2003, we incurred an
EBITDA (earnings before interest taxes depreciation and amortization) of
approximately $2,200, or 1% of net sales, compared to an EBITDA of approximately
<$14,000>, or 2% of net sales, for the same three-months ending in 2002. The
following table reconciles EBITDA to net loss for the three-months ending
December 31, 2003 and 2002, respectively:
FOR THE THREE-MONTHS ENDING DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------------------------- ------------------ ------------------
(UNAUDITED) (UNAUDITED)
------------------ ------------------
NET LOSS (INCOME) (120,272) (358,417)
-------------------------------------- ------------------ ------------------
Interest Expense . . . . . . . . . . . 26,809 78,375
Non-Cash Interest exp. (Debt Discount) (0) 125,000
Gain on Building Sale. . . . . . . . . (29,318) 0
Loan Fee - Equity Compensation. . . . 109,470 0
Provision for income taxes . . . . . . 1,600 1,600
Depreciation and Amortization. . . . . 13,948 139,488
-------------------------------------- ------------------ ------------------
EBITDA . . . . . . . . . . . . . . . . 2,237 (13,954)
-------------------------------------- ------------------ ------------------
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 significant
improvement in bottom line performance from quarter to quarter in 2003 can be
attributed to: 1) the financial controls implemented by our new CFO; 2) tighter
management of projects, project schedules, project costs and project issues by
the management team; 3) greater technological experience as we move down the
development pathway; and, 4) growing revenues as new projects and contracts are
acquired.
LIQUIDITY AND CAPITAL RESOURCES
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.
28
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 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, the Company has 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.
CRITICAL ACCOUNTING STANDARDS
Our revenues transitioned in 2003 from being primarily fixed-price contracts,
where revenues are recognized using the percentage-of-completion method of
contract accounting based on the ratio of total costs incurred to total
estimated costs, to cost-plus 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.
29
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.
Fixed assets are depreciated over their estimated useful lives of three-to-five
years using the straight-line method of accounting in accordance with SFAS No.
144. Goodwill and other intangible assets were created upon the acquisition of
our subsidiaries. Intangible assets are amortized over their assets' estimated
future useful lives on a straight-line basis over three-to-five years. Goodwill
and other intangibles are periodically reviewed for impairment based on an
assessment of future operations to ensure they are appropriately valued in
accordance with SFAS No. 142. Since November 2001, there has been no
amortization of goodwill. (See Notes to the Consolidated Financial Statements.)
CASH POSITION AND REMOVAL OF GOING CONCERN
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) 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 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 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
MDA, 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. Management believes 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. 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 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 reduce the working capital deficit by raising additional capital. We are
working with our revolving credit facility provider and investigating the
possibility of raising additional capital to further support operations as new
contracts and business opportunities materialize. The prospective funding, as
well, as new business opportunities, can come from a variety of sources,
including public or private equity markets, state and federal grants and
government and commercial customer program funding. However, there can be no
assurance that we will be able to obtain such funding or contracts as needed or,
if such funding or contracts are available, that we can obtain 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.
30
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 approximate net proceeds to us for working
capital purposes was approximately $636,000. However, due to delays in closing
new business and previous customer schedule slips in 2002 and early 2003, we
remain in a tight cash position.
At the end of 2002, we raised $475,000 from certain of our directors and
officers by issuing 2.03% convertible debentures. The convertible debentures
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.
During the year ending December 31, 2003, we raised approximately $426,000 from
accredited investors by selling 861,267 units of our common stock and common
stock purchase warrants under in a private placement offering ("PPO") made under
Section 4(2) of the Securities Act of 1933, and Rule 506, to accredited
investors only . We subsequently closed the PPO. (See Note 8 of the Consolidated
Financial Statements.)
31
We have sustained ourselves over the last few years with a mixture of government
and commercial contracts and capital raised in the private market. In
particular, we anticipated and received an award for AFRL Phase II on March 28,
2003. AFRL Phase II is a cost-plus contract, which has required us to incur
certain costs in advance of regular contract reimbursements from AFRL. 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 to support our advance
payment needs. In addition, we anticipated and received the initial
investigatory contract from the MDA to explore the use of micro-satellites in
national missile defense. On February 29, 2004, we concluded the study to
explore a mission with a fast response microsat launch and commissioning; small,
low-power passive sensors; formation flying and local area networking within a
cluster of microsats; and an extension of our proven use of the Internet for
on-orbit command, control and data handling. The purchase order was valued at
$800,000 and was a cost plus fixed fee agreement. The final retention payment
of approximately $33,000 will be made after the final report is approved by MDA.
In anticipation that the new $43,362,271 contract would be awarded to us, we
agreed to begin work on the MDA program on March 1, 2004. MDA agreed to make
the effective date of the agreement March 1, 2004, when it was awarded. Again,
our newly awarded $43,362,271 MDA contract is a phased contract and we can give
no assurance that the entire contract will be realized by us, even though we
have begun work on the next phase and we currently anticipate the successful
completion of future phases.
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 December 31, 2003, Laurus
had converted 415,000 shares under the revolving credit facility, which
represented approximately $228,000 of debt converted to equity.
We expect to begin showing a positive cash flow in the first part of 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 for 2004, that net positive cash flow from operations will be
sufficient to fund both operations and capital expenditures in 2004. There is
no assurance, however, that we will achieve or sustain any positive cash flow or
profitability now or thereafter.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
32
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 November 2002, FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 elaborates on previously
existing disclosure requirements for most guarantees. It also clarifies that at
the time a company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it assumes
under the guarantee and must disclose that information in its financial
statements. The provisions related to recognizing a liability at inception of
the guarantee for the fair value of the guarantor's obligations does not apply
to product warranties or to guarantees accounted for as derivatives. FIN No. 45
also requires expanded disclosures regarding product warranty expense. The
initial recognition and initial measurement provisions apply on a prospective
basis to guarantees issued or modified after December 31, 2002. The adoption of
this Statement did not have a material effect on the consolidated financial
statements.
In January 2003, FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51." This interpretation provides
guidance on: 1) the identification of entities for which control is achieved
through means other than through voting rights, known as "variable interest
entities" (VIEs); and 2) which business enterprise is the primary beneficiary
and when it should consolidate the VIE. This new model for consolidation applies
to entities: 1) where the equity investors (if any) do not have a controlling
financial interest; or 2) whose equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, this interpretation requires
that both the primary beneficiary and all other enterprises with a significant
variable interest in a VIE make additional disclosures. This interpretation is
effective for all new VIEs created or acquired after January 31, 2003. For VIEs
created or acquired prior to February 1, 2003, the provisions of the
interpretation must be applied no later than the beginning of the first interim
or annual reporting period beginning after June 15, 2003. Certain disclosures
are effective immediately. The adoption of this Statement did not have an
effect on the consolidated financial statements.
33
In April 2003, 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 an effect on the consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this Statement did not have a material
effect on the consolidated financial statements.
FORWARD-LOOKING STATEMENTS AND RISK ANALYSIS
During the first three months of 2004, we submitted four bids for government
programs, continued our work with the US Congress to identify directed funding
for our programs and are actively working to win several significant commercial
programs. We believe that we will win some of these programs, which would enable
us to continue to grow and broaden our business base, although there can be no
assurance that these contracts will be awarded to us.
To date, we have maintained a mix of government and commercial business. In
2003, we had about 82% government or government-related work. In 2002, we had
about 64% government and government-related work. In 2005, 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. 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.
34
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 achieve a 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; however, there can
be no assurance that they will not be terminated 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 year ended December 31, 2003, we raised approximately $654,000
through a combination of private sales of our stock (approximately $426,000) and
conversions on our revolving credit facility (approximately $228,000). During
the year ended December 31, 2002, we raised approximately $475,000 from our
convertible debt offering, of which $237,500 plus interest was repaid in 2003.
To execute our strategy of growing our Company with small, capable, low-cost
micro- and nano-satellites, hybrid propulsion products and new commercial
revenue sources, we require additional funding and/or the win of both
significant government and commercial programs. We believe investor or customer
funding of $5 to $15 million may be required, which could come from a
combination of private and/or public equity placements or government and
commercial customers. At this time, we do not have any ongoing private or
public equity offerings.
The amount of capital we need to raise is dependent upon many factors. For
example, the need for additional capital will be greater if (i) we do not enter
into agreements with our customers on the terms we anticipate; (ii) our net
operating deficit increases because we incur significant unanticipated expenses;
or (iii) we incur additional costs from modifying our 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 be profitable or once profitable maintain profitability, 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. The unavailability of funds when needed would have a
material adverse effect on us.
35
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.
ITEM 7. FINANCIAL STATEMENTS
Please see our audited financial statements for the period ended December 31,
2003 as compared to the period ended December 31, 2002 attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
During our last fiscal year, we changed our principal independent accountants
due to their decision, at the time, not to register with the Public Company
Accounting Oversight Board ("PCAOB") established by the Sarbanes-Oxley Act of
2002 ("Act"), which was charged with the responsibility of overseeing the audits
of public companies that are subject to the federal securities laws. Under the
Act, the PCAOB's duties include the establishment of a registration system for
public accounting firms. All public accounting firms were 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. At the end of the first quarter of 2003, we were
informed by our independent auditor, Nation Smith Hermes Diamond, Accountants
and Consultants, P.C. ("Nation Smith"), that it may not register with the PCAOB
and, as a result, would not be able to continue to act as our independent
auditor once the rules were in effect. Nation Smith did not resign its position
as a result of any disagreements with us on accounting or financial disclosure
issues.
Effective June 3, 2003, we confirmed with Nation Smith that they 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 and reviewed our Form 10-QSB for the first quarter of 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 June 3,
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.
36
During fiscal year 2002 and the subsequent interim period through June 3, 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 June 3, 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 June 3, 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 June 3, 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 June 3, 2003,
Nation Smith did not advise us that there was any information which the
accountants concluded would materially impact the fairness and reliability of
either (i) a previously issued audit report or the underlying financial
statements, or (ii) the financial statements issued or to be issued covering
the fiscal period(s) subsequent to the date of the most recent financial
statements covered by an audit report (including information that, unless
resolved to the accountant's satisfaction, would prevent it from rendering an
unqualified audit report on those financial statements.
We requested that Nation Smith furnish us with a letter addressed to the SEC
stating whether or not it agrees with the above statements. A copy of such
letter, dated June 9, 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 3, 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 3, 2003,
we had not consulted with PKF regarding (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our financial statements, and no
written report or oral advice was provided to us by PKF concluding there was an
important factor to be considered by us in reaching a decision as to an
accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304 of
Regulation S-B, or a reportable event, as that term is defined in Item
304(a)(1)(iv) of Regulation S-B.
ITEM 8A. CONTROLS AND PROCEDURES
Within 90 days of the filing date of this report, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in the reports that we file
under the Exchange Act is accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. There have been no significant
changes in our internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our evaluation, including any
significant actions regarding any deficiencies. We intend to review our
controls and procedures regularly with our management and Board of Directors.
37
38
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Our management and directors' business activities are under the control of our
Board of Directors. Our Chief Executive Officer, James W. Benson, Vice President
of Engineering, Randall K. Simpson, and Chief Financial Officer, Richard B.
Slansky, manage the Company's 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 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
Randall K. Simpson . . . . . . . . . . . . . Vice President, Engineering
13855 Stowe Drive
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
Scott McClendon *. . . . . . . . . . . . . . Director
13855 Stowe Drive
Poway, California 92064
* Denotes Independent Director
39
The following is a summary of the business experience of our officers and
directors as well as other key employees.
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. The company 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.
Randall K. Simpson, age 57, is our Vice President of Engineering 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.
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.
40
Stuart Schaffer, age 44, was appointed to our Board of Directors on May 17,
2002. Mr. Schaffer is currently VP 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 budgets, 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 press spokesperson for the company, 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
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 ("JPL"). Dr.
Huntress joined JPL 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 JPL in 1969. He and his JPL team gained an international
reputation for their pioneering studies of chemical evolution in interstellar
clouds, comets and planetary atmospheres. At JPL 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 JPL, and spent a year as a
visiting professor in the Department of Planetary Science and Geophysics at
Caltech.
41
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").
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 Wexler & Walker in 2003.
42
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.
SIGNIFICANT EMPLOYEES
Jeff Janicik, age 36, is our director of engineering and was primarily
responsible for managing the success of the CHIPSat project. He also oversees
all flight system / component marketing and research activity. Mr. Janicik has
over 14 years experience in program management, engineering and instruction in
aerospace. Before coming to us in January 2000, Mr. Janicik spent ten years as
a project manager, engineer and instructor in the field of aerospace working for
the United States Air Force in designing low-cost, streamlined approaches for
the X-40A and X-37 program at Air Force SMC/TE, and set the precedent for future
space vehicle demos with extensive research of safety, technical and operational
issues. Mr. Janicik has an Aerospace Engineering degree from the University of
Notre Dame and a Master's Degree in Mechanical Engineering from the University
of California, Davis, which he received while serving as an active duty officer
in the United States Air Force.
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").
COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE
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.
43
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE OFFICER COMPENSATION
During the fiscal years ended December 31, 2001, 2002 and 2003, the Company
granted options to certain of its officers as compensation for their services
pursuant to the Company's Stock Option Plan. Total compensation paid to
officers of the Company for its past three fiscal years is set forth below:
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
---------------------- ---------- ---------
Name Year Salary ($) Bonus ($) Other Annual Restricted Securities LTIP All Other
And Compensation Stock Underlying Payouts Compensation
Principal ($) Award(s) Options ($) ($)
Position(1) ($) / SARs #
-----------------------------------------------------------------------------------------------------------------
James W 2001 147,923 - - - - - -
Benson, 2002 141,325 - - - 10,000(2) - -
CEO (2) 2003 150,000 - - - - - -
-----------------------------------------------------------------------------------------------------------------
Richard B. 2001 - - - - - - -
Slansky, 2002 - - - - - - -
CFO 2003 94,625 - 1,183 - 355,000(3) - -
-----------------------------------------------------------------------------------------------------------------
(1) The table includes information as to the Chief Executive Officer and
highest paid officers of the Company for the last fiscal year, including persons
whose information would have been required but for the fact that they were not
serving as officers of the Company at its fiscal year end. For purposes of the
table, only persons whose total annual salary and bonus exceeded $100,000 have
been included.
(2) Mr. Benson was awarded 10,000 options in 2001 as a part of an annual
award of options to our employees.
(3) Mr. Slansky was awarded up to 385,000 options in 2003 as part of his
employment agreement, with 25,000 vested immediately, 180,000 vesting in
six-month increments over five years and the remaining based on performance
criteria established by the CEO. The timeframe for certain performance criteria
lapsed in 2003 and 30,000 options not earned were forfeited; thereby, reducing
Mr. Slansky's potential securities underlying options to a maximum of 355,000,
as illustrated above.
During the last fiscal year and as of December 31, 2003, the Company granted
stock options to executive officers as set forth in the following table:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
------------------
Name Number of Securities % of Total Options/SARs Exercise of Base Expiration
Underlying Granted to Employees in Price ($/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
------------------ -------------------- ---------------------- ---------------- -----------
44
As of December 31, 2003, the Company 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 Value of Unexercised
Underlying In-the-Money
Unexercised Options/SARs Options/SARs at
at FY-End (#) 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.
DIRECTOR COMPENSATION
At our annual meeting on July 16, 2000, our Board of Directors adopted a
compensation plan for independent directors whereby they receive options for
attending meetings of the Board as follows: each such director shall receive 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 will not receive additional compensation
for attending meetings in excess of those described above. In addition to the
above, independent directors will receive $5,000 in options on the date of
election or appointment. All such options will be issued pursuant to our 1999
Incentive Stock Option 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
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. We do not pay directors who are also officers of the Company 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
-------------------------- -------- ------- --------- --------- --------------
45
(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 an investor in the Company
with ownership of 665,188 shares and warrants to purchase 665,188 shares.
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.
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 the Company.
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.
46
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 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 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 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.
47
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based upon a review on the Forms 3 and 4 furnished to us with respect to our
most recent fiscal year, each of the Directors and/or Executive Officers timely
filed his initial Form 3 and Form 4 under Section 16(a) of the Securities and
Exchange Act of 1934 during 2003 with the following exceptions: Mr. Slansky
filed his Form 3 on March 28, 2003 after the Board approved his contract and
options. Prior to March 28, 2003, Mr. Slansky had no beneficial ownership in us
but should have filed a Form 3 on or before February 21, 2003. Messrs. Blake,
Estes, Grosvenor, Huntress, McClendon and Walker filed their Form 4 related to
options granted at the May Board meeting on June 4, 2003, a few days late.
Messrs. Benson, Schaffer and Slansky filed their Form 4 related to retirement of
our convertible debt program on September 15, 2003, a few days late due to the
delay in getting signatures from all parties to the transaction. Mr. DaPra
filed his Form 3 on December 22, 2003, one day late.
48
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of March 4, 2004 concerning the
beneficial ownership of the Company's 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 the Company's 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 9,748,373(2) 49.56%
value and Chairman
common 13855 Stowe Drive
stock Poway, California 92064
..0001 par Richard B. Slansky 180,357(3) 0.92%
value 13855 Stowe Drive
common Poway, California 92064
stock
..0001 par J. Mark Grosvenor 1,330,376(4) 6.76%
value 13855 Stowe Drive
common Poway, California 92064
stock
..0001 par Curt Dean Blake 128,430(5) 0.65%
value Director
common 13855 Stowe Drive
stock Poway, California 92064
..0001 par Wesley T. Huntress Jr. 80,515(6) 0.41%
value Director
common 13855 Stowe Drive
stock Poway, California 92064
..0001 par General Howell M. 54,167(7) 0.28%
value Estes III, Director
common 13855 Stowe Drive
stock Poway, California 92064
..0001 par Robert S. Walker 54,167(8) 0.28%
value Director
common 13855 Stowe Drive
stock Poway, California 92064
..0001 par Stuart Schaffer, Director 218,206(9) 1.11%
value 13855 Stowe Drive
common Poway, California 92064
stock
..0001 par Scott McClendon 15,230(10) 0.08%
value Director
common 13855 Stowe Drive
stock Poway, California 92064
..0001 par Officers and Directors as 11,809,821(11) 60.04%(1)
value a group (10 Persons)
common
stock
------------------------------------------------------------------------------------------------
49
(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 March
4, 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 March 4, 2004
plus options and warrants that will become exercisable within 60 days of March
4, 2004, for a total of 19,670,844 shares.
(2) Represents 8,257,647 shares held directly by Mr. Benson and his wife,
Susan Benson, (including 486,647 shares as part of the Company's 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 506,666 shares; and, warrants on
486,647 shares (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 2,003,334 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 40,895 shares of which 38,462 shares he purchased for
cash in a private transaction with Mr. Skarupa, the Company's former Vice
President of Operations; 38,462 warrants which were also purchased from Mr.
Skarupa; and, vested options on 101,000 shares. Mr. Slansky also holds 254,000
unvested options.
(4) 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.
(5) 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 67,206
vested options, which he received as compensation for his participation on our
Board of Directors. In addition, Mr. Blake has unvested options on 22,500
shares.
(6) Mr. Huntress owns 8,868 shares of our common stock. Mr. Huntress also
owns 71,647 vested options, which he received as compensation for his
participation on our Board of Directors. In addition, Mr. Huntress has unvested
options on 30,000 shares.
(7) General Estes III owns 54,167 vested options, which he received as
compensation for his participation on our Board of Directors. In addition,
General Estes III has unvested options on 32,500 shares.
(8) Mr. Walker owns 54,167 vested options, which he received as compensation
for his participation on our Board of Directors. In addition, Mr. Walker has
unvested options on 27,500 shares.
(9) Mr. Schaffer owns 64,103 warrants, however in 2003 as part of the
Company's convertible debt repayment, Mr. Schaffer forgave 64,103 warrants and
converted $25,000 of his debt to the Company into 64,103 shares. 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.
(10) Mr. McClendon owns 15,230 vested options, which he received as
compensation for his participation on our Board of Directors. In addition, Mr.
McClendon has unvested options on 30,230 shares.
(11) Officers and directors as a group include our seven Board members, one
of whom is also an officer of the Company, Messrs. Grosvenor, Slansky and
Simpson. Mr. Simpson holds no beneficially owned shares but holds unvested
options on 250,000 shares, which are not included in the calculation.
50
ITEM 12. 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 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. 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
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. 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. The Company 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.
51
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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
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(8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7
1999 Employee Stock Purchase Plan(8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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
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 ISS (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 of James W. Benson (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6
Employment Agreement between ISS and Charles H. Lloyd (1) . . . . . . . . . . . . . . . . . . . . . . . . 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 Feb. 10, 2003(7). . . . . . . . . . . 10.16
Second Amendment to Series A Subordinated Convertible Note - Benson1, dated Mar. 25, 2003(7). . . . . . . 10.17
52
Second Amendment to Series A Subordinated Convertible Note - Benson2, dated Mar. 25, 2003(7). . . . . . . 10.18
Second Amendment to Series A Subordinated Convertible Note - Benson3, dated Mar. 25, 2003(7). . . . . . . 10.19
Second Amendment to Series A Subordinated Convertible Note - Benson4, dated Mar. 25, 2003(7). . . . . . . 10.20
Second Amendment to Series A Subordinated Convertible Note - Skarupa, dated Mar. 25, 2003(7). . . . . . . 10.21
Second Amendment to Series A Subordinated Convertible Note - Schaffer, dated Mar. 25, 2003(7) . . . . . . 10.22
Confidential Separation Agreement and General Release of Claims with Mr. Schaffer, dated July 2, 2003(8). 10.23
AFRL Small Vehicle Launch Technology SBIR contract(9) . . . . . . . . . . . . . . . . . . . . . . . . . . 10.24
AFRL Small Satellite Bus Technologies SBIR contract(9). . . . . . . . . . . . . . . . . . . . . . . . . . 10.25
AFRL Small Shuttle Compatible Propulsion Module contract(9) . . . . . . . . . . . . . . . . . . . . . . . 10.26
MDA Advanced Systems Deputate for the Micro Satellite Experiment(9) . . . . . . . . . . . . . . . . . . . 10.27
MDA Advanced Systems Deputate for the Micro Satellite Experiment (Modification) (9) . . . . . . . . . . . 10.28
Lunar Enterprises of California contract(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.29
Hybrid Rocket Motor Systems and Components contract*(9) . . . . . . . . . . . . . . . . . . . . . . . . . 10.30
Third Amendment to Series A Subordinated Convertible Note - Benson1, dated Sept. 5, 2003(9). . . . . . . 10.31
Third Amendment to Series A Subordinated Convertible Note - Benson2, dated Sept. 5, 2003(9). . . . . . . 10.32
Third Amendment to Series A Subordinated Convertible Note - Benson3, dated Sept. 5, 2003(9). . . . . . . 10.33
Third Amendment to Series A Subordinated Convertible Note - Benson4, dated Sept. 5, 2003(9). . . . . . . 10.34
Third Amendment to Series A Subordinated Convertible Note - Skarupa, dated Sept. 5, 2003(9). . . . . . . 10.35
Third Amendment to Series A Subordinated Convertible Note - Schaffer, dated Sept. 5, 2003(9). . . . . . . 10.36
Employment Offer between SpaceDev and Dario Emanuel DaPra, dated November 17, 2003 . . . . . . . . . . . 10.37
Employment Offer between SpaceDev and Randall K. Simpson, dated Jan. 16, 2004 . . . . . . . . . . . . . . 10.38
Confidential Separation Agreement and General Release of Claims with Mr. DaPra, dated March 18, 2004. . . 10.39
Missile Defense Agency Contract with SpaceDev, dated March 31, 2004 . . . . . . . . . . . . . . . . . . . 10.40
Amendment No. 1 to Note with the Laurus Master Fund, dated March 31, 2004 . . . . . . . . . . . . . . . . 10.41
Waiver Letter from Laurus Master Fund, dated March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . 10.42
First Task Order Under Missile Defense Agency Contract with SpaceDev, dated April 1, 2004 . . . . . . . . 10.43
List of Subsidiaries of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Consent of Independent Auditor - Form SB-2, dated July 21, 2003 - Nation Smith Hermes Diamond. . . . . . 23.1
Consent of Independent Auditor (2003) - Form 10-KSB, dated April 5, 2004, PKF . . . . . . . . . . . . . . 23.2
Consent of Independent Auditor (2002) - Form 10-KSB, dated April 2, 2004, Nation Smith Hermes Diamond . . 23.3
Certificate of James W. Benson Pursuant to Section 1350 of Chapter 63 of Title 18 U.S. Code . . . . . . . 99.1
Certificate of Richard B. Slansky Pursuant to Section 1350 of Chapter 63 of Title 18 U.S. Code. . . . . . 99.2
* Registrant requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with the
Commission.
(b) Reports on Form 8-K:
We have filed two reports on Form 8-K, since fiscal year ended December 31,
2002. These reports, dated June 4, 2003 (and subsequently amended on June 9,
2003) and June 18, 2003, disclosed: 1) the changes in registrants certifying
accountants; and, 2) the establishment of the registrant's revolving credit
facility with the Laurus Master Fund, Ltd.
(1) Incorporated by reference to the corresponding Exhibit previously filed
as an Exhibit to Registrant's Form 10-SB (File #0-28947).
53
(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 4.11, 4.12 and 4.13 previously
filed as an Exhibit to Registrant's Form 10-QSB filed on November 14, 2002.
(7) Incorporated by reference to Exhibits 10.11, 10.12, 10.13, 10.14, 10.15,
10.16, 10.17, 10.18, 10.19, 10.20, 10.21 and 10.22 previously filed as an
Exhibit to Registrant's Form 10-KSB on March 28, 2003.
(8) Incorporated by reference to Exhibit 10.27 previously filed as an
Exhibit to Registrant's Form SB-2 on July 25, 2003.
(9) 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following are the fees billed us by our auditors, PKF and Nation Smith
Hermes Diamond, P.C. ("Nation Smith"), respectively, for services rendered
thereby during 2003 and 2002:
2003 2002
------- -------
Audit Fees . . . . $55,025 $54,500
------------------ ------- -------
Audit Related Fees $ - $ -
------------------ ------- -------
Tax Fees . . . . . $ 7,850 $11,734
------------------ ------- -------
All Other Fees . . $ 5,093 $12,712
------------------ ------- -------
Audit Fees consist of the aggregate fees billed for professional services
rendered for the audit of our annual financial statements and the reviews of the
financial statements included in our Forms 10-QSB and for any other services
that are normally provided by PKF and Nation Smith in connection with our
statutory and regulatory filings or engagements.
Audit Related Fees consist of the aggregate fees billed for professional
services rendered for assurance and related services that were reasonably
related to the performance of the audit or review of our financial statements
and were not otherwise included in Audit Fees.
Tax Fees consist of the aggregate fees billed for professional services rendered
for tax compliance, tax advice and tax planning. Included in such Tax Fees were
fees for preparation of our tax returns and consultancy and advice on other tax
planning matters.
All Other Fees consist of the aggregate fees billed for products and services
provided by PKF and Nation Smith and not otherwise included in Audit Fees, Audit
Related Fees or Tax Fees. Included in such Other Fees were fees for services
rendered by PKF or Nation Smith in connection with our private and public
offerings conducted during such periods.
54
Our Audit Committee has considered whether the provision of the non-audit
services described above is compatible with maintaining PKF's and Nation Smith's
independence and determined that such services are appropriate.
Before the auditors are engaged to provide us audit or non-audit services, such
engagement is approved by the Audit Committee of our Board of Directors.
55
SIGNATURES
In accordance with section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPACEDEV, INC.
Date: April 6, 2004 By: /s/James W. Benson
--------------------
James W. Benson, CEO
Date: April 6, 2004 By: /s/Richard B. Slansky
-----------------------
Richard B. Slansky, CFO
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Date: April 6, 2004 By: /s/James W. Benson
--------------------
James W. Benson, CEO and
Chairman of the Board of
Directors
Date: April 6, 2004 By: /s/Scott McClendon
-------------------
Scott McClendon, Director
Date: April 6, 2004 By: /s/Gen. Howell M. Estes, III
----------------------------
Gen. Howell M. Estes, III,
Director
Date: April 6, 2004 By: /s/Stuart E. Schaffer
--------------------
Stuart E. Schaffer, Director
Date: April 6, 2004 By: /s/Robert S. Walker
---------------------
Robert S. Walker, Director
Date: April 6, 2004 By: /s/Curt D. Blake
------------------
Curt D. Blake, Director
Date: April 6, 2004 By: /s/Wesley T. Huntress
-----------------------
Wesley T. Huntress, Director
56
SPACEDEV, INC.
a Colorado corporation
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 302 Certification
I, James W. Benson, certify that:
1. I have reviewed this annual report on Form 10-KSB of SpaceDev, Inc., a
Colorado corporation (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
57
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 6, 2004
By:/s/ James W. Benson
-------------------------
James W. Benson
Chief Executive Officer
58
SPACEDEV, INC.
a Colorado corporation
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Section 302 Certification
I, Richard B. Slansky, certify that:
1. I have reviewed this annual report on Form 10-KSB of SpaceDev, Inc., a
Colorado corporation (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
59
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 6, 2004
By:/s/ Richard B. Slansky
-------------------------
Richard B. Slansky
Chief Financial Officer
60
SPACEDEV, INC.
AND SUBSIDIARIES
CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS F-2 to F-3
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-4 to F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Deficit F-7 to F-9
Consolidated Statements of Cash Flows F-10 to F-11
Notes to Consolidated Financial Statements F-12 to F-32
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)
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
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.
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, $.0001 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.
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.
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.
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.
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.
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.
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 $249,385
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.
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 micro-satellites, nano-satellites 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 nano-satellites, hybrid rocket-based orbital
Maneuvering and orbital Transfer Vehicles ("MoTVs") 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 micro-satellite and nano-satellite 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. ("ISS"), a California corporation founded for the
purpose of providing engineering and technical services related to space-based
systems. The ISS employee base, acquired upon acquisition, largely consisted of
former Atlas and General Dynamics personnel and enlarged its then current
employee base to 20 employees. ISS was purchased for approximately $3.6
million, paid in Rule 144 restricted common shares of SpaceDev. Goodwill of
approximately $3.5 million was capitalized and was to be amortized over a period
of 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 ISS, which was approximately $923,000, had become impaired and it
was written-off. While the ISS segment did provide small hybrid propulsion
space systems and engineering services on separate contracts (mainly with
government agencies), the engineering service contracts had expired and,
therefore, would not be producing revenue or cash flow to support future
operations. 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 ISS in December 2003, since all activities
have been integrated into SpaceDev, Inc.
F-12
(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.
(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.
F-13
(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.
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.
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.
F-16
(o) Segment reporting
The Company merged its Space Missions Division business segment and ISS business
segment in 2002. The Company has one other inactive 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.
F-17
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. 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).)
F-18
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.
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.
The Company's intangible assets were fully amortized in 2003. Amortization
expense was approximately $11,000 and $40,000 for 2003 and 2002, respectively.
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
---------- ----------
F-19
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.
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%.
F-20
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
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%.
F-21
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
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.
F-22
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.
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.
F-23
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
Net operating loss for which no tax 5% 5%
Benefit is currently available . . . . . . (39%) (39%)
-------------------------------------------- ----- -----
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.
F-24
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
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.
F-25
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
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.
F-26
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
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:
F-27
All options expire ten (10) years from date of amendment.
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 reading $250 million $ 5.00
500,000. . . . . Upon the Company market capitalization reading $500 million $ 10.00
750,000. . . . . Upon the Company market capitalization reading $1 billion $ 20.00
------- ---------------------------------------------------------- -------------------
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.
The following summarizes stock option activity related to all of the option plan
and employee compensation agreements:
F-28
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 Average
Range of Number of 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
the expected life of the options was assumed to be three to five years based on
the average vesting period of options granted.
F-29
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.
F-30
(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.
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 UCB 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.
F-31
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.
F-32