Forward
Looking Statements
The text
of this Annual Report should be read in conjunction with our consolidated
financial statements and the notes thereto and the other financial information
appearing elsewhere in this document. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without limitation the disclosures made under the caption "Management's
Discussion and Analysis or Plan of Operation," in this Form 10-KSB and in our
other SEC reports.
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.
Actual
results could differ materially from those anticipated by such forward-looking
statements. 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.
Available
Information
We
maintain our internet website at www.spacedev.com. In
addition to news and other information about us, we make available on or through
the Investors section
of our website: 1) our annual report on Form 10-KSB; 2) our quarterly reports on
Form 10-QSB; 3) our current reports on Form 8-K; and, 4) all amendments to these
reports via a link to the Securities and Exchange Commission website at www.sec.gov as soon
as reasonably practical after we electronically file this information with the
Securities and Exchange Commission (SEC). Copies of information on us
may be requested by contacting our Investor Relations Department either by
e-mail at investor.relations@spacedev.com
or by telephone at (858) 375-2026. All materials are available free
of charge. The materials are also available at the SEC's Public Reference Room,
located at 100 F Street, Washington, D.C. 20549. The public may
obtain information through the public reference room by calling the SEC at (800)
SEC-0330.
General
SpaceDev,
Inc., a Delaware corporation, (together with its subsidiaries, (“SpaceDev,”
“we,” “us,” “our,” or the “Company”), is a leading space technology
company. SpaceDev is engaged in the conception, design, development,
manufacture, integration, sale and operation of space technology systems,
subsystems, products and services, as well as the design, manufacture, and sale
of mechanical and electromechanical subsystems and components for
spacecraft. We are currently focused on the commercial and military
development of low-cost small satellites and related subsystems, hybrid rocket
propulsion for space and launch vehicles, subsystems that enable critical
spacecraft functions such as pointing solar arrays and communication antennas
and restraining, deploying and actuating moving spacecraft
components.
The
acquisition of Starsys Research Corporation on January 31, 2006 fundamentally
changed our profile. In 2006, SpaceDev and Starsys Research
Corporation merged and had combined revenues of approximately $32 million and
operating losses of less than $1.0 million. In 2007, our combined revenues were
approximately $35 million and operating profit was approximately
$116,000. We have identified numerous potential synergies between the
historic SpaceDev business and the Starsys Research Corporation business and now
operate as one company. During 2006 and 2007, we were required to maintain
a certain separation due to the structure of the Starsys Research Corporation
earn out. We integrated certain business management functions in 2006
and 2007 but expect to realize additional efficiencies and cost savings, and
more fully integrate our operations as a single company in
2008.
Our
primary products, mission solutions and services include small
spacecraft. These are sophisticated small, micro- and nano-
satellites for remote sensing, military, scientific and commercial missions, and
space-related technical support services.
We are
developing our hybrid rocket-based motor technology, orbital maneuvering and
orbital transfer vehicle technology as well as safe sub-orbital and orbital
hybrid rocket-based propulsion systems to support small satellites and other
related commercial and government business opportunities, including but not
limited to small high performance space vehicles and subsystems. Our hybrid
rocket motors use synthetic rubber as the solid propellant (i.e., the fuel), and
nitrous oxide under compression for the liquid (i.e., the oxidizer) to make the
rubber burn. Traditional rocket motors use two liquids, or a solid
propellant that combines the fuel and oxidizer, but both types of rocket motors
are explosive, and all solid motors produce copious quantities of toxic
exhaust. Our hybrid rocket motors are safe, non-toxic, are
re-startable and do not detonate like solid or liquid rocket
motors.
We also
manufacture a wide range of products for small and large spacecraft that include
high output paraffin actuators, hinges, battery bypass switches, bi-axis
gimbals, flat plate gimbals, solar array pointing mechanisms, restraint devices,
thermal switches, thermal louvers, and cover systems. These products
are mainly sold as custom systems that are developed for specific small and
large spacecraft applications but are also offered as "off-the-shelf" catalog
products with spaceflight history. Our products are typically sold
directly to small and large spacecraft manufacturers. We are also in
the process of designing and developing deployable space structures and other
structural subsystems for small and large spacecraft.
Our
customer base covers a wide range of groups from domestic and international
commercial spacecraft companies to civil spacecraft (i.e., NASA) that are
primarily scientific in nature, as well as defense spacecraft that support
military capability. We also offer products to certain non-space
customers, including aerospace, maritime, educational institutions, and
industrial customers that represent less than 2% of our business.
Our
engineering and manufacturing capabilities position us to provide our customers
and potential customers with an end-to-end mission solution. A
mission might require one or more spacecraft buses, mechanical and
electromechanical subsystems, deployable booms, and other spacecraft products
and subsystems. Our strategy is to identify opportunities and either
act as a prime contractor by partnering with other (sometimes larger) companies,
or act as a subcontractor to larger prime contractors where and when the
business opportunity dictates. The product life cycle for our
products within the space industry can range from less than three years to more
than fifteen years.
Our
historic SpaceDev business approach has been to provide smaller spacecraft –
generally 250 kg (550 pounds) mass and less – and cleaner, safer hybrid
propulsion systems to commercial, government, university, and limited
international 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 concluded, or are concluding contracts from such esteemed
government, university, and commercial customers as the Air Force Research
Laboratory, the Defense Advanced Research Projects Agency, NASA's Jet Propulsion
Laboratory, Lockheed Martin, Northrop Grumman, Swales Aerospace, Space
Systems/Loral, the Missile Defense Agency, and many more. The end
users of our products generally are government and commercial
enterprises. Several different groups could fall into one customer
category, in a given year, and alone could constitute 10% or more of our
consolidated revenues. In 2007, the Missile Defense Agency, Lockheed
Martin and Swales each provided over 10% of our consolidated
revenues.
Our
business consists of a mix of cost-plus fixed-fee contracts and fixed price
contracts together with some product sales. To succeed in our business, we must
properly evaluate opportunities, bid on and price contracts, and then execute
efficiently so as to achieve profitability. In the past, we have been
challenged in this area due to losses on fixed price development contracts. Our
ability to properly bid fixed price development contracts is a key priority for
our company.
Recent
SpaceDev Contracts and Technology Development
In June
2002, Starsys Research Corporation was awarded a contract from Northrop Grumman
Space Technology for the design, development, assembly, and test of two
configurations of flat plate gimbal drive assemblies. These gimbals
are used to position six dish antennas and two nulling antenna systems for each
of two large spacecraft. Subsequent to this award, Northrop Grumman Space
Technology modified this contract to include a third shipset bringing the total
contract value to approximately $7.1 million. In addition to eight flight
unit deliveries per large spacecraft, the program includes development and
qualification hardware. This contract was awarded as a firm fixed price
contract with the final delivery scheduled for March 2007 and was part of our
acquisition of Starsys Research Corporation on January 31, 2006. We
recorded revenues from this contract for 2007 and from February 1, 2006 through
December 31, 2006 of approximately $1.4 million and $2.9 million, respectively.
We experienced significant cost overruns on this contract. Prior to our
merger, the contract was modified to add an additional $1.7 million. After
the merger, we negotiated contract modifications in both the timing of payments
and in the amount of additional contract consideration of up to $1.0 million
based on the achievement of specific milestones. Of the additional possible $1.0
million, we achieved milestones entitling us to the majority of the incentive
payments, which will partially mitigate the impact of significant cost, scope
and requirement changes and overruns. Since we were successful in
achieving our performance targets, we defrayed some of our cost overruns;
however, there were some ongoing costs that we will incur in early 2008 until
the program is completed. As of December 31, 2007, the total contract value of
this program is approximately $9.8 million.
In March
2004, we were awarded a five-year, cost-plus fixed-fee indefinite
delivery/indefinite quantity contract for up to approximately $43 million to
conduct a microsatellite distributed sensing experiment (intended to design and
build up to six responsive, affordable, high performance microsatellites to
support national missile defense), an option for a laser communications
experiment, and other microsatellite studies and experiments as required in
support of the Advanced Systems Deputate of the Missile Defense
Agency. The overall contract initially called 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 microsatellites
to be networked on-orbit with high speed laser communications
technology. This overall contract proceeded under a phased
approach. The first phase, executed under Task Order I for
approximately $1.1 million, was awarded in April 2004, completed in September
2004, and resulted in a general mission and microsatellite
design. The second phase, executed under Task Order II for
approximately $8.3 million, was awarded in October 2004 and was originally
expected to be completed by January 2006 but was extended at the request of the
Missile Defense Agency with an increased funding of $1.5 million, and
subsequently completed in March 2006. Task Order II resulted in a
detailed mission and microsatellite design, which underwent a successful
Critical Design Review in March 2006. Task Order III, the first of
several task orders expected during the third phase, was awarded in April 2006
for a total of approximately $1.5 million, which was later amended to
approximately $2.5 million and was successfully completed in June 2006. Task
Order IV was awarded by the Missile Defense Agency in July 2006, with initial
funding of approximately $4.0 million through November 2006. Task
Order IV was subsequently amended to approximately $4.5 million and extended
through June 15, 2007. On April 12, 2007, we finalized a contract
modification to Task Order IV with the Missile Defense Agency. The
main content of the change was to: 1) extend the period of performance from June
15, 2007 to September 30, 2007 and subsequently to March 31, 2008, at no
additional cost to the government; 2) increase the funding ceiling from
approximately $4.5 million to approximately $9.0 million; 3) provide
approximately $1.6 million in funding toward the increased ceiling; and 4)
change the statement of work to reflect the delivery of one
microsatellite. On May 11, 2007 the remaining $2.9 million in funding
was provided to fully fund the $9.0 million task order. We were
informed that there was no Government Fiscal Year 2008 funds available from the
Missile Defense Agency to support our microsatellite distributed sensing
experiment beyond the funds described above. We have been working
with the Missile Defense Agency and other government agencies for additional
funding support. Government contract funds from the Missile Defense
Agency from Government Fiscal Year 2007 were not exhausted by December 31, 2007
and were used to cover anticipated phase completion costs through January
2008. In January 2008, we arranged for another government agency, the
Department of Defense Operationally Responsive Space Office, to fund our
continued development through at least May 2008 with a possible extension that
may lead to a launch of this experimental satellite. (See Risk Factors: “Some of our government contracts,
including our large Missile Defense Agency contract, are staged and we cannot
guarantee that all stages of the contracts will be awarded to us or fully
funded” and “A
substantial portion of our net sales are generated from government contracts,
which makes us susceptible to the uncertainties inherent in the government
budgeting process. In addition, many of our contracts can be
terminated by the customer.) We recognized revenues of approximately $5.2
million under this contract in 2007, and $22.0 million under this contract from
inception through December 31, 2007.
In
January 2005, we were awarded a firm fixed price contract from Raytheon in
Goleta, California for the design, development, manufacture, assembly and test
of the Aerosol Polarimetry Sensor, Scan Mirror Motor/Encoder
Assembly. The Aerosol Polarimetry Sensor instrument is slated to fly
on the NASA Glory mission. The Aerosol Polarimetry Sensor instrument
is also a prime candidate for a secondary payload on National Polar-orbiting
Operational Environmental Satellite System (NPOESS). The Scan Mirror
Motor/Encoder Assembly consists of low ripple, precision brushless DC motor and
optical encoder assembly. The program consists of a development unit,
engineering unit, qualification/life test unit, and flight units. This contract
was awarded as a cost-plus fixed-fee contract at a value of $2.5
million. In July 2006, the contract was modified to add approximately
$2.5 million with incremental funding and extend to March 2009. We
recorded revenues from this contract for 2007 and from February 1, 2006 through
December 31, 2006 of approximately $1.4 million and $2.0 million,
respectively.
In
October 2005, we were awarded a contract from General Dynamics C4 Systems to
design and deliver an antenna pointing gimbal and control electronics for the
GeoEye-1 program. The contract awarded was originally valued at $2.0
million, and modified to $2.4 million in 2007. The GeoEye-1 program is a
next-generation, high-resolution commercial remote-sensing satellite originally
scheduled for launch in 2007. The antenna control system is uniquely designed to
operate by greatly reducing motion to the GeoEye-1 spacecraft while pictures are
being taken and data is simultaneously transmitted to earth ground stations
through incorporation of a low disturbance designed micro-stepping actuator and
actuator drive electronics (Quiet Array Drive). We recorded revenues
from this contract for 2007 and from February 1, 2006 through December 31, 2006
of approximately $700,000 and $1.26 million, respectively. This
program was completed in July 2007.
In
February 2006, the Air Force Research Laboratory awarded us two deployable boom
technology contracts for advance research and development of a self-deployed
articulated boom for approximately $950,000 and a jack screw
deployed boom for approximately $1.5 million. We recorded revenues from
these contracts for 2007 and 2006 of approximately $1.5 million and $833,000,
respectively.
In June
2006, Lockheed Martin Commercial Space Systems awarded us a firm fixed price
contract for the design and fabrication of the antenna pointing gimbals onboard
the US Navy’s Mobile User Objective System. The initial award is for two
flight shipsets and includes two standard A2100 5-meter antenna gimbal
assemblies, four Ka-Band antenna gimbal assemblies and two 14-meter gimbal
assemblies. Options are included for additional gimbals supporting three
additional large spacecraft. The contract will include the development and
qualification of the Ka-Band and 14-meter gimbal designs in addition to delivery
of standard gimbals and solar array deployment hinges that we have previously
provided for the A-2100 bus. The contract value for the initial award was
$1.8 million; however, if all options are exercised, the total contract value
could exceed $6.0 million. The current value of this contract is
approximately $4.3 million. We recorded revenues from this contract
for 2007 and 2006 of approximately $1.2 million and $625,000,
respectively.
In July
2006, we were awarded a contract from the Air Force Research Laboratories in
support of a Broad Agency Announcement. This contract allows tasks to be
identified, approved, and funded to develop innovative technologies in the field
of deployable structures for spaceflight applications. The current contract
value is $1.3 million. Future funding will be available in the amount of
$1.1 million from General Dynamics C4 Systems to design and deliver upon task
approval. Deployable structures are designed to enable the placement of large
payloads within the constrained volume of the launch vehicle and then to deploy,
or erect, a larger system once the satellite or vehicle is no longer constrained
by the enclosed volume of the launch vehicle fairing. The development efforts to
date have focused on deployable antennae for commercial applications, large
systems for a variety of radio frequency missions, and deployable optical
systems. Several of these efforts have resulted in securing customer funding
from potential missions to further design and/or analyses in evaluating the
potential application of the SDI deployable structure technologies. We recorded
revenues for 2007, and from July 1, 2006 through December 31, 2006 of
approximately $381,000 and $6,000 respectively.
In August
2006, we were awarded a government firm fixed price contract to provide the
solar array drive, antenna pointing actuators, and gimbal control electronic
assemblies for the Lunar Reconnaissance Orbiter program from NASA Goddard Space
Flight Center and Swales Aerospace. The total contract value is in excess of
$6.6 million. The
Lunar Reconnaissance Orbiter mission is scheduled to launch in the fall of 2008
as part of NASA's Lunar Precursor and Robotic Program. The spacecraft requires
two drive actuators to align the solar panels with the sun, and a two axis
pointing mechanism to align the downlink antenna for communication with
earth. We are to provide these actuators for the large spacecraft
along with the electronics to control them. A total of seven actuators and five
control electronics assemblies will be delivered under the contract. We
recorded revenues from this contract for 2007 and 2006 of approximately $4.0
million and $1.8 million, respectively.
In August
and November 2006 we were awarded two contracts to provide hardware for the H-II
Transfer Vehicle for Ishikawa Aerospace and JAXA, the Japanese Space Agency. The
H-II Transfer Vehicle will provide servicing missions to deliver supplies to the
International Space Station. These contracts were obtained as follow-on to a
prior development contract started in 2002. The total value of these two
contracts is $1.2 million. JAXA is continuing to market supply missions which
may result in further contract growth to this award. We recorded revenues
from this contract for 2007 and from August 1, 2006 through December 31, 2006 of
approximately $896,000 and $200,000 respectively.
In
January 2007, in partnership with the University of Colorado Laboratory for
Space Physics, we were awarded a $750,000 contract from the Missile Defense
Agency to design and develop a non-sticking cover seal system for the
Exo-atmospheric Kill Vehicle program, which is the kill vehicle component of the
Ground Based Interceptor (the weapon element of the Ground-based Midcourse
Defense System program). The contract was awarded under the Small
Business Technology Transfer Program that provides research funding for
partnerships between industry and non-profit research institutions. We
recognized approximately $382,000 in revenue under this contract from inception
through December 31, 2007.
In
February 2007, we were awarded a $1.4 million cost reimbursable design and
development subcontract with NASA’s Jet Propulsion Laboratory in support of the
Mars Science Laboratory mission. In 2007, this contract was modified
to a value of approximately $1.9 million, and in 2008, we received an additional
contract modification bringing the total contract value today to approximately
$2.5 million. We will develop and deliver electromechanical Descent
Brake dampers. The contract period of performance is approximately 18
months. NASA’s Mars Science Laboratory mission will deliver a
1,800-pound rover to the surface of Mars in 2010. Rather than the
airbag landing system used by the Mars Exploration Rover mission, a “Skycrane”
landing system will use a rocket-decelerated Descent Stage that will hover and
gently lower the rover on a 25-foot long bridle cord. A critical
component of the “Skycrane” landing system is the Descent Brake that will lower
the rover in less than seven seconds with a controlled speed profile that will
provide a gentle touch-down on the Martian surface. We recognized
approximately $1.9 million in revenue under this contract from inception through
December 31, 2007 and expect to complete this program during the second quarter
of 2008.
In
February 2007, we were awarded a contract valued at $1.5 million from Space Systems/Loral
to deliver cell shorting devices for their communication satellite battery
systems. We are now working on the assembly and test of the first 100-unit
delivery. This is a follow-on contract for these devices that were originally
developed under a previous contract and flight units have been in production
since 2001. The Space Systems/Loral communications satellite platform is
currently the leading seller among U.S. satellite platforms for commercial
communications. The cell shorting devices provide autonomous shorting or
override of cells in the event that a cell fails. This preserves the battery
system operation and performance at the best possible levels in the event of a
cell failure. We recorded revenues from this contract through December 31, 2007
of approximately $636,000.
In March
2007, we were awarded a $500,000 cost reimbursable contract with the Naval
Research Laboratory for the preliminary design of the Combined Optical, Radio,
Radar Instrument, designed for a small satellite payload application.
Combined Optical, Radio, Radar Instrument integrates three independent
capabilities into a single instrument suite: high resolution optical/IR imagery,
high-gain broadband RF up/downlink and sensitive proximity radar. We
recognized approximately $450,000 in revenue under this contract from inception
through December 31, 2007. This program was successfully completed in February
2008.
Also in
March 2007, we received a follow-on order from Ball Aerospace and Technology
Corporation for solar array rotational drive assemblies and drive control
electronics for the Digital Globe WorldView-2 satellite program. The value of
the order is approximately $1.3 million increasing the total contract value to
$2.5 million. The Starsys Quiet Array Drive Micro-Stepping motion control
technology will be utilized on the Ball Aerospace BCP 2000 platform, which will
articulate each of the two solar arrays for alignment with the sun. The
WorldView-2 satellite is scheduled to be ready for launch in late 2008 and is
expected to expand the capabilities of DigitalGlobe’s world imaging portfolio.
We recognized revenue on this program through December 31, 2007 of approximately
$1.9 million.
In
September 2007, we were awarded a cost reimbursable design and development
contract with the Defense Advanced Research Projects Agency to develop a Solar
Thermal Propulsion demonstration article as a subsystem of a small satellite
that is intended to enable the first Solar Thermal Propulsion flight
experiment. The program consists of a six-month Base Program culminating
in a Critical Design Review, followed by a six-month option culminating in a
Solar Thermal Propulsion demonstration. The award of the option is
contingent on the Defense Advanced Research Projects Agency’s evaluation of the
research results of the Base Program against a set of Go and No-Go
criteria. The contract value for the initial Base Program is $3.8 million.
However, if the option is exercised, the total contract value would be $7.3
million. We recognized approximately $1.2 million in revenue under this
contract from inception through December 31, 2007.
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
commercial 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 products and services.
Our
business strategy and approach for our operations 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
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;
and,
|
·
|
Apply
our low cost space products to new applications and to create new users,
new markets and new revenue
streams.
|
Today, a majority of our business
involves us serving as a subcontractor to a prime contractor who integrates our
contributions into a larger spacecraft. However, an increasing portion of our
business involves us serving as a prime contractor with other companies (often
much larger companies) serving as a subcontractor to us. Our business
development process is generally a competitive bid in response to a request for
proposal that is generated by our potential customers. These
proposals have various bases, including firm fixed price, cost-plus fixed-fee,
products and time-and-materials. We typically prepare between ten and
twenty proposals in a given month and we usually have one to three weeks to
respond to a request for proposal. We also execute on long term
build to requirement contracts with some of the prime
contractors. However, due to our past experiences where we realized
losses on fixed price development contracts, we are now more careful in bidding
fixed price development work. It is our preference, wherever
possible, to bid development work using a cost reimbursable-type contract;
however, when customers require fixed price contracts, we decide to bid or not
to bid the opportunity based on the risk premium that we can apply to the
proposal. The risk premium addresses our perceived exposure to
bidding development work on a fixed price basis.
Products
and Services; Market
Our space
technology business is focused on providing end-to-end spacecraft mission
solutions and spacecraft products and services to customers in the space and
aerospace marketplace. We have several areas of space technology,
which when applied to customer needs, we believe provides our industry with a
sound, profitable and cost effective alternative to the large aerospace
solutions. We operate in small interdisciplinary teams to provide
high value at a much lower cost than the large aerospace
companies. We can design and integrate different space products,
services and technologies, as customer needs require, across a spectrum of
missions to help meet the needs of our customers. Many of our
products and technologies could be employed on a single project or mission to
provide an optimal end-to-end solution. We have flown 2,500
mechanisms and systems on 250 spacecraft with complete on-orbit mission success
to affirm our understanding of design/build of space qualified parts and provide
the heritage desired by customers in our industry.
Our
spacecraft focus is mainly on small satellites, (e.g., microsatellite and
nanosatellite spacecraft buses), although many of our products and technologies
service larger spacecraft. The primary benefit of small satellites is
lower cost, less weight and more rapid time to deployment. Due to our
business strategy and core business model, we believe that we can dramatically
reduce manufacturing costs and the costs to launch small satellites to
earth-orbit and deep space. In doing so, we can pass 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 supplement to, and a viable alternative to, larger, more expensive
satellites, as they provide a high powered, cost-effective solution to
traditional problems. We design and build low cost, high-performance
space-mission solutions involving small satellites generally 250 kg (550 pounds)
to meet our customer requirements. Our approach is to maintain a core
business supporting larger satellites while fostering the growth of an emerging
small satellite market.
We
provide rapid access to space through innovative mission solutions currently
lacking in the marketplace. Our approach is to provide smaller spacecraft –
generally 500 kg mass and less – and draw upon our other compatible products and
technologies to support commercial, university and government customers. The
small spacecraft market is evolving and supported by the evolution of
microelectronics, common hardware and software interface standards, and smaller
launch vehicles. Reduction of the size and mass of traditional spacecraft
electronics has reduced the overall spacecraft size, mass, and volume over the
past 10 to 15 years. For example, our miniature flight computer is only 24 cubic
inches and provides 300 million instructions per second of processing power
versus a competitor's more "traditional" solution that requires about 63 cubic
inches and only provides 10 million instructions per second. We also provide a
wide variety of hybrid propulsion systems to safely and inexpensively enable
small 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 and throttleable, and is easy to
transport, handle and store.
We have
our own mission control and operations center, located in our headquarters
building near San Diego, coupled with our mission control and operations
package, which is Internet-based and allows for the operation and control of
missions from anywhere in the world that has access to the
Internet. Our first small satellite, CHIPSat, which was launched in
January 2003 and is still operating today, was one of the first U.S. missions to
use end-to-end satellite operations with TCP/IP and FTP. This concept
can provide significant advantages. For example, a formation-flying cluster or
constellation of TCP/IP-based small satellites can be designed to communicate
directly with each other, as a wide area network in space. Provided
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.
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. Our propulsion products and services are being designed to
support our small spacecraft, although we are also involved with helping other
companies and agencies utilize this safe and efficient hybrid propulsion
technology in other applications. We team with launch providers in
order to identify and market affordable launches for the small satellite
market. We can provide customers with a complete on-orbit data
delivery service that can also involve our spacecraft and related products and
technologies. These innovative, low-cost, turnkey mission solutions could allow
us to provide a one-stop shop for mission services, spacecraft, payload
accommodation, total flight system integration and test, and mission
operations. Our customers and potential customers only need define
their mission (and in some cases provide the payload), and we perform all the
tasks required for the customer to get to orbit and begin collecting
data.
As an
ancillary initiative, we have begun designing a reuseable, piloted, sub-orbital
space ship that could be scaled to transport passengers to and from Low Earth
Orbit, including the International Space Station. The name of the vehicle is the
SpaceDev Dream Chaser™. We signed a non-binding Space Act Memorandum of
Understanding with NASA, which confirms our intention to explore novel, hybrid
propulsion based hypersonic test beds for routine human space access. We will
explore with NASA collaborative partnerships to investigate the potential of
using our proven hybrid propulsion and other technologies, and a low cost,
private space program development approach to establish and design new piloted
small launch vehicles and flight test platforms to enable near-term, low-cost
routine space access for NASA and the United States. The SpaceDev Dream Chaser™
is expected to be crewed and launch vertically, like most launch vehicles, and
would glide back for a normal horizontal runway landing. We are
continuing to seek funding partners for this activity.
In
addition to supporting our own mission solutions, we provide space components,
mechanisms and electromechanical systems for larger spacecraft applications.
These include electromagnetic motors, pointing systems, thermal control systems,
and robotic systems to a variety of general drive
applications. Motors and actuators are required on spacecraft to move
instruments, point antennas and solar arrays, and deploy structural
elements. We have a suite of technologies that can be combined to
meet a wide variety of spacecraft requirements. Many of our systems
provide critical spacecraft functions. Our unique suite of
technological core competencies enables us to deliver these as turn-key systems.
These mission solutions, products and services are being marketed and sold
directly into primarily domestic government, university, military and commercial
markets.
Our
business is, in part, reliant on the U.S. Government budgeting process and as a
result, has elements of seasonality. In addition, our business follows normal
industry trends such as increased demand during bullish economic periods, or
slow-downs in demand during periods of recession.
Finally,
we are working with potential partners to create new markets that can generate
new space-related service and commercial revenue streams. While we believe that
certain space market opportunities are still several years away, our focus
continues to be on the commercialization of space and finding ways to create
value for our shareholders through these endeavors.
Components
and Raw Materials
Although
our business 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.
We
purchase a significant percentage of product materials, components, structural
assemblies and certain key satellite components and instruments from third
parties. We also occasionally obtain parts and equipment that we use
in the production of our mission solutions and products or in the provision of
our services from the U.S. government or customers. Generally, we do
not experience difficulty in obtaining product materials components and
equipment, and believe that alternatives to our existing sources of supply are
readily available. If securing alternative sources of supply is
necessary or required, increases in costs and delays may be incurred as a result
of such actions. For a relatively small number of unique materials or
product components, we do rely upon sole sourced suppliers to provide such
items. While alternative sources may be available, the inability of any such
supplier to provide us with these items to qualified specifications could have
an adverse effect on our ability to manufacture our products and would impact
costing and schedules.
Competition
We
compete for contracts related to our mission solutions and for sales of our
products and services based on price, performance, technical features,
contracting approach, reliability, availability, customization, perceived
stability, and, in some situations, geography. The following list identifies
some of our competitors, depending on the type of contract or sale that we may
be seeking:
Ø
|
Aeroflex
(a subsidiary of UMTC)
|
Ø
|
Cesaroni
Technology Incorporated
|
Ø
|
Microsat
Systems (a subsidiary of Sierra
Nevada)
|
Ø
|
MPC
Products Corporation
|
Ø
|
Planetary
Systems, Inc.
|
Ø
|
Prime
Contractor Internal Mechanisms
|
Ø
|
Surrey
Satellite Technology Limited
|
We
believe that our mission solutions, as well as our product and service
offerings, provide a significant value to our customers and prospective
customers. Some of our competitors compete across a broader range of
opportunities than others. Several of our current and potential
competitors have greater resources, including technical and engineering
resources, marketing resources, and political connections. Also, customers may
perceive larger competitors to be more stable.
Our
customers are sometimes our competitors. In the aerospace industry, we
have found that we subcontract to companies that we also compete with when it
comes to responding to requests for proposals and requests for
information. Many of these competitors are larger companies and have
substantially greater resources (and rate structures) than we do, which is often
why we can supply them with cost effective solutions, components and/or
subsystems. Part of our strategy is to remain non-confrontational with the
larger aerospace companies so that we can both supply and compete with them.
Even the larger aerospace companies have this issue with each other as they
strive to support their customer, e.g., a government agency.
Furthermore,
it is possible that other domestic or foreign companies or governments, some
with greater experience in the space and defense industry and many with greater
financial resources than we possess, will seek to provide mission solutions,
products or services that compete with us. Any such foreign competitor could
benefit from subsidies from or other protective measures by its home
country.
We also
compete with each of our competitors for a qualified work
force. There are a limited number of individuals with all of the
requirements that we seek and there can be no assurance that we can locate and
recruit these individuals in a timely and cost-effective manner. Many of our
competitors have greater resources than we do and can offer higher salaries or
better incentives to attract these individuals or to hire our existing employees
away from us.
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. We are required to ensure that any disclosure of
scientific and technical information complies with the Export Administration
Regulations (EAR) and the International Traffic in Arms Regulations
(ITAR). Exports of our products, services and technical data require
either Technical Assistance Agreements or Licenses from the United States
Department of State, depending on the complexity of the technology being
exported. The commercial exports of information with respect to
ground-based sensors, detectors, and high-speed computers are controlled by the
Department of Commerce. The government is vigilant with respect to
strict compliance. Statutes state that failure to comply with the ITAR and/or
the Commerce Department regulations may subject guilty parties to substantial
fines of up to $1 million and/or up to 10 years imprisonment per
violation. Our failure to comply with any of the previous regulations
could have a serious adverse effect on our ability to do
business. Our ability to market, sell and deliver products into
international markets may be adversely impacted due to ITAR and/or Commerce
Department requirements. Potential negative impacts include, but are not limited
to, the inability to sell to certain customers, extended sales cycles, delays in
material procurement, manufacturing, test, product delivery, and collection of
accounts receivable. Our conservative position is to consider any material
beyond standard marketing material to be regulated by federal statute i.e., EAR,
ITAR.
In
addition to local, state, and national government regulations that all
businesses must adhere to, the space industry has specific federal
regulations. In the United States, command and telemetry frequency
assignments for space missions are primarily regulated by the Federal
Communications Commission for our domestic commercial products. Our products
marketed towards domestic government customers are regulated by the National
Telecommunications Information Agency. Products sold internationally 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 United
States Air Force. In addition, all commercial space launches that we
might perform require a license from the Department of
Transportation. Satellites that are launched must obtain approvals
for command and frequency assignments.
We may
also be 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
Deep Space Network is a United States funded network of large antennas that
support 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 an asset of NASA, and is managed and
operated for NASA by the Jet Propulsion Laboratory (JPL) at California
Technology Institute. The Telecommunications and Mission Operations
Directorate at JPL manages the Program.
Also,
some of our projects with the Department of Defense may need special clearances
to continue work advancing our projects. Classified programs
generally will require that we comply with various Executive Orders, Federal
laws, regulations and customer security requirements that may include
specialized facilities and restrictions on how we develop, store, protect, and
share information. Laboratories, manufacturing and assembly areas,
meeting spaces, office areas, storage areas, computers systems, and networks and
telecommunications systems may require modification or replacement in order to
comply with classified customer requirements. Classified programs may
require our employees to obtain government clearances and restrict our ability
to have key employees work on these programs until these clearances are received
from the appropriate United States government agencies.
In order
to staff these programs we may need to recruit and retain personnel with the
appropriate professional training, experience, and security clearances.
There are a very limited number of individuals with all of the requirements that
we may be required to seek in the marketplace. There is no assurance
that we can locate and recruit these individuals in a timely and cost-effective
manner. We may be required to modify existing facilities and to
develop new facilities and capabilities that will only be utilized by these
classified programs. We may be required to install computer networks,
communications systems, and monitoring systems that are dedicated to these
classified programs. Some or all of these requirements may entail
additional expense. It is uncertain whether we will be able to
recover all of the costs of these systems from our classified customers.
Many of these classified programs are regulated by Executive Orders, various
Federal laws and regulations, and customer requirements. Failure to
comply with any of the aforementioned Executive Orders, Federal laws and
regulations and customer requirements could have serious adverse effects on the
business. Also, our ability to successfully market and sell into the
Department of Defense markets may be severely restricted if we are unable to
meet threshold classified program requirements. There is no assurance that
we will be able to successfully pass the criteria required in order to win new
classified programs or to maintain current classified contracts. There is also
no assurance that we will maintain any particular level of classified status
once it has been granted.
Employees
As of
December 31, 2007, we employed 173 full-time and 12 part-time persons, most of
whom are engineers or technicians. We employ the following types of
engineers: spacecraft systems, propulsion systems, avionics,
software, guidance/navigation/control, structural, mechanical, electrical, and
electro-mechanical. We employed 114 full-time and 8 part-time
employees in the Louisville/Denver area of Colorado, 44 full-time employees in
the San Diego area of Southern California, and 15 full-time employees in the
Raleigh/Durham area of North Carolina. We do not have any collective
bargaining agreements with our employees.
Intellectual
Property
We have
protected and intend to continue 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. We rely, in part, on patents, trade secrets and
know-how to develop and maintain our competitive position and technological
advantage, particularly with respect to our launch vehicle, satellite products,
structures, and mechanisms. We hold U.S. and foreign patents relating
to release devices, deployable truss structures, hybrid propulsion, and battery
cell shorting mechanisms. The majority of our U.S. patents relating
to the noted technologies expire between 2019 and 2022. We have also
filed patent applications relating to our hybrid propulsion technology,
satellite technology and structures technology. There can be no
assurance that the patents from such applications will be granted. We
have entered, and intend to continue to enter, into confidentiality agreements
with our employees, consultants and vendors; entered into license agreements
with third parties; and, generally, sought to control access to and distribution
of our intellectual property.
Mission
Assurance and Testing
Our
mission assurance charter is to ensure procured materials, internal processes,
and finished products meet contract and Quality Management System
requirements. Our Colorado and North Carolina facilities maintain
AS9100 and ISO-9001 third party certified quality management
systems. Both facilities have implemented rigorous employee training
and certification programs to empower operator ownership for process adherence
and product quality. We perform frequent internal audits and facilitate third
party site audits to confirm processes perform to expectations, products comply
with engineering requirements and to identify opportunities to provide higher
quality and increased value to our customers.
Our
Quality Engineering provides up-front support to ensure contract requirements
are clearly identified and appropriately flowed down, processes are capable to
provide consistent and measurable results, and sub-tier suppliers meet their
quality goals and objectives. Our Quality Inspection provides
specialized inspection support for detailed dimensional inspections, independent
confirmations of operator self verification activities, and in-line inspections
when mandated by regulatory or contract requirements. We have extensive in-house
capabilities for aerospace environmental testing, including thermal and
thermal/vacuum chambers, and vibration testing. We also have access to certified
suppliers for vibration, shock, and electromagnetic interference testing. We
maintain an environmentally controlled dimensional inspection lab to house our
state of the art, high precision coordinate measuring machine work centers. All
test and measurement activities are performed with equipment calibrated to
standards traceable to the National Institute of Standards and
Technology.
Although
our mission assurance charter extends to all of our operating facilities, our
quality management operations have not been third party certified in our
California facilities. We anticipate third party quality management
system certification at all of our facilities in the future.
Research
and Development
A large
portion of our total new product development and enhancement programs is funded
under government and customer contracts. Our internal research and development
expenses, other than under such contracts, totaled approximately $300,000 and
$284,000 for the years ended December 31, 2007 and 2006,
respectively. We expect to invest some non-government and
non-customer internal research and development monies in 2008 to improve current
products and to develop new products within our areas of core
competency.
During
2007 and 2006, approximately 73% and 89% of our total annual revenues were
derived from contracts with the U.S. government and its agencies, or from
subcontracts with other U.S. government prime contractors. Most of our U.S.
government contracts are funded incrementally on a year-to-year
basis.
Our major
contracts with the United States Government fall into three categories;
cost-reimbursable contracts, fixed price contracts, and time-and-material
contracts. In 2007, approximately 53% of revenues from U.S. government
contracts were derived from cost-reimbursable contracts, 44% from fixed price
contracts, and 3% from time-and-material contracts compared to approximately
51%, 48%, and 1% in 2006, respectively. Under a cost-reimbursable
contract, we recover our allowable incurred costs, allowable overhead costs, and
a fee consisting of a fixed-fee established at the inception of the contract,
and/or an award fee amount that is based upon the customer’s evaluation of our
performance in terms of the criteria stated in the contract and/or an incentive
fee established based upon schedule, technical, cost and management
criteria. Our fixed price contracts include firm fixed price and
fixed price incentive fee contracts. Under firm fixed price
contracts, work performed and products shipped are paid for at a fixed price
without adjustment for actual costs incurred in connection with the contract.
Therefore, we bear the risk of loss if costs increase, although some of
this risk may be passed on to subcontractors. Fixed price incentive fee
contracts provide for sharing by us and the customer of unexpected costs
incurred or savings realized within specified limits, and may provide for
adjustments in price depending on actual contract performance other than costs.
Costs in excess of the negotiated maximum (ceiling) price and the
risk of loss by reason of such excess costs are borne by us, although some of
this risk may be passed on to subcontractors.
We have
experienced significant cost overruns in the past on fixed price development
projects resulting in losses on contracts before application of
reserves. Since merging with Starsys, we have taken significant steps
to limit our risk on fixed price development contracts going forward, including
but not limited to seeking voluntary relief or additional consideration from our
customer(s), altering our bid and proposal process to address risk assessment on
fixed price development contracts, and migrating our contract structure toward
cost reimbursable contracts. Under cost reimbursable contracts, we are
reimbursed for allowable incurred costs plus a fixed-fee award fee or
incentive fee. This contracting arrangement allows us to better
manage the risk for a development-type program.
We expect
the majority of our United States Government contracts to remain cost
reimbursable contracts. We expect our government-related contracts
(i.e., contracts awarded by the United States Government to a prime commercial
contractor, where we are a sub-contractor to the prime contractor) will increase
in 2008, and we intend to minimize the use of fixed price contracts for
development work. Due to our past experiences where we realized
losses on fixed price development contracts, we are much more careful in bidding
fixed price development contracts. Sometimes our customers require
fixed price contracts, in which case, we make a decision to bid or not bid the
opportunity based on the risk premium that we can apply to the
proposal. It is our preference, wherever possible, to bid development
work using a cost reimbursable-type contract.
United
States Government contracts are dependent on continued political support and
funding. All of our United States Government contracts and, in general, our
subcontracts with other United States prime contractors provide that such
contracts may be terminated for convenience at any time by the United States
Government or by the prime contractor. Furthermore, any of these contracts
may become subject to a government-issued stop work order under which we would
be required to suspend our activities under the contract. In the event of a
termination for convenience, contractors generally are entitled to receive the
purchase price for delivered items, reasonable reimbursement for allowable costs
for work in process, and an allowance for reasonable profit thereon or
adjustment for loss if completion of performance would have resulted in a
loss.
The
following factors, among others, could cause actual results to differ materially
from those contained in forward-looking statements made herein and presented
elsewhere by management from time to time.
We
have experienced losses from operations in prior periods and have been required
to seek additional financing to support our businesses.
In prior years, we have experienced
operating losses and, in some periods, revenue from operations has not been
sufficient to fund our operations. Assuming our merger with Starsys
Research Corporation had occurred on January 1, 2005, on a pro forma basis, we
would have had revenue of approximately $35 million, $32 million, and $27
million, with a profit from operations of approximately $116,000 and a net loss
from operations of approximately $1.0 million and $2.9 million for the years
ended December 31, 2007, 2006, and 2005, respectively. In addition,
our operating activities have been using cash rather than providing
cash. The success of our company depends upon our ability to generate
revenue from existing contracts, to execute programs cost-effectively, to price
fixed price contracts accurately, to attract and successfully complete
additional government and commercial contracts, and possibly to obtain
additional financing. The likelihood of our success must be
considered in light of the expenses, difficulties and delays frequently
encountered in connection with developing businesses, those historically
encountered by us, and the competitive environment in which we
operate.
If
we are unable to raise capital, we may be unable to fund operating cash
shortfalls, necessary capital expenditures, and future growth
opportunities.
In the
past, we have relied upon cash from financing activities to fund part of the
cash requirements of our business. We may need additional financing
to fund our projected operations, capital expenditures or expansion plans
(including acquisitions). Additional financing may not be available
to us on acceptable terms, or at all. Any equity financing may cause
additional dilution to existing stockholders. Any debt financing or
other issuance of securities senior to common stock likely will include
financial and other covenants that will restrict our operating flexibility and
payment of dividends to common stockholders.
Our
size tends to limit our business opportunities.
Our size
is determined by revenues, work force, and capabilities. As a small company, our
ability to compete successfully for a large amount of desirable business may be
limited because customers perceive that larger suppliers are more dependable,
have the resources to successfully execute larger programs and, therefore, are
more stable. Yet, if we cannot win such business, it may be difficult
for us to rapidly grow our business through organic growth. Prime
contracts in our industry may be large in dollar amount and critical to national
interests. As a practical matter, smaller companies are at a disadvantage when
competing to be awarded such large contracts as the prime contractor, due to
customer perception that larger companies might be more stable. For this
purpose, we would currently be considered a "smaller company."
Some
of our government contracts are staged and we cannot guarantee that all stages
of the contracts will be awarded to us or fully funded.
Some of
our government contracts are phased contracts in which the customer may
determine to terminate the contract between phases for any
reason. Accordingly, the entire contract amount may not be realized
by us. In the event that subsequent phases of some of our government
contracts are not awarded to us, or if they are awarded to us but not fully
funded, it could have a material adverse effect on our financial position and
results of operations. We were informed in 2007 that there were not
going to be any GFY 2008 funds from the Missile Defense Agency to support our
microsatellite distributed sensing experiment. We have been working
with the Missile Defense Agency and other government agencies for additional
funding support. Government contract funds from the Missile Defense
Agency from GFY 2007 were not exhausted by December 31, 2007 and were used to
cover anticipated phase completion costs through January 2008. In
early 2008, we were notified that the Department of Defense Operationally
Responsive Space Office will be funding this program though at least May 2008
with a possible extension that may lead to a launch of this experimental
satellite. However, there can be no assurance that funding will be
available after March 2008, and if available, sufficient to fully fund the
program.
We
provide our products and services primarily through fixed price and cost-plus
fixed-fee contracts. We have experienced significant losses on fixed price
contracts, especially those requiring product development. Cost overruns may
result in further losses and, if significant, could impair our liquidity
position.
Under
fixed price contracts, our customers pay us for work performed and products
shipped without adjustment for the costs we incur in the process. Therefore, we
generally bear all or a significant portion of the risk of losses as a result of
increased costs on these contracts, unless we can obtain voluntary relief from
our customer, which relief (or additional consideration) cannot be assured.
Although we have taken significant steps to try to limit our risk on fixed price
contracts going forward, we have historically experienced significant cost
overruns on development projects under fixed price contracts, resulting in
estimated losses on contracts before application of any management reserves of
approximately $316,000 at December 31, 2007 and approximately $1.7 million at
December 31, 2006. As of December 31, 2007, the accrual for potential
losses on projects, which existed at January 31, 2006, was approximately
$30,000. For example, we experienced significant cost overruns in 2006 and 2007
on a sizable subcontract with Northrop Grumman Space
Technology. These costs significantly affected our gross margin and
impaired our liquidity position and operations.
When
contract provisions produce unfavorable results for us, or fixed price
development contracts result in losses, we generally do not have the legal or
economic leverage needed to easily obtain renegotiated terms. Our customers
generally would not fear any threat we might make to withhold future business
and our financial and business position make litigation an unfavorable option
for us. On the other hand, the reverse might be true of our customers, who tend
to be large aerospace companies with significant resources. In the case of two
major fixed price contracts on which we have experienced significant cost
overruns, the customers were willing to work with us and negotiations resulted
in contract amendments providing additional incentive payments based on
performance. However, there can be no assurance that future attempts to
renegotiate contracts will be successful.
To
mitigate risks of this kind, we have made a business decision to:
·
|
limit
the number of new fixed price development
contracts;
|
·
|
offer
our customers alternative contract structures that better protect
us;
|
·
|
establish
additional costing reviews; and
|
·
|
increase
senior management involvement to scrutinize proposal efforts related to
fixed price contracts.
|
This
decision could limit our ability to obtain new business.
Under
cost-plus contracts, we are reimbursed for allowable incurred costs plus a fee,
which may be fixed or variable. This type of contract structure passes much of
the risk to the buyer; however, it also limits our ability to generate
profit. We normally try to negotiate a cost-plus contract for high
risk development-type programs. Most customers prefer a fixed-fee arrangement
but variable fee arrangements are possible. There is no guarantee as
to the fee amount we will be awarded under a cost-plus contract with a variable
fee. The price on a cost-plus fixed-fee reimbursable contract is based on
allowable costs incurred, but generally is subject to contract funding
limitations. Therefore, we could bear the amount of costs in excess of the
funding limitation specified in the contract, and we may not be able to recover
those cost overruns. Generally, cost-plus contracts are the best way
to mitigate risks related to development-type programs and other higher risk
opportunities. However, there can be no assurance that any type of contract
vehicle can protect us from cost overruns and significant cost overruns could
impair our liquidity position.
If
we fail to integrate and operate our multi-location business effectively, we may
have disappointing business results.
The
integration of Starsys Research Corporation into SpaceDev is still ongoing and
may disrupt operations, causing inefficiencies and additional expense, if it is
not completed in a timely and efficient manner. If this integration effort is
not successful, our company's results of operations could be affected and our
company may not achieve the synergies or benefits we anticipated. Our
company may encounter difficulties, costs, and delays involved in integrating
our operations, including but not limited to the following:
·
|
difficulties
in successfully integrating the management teams and employees of the two
companies;
|
·
|
challenges
encountered in managing larger, more geographically dispersed
operations;
|
·
|
the
loss of key employees;
|
·
|
diversion
of the attention of management from other ongoing business
concerns;
|
·
|
potential
incompatibilities of processes, technologies and
systems;
|
·
|
potential
difficulties integrating and harmonizing financial reporting systems;
and,
|
·
|
potential
failure to implement systems to properly price and manage the execution of
fixed price contracts.
|
We do not
believe that the anticipated benefits of the merger with Starsys have yet been
fully realized. We believe the market price of our common stock
may have declined, in part, due to this. We will not meet the expectations of
investors and financial or industry analysts if:
·
|
the
integration of the two companies does not result in the anticipated
synergies and benefits;
|
·
|
the
costs savings from operational improvements arising from the merger is not
greater than anticipated;
|
·
|
the
combined financial results are not consistent with
expectations;
|
·
|
management
is unable to successfully manage a multi-location
business;
|
·
|
the
anticipated operating and product synergies of the merger are not
realized; or,
|
·
|
the
fixed price development contracts acquired in the merger, or new fixed
price contracts entered into after the merger, incur major cost overruns
or remain unprofitable for other
reasons.
|
We
relocated to a new Colorado facility and North Carolina facility in 2007,
increasing our rental costs.
The move
of our Boulder, Colorado and Durham, North Carolina operations to new and larger
nearby facilities in 2007 was time consuming and expensive and partially
disrupted operations. In addition, we may not achieve anticipated
efficiencies or other operational benefits of these moves. Although
both moves are complete, we may not realize the anticipated operating
efficiencies. Moreover, if our business does not develop
as expected, the new facilities may be larger than what we require, resulting in
rent payments for some unneeded space. Our rental costs at the new
facilities are approximately 72% higher than we had paid at the prior
facilities.
A
substantial portion of our net sales are generated from government contracts,
which makes us susceptible to the uncertainties inherent in the government
budgeting process. In addition, many of our contracts can be terminated by
our customer.
Our
concentration of government work makes us susceptible to government budget cuts
and policy changes, which may impact the award of new contracts or future phases
of existing contracts. Government budgets (both in general and as to
space and defense projects) are subject to the prevailing political climate,
which is subject to change at any time. Additionally, awarded
contracts could be altered or terminated before we recognize our projected
revenue. Many contracts are awarded in phases where future phases are not
guaranteed to us. For example, in 2007, we were informed by the
Missile Defense Agency that there were no Government Fiscal Year 2008 funds
available to support our microsatellite distributed sensing experiment. In
addition, obtaining contracts and subcontracts from government agencies is
challenging, and contracts often include provisions that are not standard in
private commercial transactions. For example, government contracts
may:
·
|
include
provisions that allow the government agency to terminate the contract
without penalty;
|
·
|
be
subject to purchasing decisions of agencies that are subject to political
influence;
|
·
|
contain
onerous procurement procedures;
and,
|
·
|
be
subject to cancellation if government funding becomes
unavailable.
|
Securing
government contracts can be a protracted process involving competitive
bidding. In many cases, unsuccessful bidders may challenge contract
awards, which can lead to increased costs, delays, and possible loss of the
contract for the winning bidder.
In
addition, major contracts are often awarded to teams of companies. Therefore,
our ability to win contracts may depend not only on our own merits, but also
those of our bid team members. Also, if we do not lead the bid team as the prime
contractor, we will have limited control over the contract bid and award
processes.
Our
common stockholders will experience dilution if our preferred stock is converted
or our outstanding warrants and options are exercised.
As of
March 10, 2008, we have outstanding non-stock-option derivative securities which
could obligate us to issue 7,978,305 shares of our common stock, of which
1,922,138 underlie outstanding warrants and 6,056,167 are issuable upon
conversion of our outstanding Series C and Series D-1 preferred
stock. In addition, as of March 10, 2008, we had outstanding stock
options to purchase an aggregate of 10,828,578 shares of our common stock, of
which 8,243,773 are currently vested. The total number of shares
issuable upon the exercise or conversion of currently vested warrants, options
and preferred stock (16,222,078 shares) represents approximately 38% of our
issued and outstanding shares of common stock as of March 10, 2008.
We
face significant competition and many of our competitors have greater resources
and market status than we do.
We face
significant competition for our government and commercial
contracts. Many of our competitors have greater resources than we do
and may be able to devote greater resources than us to research and development,
marketing, and lobbying efforts. Given the sophistication inherent in
any space company's operations, larger competitors may have a significant
advantage and may be able to more efficiently adapt and implement technological
advances. In addition, larger and financially stronger corporations have
advantages over us in obtaining space and defense contracts due to their
superior marketing (lobbying) resources and the perception that they may be a
better choice than smaller companies for mission-critical projects because of
the higher likelihood that they will be able to continue in business for the
necessary future period.
Furthermore,
it is possible that other domestic or foreign companies or governments, some
with greater experience in the space industry and many with greater financial
resources than we possess, could seek to develop mission solutions or produce
products or services that compete with us, including new mechanisms and
electromechanical subsystems using new technology which could render our mission
solutions and products less viable. Some of our foreign competitors
currently benefit from, and others may benefit in the future from, subsidies
from or other protective measures implemented by their home
countries.
Our
level of business may be difficult to predict.
We hope
to sell an increasing percentage of our mission solutions, products and services
on a recurring basis, but most of our revenue is derived from government
contracts and government-related work, which may not be recurring or may be
terminated. (See Risk Factor: A substantial portion of our net
sales are generated from government contracts, which makes us susceptible to the
uncertainties inherent in the government budgeting process. In addition,
many of our contracts can be terminated by our
customer.) Government contracts can be defunded or terminated
by the Government for convenience. Also, some of our mission solutions, products
and services may not achieve market acceptance, and our future prospects may
therefore be difficult to evaluate.
We
may not develop products successfully or in a timely manner.
Many of
our mission solutions, products, services and technologies are currently in
various stages of development. Further development and testing of our
products and technologies will be required to prove additional performance
capability beyond current levels and to confirm commercial
viability. Additionally, the final cost of development cannot be
determined until development is complete. Most of our development
work is in fact performed under contracts from our customers. In the
past, we have contracted to execute development programs under fixed price
contracts. Under these contracts, even if our costs begin to exceed
the amount to be paid by the customer under the contract, we are required to
complete the contract without receiving any additional payments from our
customer. It is difficult to predict accurately the total cost of
executing these programs. If the costs to complete these programs
significantly exceed the payments from our customers under the contracts, our
results of operations will be harmed. These contracts are inherently risky, and
in the past have had material adverse effects to us. We intend to
significantly reduce our acceptance of this sort of contract. This may limit our
opportunity to develop products at a customer's expense.
Our
mission solutions, products, services and technologies are, and will continue to
be, subject to significant technological change and innovation. Our success will
generally depend on our ability to continue to conceive, design, manufacture,
and market new products and services on a cost-effective and timely basis. We
anticipate that we will incur significant expenses in the design and initial
manufacture and marketing of new products and services. Some of these
costs may be covered by our customers or partnership arrangements. However,
there can be no assurance that significant costs will not be incurred by
us.
The
marketplace for our technology and products is uncertain.
The
demand for all space-related goods and services in general, and for our mission
solutions, products, services and technologies in particular, is uncertain and
we may not obtain a sufficient market share to sustain our business or to
increase profitability. Our business plan assumes that near-term revenues will
be generated largely from government contracts from our mission solutions,
including, but not limited to, small satellites and electromechanical systems
for spacecraft. A long-term commercial market may not develop for
private manned and unmanned space exploration. Small satellites and
commercial space exploration are still relatively new concepts, and it is
difficult to predict accurately the ultimate size of the market. In addition, we
are working to develop new ways to enhance our mission solutions, such as large
deployable structures, solar array drives, slip rings, precision scanning
assemblies for spacecraft, and now services such as turnkey launch
solutions. Many of our products and services are new and unproven,
and the true level of customer demand is uncertain. Lack of significant market
acceptance of our mission solutions, products, services and technologies, delays
in such acceptance, or failure of our markets to develop or grow could
negatively affect our business, financial condition, and results of
operations.
Our
operating results could fluctuate on a quarterly and annual basis, which could
cause our stock price to decline.
Our
operating results may fluctuate from quarter-to-quarter and year-to-year for a
variety of reasons, many of which are beyond our control. Factors that could
affect our quarterly and annual operating results include those listed below as
well as others listed in this "Risk Factors" section:
·
|
we
may not be awarded all stages of existing or future
contracts;
|
·
|
significant
contracts may be awarded to our competitors rather than to
us;
|
·
|
the
timing of new technological advances and mission solution announcements or
introductions by us and our
competitors;
|
·
|
changes
in the terms of our arrangements with customers or
suppliers;
|
·
|
reliance
on a few customers for a significant portion of our
revenue;
|
·
|
the
failure of our key suppliers to perform as
expected;
|
·
|
general
or particular political conditions that could affect spending for the
products that we offer;
|
·
|
changes
in perception of the safety of space
travel;
|
·
|
cost
overruns or other delays or failures to satisfy our obligations under our
contracts on a timely basis;
|
·
|
the
failure of our mission solution to conduct a successful
mission;
|
·
|
the
uncertain market for our mission solutions, products, services and
technologies;
|
·
|
the
availability and cost of raw materials and components;
and,
|
·
|
the
potential loss of or inability to hire key
personnel.
|
Our
operating results may fall below the expectations of public market analysts or
investors. In this event, our stock price could decline
significantly.
Our
products and services may not function well under certain
conditions.
Most of
our mission solutions and related products are technologically advanced and
tested, but sometimes are not space qualified for performance under demanding
operating conditions. Many of our customers conduct extensive testing during the
extensive pre-launch period, while the hardware is on the
ground. Depending on the contract terms, we could incur additional
costs related to rework. Although we have never had a failure of our
mission solutions or products in space, it is possible that our mission solution
or products may not successfully launch or operate, or perform or operate as
intended in space. Like most organizations that have designed space missions or
launched space qualified hardware, we may experience some failures, cost
overruns, schedule delays, and other problems.
Launch
failures or delays, due to no fault of our own, could have serious adverse
effects on our business.
Launch
failures or delays could have serious adverse effects on our business. Launches
are subject to significant risks, the realization of which can cause disabling
damage to, or total loss of, our mission solution and/or products, as well as
damage to our reputation among actual and potential customers. Delays in the
launch could also adversely affect our revenues. Delays could be caused by a
number of factors related to the launch vehicle and outside of our
control. Delays and the perception of potential delays could
negatively affect our marketing efforts and limit our ability to obtain new
contracts and projects.
In
addition to many other risks involving our business, until we develop our own
launch vehicle, we may be dependent on the performance of third party companies
like United Launch Alliance (ULA), a large company, or Space Exploration
Technologies, a small company with limited operating history, which has not yet
had a successful launch, for our launch vehicle.
Our
U.S. government contracts are subject to audits that could result in a material
adverse effect on our financial condition and results of operations if a
material adjustment is required.
The
accuracy and appropriateness of our direct and indirect costs and expenses under
our contracts with the U.S. government are subject to extensive regulation and
audit by the Defense Contract Audit Agency, by other agencies of the U.S.
government, or by prime contractors. These entities have the right to
audit our cost estimates and/or allowable cost allocations with respect to
certain contracts. From time to time we may in the future be required
to make adjustments and reimbursements as a result of these
audits. Responding to governmental audits, inquiries, or
investigations may involve significant expense and divert management
attention. Also, an adverse finding in any such audit, inquiry, or
investigation could involve contract termination, suspension, fines, injunctions
or other sanctions.
Our
success depends on our ability to retain our key personnel.
Our
success will be dependent upon the efforts of key members of our management and
engineering team, including our Chairman and Chief Executive Officer, Mark N.
Sirangelo, our President and Chief Financial Officer, Richard B. Slansky, and
certain other key personnel. The loss of any of these persons, or
other key employees, including personnel with security clearances required for
classified work and highly skilled technicians and engineers, could have a
material adverse effect on us. Our future success is likely to depend
substantially on our continued ability to attract and retain highly qualified
personnel. The competition for such personnel is intense, and our
inability to attract and retain such personnel could have a material adverse
effect on us. At this time, we do not maintain key man life insurance
on any of our key personnel.
We
reduced the use of stock options, in part due to SFAS 123(R), which reduced the
effectiveness of stock options as a retention device.
Historically,
we have used vesting stock options to enhance our ability to retain key
personnel. Technology companies, in general, and our company in
particular, depends upon and uses broad based employee stock option programs to
hire, incentivize, and retain employees in a competitive marketplace. If the
employee leaves us before the vesting period has been completed, the employee
must forfeit any unvested portion of the stock options. To the extent
vesting stock options were operating as a retention device, the reduced use of
vesting stock options, in part due to SFAS 123(R), and the elimination of the
vesting requirements on pre-2006 issued stock options, eliminated the retention
benefit. An accounting standard setting body adopted SFAS 123(R), an
accounting standard that requires us to record equity-based compensation expense
for stock options and employee stock purchase plan rights granted to employees
based on the fair value of the equity instrument at the time of grant. We began
recording these expenses in 2006. The change in accounting rules lead to a
decrease in reported earnings, if we have earnings, or an increased loss, if we
do not have earnings. We continue to use vesting stock options as an incentive;
however, as a result of SFAS 123(R) and other issues, the number of options
being granted has been significantly reduced. By doing so, we may have lost the
advantage of a valuable incentive tool and could be placed at a competitive
disadvantage by other potential employers who were more willing to grant stock
options and incur the related expense.
If
we grow but do not effectively manage the growth, our business could suffer as a
result.
Even if
we are successful in obtaining new business, failure to manage the growth could
adversely affect our operations. We may experience acute periods of very rapid
growth (for example, if we were to win a major contract), which could place a
significant strain on our management, operating, financial, and other resources.
Our future performance will depend in part on our ability to manage growth
effectively. We must develop management information systems, including
operating, financial, and accounting systems, improve project management systems
and processes and expand, train, and manage our workforce to keep pace with
growth. Our inability to manage growth effectively could negatively affect
results of operations and the ability to meet obligations as they come
due.
We
may not successfully address the problems encountered in connection with
potential future acquisitions.
We expect
to consider opportunities to acquire or make investments in other technologies,
and businesses that could enhance our capabilities, complement our current
business, or expand the breadth of our markets or customer
base. Acquisitions may be necessary to enable us to quickly achieve
the size needed for some potential customers to seriously consider entrusting us
with mission solutions, mission-critical contracts or subcontracts. As a
company, we have limited experience in acquiring other businesses and
technologies: the Starsys Research Corporation acquisition was our first major
acquisition. Potential and completed acquisitions and strategic
investments involve numerous risks, including:
·
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problems
assimilating the purchased technologies, products, or business
operations;
|
·
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problems
maintaining uniform standards, procedures, controls, and
policies;
|
·
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unanticipated
costs associated with the
acquisition;
|
·
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diversion
of management's attention from core
businesses;
|
·
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adverse
effects on existing business relationships with suppliers and
customers;
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·
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incompatibility
of business cultures;
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·
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risks
associated with entering new markets in which we have no or limited prior
experience;
|
·
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dilution
of common stock and shareholder value as well as adverse changes in stock
price;
|
·
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potential
loss of key employees of acquired businesses;
and
|
·
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increased
legal and accounting costs as a result of the rules and regulations
related to the Sarbanes-Oxley Act of
2002.
|
If
our key suppliers fail to perform as expected, our reputation may be
damaged. We may experience delays, lose customers, and experience
declines in revenues, profitability, and cash flow.
We
purchase a significant percentage of our product components and subassemblies
from third parties. If our subcontractors fail to perform as expected or
encounter financial difficulties, we may have difficulty replacing them or
identifying qualified replacements in a timely or cost effective
manner. As a result, we may experience performance delays that could
result in additional program costs, contract termination for default, or damage
to our customer relationships which may cause our revenues, profitability, and
cash flow to decline. In addition, negative publicity from any
failure of one of our products or sub-systems as a result of a supplier failure
could damage our reputation and prevent us from winning new
contracts.
Our
limited insurance may not cover all risks inherent in our
operations.
We may
find it difficult to insure certain risks involved in our operations, including
our mission solutions and satellite operations, accidental damage to high value
customer hardware during the manufacturing process, and damages to customer
spacecraft caused by us not working to specification. Insurance market
conditions or factors outside of our control at the time insurance is purchased
could cause premiums to be significantly higher than current estimates.
Additionally, the U.S. Department of State has published regulations which could
significantly affect the ability of brokers and underwriters to insure certain
missions or launches. These factors could cause other terms to be significantly
less favorable than those currently available, may result in limits on amounts
of coverage that we can obtain, or may prevent us from obtaining insurance at
all. Furthermore, proceeds from insurance may not be sufficient to cover
losses.
Our
competitive position may be seriously damaged if we cannot protect intellectual
property rights in our technology.
Our
success, in part, depends on our ability to obtain and enforce intellectual
property protection for our technologies. We rely on a combination of
patents, trade secrets and contracts to establish and protect our proprietary
rights in our technologies. However, we may not be able to prevent
misappropriation of our intellectual property, and the agreements we enter into
may not be enforceable. In addition, effective intellectual property
protection may be unavailable or limited in some foreign countries.
There is
no guarantee any patent will be issued on any patent application that we have
filed or may file. Further, any patent that we may obtain will
expire, and it is possible that it may be challenged, invalidated, or
circumvented. If we do not secure and maintain patent protection for
our technologies, our competitive position may be significantly harmed because
it may be much easier for competitors to copy our mission solutions or sell
products similar to ours. Alternatively, a competitor may
independently develop or patent technologies designed around our patented
technologies. In addition, it is possible that any patent that we may
obtain may not provide adequate protection and our competitive position could be
significantly harmed.
As we
expand our mission solution offerings or develop new uses for our products,
these offerings or uses may be outside the scope of our current patent
applications, issued patents, and other intellectual property
rights. In addition, if we develop new mission solutions or
enhancements to existing products, there is no guarantee that we will be able to
obtain patents to protect them. Even if we do receive patents, these
patents may not provide meaningful protection. In some countries
outside of the United States, effective patent protection is not
available. Moreover, some countries that do allow registration of
patents do not provide meaningful redress for violations of
patents. As a result, protecting intellectual property in these
countries is difficult and our competitors may successfully develop mission
solution offerings and sell products in those countries that have functions and
features that infringe on our intellectual property.
We may
initiate claims or litigation against third parties in the future for
infringement of our proprietary rights or to determine the scope and validity of
our proprietary rights or the proprietary rights of
competitors. These claims could result in costly litigation and
divert the efforts of our technical and management personnel. As a
result, our operating results could suffer and our financial condition could be
harmed, regardless of the outcome of the case.
Claims
by other companies that we infringe on their intellectual property or that
patents on which we rely are invalid could adversely affect our
business.
From time
to time, companies may assert patent, copyright and other intellectual property
rights against our mission solutions, or products using our technologies, or
other technologies used in our industry. These claims may result in
our involvement in litigation. We may not prevail in such litigation
given the complex technical issues and inherent uncertainties in intellectual
property litigation, as well as the possible need to devote our finite resources
to priorities other than expensive litigation. If any of our products
were found to infringe on another company's intellectual property rights, we
could be required to redesign our mission solution or product, or license such
rights and/or pay damages or other compensation to such other
company. If we were unable to redesign our mission solution or
product, or license such intellectual property rights used in our products, we
could be prohibited from using such mission solution, or making and selling such
products.
Other
companies or entities also may commence actions seeking to establish the
invalidity of our patents. In the event that one or more of our
patents is challenged, a court may invalidate the patent or determine that the
patent is not enforceable, which could harm our competitive
position. If any of our key patents are invalidated, or if the scope
of the claims in any of these patents is limited by court decision, we could be
prevented from licensing the invalidated or limited portion of such
patents. Even if such a patent challenge is not successful, it could
be expensive and time consuming to address, divert management attention from our
business, and harm our reputation.
We
are subject to substantial regulations, some of which prohibit us from selling
internationally. Any failure to comply with existing regulations, or
increased levels of regulation, could have a material adverse effect on
us.
Our
business activities are subject to substantial regulations by various agencies
and departments of the United States government and, in certain circumstances,
the governments of other countries. Several government agencies,
including NASA and the U.S. Air Force, maintain Export Control Offices to ensure
that any disclosure of scientific and technical information complies with the
Export Administration Regulations and the International Traffic in Arms
Regulations (ITAR). Exports of our mission solutions, products,
services, and technical information require Technical Assistance Agreements,
manufacturing license agreements, or licenses from the U.S. Department of State
depending on the level of technology being transferred. This includes
recently published regulations restricting the ability of U.S.-based companies
to complete offshore launches, or to export certain satellite components and
technical data to any country outside the United States. The export
of information with respect to ground-based sensors, detectors, high-speed
computers, and national security and missile technology items are controlled by
the Department of Commerce. 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 practical
effect of ITAR is to limit our opportunities or increase the costs of our
proposals in the international marketplace.
In
September 2007, we sold to OHB Technology AG, a leading German space technology
company, and MT Aerospace AG, a subsidiary of OHB Technology AG and an
established supplier in the aeronautic, aerospace and defense sectors, common
stock amounting to 19% of our then total outstanding shares. In
December 2007, after an additional investment by Loeb Partners, a New York based
investment firm, we sold additional shares of our common stock to OHB Technology
AG and MT Aerospace AG, when they exercised their pre-emptive rights to remain
at 19% of our total outstanding shares. Because they are foreign
companies, we could possibly be at risk of losing new and ongoing business if we
do not have the proper procedures in place to delineate and inform employees and
visitors, and also stockholders like OHB, regarding our controls necessary to
ensure that no transfer of classified defense information or controlled
unclassified information occurs unless authorized.
In
addition, the space industry has specific regulations with which we must
comply. Command and telemetry frequency assignments for space
missions are regulated internationally by the International Telecommunications
Union (ITU). In the United States, the Federal Communications Commission (FCC)
and the National Telecommunications Information Agency (NTIA), regulate command
and telemetry frequency assignments. All launch vehicles that are
launched from a launch site in the United States must pass certain launch range
safety regulations that are administered by the U.S. Air Force. In addition, all
commercial space launches that we would perform require a license from the
Department of Transportation. Satellites that are launched must obtain approvals
for command and frequency assignments. For international approvals,
the FCC and NTIA obtain these approvals from the ITU. These
regulations have been in place for a number of years to cover the large number
of non-government commercial space missions that have been launched and put into
orbit in the last 15 to 20 years. Any commercial deep space mission that we
would perform would be subject to these regulations.
We are
also subject to laws and regulations placed on the formation, administration and
performance of, and accounting for, U.S. government contracts. With
respect to such contracts, any failure to comply with applicable laws could
result in contract termination, price or fee reductions, penalties, suspension,
or debarment from contracting with the U.S. government.
We are
also required to obtain permits, licenses, and other authorizations under
federal, state, local, and foreign laws and regulations relating to the
environment. Our failure to comply with applicable law or government
regulations, including any of the above-mentioned regulations, could have
serious adverse effects on our business.
Our
stock price has been and may continue to be volatile, which could result in
substantial losses for investors purchasing shares of our common
stock.
The
market prices of securities of technology-based companies like ours,
particularly in industries (also like ours) where substantial value is ascribed
to a hope for future increase in the size of the total market, are often highly
volatile. The market price of our common stock has fluctuated significantly in
the past. Our market price may continue to exhibit significant fluctuations in
response to a variety of factors, many of which are beyond our control,
including:
·
|
deviations
in our results of operations from
estimates;
|
·
|
changes
in estimates of our financial performance or in analyst coverage
decisions;
|
·
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changes
in our markets, including decreased government spending or the entry of
new competitors;
|
·
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awards
of significant contracts to competitors rather than to
us;
|
·
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our
inability to obtain financing necessary to operate our
business;
|
·
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potential
loss of key personnel;
|
·
|
perceptions
about the effect of possible dilution arising from the issuance of large
numbers of shares of common stock underlying outstanding stock options,
warrants, and preferred stock:
|
·
|
changes
in market valuations of similar companies and of stocks
generally;
|
·
|
volume
fluctuations generally; and,
|
·
|
other
factors listed above in our Risk Factor: "Our operating results could
fluctuate on a quarterly and annual basis, which could cause our stock
price to fluctuate or
decline."
|
The
concentration of ownership of our common stock gives a few individuals
significant control over important policy decisions and could delay or prevent
changes in control.
As of
March 10, 2008, our Executive Officers and Directors together beneficially owned
approximately 34.1% of the issued and outstanding shares of our common
stock. (Note: The beneficial ownership calculations are different
from a straight percentage of outstanding ownership calculation. The
beneficial ownership calculation takes into consideration derivative securities,
such as stock options and warrants, which are vested or will vest within 60 days
from March 10, 2008. These additional securities are deemed to be
outstanding for the purpose of computing the percentage of common stock owned in
this table, but are not deemed outstanding for the purpose of computing the
percentage owned). OHB Technology AG and MT Aerospace AG collectively
beneficially own approximately 18.8% of our common stock. James W.
Benson and Susan C. Benson beneficially own approximately 16.7% of our common
stock. (Mr. Benson separated from our employ in September 2006 but
retains a seat on our Board of Directors.) Loeb Partners Corporation
owns approximately 11.3% of our common stock. As a result, Executive
Officers, Directors and/or significant stockholders (i.e., OHB Technology AG, MT
Aerospace AG, Loeb Partners and/or the Bensons) could have the ability to exert
significant influence over matters concerning us, including the election of
directors, changes in the size and composition of the Board of Directors, and
mergers and other business combinations involving us. Our foreign
stockholders are contractually limited for a period of two years from their
stock purchase date and Loeb Partners is contractually limited for a period of
one year from their stock purchase date in their ability to exert significant
influence over us by voting of shares. Also, through control of the
Board of Directors and voting power, our Officers and Directors may be able to
control certain decisions, including decisions regarding the qualification and
appointment of officers, dividend policy, access to capital (including borrowing
from third-party lenders and the issuance of additional equity securities), and
the acquisition or disposition of our assets. In addition, the
concentration of voting power in the hands of those individuals and entities
could have the effect of delaying or preventing a change in control of our
company, even if the change in control would benefit our
stockholders. A perception in the investment community of an
anti-takeover environment at our company could cause investors to value our
stock lower than in the absence of such a perception.
We
have not paid dividends on our common stock in the past and do not anticipate
paying dividends on our common stock in the foreseeable future. In addition,
other securities may restrict payment of common stock dividends.
We have
not paid common stock dividends since our inception and do not anticipate paying
dividends in the foreseeable future. Our current business plan provides for the
reinvestment of any earnings in an effort to complete development of our
technologies and products, with the goal of increasing sales and long-term
profitability and value. In addition, the terms of our preferred
stock currently restrict, and any other credit or borrowing arrangements that we
may enter into may in the future restrict or limit, our ability to pay common
stock dividends to our shareholders.
We
are subject to new corporate governance and internal control reporting
requirements, and our costs related to compliance with, or our failure to comply
with existing and future requirements, could adversely affect our
business.
We face
new corporate governance requirements under the Sarbanes-Oxley Act of 2002, as
well as new rules and regulations subsequently adopted by the SEC, the Public
Company Accounting Oversight Board and any stock exchange on which our stock may
be listed in the future. These laws, rules and regulations, which are already
known to be burdensome and costly, continue to evolve and may become
increasingly stringent in the future. In particular, we are required to include
a management report on internal control over financial reporting as part of this
Form 10-KSB annual report (and future annual reports) pursuant to Section 404 of
the Sarbanes-Oxley Act. We are continually evaluating our internal
controls and processes to help ensure that we will be able to comply with
Section 404 of the Sarbanes-Oxley Act. We cannot assure you that we
will be able to fully maintain compliance with these laws, rules and regulations
that address corporate governance, internal control reporting, and similar
matters. Failure to comply with these laws, rules, and
regulations, may be viewed negatively by investors and could
materially adversely affect our reputation, financial condition, and the value
of our securities.
The
terms of our outstanding shares of preferred stock, and any shares of preferred
stock issued in the future, may reduce the value of your common
stock.
We have
up to 10,000,000 shares of authorized preferred stock in one or more series. We
currently have outstanding 248,460 shares of our Series C Preferred Stock and
approximately 3,010 shares of our Series D-1 Preferred Stock, as of March 10,
2008. Our Board of Directors may determine the terms of future
preferred stock offerings without further action by our stockholders. If we
issue additional preferred stock, it could affect the rights of stockholders or
reduce the value of common stock. In particular, specific rights granted to
future holders of preferred stock could be used to restrict our ability to merge
with or sell our assets to a third party. These terms may include voting rights,
preferences as to dividends and liquidation, conversion and redemption rights,
and sinking fund provisions. Our Series C Preferred Stock and Series
D-1 Preferred Stock rank senior to the common stock with respect to dividends
and liquidation and have other important preferred rights.
Our
available secured debt financing is expensive and carries restrictive
conditions.
On
September 29, 2006, we entered into a secured revolving credit facility with
Laurus Master Fund. Although the maximum size of the facility is $5.0
million, actual borrowings are limited by a formula based on our eligible
accounts receivable and eligible inventory. We currently have nothing
drawn on the revolving credit facility. We paid a loan fee at inception in the
form of 310,009 shares of common stock valued at $350,000. On
September 30, 2007, we issued an additional 283,286 restricted shares to Laurus,
equivalent to a $200,000 fee upon the first anniversary of the
facility. In addition, we will be required to pay Laurus an
additional loan fee in the form of common stock valued at $200,000 on September
29, 2008, the second anniversary date of the facility, if the facility remains
in place. Any outstanding balance on the facility bears interest at a floating
rate of prime plus 2%, and the maximum life of the facility is three
years. The facility is collateralized by substantially all of our
assets. The facility contains certain default
provisions. In the event of a default by us, we will be required to
pay an additional fee per month until the default is cured. Laurus
has the option of accelerating the entire principal balance and requiring us to
pay a premium in the event of an uncured default.
Any
further debt financing, if available at all when needed, might require further
expensive and onerous financial terms, security provisions and restrictive
covenants. If we cannot repay or refinance our debt when it comes
due, we would be materially adversely affected.
Because
our common stock is not listed on a national stock exchange and is subject to
the SEC's penny stock rules, broker-dealers may experience difficulty in
completing customer transactions and trading activity in our securities may be
adversely affected.
Transactions
in our common stock are currently subject to the "penny stock" rules promulgated
under the Securities Exchange Act of 1934. Under these rules, broker-dealers who
recommend our securities to persons other than institutional accredited
investors must:
·
|
make
a special written suitability determination for the
purchaser;
|
·
|
receive
the purchaser's written agreement to a transaction prior to
sale;
|
·
|
provide
the purchaser with risk disclosure documents which identify certain risks
associated with investing in "penny stocks" and which describe the market
for these "penny stocks" as well as a purchaser's legal remedies;
and,
|
·
|
obtain
a signed and dated acknowledgment from the purchaser demonstrating that
the purchaser has actually received the required risk disclosure document
before a transaction in a "penny stock" can be
completed.
|
As a
result of these rules, broker-dealers may find it difficult to effectuate
customer transactions and trading activity in our securities may be adversely
affected. As a result, the market price of our securities may be
depressed, and it may be more difficult to sell our securities. In addition,
having a common stock traded on the OTC Bulletin Board with a low trading price
may result in a negative image which hinders our commercial initiatives and our
future capital-raising activities.
ITEM
2. DESCRIPTION
OF PROPERTY
In
January 2003, we entered into a sale and 10-year leaseback of our 25,000 square
foot headquarters facility in Poway, California. Our facility
includes a small Spacecraft Assembly and Test facility with a 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. In March 2005, we leased an additional 11,000
square feet of office and warehouse space within a mile of our Poway, California
facility and moved our machine shop with rocket motor casting capability for
hybrid propulsion into it. This lease is now set to expire on June
30, 2008. We also negotiated an arrangement with Northrop Grumman for
use of a test pad at their Capistrano Test Facility approximately one hour from
our Poway, California offices. We use this site to fire and test
larger hybrid rocket motors. Key uses of our California facilities
are program and project conferences and meetings, engineering design,
engineering analysis, spacecraft assembly, avionics labs, software labs, and
media outreach. We also have an Internet-based Mission Control and
Operations Center in our building. Our facilities allow for efficient
design, assembly, and test for our projects, and of our mission solutions,
products and technologies.
The rent
on our headquarters building is approximately $29,500 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. The rent on the second Poway facility
was approximately $9,000 per month in 2006 and $11,000 per month in 2007 and
included all CAM charges and taxes. The Capistrano facility is billed
to us by Northrop Grumman only when in use and includes all support
services.
As a
result of our acquisition of Starsys Research Corporation in January 2006, we
acquired a lease for a 41,400 square foot facility in Boulder, Colorado (at a
rental rate of approximately $55,000 per month) and a 5,000 square foot facility
in Durham, North Carolina (at a rental rate of approximately $6,000 per
month). We entered into a new lease in August 2006 on a facility
located at 1722 Boxelder Street in the Colorado Technology Center in Louisville,
Colorado. The Boulder lease expired in March 2007. We
relocated our manufacturing operations from Boulder to Louisville, Colorado in
March 2007, which was approximately 12 miles southeast of the Boulder
location. This new facility provided an immediate improvement in
product work flow over the existing Boulder location. The Louisville facility
has approximately 72,000 square feet, and rent is approximately $92,000 per
month including common area maintenance charges and with a 3.0% COLA increase
annually. We plan to develop this space through phased capital equipment
additions that will improve our fabrication, assembly, and test
capabilities.
Finally,
our Durham, North Carolina facility lease expired in March 2007. We signed a new
lease in March 2007, and in May 2007 relocated our Durham manufacturing
operations from 633 Davis Drive to 1030 Swabia Court, one mile east of the prior
location. We held over in the existing facility until the tenant
improvements were completed. The new Durham facility has approximately
13,500 square feet of usable office and laboratory space. The rent is
approximately $11,000 per month with an increase annually.
ITEM
3. LEGAL
PROCEEDINGS
None.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES
Market
Information
Our
common stock has been traded on the OTC 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 from
fiscal 2006 through March 10, 2008 as reported by Yahoo! Finance Historical
Prices (www.finance.yahoo.com). The quotations reflect the high and
low sale prices, without retail mark-up, markdown or commission and may not
represent actual transactions.
Quarter
Ending
|
Quarterly
High
|
Quarterly
Low
|
3/31/2006
|
$1.52
|
$1.10
|
6/30/2006
|
$1.58
|
$1.20
|
9/30/2006
|
$1.36
|
$0.91
|
12/31/2006
|
$1.23
|
$0.65
|
3/31/2007
|
$1.06
|
$0.68
|
6/30/2007
|
$0.98
|
$0.65
|
9/30/2007
|
$0.84
|
$0.51
|
12/31/2007
|
$0.88
|
$0.65
|
3/10/2008
|
$1.06
|
$0.60
|
Holders
of Record
As of
March 10, 2008, there were approximately 500 holders of record of SpaceDev
common stock.
Dividends
We have
never paid a cash dividend on our common stock. Payment of common
stock 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 common stock dividends in the foreseeable future. Our secured debt
and our preferred stock outstanding currently restrict our ability to pay common
stock dividends.
ITEM
6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 Risk Factors set forth herein.
SpaceDev,
Inc., a Delaware corporation, together with our subsidiaries, (“SpaceDev,”
“we,” “us,” “our,” or “Company”), is a leading space technology
company. We are engaged in the conception, design, development,
manufacture, integration, sale, and operation of space systems, subsystems,
products and services, as well as the design, manufacture, and sale of
mechanical and electromechanical subsystems and components for
spacecraft. We are currently focused on the commercial and military
development of low-cost small satellites and related subsystems, hybrid rocket
propulsion for space and launch vehicles, subsystems that enable critical
spacecraft functions such as pointing solar arrays and communication antennas
and restraining, deploying and actuating moving spacecraft
components. We maintain our corporate headquarters in California and
operating centers in California, Colorado and North Carolina and currently have
approximately 185 full and part time employees.
During
2007, approximately 73% of our revenues were generated from direct government
contracts, and from government-related work through subcontracts with others,
while the remaining 27% were generated from commercial contracts. In
2006, approximately 89% of our revenues were generated from direct government
contracts, and from government-related work through subcontracts with others,
while the remaining 11% were generated from commercial
contracts. Currently, we are focusing on the domestic United States
government market, which we believe is only about one-half of the global
government market for our mission solutions, products, services and
technologies. We are restricted by export control regulations, including
International Traffic in Arms Regulations, which may limit our ability to
develop market opportunities outside the United States. However,
international revenues have historically represented less than 5% of our total
net sales and we are interested in exploring further international contract
opportunities, Our new and evolving relationship with OHB Technology AG and MT
Aerospace AG may influence our decision and ability to operate in the
international marketplace, as well as for them to operate in the United States
government and civil marketplace.
During
2007, we submitted approximately 205 bids for government or commercial programs
and continued our work with the United States Congress to identify directed
funding for our programs.
Financing
Sale of Common Stock to Loeb
Partners Corporation
In
December 2007, we entered into a Stock Purchase Agreement with Loeb Partners
Corporation (hereinafter “Loeb”) covering the issuance and sale of 3,750,000
shares of our common stock at a purchase price of $0.75 per share. We
received gross proceeds from the sale of approximately $2.8 million in
cash. The common stock is restricted. In addition,
pursuant to our Stockholder Agreement with Loeb, Loeb has agreed not to sell the
common stock issued under the Stock Purchase Agreement for one
year. We have also provided Loeb with the right, after one year, to
demand that we file a registration statement with the Securities and Exchange
Commission to cover re-sales of their common stock. In addition,
subject to existing rights of other stockholders, we have provided Loeb with
rights to participate in our future financings.
Pursuant
to our Stockholder Agreement with Loeb, for one year, Loeb agreed to vote their
common stock in favor of nominees recommended by our Board of
Directors. Loeb agreed to, after the first year, continue to vote
their common stock in favor of current members of the Board of
Directors. Further, Loeb agreed not to purchase additional shares of
common stock or cause others to do so, except as expressly provided in the
Stockholder Agreement. The Stockholder Agreement expires on the
earliest of: (1) ten years; (2) a change of control of SpaceDev; or
(3) when Loeb owns less than 4.99% of us.
Sale of Common Stock to OHB
Technology AG and MT Aerospace AG
In
September 2007, we raised $4.4 million in cash by selling 7,095,566 shares of
our common stock to OHB Technology AG, a leading German space technology
company, and MT Aerospace AG, a subsidiary of OHB Technology AG, in a private
transaction at a purchase price of $0.62 per share. The price was
determined as a premium of 11% to the closing price of our common stock on
September 12, 2007, which was $0.56 per share. We used some of this
cash to retire revolving debt balances and certain dividend bearing preferred
stock. We also believe that our relationship with OHB Technology AG
and MT Aerospace AG may evolve into a strategic one of mutual high level benefit
as a result of actively exploring manufacturing opportunities using our
production facilities, systems development by both organizations, and new
business program opportunities in Europe as well as in the United
States.
In
December 2007, we raised an additional $658,000 in cash by selling 877,653
shares of our common stock to OHB Technology AG and MT Aerospace AG at $0.75 per
share, in connection with the Loeb Partners Corporation investment in us, and
the pre-emptive right of OHB Technology AG and MT Aerospace AG to maintain their
19% ownership in us.
The
investors agreed not to solicit our customers and clients in the United States
for the same products and services provided by us. The investors agreed not to
purchase additional shares of common stock or cause others to do so, except as
expressly provided in our Stockholder Agreement with them. The
Stockholder Agreement expires on the earliest of: (1) ten years, (2)
a change of control of SpaceDev or (3) when the investors own less than 4.99% of
us.
Also,
pursuant to this Stockholder Agreement, we agreed to elect a qualified
representative of OHB Technology AG (or any qualified replacement) to our Board
of Directors and to nominate this representative of OHB Technology AG for
election by the stockholders. This obligation will continue until the
expiration of this Stockholder Agreement. Pursuant to this provision,
we elected Hans Steininger to our Board of Directors in November
2007. In addition, per our Stockholder Agreement, for two years OHB
Technology AG and MT Aerospace AG agreed to vote their shares of our common
stock in favor of the nominees to our Board of Directors that have been
recommended for election by the Board of Directors. OHB Technology AG
and MT Aerospace AG also agreed to, following this two year
period, continue to vote their shares of common stock in favor of any
nominees recommended by the Company’s Board of Directors (1) if such nominee is
a current member of the Board of Directors or (2) if the slate of nominees that
is recommended for election by the Board of Directors includes the Stockholder’s
nominee.
Revolving Credit
Facility
In
September 2006, we entered into a $5.0 million financing arrangement with Laurus
Master Fund, Ltd. (“Laurus”). The financing is effected through a
revolving note for up to $5.0 million, although the exact principal balance at
any given time will depend on draws made by us on the facility. We
are allowed to borrow against the revolving credit facility under an investment
formula based on accounts receivable at an advance rate equal to 90% of eligible
receivables and the lesser of: (a) 50% of eligible inventory (calculated on the
basis of the lower-of-cost-or-market, on a first-in-first-out basis); or, (b)
$1.0 million, provided, however, that no more than $500,000 of such eligible
inventory may be in the form of work-in-process inventory. The balance on this
revolving credit facility at December 31, 2007 and 2006 was approximately $0 and
$805,000, respectively.
The
revolving credit facility bears interest at a rate equal to prime plus 2% and is
payable monthly. The rate will be increased or decreased on the date the Prime
Rate is adjusted. Interest is due on the first business day of each
month through maturity. The term of the facility is scheduled to end
on September 29, 2009. At inception, Laurus received, as a loan fee,
310,009 unregistered shares of our common stock valued at $350,000 plus cash
fees of $175,000. The value of these shares was determined based on the $1.13
average trading price for the stock during the preceding ten (10) business days
and the expense was amortized daily over the first year of the note. The cash
loan fee is being amortized over 36 months. In September 2007, Laurus
became entitled to an additional 283,286 shares, valued at $200,000 upon the
first anniversary of the facility. We will issue additional
restricted shares of our common stock worth, in the aggregate, $200,000 to
Laurus in September 2008, if the facility remains in place. The
pricing of these additional shares will be based on the applicable preceding ten
(10) business day average trading price. The facility is not
convertible into any class of our securities.
Laurus
agreed that if and when it can resell the unregistered shares under Rule 144,
its resale on any one day cannot exceed 10% of the daily trading volume. We
registered the 310,009 shares and 283,286 shares, which totaled 593,295 shares,
for resale in a registration statement that we filed in January 2008 and which
was declared effective by the Securities and Exchange Commission in February
2008. In addition, Laurus is strictly prohibited from engaging in any
short sales of our common stock during the term of the facility.
The
facility is a secured debt, collateralized by substantially all of our assets.
The facility contains certain default provisions. In the event of a
default by us, we will be required to pay an additional fee per month until the
default is cured. Laurus has the option of accelerating the entire
principal balance and requiring us to pay a premium in the event of an uncured
default. The facility requires us to deposit all funds (other than
certain refundable deposits) into a lockbox that will be swept on a daily basis
to reduce any outstanding facility balance. Any funds in excess of any
outstanding facility balance are transferred to us on a daily
basis.
Series D-1 Amortizing
Convertible Perpetual Preferred Stock
In
January 2006, we entered into a securities purchase agreement, which we refer to
as the 2006 Purchase Agreement, with a limited number of institutional
accredited investors, led by Omicron Capital, but including Tailwind Capital
Management, Bristol Capital, Nite Capital and Laurus. Omicron
subsequently distributed its ownership to Rockmore Capital and Portside
Capital/Ramius, upon the dissolution of Omicron. We issued and sold
to these investors 5,150 shares of our Series D-1 Amortizing Convertible
Perpetual Preferred Stock, par value $0.001 per share, which we refer to as
Series D-1 Preferred Stock, for an aggregate purchase price of $5,150,000, or
$1,000 per share. We also issued various warrants to these investors
under the 2006 Purchase Agreement.
In May
2007, we offered to the holders of the Series D-1 warrants the opportunity to
exercise the warrants at a reduced price to be calculated as 80% times the
volume weighted average price of our common stock for the 20 trading days
preceding the warrant holder’s acceptance of the offer. Although this written
offer expired by its terms in mid-June 2007, we orally renewed the offer to the
end of June 2007 and Laurus accepted, exercising 500,000 of their 639,203
warrants of this series for $290,000 cash. The Volume Weighted
Average Price for the 20 trading days preceding Laurus’ exercise was $0.725 per
share, making the strike price of the common stock warrant $0.58 which is 80% of
the $0.725. Due to a ratchet anti-dilution provision in the warrants
of this series, the exercise price of the remaining 635,138 warrants in the
series (which includes 139,203 warrants still owned by Laurus) was reduced to
$0.58 per share as a result of this transaction, and otherwise the remaining
warrants remain in full force and effect in accordance with their original
terms. The warrants are exercisable for five years following the date of grant.
The warrants feature a net exercise provision, which enables the holder to
choose to exercise the warrant without paying cash. However, this
right is available only if a registration statement or prospectus covering the
shares subject to the warrant is not available. The warrants will continue to
have the anti-dilution provisions reducing the warrant exercise price, if we
issue equity securities (other than in specified exempt transactions) at an
effective price below the warrant exercise price, to such lower exercise
price.
Net
Sales
During
the twelve months ended December 31, 2007, we had net sales of approximately
$34.7 million as compared to net sales of approximately $32.6 million for the
same period in 2006, an increase of approximately 6%. In 2007, we had
several events that impacted revenues. These were the rebuild, restructure, and
moving of our Colorado and North Carolina operations, the conclusion of certain
loss-generating fixed price development contracts, fire storms, which affected
our San Diego operations for an extended period, as well as discontinuation of
revenue from our Missile Defense Agency contract in the fourth
quarter. Approximately $25.4 million, or 73%, of net sales were
attributable to government and government-related work, with approximately $9.1
million, or 27%, of net sales being attributable to commercial contracts. Our
government customers include, but are not limited to, the Missile Defense
Agency, the Air Force Research Laboratory, NASA, and other U.S. Department of
Defense agencies. Our government-related work customers include, but
are not limited to, General Dynamics, Northrop Grumman, and
Raytheon. Commercial customers include Lockheed Martin and
Sumitomo. Revenues during 2006 derived from government and
government-related work were approximately $28.9 million, or 89% of net sales
and revenue from commercial customers was approximately $3.6 million, or 11% of
net sales.
Cost
of Sales
For the
year ended December 31, 2007, cost of sales was approximately $25.9 million, or
74.6% of net sales, as compared to approximately $25.7 million, or 79.0% of net
sales during the same period in 2006. Cost of sales consists of
direct and allocated costs associated with individual contracts. The
improved margin percentage was due to the wind-down of work on certain
loss-generating fixed price government-related development contracts, which we
inherited in the Starsys acquisition. We continue to focus our
efforts on final completion of these contracts, as well as altering our bid and
proposal processes to better manage any decision to enter into fixed price
development contracts. Contracts of a developmental nature are now
usually bid using cost reimbursable contracts to mitigate the risk wherever
possible. We are also continuing to focus efforts on improving our
operations and increasing our efficiencies, including but not limited to,
recruiting new talented engineers and business professionals, developing and
enhancing our project management skills, and creating or expanding systems to
assist in the efficient and effective management of our projects.
Operating
Expenses
Operating
expenses increased from approximately $7.8 million, or 24.0% of net sales, for
the year ended December 31, 2006 to approximately $8.7 million, or 25.0% of net
sales, for the year ended December 31, 2007. Operating expenses include general
and administrative expenses, research and development costs and marketing and
sales expenses.
·
|
General
and administrative expenses decreased from approximately $5.3 million, or
16.4% of net sales, for the year ended December 31, 2006 to approximately
$5.1 million, or 14.6% of net sales, for the year ended December 31,
2007. This decrease is attributed mainly to an initiative to
integrate certain business management functions within the company,
including, but not limited to finance and accounting, contracts,
information systems and security, as well as a refinement of our cost
allocation method and a movement toward activity based
costing. The benefit of this reduction was partially offset by
the added expense in 2007 related to: 1) the Company’s investment in a
security professional and related expenses; 2) the relocation of our
Colorado and North Carolina facilities; and 3) costs related to preparing
for regulatory compliance, e.g., Sarbanes-Oxley,
etc.
|
·
|
Research
and development expenses, internally funded, increased to approximately
$300,000, or 0.9% of net sales, for the year ended December 31, 2007, from
approximately $284,000, or 0.9% of net sales, during the same period in
2006. Both the total dollars spent and percent of net sales remained
essentially flat as most of our scientific work is performed under
customer or government funded contracts. Since monies from
those contracts are accounted for as revenue, we account for the related
expenses as a cost of sales, rather than as research and development
expense, in order to match the revenue with the appropriate
expenses.
|
·
|
Marketing
and sales expenses increased to approximately $3.3 million, or 9.5% of net
sales, for the year ended December 31, 2007, from approximately $2.2
million, or 6.8% of net sales, during the same period in 2006. The
total dollar increase of approximately $1.1 million was mainly due to
costs related to bidding a larger number of proposals, an increase in
engineering efforts on proposals, and appropriately capturing costs
related to engineering efforts on proposals. The core marketing and
sales costs remained essentially flat from year to year. In 2007, we
responded to over 200 proposal requests for potential work over the next
several years, including, but not limited to, the second phase of NASA
COTS. In 2006, we responded to approximately 100 requests
for proposals, including, but not limited to, the first phase of NASA
COTS. Although we did not win the NASA COTS proposal, we spent in excess
of $300,000 in 2007 and in excess of $800,000 in 2006 bidding on this
program.
|
Included
in all of our expenses, cost of sales, general and administrative, research and
development and marketing and sales, we have recorded our stock option expense
which is based on a calculation using the minimum value method as prescribed by
SFAS 123(R), otherwise known as the Black-Scholes method. Under
this method, we used a risk-free interest rate at the date of grant, an expected
volatility, an expected dividend yield, and an expected life of the options to
determine the fair value of options granted. The risk-free interest rate ranged
from 3.03% to 4.79%, expected volatility ranged from 59.99% to 90.8% at the time
all options were granted, the dividend yield was assumed to be zero, and the
expected life of the options was assumed to be four years based on the average
vesting period of options granted. The total expense for the years
ended December 31, 2007 and 2006 was approximately $408,000 and $133,000,
respectively. To minimize SFAS 123(R) stock option expense, we have
reduced the number of stock options we would otherwise be granting.
Income/(loss)
from operations improved from a loss of approximately $974,000, or 3% of net
sales for the year ended December 31, 2006, to a profit of approximately
$116,000, or 0.3% of net sales for the year ended December 31, 2007, an increase
of approximately $1.1 million from year to year. This improvement
includes an increase of approximately $275,000 in non-cash stock option expense,
which is included in cost of sales, marketing and sales, and general and
administrative expenses (see allocation chart at the bottom of our Consolidated
Statements of Operations).
Non-operating
expense (income) consisted of amortization of deferred gain on the sale of our
Poway headquarters building, other non-cash loan fees and expenses, and interest
expense and interest income. Our loan fees expense increased
substantially in 2007 as a result of the Laurus revolving credit facility, and
our interest expense increased in 2007, due to larger average balances on our
revolving credit facility. We experienced net non-operating loss of
approximately $399,000 compared to net non-operating income of approximately
$20,000 for the years ended December 31, 2007 and 2006,
respectively.
·
|
We
recorded loan fees related to our revolving credit facility as well as
other fund financing activities of approximately $389,000 and $115,000 for
the years ended December 31, 2007 and 2006, respectively. The
increase in expense was due to the partial year of use in 2006 and the
full year of use in 2007. We issued 310,009 shares of our
common stock, valued at $350,000, to Laurus in September 2006 for
revolving credit facility loan fees, which we amortized over the initial
12 months, plus cash fees of $175,000, which we are amortizing over 36
months. We further issued 283,286 shares of our common stock,
valued at $200,000, to Laurus in September 2007 for revolving credit
facility loan fees, which we are amortizing from October 2007 through
September 2008. The following chart highlights the loan fee
expenses under our revolving credit facility for 2006 through
2008:
|
Date
Granted
|
Type
|
|
Shares
|
|
|
Expense
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
September,
2006
|
Non-Cash
|
|
|
310,009 |
|
|
$ |
350,000 |
|
|
$ |
90,137 |
|
|
$ |
259,863 |
|
|
$ |
- |
|
|
$ |
- |
|
September,
2007
|
Non-Cash
|
|
|
283,286 |
|
|
$ |
200,000 |
|
|
$ |
- |
|
|
$ |
51,507 |
|
|
$ |
148,493 |
|
|
$ |
- |
|
September,
2008
|
Non-Cash
|
|
TBD*
|
|
|
$ |
200,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
51,507 |
|
|
$ |
148,493 |
|
September,
2006
|
Cash
|
|
|
N/A |
|
|
$ |
175,000 |
|
|
$ |
24,463 |
|
|
$ |
58,333 |
|
|
$ |
58,333 |
|
|
$ |
33,871 |
|
Cash
and Non-Cash Loan Fees
|
|
|
$ |
114,600 |
|
|
$ |
369,703 |
|
|
$ |
258,333 |
|
|
$ |
182,364 |
|
*
Presuming that the revolving credit facility remains in place for the third
year.
·
|
We
expensed approximately $208,000 and $66,000 in interest for the years
ended December 31, 2007 and 2006, respectively. The increase
was due to borrowings under our new revolving credit facility that we
entered into in September 2006 and utilized to fund operations for most of
2007. In the fourth quarter of 2007, we used a portion of the
proceeds from our common stock offerings to reduce the balance on our
revolving credit facility to zero by December 31, 2007. We will
continue to pay interest expense on certain capital leases in 2008 and, if
needed, borrowings on our revolving credit facility; however, we do not
anticipate using the $5.0 million revolving credit facility at this
time.
|
·
|
We
recognized approximately $81,000 and $83,000 in interest income in 2007
and 2006, respectively. Our interest income remained
essentially flat as we continued to manage our cash and cash
reserves.
|
·
|
We
recognized approximately $117,000 of amortized deferred gain on the sale
of our Poway headquarters building during each of the years ended December
31, 2007 and 2006, and we will continue to amortize the remaining deferred
gain of approximately $596,000 into non-operating income over the
remainder of the lease of the building, which is scheduled to expire in
2013.
|
Net
Income (Loss) and Adjusted EBITDA
Net loss
was approximately $273,000, or 0.8% of net sales, for the year ended December
31, 2007, compared to a net loss of approximately $973,000, or 3.0% of net
sales, for the year ended December 31, 2006. During the year ended
December 31, 2007, we had adjusted earnings before interest, taxes, depreciation
and amortization, loan fees on our revolving facility, stock option expense, and
gain on our 2003 building sale, or Adjusted EBITDA, of approximately $1.7
million, or 5.0% of net sales, compared to approximately $142,000, or 0.4% of
net sales, for the year ended December 31, 2006.
The
following table reconciles Adjusted EBITDA to net income (loss) for the years
ended December 31, 2007 and 2006:
For
the twelve months ended
|
|
|
|
|
(Restated)
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
Net
Loss
|
|
$ |
(272,562 |
) |
|
$ |
(973,185 |
) |
Interest
Income
|
|
|
(81,156 |
) |
|
|
(83,362 |
) |
Cash
Interest Expense
|
|
|
207,516 |
|
|
|
65,713 |
|
Loan
Fees on Revolving Credit Facility
|
|
|
389,479 |
|
|
|
114,600 |
|
Gain
on Building Sale
|
|
|
(117,272 |
) |
|
|
(117,274 |
) |
Stock
Option Expense
|
|
|
408,094 |
|
|
|
133,379 |
|
Provision
for income taxes
|
|
|
(9,809 |
) |
|
|
19,290 |
|
Depreciation
and Amortization
|
|
|
1,234,261 |
|
|
|
982,860 |
|
Adjusted
EBITDA *
|
|
$ |
1,758,551 |
|
|
$ |
142,021 |
|
*
Adjusted earnings before interest, taxes, depreciation, amortization, loan fees
on our revolving credit facility, stock option expense, and gain on the 2003
sale of our building. Other companies may use the same "Adjusted EBITDA" phrase
as we do, but define or calculate it differently than we do.
We define
Adjusted EBITDA as net income before interest, taxes, depreciation,
amortization, loan fees on our revolving credit facility, stock option expense,
and gain on the 2003 sale of our Poway building. Adjusted EBITDA is
not recognized under U.S. GAAP. We believe the use of Adjusted EBITDA
along with U.S. GAAP financial measures enhances the understanding of our
operating results and is useful to our management, Board of Directors and
investors.
·
|
Adjusted
EBITDA is used by management as a performance measure for benchmarking
against our peers and our competitors. In particular, we
evaluate management performance by using revenues and operating income
(loss) before depreciation and amortization, loan fees on our revolving
credit facility, stock option expense, and gain on our 2003 building
sale. We also use Adjusted EBITDA to evaluate operating
performance, to measure performance for incentive compensation programs,
and to evaluate future growth
opportunities.
|
·
|
Adjusted
EBITDA is one of the metrics used by management and our Board of
Directors, to review the financial performance of the business on a
monthly basis and, in part, to determine the level of compensation for
management. This is done by comparing the managers’
departmental budgets without interest, taxes, depreciation and
amortization, loan fees on our revolving credit facility, stock option
expense, and gain on our 2003 building sale as a measure of their
performance.
|
·
|
We
believe Adjusted EBITDA is useful to investors and allows a comparison of
our operating results with that of competitors exclusive of depreciation
and amortization, interest income, interest expense, non-cash stock option
expenses and other non-operating expenses such as loan fees and gain on
our 2003 building sale. Financial results of competitors in our
industry have significant variations that can result from timing of
capital expenditures, the amount of intangible assets recorded, the
differences in assets’ lives, the timing and amount of investments and the
variances in the amount of stock options granted to
employees.
|
Adjusted
EBITDA should not be viewed in isolation and is not presented as an alternative
to cash flow from operations as a measure of our liquidity or as an alternative
to net income as an indicator of our operating performance. Adjusted
EBITDA should be used in conjunction with U.S. GAAP financial measures. Adjusted
EBITDA is not intended to be a measure of free cash flow for management’s
discretionary use, as it does not consider certain cash requirements such as
capital expenditures, contractual commitments, interest payments, income tax
payments and debt service requirements. There are material
limitations associated with making the adjustments to calculate Adjusted EBITDA
and using this non-GAAP financial measure as compared to the most directly
comparable GAAP financial measure. For instance, EBITDA does not
include: 1) interest expense, and because we often borrow money to
finance our operations, interest expense is a necessary element of our
costs; 2) depreciation and amortization expense, and because we use
tangible and intangible capital assets, depreciation and amortization expense is
a necessary element of our costs; and, 3) income tax expense, and
despite our prospective tax loss carry forwards, because the payment of income
taxes is part of our operations, income tax expense is a necessary element of
our costs. Since not all companies use identical calculations, our
presentation of Adjusted EBITDA may not be comparable to other similarly titled
measures of other companies.
We showed
three consecutive years of positive and growing revenue and three consecutive
years of positive Adjusted EBITDA. The following chart illustrates
our annual trend in Adjusted EBITDA for the years ended December 31, 2005, 2006
and 2007.
Net
increase in cash and cash equivalents during the twelve months ended December
31, 2007 was approximately $5.1 million compared to a net decrease of
approximately $4.3 million for the same twelve-month period in
2006. Net cash provided by operating activities totaled approximately
$1.7 million for the year ended December 31, 2007, compared to approximately
$1.4 million used in operating activities during 2006. The
approximate $3.1 million increase in cash from operating activities was
primarily due to our improvement in operating performance (approximately
$700,000), an increase in depreciation and amortization (approximately
$250,000), an increase in stock options expense (approximately $275,000), an
increase in non-cash loan fees (approximately $255,000), an increase in deferred
rent and other non-cash accruals of approximately ($362,000) and an increase in
all other operating assets and liabilities (approximately $1,258,000) which
relates to normal payables and receivables of approximately $3,633,000 offset by
the source and use of current inventories and the increase and decrease of work
performed over work billed to date of approximately $2,375,000. These
working capital items are somewhat skewed due to Starsys’ condition when we
acquired it in early 2006, which continued to require us to commit working
capital as of December 31, 2006.
Net cash
used in investing activities totaled approximately $1.7 million for the year
ended December 31, 2007, compared to approximately $2.8 million used in
investing activities during the same twelve-month period in 2006. The cash used
in investing activities in 2006 included approximately $1.4 million of one-time
acquisition costs for Starsys Research Corporation. Other than that,
cash used in investing activities in 2007 related to the purchases of fixed
assets of approximately $1.5 million versus comparable purchases of fixed assets
in 2006 of approximately $1.4 million, illustrating a small increase in fixed
asset spending, mainly due to the relocation of our Colorado and North Carolina
facilities in 2007.
Net cash
provided by financing activities totaled approximately $5.1 million for the year
ended December 31, 2007, compared to net cash provided by financing activities
totaling approximately $137,000 during 2006. The increase is primarily
attributable to the sale of our common stock to OHB Technology AG, MT Aerospace
AG and Loeb Partners Corporation in 2007 of approximately $7.9 million,
partially offset by the partial redemption (i.e., amortization) of our Series
D-1 Preferred Stock of approximately $1.3 million. All other
financing activities included:
·
|
net
borrowings on notes and capital leases (approx.
<$130,000>);
|
·
|
payments
on the revolving credit facility (approx.
<$805,000>);
|
·
|
Employee
Stock Purchase Plan contributions (approx. <$38,000>);
and,
|
·
|
dividend
payments on our preferred stock (approx.
<$570,000>).
|
The total
of the financing activities was a use of cash of approximately $1.1
million. Key factors in 2006 were the issuance of Series D-1
Preferred Stock for $4.0 million net, and note principal payments (related to
the Starsys acquisition) of $4.7 million.
Our cash,
cash reserves, and cash available for investment increased to approximately $6.5
million at December 31, 2007, compared to approximately $1.4 million at December
31, 2006. The increase was mainly attributable to the proceeds from
issuance of our common stock. Cash plus accounts receivable increased from
approximately $8.7 million at December 31, 2006 to approximately $13.0 million
at December 31, 2007, an increase of over $4.2 million. Our working
capital ratio at December 31, 2007 was approximately 2.0 compared to 1.2 at
December 31, 2006.
We had
net billings in excess of costs (which is defined as “billings in excess of
costs” [an asset] minus “costs in excess of billings” [a liability]) of
approximately $1.0 million and $1.1 million at December 31, 2007 and 2006,
respectively. This effectively means that, on average, we were
advanced more contract funds from our customers than we expended or earned and
were not able to bill yet, i.e., it was a net advance payment. At
December 31, 2007 and 2006, “billings in excess of costs”, which represented the
amounts billed to our customers under the contractual terms, represented
approximately $2.4 million and $2.8 million, respectively. At December 31,
2007 and 2006, “costs in excess of billings” which represented the actual costs
incurred that had not been billed to date, represented approximately $1.4
million and $1.7 million at December 31, 2007 and 2006,
respectively.
Our
backlog was approximately $29 million at December 31, 2007, compared to
approximately $28 million at December 31, 2006. Our backlog consists of
contracted and contract-in-process business. Our contracted business
is the estimated value of contracts for which we are authorized to incur costs
and for which orders have been recorded, but for which revenue has not yet been
recognized. Contracted business fluctuates due to a variety of
events, including but not limited to the timing of
awards. Contracts-in-process business are situations where we have
been informed that our bids on new contract work have been accepted, but due to
issues, such as: delays in the adoption of the U.S. Government budget; changes
in program budgets; and, finalization of mutually acceptable contract terms and
conditions, these contract opportunities have not been admitted into our
backlog. Our contracted business was approximately $16 million and
$20 million at December 31, 2007 and 2006, respectively. Our
contract-in-process business was approximately $13 million and $8 million at
December 31, 2007 and 2006, respectively.
Issuance
of Our Common Stock to OHB Technology AG and MT Aerospace AG
In
September 2007, we raised $4.4 million in cash by selling 7,095,566 shares of
our common stock to OHB Technology AG, a leading German space technology
company, and MT Aerospace AG, a subsidiary of OHB Technology AG and an
established supplier in the aeronautic, aerospace and defense sectors, in a
private transaction at a purchase price of $0.62 per share. The price
was determined as a premium of 11% to the closing price of our common stock on
September 12, 2007, which was $0.56 per share. We used some of this
cash to retire revolving debt balances and certain dividend bearing preferred
stock. We also believe that our relationship with OHB Technology AG
and MT Aerospace AG may evolve into a strategic one of mutual benefit as a
result of actively exploring manufacturing opportunities using our production
facilities, systems development by both organizations, and new business program
opportunities in Europe as well as in the United States.
In
December 2007, we raised an additional $658,000 in cash by selling 877,653
shares of our common stock to OHB Technology AG and MT Aerospace AG at $0.75 per
share, in connection with the Loeb Partners Corporation investment in us, and
the pre-emptive right of OHB Technology AG and MT Aerospace AG to maintain their
19% ownership in us.
The
common stock we issued is restricted. We also entered into a Stockholder
Agreement with the investors, which provide the investors with the right, after
one year, to demand that we file a registration statement with the Securities
and Exchange Commission to cover re-sales of the common stock from time to time
by the investors. In addition, subject to existing rights of other
stockholders, we provided the investors with rights to participate in our future
financings.
The
investors agreed not to solicit our customers and clients in the United States
for the same products and services provided by us. The investors agreed not to
purchase additional shares of common stock or cause others to do so, except as
expressly provided in our Stockholder Agreement with them. Our
Stockholder Agreement with them expires on the earliest of: (1) ten
years, (2) a change of control of SpaceDev or (3) when the investors own less
than 4.99% of us.
Also,
pursuant to our Stockholder Agreement, we agreed to elect a qualified
representative of OHB Technology AG (or any qualified replacement) to our Board
of Directors and to nominate this representative of OHB Technology AG for
election by the stockholders. This obligation will continue until the
expiration of our Stockholder Agreement. Pursuant to this provision,
we elected Hans Steininger to our Board of Directors in November
2007. In addition, per our Stockholder Agreement, for two years OHB
Technology AG and MT Aerospace AG agreed to vote their shares of our common
stock in favor of the nominees to our Board of Directors that have been
recommended for election by the Board of Directors. OHB Technology AG
and MT Aerospace AG also agreed to, following this two year
period, continue voting their shares of common stock in favor of any
nominees recommended by the Company’s Board of Directors (1) if such nominee is
a current member of the Board of Directors or (2) if the slate of nominees that
is recommended for election by the Board of Directors includes the Stockholder’s
nominee.
Issuance
of Our Common Stock to Loeb Partners Corporation
In
December 2007, we entered into a Stock Purchase Agreement with Loeb Partners
Corporation (hereinafter “Loeb”) covering the issuance and sale of 3,750,000
shares of our common stock at a purchase price of $0.75 per share. We
received gross proceeds from the sale of approximately $2.8 million in
cash. The common stock is restricted. In addition,
pursuant to our Stockholder Agreement with Loeb, Loeb agreed not to sell the
common stock issued under the Stock Purchase Agreement for one
year. We have also provided Loeb with the right, after one year, to
demand that we file a registration statement with the Securities and Exchange
Commission to cover re-sales of their common stock. In addition,
subject to existing rights of other stockholders, we have provided Loeb with
rights to participate in our future financings.
Pursuant
to our Stockholder Agreement with Loeb, for one year, Loeb agreed to vote their
common stock in favor of nominees recommended by our Board of Directors and Loeb
agreed to, after one year, continue to vote their common stock in favor of
current members of the Board of Directors. Further, Loeb has agreed
not to purchase additional shares of common stock or cause others to do so,
except as expressly provided in our Stockholder Agreement with
Loeb. Our Stockholder Agreement with Loeb expires on the earliest
of: (1) ten years; (2) a change of control of SpaceDev; or (3) when
Loeb owns less than 4.99% of us.
Our
Revolving Credit Facility with Laurus
In
September 2006, we entered into a new revolving financing arrangement with
Laurus. The financing is effected through a revolving note for up to $5.0
million, although the exact principal balance at any given time will depend on
draws made by us on the facility. We are allowed to borrow against the
facility under an investment formula based on accounts receivable (See
“Financing: Revolving Credit Facility” above). The balance on this
revolving credit facility at December 31, 2007 and 2006 was approximately zero
and $805,000, respectively. The facility is not convertible into any
class of our securities. The facility is a secured debt, collateralized by
substantially all of our assets. The facility contains certain default
provisions.
Our
Series D-1 Preferred Stock Financing
In
January 2006, we entered into a securities purchase agreement, which we refer to
as the 2006 purchase agreement, with a limited number of institutional
accredited investors, led by Omicron Capital. We issued and sold to these
investors 5,150 shares of our Series D-1 Amortizing Convertible Perpetual
Preferred Stock, par value $0.001 per share, which we refer to as Series D-1
Preferred Stock, for an aggregate purchase price of $5,150,000, or $1,000 per
share. We also issued various warrants to these investors under the 2006
purchase agreement. Since then, we have repurchased, or redeemed, approximately
$2.0 million which represented approximately 1,951 shares of Series D-1
Preferred Stock.
Due to
the acquisition of Starsys, our revenues transitioned in 2006 from being
primarily cost-plus fixed-fee contracts, where revenues are recognized as costs
are incurred and services are performed, to a combination of cost-plus fixed-fee
contracts and 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. Losses on contracts are
recognized when they become known and reasonably estimated (see the Notes to our
Consolidated Financial Statements). Actual results of contracts may
differ from management's estimates and such differences could be material to the
consolidated financial statements. In addition, when the total value
of a contract becomes uncertain (such as when a contract modification to reflect
cost overruns is being negotiated), we may be unable to report further revenues
on the contract under the percentage-of-completion method until the uncertainty
is resolved.
Professional
fees are billed to customers on a time-and-materials basis, a fixed price basis
or a per-transaction basis. Time-and-material revenues are recognized
as services are performed. Deferred revenue represents amounts
collected from customers for services to be provided at a future
date. Research and development costs are expensed as
incurred.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123(R)), which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS
123(R) requires all share-based payments to employees, including grants and
vesting of employee stock options beginning January 1, 2006, to be recognized in
the financial statements based on their fair values. In addition, the adoption
of SFAS 123(R) requires additional accounting related to the income tax effects
and additional disclosure regarding the cash flow effects resulting from
share-based payment arrangements. SFAS 123(R) became effective January 1, 2006
for calendar year companies. Accordingly, we implemented the revised standard in
the first quarter of 2006. (See Note 7 to our Consolidated Financial Statements
for additional information.)
Recent Accounting Pronouncements
In
September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements. This
statement defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. It provides a framework for measuring fair
value and requires additional disclosures about fair value measurements. This
statement applies only to fair value measurements already required or permitted
by other statements; it does not impose additional fair value measurements. This
statement is effective for fair value measurements in fiscal years beginning
after November 15, 2007. We do not expect this statement to have a material
impact on our financial condition or results of operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - including an amendment of FASB Statement No.
115 ("SFAS No. 159"). SFAS No. 159 permits entities to elect to measure
many financial instruments and certain other items at fair value. Upon adoption
of SFAS No. 159, an entity may elect the fair value option for eligible items
that exist at the adoption date. Subsequent to the initial adoption, the
election of the fair value option should only be made at initial recognition of
the asset or liability or upon a re-measurement event that gives rise to
new-basis accounting. SFAS No. 159 does not affect any existing accounting
literature that requires certain assets and liabilities to be carried at fair
value nor does it eliminate disclosure requirements included in other accounting
standards. SFAS No. 159 is effective for fiscal years beginning after November
15, 2007. We are currently assessing the impact of SFAS No. 159 on our
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and
SFAS No. 160, Noncontrolling interests in
Consolidated Financial Statements, an amendment of ARB No. 51. The
new standards require that a noncontrolling interest in a consolidated
subsidiary be displayed in the consolidated statement of financial position as a
separate component of equity. The new standards also indicate gains and
losses should not be recognized on sales of noncontrolling interests in
subsidiaries but that differences between sale proceeds and the consolidated
basis of accounting should be accounted for as charges or credits to
consolidated additional paid-in-capital. However, in a sale of a
subsidiary’s shares that results in the deconsolidation of the subsidiary, a
gain or loss would be recognized for the difference between the proceeds of that
sale and the carrying amount of the interest sold. Also, a new fair value
in any remaining noncontrolling ownership interest is established. These
statements are effective for the first annual reporting period on or after
December 15, 2008. We are currently evaluating the provisions of SFAS
141 (R) and SFAS 160 and do not expect there to be an impact to our current
financial statements; however, future acquisitions could be
impacted.
ITEM 7. FINANCIAL STATEMENTS
Financial
Statements are attached at the end of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A(T). CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain a set of disclosure controls and procedures designed to reasonably
ensure that information we are required to disclose in reports filed under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange
Commission’s rules and forms and that such information is accumulated and
communicated to our management, including Mark N. Sirangelo, our Chief Executive
Officer, and Richard B. Slansky, our Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management is required to apply its reasonable judgment in evaluating the
cost-benefit relationship of possible controls and procedures, in light of the
limited resources, which it has at its disposal at the time.
As
required by Commission Rule 13a-15(b), and as defined in Rules 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934, as amended, 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 our disclosure controls and procedures as of the end of
the period covered by this Report. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective for a company of our size, maturity and
financial level.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial
reporting is a process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer, and effected by our board of
Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
Our
internal control over financial reporting includes those policies and procedures
that:
Ø
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our
assets;
|
Ø
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and
directors; and
|
Ø
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Our
evaluation of internal control over financial reporting includes using the COSO
framework, an integrated framework for the evaluation of internal controls
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
to identify the risks and control objectives related to the evaluation of our
control environment.
Based on
our evaluation under the frameworks described above, our management has
concluded that our internal control over financial reporting was effective as of
December 31, 2007.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation requirements by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.
ITEM 8B. OTHER INFORMATION
On
December 20, 2005, we entered into executive employment agreements with Mark N.
Sirangelo and Richard B. Slansky pursuant to which Mr. Sirangelo was employed as
our Chief Executive Officer and Vice Chairman and Mr. Slansky was employed as
our President and Chief Financial Officer. The agreements had an initial term of
two years, and were automatically renewed on December 20, 2007, for a third
year, since neither we nor Messrs Sirangelo and Slansky provided written
notice of intent not to renew.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,
CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT
The
following are the current Directors and Executive Officers of SpaceDev and their
background and ages as of March 10, 2008.
Name
|
Age
|
Title
|
Mark
N. Sirangelo
|
47
|
Chairman
of the Board and Chief Executive Officer
|
Richard
B. Slansky
|
50
|
President,
Chief Financial Officer, Corporate Secretary and
Director
|
Scott
Tibbitts
|
50
|
Managing
Director and Director
|
James
W. Benson
|
62
|
Director
|
Curt
Dean Blake (1)
|
50
|
Director
|
General
Howell M. Estes, III (USAF Retired) (1)
|
66
|
Director
|
|
59
|
Director
|
|
68
|
Director
|
Hans
Steininger
|
46
|
Director
|
Robert
S. Walker (1)
|
65
|
Director
|
(1)
Denotes Independent Director
Mark N. Sirangelo was
appointed our Vice Chairman and Chief Executive Officer in December 2005, became
our Chairman in 2006 upon the resignation of James W. Benson, and was appointed
to our Government Security Committee in 2007. Before SpaceDev, Mr. Sirangelo was
the managing member and Chief Executive Officer of The Quanstar Group, LLC from
December 2003 until November 2005 and the managing member of QS Advisors, LLC
from February 1998 to December 2005. During this tenure, Mr. Sirangelo actively
participated in the development of a number of early-stage companies in
aerospace, technical, and scientific industries. His work also included hands-on
involvement with technology commercialization transfer for university and
government laboratories. From 2001 until 2003, Mr. Sirangelo also
served as a senior Officer of Natexis Bleichroeder, Inc., an international
investment banking firm. Before that, Mr. Sirangelo had 20 years of executive
management experience operating aerospace and technology companies. Mr.
Sirangelo has a bachelor's degree in science, a master's degree in business, and
juris doctorate, all from Seton Hall University. Mr. Sirangelo is a
Director for the National Center for Missing and Exploited Children, a Director
and Treasurer of the International Center for Missing and Exploited Children, a
Director of the California Space Authority, and the Vice Chairman of the
Personal Spaceflight Federation.
Richard B. Slansky is
currently our President, Chief Financial Officer, Director, and Corporate
Secretary. He joined us in February 2003 as Chief Financial Officer
and Corporate Secretary. In November 2004, Mr. Slansky was appointed as
President and Director. Mr. Slansky served as interim Chief Executive
Officer, interim Chief Financial Officer, and Director for Quick Strike
Resources, Inc., an IT training, services, and consulting firm, from July 2002
to February 2003. From May 2000 to July 2002, Mr. Slansky served as
Chief Financial Officer, Vice President of finance, administration and
operations, and Corporate Secretary for Path 1 Network Technologies Inc., a
public company focused on merging broadcast and cable quality video transport
with IP networks. 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.
Scott Tibbitts was appointed
our Managing Director and a Director on January 31, 2006. Mr.
Tibbitts co-founded Starsys Research Corporation in 1988 and has served as
President, Chief Executive Officer, and a member of the Board of Directors of
Starsys Research Corporation from 1988 until May 2005; and from May 2005 to
January 2006 served as Chief Executive Officer and a member of the Board of
Directors of Starsys Research Corporation. Mr. Tibbitts has a bachelor's degree
in chemical engineering from the University of Wisconsin.
James W. Benson is our
founder and served as our Chairman of the Board from October 1997 until
September 2006. Mr. Benson also served as our Chief Executive Officer
from October 1997 until December 2005, at which time he was succeeded by Mark N.
Sirangelo in such position, and became our Chief Technology Officer. In
September 2006, Mr. Benson resigned from SpaceDev to found Benson Space Company,
but remained a member of our Board or Directors. In 1984, Mr. Benson founded
Compusearch Corporation (later renamed Compusearch Software Systems) in McLean,
Virginia, which was engaged in the development of software algorithms and
applications for personal computers and networked servers to create full text
indexes of government procurement regulations and to provide instant full text
searches for any word or phrase. In 1989, Mr. Benson started the
award-winning ImageFast Software Systems, which later merged with
Compusearch. In 1995, Mr. Benson sold Compusearch and ImageFast, and
retired at age fifty. Mr. Benson started SpaceDev, Inc., a Nevada
corporation, which was acquired by Pegasus Development Corp, a Colorado
corporation, in October of 1997. Mr. Benson acquired a controlling ownership in
Pegasus and later changed its name to SpaceDev, Inc. Mr. Benson
holds a bachelor's 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.
Curt Dean Blake was appointed
to our Board of Directors as an independent Director in September 2000. He
serves as Chairman of our Audit Committee and is a member of our Compensation
Committee. The Board has identified Mr. Blake as an audit committee financial
expert under the rules of the Securities and Exchange Commission. In 2003 Mr.
Blake formed, and currently remains the Chief Executive Officer 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 has a master's degree and juris doctorate from the University of
Washington.
General Howell M. Estes, III (USAF
Retired) was appointed to our Board of Directors as an independent
Director in April 2001, is Chairman of our Nominating and Corporate Governance
Committee and is a member of our Compensation and Government Security
Committees. 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 and the United States Space
Command, and the Commander of the Air Force Space Command headquartered at
Peterson Air Force Base, 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 J.F.K. School of Government. Since
1998 General Estes has been the President of Howell Estes & Associates,
Inc., a consulting firm to chief executive officers, 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 as a commissioner on the U.S. Congressional
Commission to Assess United States National Security Space Management and
Organization, also known as the Rumsfeld Commission.
G. Scott Hubbard was
appointed to our Board of Directors as an independent Director in November 2007.
Mr. Hubbard is also a member of our Audit and Nominating and Corporate
Governance Committees. The Board has identified Mr. Hubbard as an audit
committee financial expert under the rules of the Securities and Exchange
Commission. He is currently a professor at Stanford University School of
Engineering, Department of Aeronautics and Astronautics. In 2006 and 2007 he was
also a Visiting Scholar at the Stanford University Electrical Engineering
Department and Carl Sagan Chair for the Study of Life in the Universe, SETI
Institute. From 1987 to 2006 Mr. Hubbard held a variety of positions with NASA
Ames Research Center including Director of NASA Ames, Deputy Director for
Research, Mars Program Director, Deputy Director of the Space Directorate,
Deputy Chief, Space Products, and Chief, Space Instrumentation and Studies. He
holds a bachelor’s degree in Physics and Astromony from Vanderbilt University, a
doctorate honoris causa from Polytech Universtiy of Madrid, and doctor of arts
honoris causa from Cogswell Polytechnic College.
Scott McClendon was appointed
to our Board of Directors as an independent Director in July 2002. He
is currently Chairman of our Compensation Committee and a member of our Audit
Committee. The Board has identified Mr. McClendon as an audit committee
financial expert under the rules of the Securities and Exchange
Commission. Mr. McClendon is currently acting President as well as
Chairman of the Board of Directors for Overland Storage, Inc., a public data
storage company. He became the Chairman of the Board after serving as
President and Chief Executive Officer from October 1991 to March 2001. In
addition to SpaceDev and Overland Storage, Mr. McClendon is currently serving on
the Board of Directors of Procera Networks, Inc., a global provider of
intelligent network traffic identification, control, and service management
infrastructure equipment. Mr. McClendon received a bachelor's degree in
electrical engineering, and a master's degree in electrical engineering from
Stanford University School of Engineering.
Hans J. Steininger was
appointed to our Board of Directors in November 2007. Mr. Steininger was
appointed Chief Executive Officer of MT Aerospace AG in June
2007. Mr. Steininger is also a co-investor in MT Aerospace, which in
July 2005 emerged in the course of the acquisition of MAN Technology AG by OHB
Technology AG/Bremen and Apollo Capital Partners/Munich. From 2005 to
May 2007, he acted as Chief Financial Officer of MT Aerospace AG. In
1999, Mr. Steininger founded Apollo Capital Partners, a Munich based private
equity firm, of which he remains a managing partner. From 1991 until
1998, he acted in various management positions within BMW Rolls Royce GmbH and
BMW AG. Mr. Steininger earned a master’s degree from the Technical University in
Munich in Aeronautical Engineering and in Business Administration.
Robert S. Walker was
appointed to our Board of Directors as an independent Director in April
2001. He is currently Chairman of our Government Security Committee,
and a member of our Nominating and Corporate Governance
Committee. Mr. Walker has acted as Chairman of Wexler & Walker
Public Policy Associates in Washington, D.C. since January 1997. Mr. Walker was
a member of the U.S. House of Representatives from 1977 through 1997, during
which time he served as Chairman of the House Science Committee, Vice Chairman
of the Budget Committee, and participated in House Republican leadership
activities. Mr. Walker was the first sitting member of the U.S. House of
Representatives to be awarded NASA's highest honor, the Distinguished Service
Medal. Mr. Walker was on the Board of Directors of The Aerospace Corporation,
from March 1997 to November 2005. Mr. Walker became Chairman of the Board of the
Space Foundation in January 2006.
Section
16 Beneficial Ownership Reporting Compliance
Based
upon a review of the Forms 3 and 4 furnished to us during 2007, each of the
Directors and/or Executive Officers timely filed any required initial Form 3 and
Form 4 under Section 16(a) of the Securities Exchange Act of 1934 during 2007
with the following exceptions: James W. Benson on January 3, 2007, June 20,
2007, July 25, 2007, September 7, 2007, October 1, 2007, October 30, 2007, and
November 19, 2007; Susan C. Benson on January 3, 2007, May 16, 2007, July 25,
2007, September 7, 2007, October 1, 2007, October 30, 2007, and November 19,
2007; Curt Blake on May 10, 2007, May 15, 2007, and September 19, 2007; Howell
Estes on February 8, 2007, May 10, 2007, and May 15, 2007; Scott Hubbard on
November 27, 2007; Wes Huntress on April 2, 2007, April 19, 2007, May 16, 2007,
and July 16, 2007; Loeb Partners Corp. on December 12, 2007; Scott McClendon on
May 10, 2007, May 16, 2007, and September 17, 2007; Hans Steininger on November
27, 2007; and Robert Walker on May 10, 2007 and May 16, 2007.
Code of Ethics
Disclosure
Our Board
of Directors adopted a Code of Ethics and Business Conduct applicable to the
members of the Board of Directors and our Officers. Our Chief Executive Officer,
Chief Financial Officer and other senior Officers specifically, are subject to
the Code. A copy of the Code may be obtained, at no cost, by contacting Richard
B. Slansky, Corporate Secretary. A copy of the Code of Ethics is also
attached as Exhibit 10.15 to our Form 10-KSB dated March 28, 2003.
ITEM
10. EXECUTIVE
COMPENSATION
Executive
Officer Compensation
Total
compensation paid to our "named Executive Officers" for the past two fiscal
years is set forth below. The named Executive Officers consist of each person
who was our principal Executive Officer at any time in 2007 and our two most
highly compensated Executive Officers other than the principal Executive
Officer(s) who were serving as Executive Officers on December 31,
2007.
Summary
Compensation Table
Name
and principal position
|
Year
|
|
Salary
($)
|
Bonus
($)
|
All
other compensation ($)
|
Total
|
Mark
N. Sirangelo
|
2007
|
|
313,962
|
-
|
-
|
|
$ 313,962
|
Chief
Executive Officer
|
2006
|
|
292,730
|
25,000
|
60,000
|
(1)
|
377,729
|
Richard
B. Slansky
|
2007
|
|
221,815
|
-
|
1,431
|
(2)
|
223,244
|
President
and Chief Financial Officer
|
2006
|
|
195,877
|
25,000
|
101,458
|
(2),(3)
|
322,335
|
Scott
Tibbitts
|
2007
|
|
150,000
|
-
|
101,475
|
(2),(4)
|
251,475
|
Managing
Director
|
2006
|
|
143,360
|
-
|
100,214
|
(2),(4)
|
243,573
|
(1)
|
Compensation
received for living expenses over the initial term of his employment
agreement.
|
(2)
|
Company
contributions to the individual’s 401(k) plan were $1,431 and $1,458 for
Mr. Slansky in 2007 and 2006, respectively; $1,475 and $2,703 for Mr.
Tibbitts in 2007 and 2006,
respectively
|
(3)
|
Commissions
paid in the amount of $100,000 on the sale of common and preferred stock
under a previous employment
agreement.
|
(4)
|
Payments
made under a non-compete agreement entered into upon the acquisition of
Starsys in January 2006 of $100,000 and $97,511 in 2007 and 2006,
respectively.
|
Outstanding
Equity Awards at Fiscal Year-End
The
following table reflects information for our Executive Officers named in the
Summary Compensation Table, effective December 31, 2007:
Name
|
Number
of securities underlying unexercised options exercisable
(#)
|
Number
of securities underlying unexercised options unexercisable
(#)
|
Equity
incentive plan award: number of securities underlying unexercised unearned
options (#)
|
Option
exercise price($)
|
Option
expiration date
|
Mark
N. Sirangelo
|
1,900,000
|
-
|
-
|
$ 1.40
|
12/20/2010
|
Richard
B. Slansky
|
1,400,000
|
-
|
-
|
1.40
|
12/20/2010
|
|
330,000
|
-
|
-
|
0.51
|
2/10/2009
|
|
395,000
|
-
|
-
|
0.92
|
3/25/2010
|
Scott
Tibbitts
|
-
|
-
|
-
|
-
|
-
|
Director
Compensation
The
following table sets forth the remuneration paid to our Directors during the
fiscal year ended December 31, 2007. We issued options for director
compensation at the end of 2007 for services under our new director compensation
arrangement which was implemented in 2007. The new director
compensation arrangement does pay our independent Directors additional
compensation for their service as Directors.
Name
|
Fees
Earned or Paid in Cash ($)
|
Stock
Awards ($)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Nonqualified
Deferred Compensation Earnings ($)
|
All
other Compensation ($)
|
Total
($)
|
Mark
N. Sirangelo
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Richard
B. Slansky
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
James
W. Benson
|
1,500
|
-
|
-
|
-
|
-
|
-
|
1,500
|
Scott
Tibbitts
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Curt
Dean Blake
|
6,750
|
-
|
4,380
|
-
|
-
|
-
|
11,130
|
General
Howell M. Estes, III
|
3,750
|
-
|
4,380
|
-
|
-
|
-
|
8,130
|
Wesley
T. Huntress
|
3,750
|
-
|
4,380
|
-
|
-
|
-
|
8,130
|
Scott
McClendon
|
7,500
|
-
|
4,380
|
-
|
-
|
-
|
11,880
|
Robert
S. Walker
|
2,250
|
-
|
4,380
|
-
|
-
|
-
|
6,630
|
Scott
Hubbard
|
1,500
|
-
|
20,872
|
-
|
-
|
-
|
22,372
|
Hans
Steininger
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Our
independent Directors received options on 10,000 shares of our common stock for
attending 2007 meetings of the Board. Our independent Directors also received
cash compensation for attending regularly scheduled Board meetings of $1,500 for
in-person attendance and $750 for telephone attendance. Each independent
Director also received $750 for their participation in each regularly scheduled
committee meeting. In addition to the above, independent Directors
received options for 5,000 shares on the date of election or appointment in 2006
and 50,000 shares on the date of election or appointment in 2007. The
2007 options granted to Board Members for the above mentioned services were
issued pursuant to the 2004 Equity Incentive Plan at fair market value as of the
date of grant, (i.e., the last business day of the year), vest over three years
in six semi-annual installments, and expire on the four-year anniversary of the
grant date.
Employment
Agreements, Termination of Employment Arrangements and Change of Control
Agreements
In
January 2006, we entered into a three year executive employment agreement with
Scott Tibbitts, pursuant to which Mr. Tibbitts is employed as our Managing
Director. Under the agreement, Mr. Tibbitts earns an annual base
salary of $150,000 and is eligible for quarterly performance bonuses, as
determined by our Board of Directors or Compensation Committee, up to an annual
aggregate amount of 50% of his base salary. Bonus milestones will be
mutually agreed upon in good faith by Mr. Tibbitts and by our Board of Directors
or Compensation Committee. We will pay severance to Mr. Tibbitts if
his employment is terminated by us without cause or by Mr. Tibbitts for good
reason. The severance payment is equal to: (1) if Mr. Tibbitts'
employment is terminated by us without cause, his then-current base salary per
month multiplied by the number of months remaining in the term of the agreement
(prorated with respect to any partial month); or, (2) if Mr. Tibbitts'
employment is terminated by Mr. Tibbitts for good reason, his then-current base
salary per month multiplied by the lesser of twelve months and the number of
months remaining in the term of the agreement. Under the agreement,
we will indemnify Mr. Tibbitts to the extent provided in our articles of
incorporation, as may be amended from time to time, and pursuant to our standard
indemnification agreement with our Officers and Directors, provided that we will
have no obligation to indemnify or defend Mr. Tibbitts for any action, suit or
other proceeding to the extent based on acts, omissions, events, or
circumstances occurring prior to the Starsys merger.
On
December 20, 2005, we entered into an executive employment agreement with Mark
N. Sirangelo pursuant to which Mr. Sirangelo was employed as our Chief Executive
Officer and Vice Chairman. The agreement had an initial term of two years, and
was automatically renewed for a third year, since neither we nor
Mr. Sirangelo provided written notice of intent not to
renew. Under the agreement, Mr. Sirangelo is entitled to receive; (1)
a base salary of $22,500 per month, subject to adjustment up to $27,500 per
month upon the happening of certain events or by the sixteenth month of service;
(2) performance-based cash bonuses based on the achievement of specific goals
set forth in the agreement (including a bonus of $25,000 upon the completion of
the merger with Starsys); and (3) a fully-vested option to purchase up to
1,900,000 shares of our common stock under the terms and conditions of a
non-plan stock option agreement between Mr. Sirangelo and us. The
option has an exercise price equal to $1.40 per share, which was the closing
sale price reported on the OTCBB on the date of grant, and will expire five
years after the date of grant. Some of the shares subject to the
option are subject to sale restrictions that expire upon the achievement of
certain specific milestones or four years from the date of grant, whichever
comes first. Subject to certain limitations, the option may be
exercised by means of a net exercise provision by surrendering shares with a
fair market value equal to the exercise price upon exercise. We will
pay severance to Mr. Sirangelo if his employment is terminated by us without
cause or by Mr. Sirangelo for good reason. The severance payment is
equal to: (1) if Mr. Sirangelo's employment is terminated by us without cause,
his then-current base salary per month multiplied by the greater of (A) 12
months or (B) the number of months remaining in the term of the agreement
(prorated with respect to any partial month); or (2) if Mr. Sirangelo's
employment is terminated by Mr. Sirangelo for good reason, his then-current base
salary per month multiplied by the lesser of (A) 12 months or (B) the number of
months remaining in the term of the agreement provided that such number of
months will not be deemed to be less than six months.
On
December 20, 2005, we entered into an amended and restated executive employment
agreement with Richard B. Slansky pursuant to which Mr. Slansky is employed as
our President and Chief Financial Officer. The agreement supersedes
in full the employment agreement dated February 10, 2003 between Mr. Slansky and
us. The agreement had an initial term of two years, and was
automatically renewed for a third year, since neither we nor Mr. Slansky
provided written notice of intent not to renew. Under the agreement,
Mr. Slansky is entitled to receive: (1) a base salary of $14,500 per month,
subject to adjustment up to $20,000 per month upon the happening of certain
events or by the sixteenth month of service; (2) performance-based cash bonuses
based on the achievement of specific goals set forth in the agreement (including
a bonus of $25,000 upon the completion of the merger with Starsys); and (3) a
fully-vested option to purchase up to 1,400,000 shares of our common stock under
the terms and conditions of a non-plan stock option agreement between Mr.
Slansky and us. The option has an exercise price equal to $1.40 per
share, which was the closing sale price reported on the OTCBB on the date of
grant, and will expire five years after the date of grant. Some of
the shares subject to the options are subject to sale restrictions that expire
upon the achievement of certain specific milestones or four years from the date
of grant, whichever comes first. Subject to certain limitations, the
option may be exercised by means of a net exercise provision by surrendering
shares with a fair market value equal to the exercise price upon
exercise. We will pay severance to Mr. Slansky if his employment is
terminated by us without cause or by Mr. Slansky for good reason. The
severance payment is equal to: (1) if Mr. Slansky's employment is terminated by
us without cause, his then-current base salary per month multiplied by the
greater of (A) 12 months or (B) the number of months remaining in the term of
the agreement (prorated with respect to any partial month); or (2) if Mr.
Slansky's employment is terminated by Mr. Slansky for good reason, his
then-current base salary per month multiplied by the lesser of (A) 12 months or
(B) the number of months remaining in the term of the agreement provided that
such number of months will not be deemed to be less than six
months.
ITEM
11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table provides information as of March 10, 2008 concerning the
beneficial ownership of our common stock, which is our only class or series of
voting securities, by; (i) each Director; (ii) each named Executive Officer;
(iii) each stockholder known by us to be the beneficial owner of more than 5% of
our outstanding Common Stock; and (iv) the Directors and Executive 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.
Name
and Address of Beneficial Owner
|
Amount
and Nature of Beneficial Ownership(1)
|
Percent
of Ownership
|
Mark
N. Sirangelo
|
2,142,500
|
(2)
|
4.82%
|
Richard
B. Slansky
|
2,237,886
|
(3)
|
5.01%
|
Susan
C. Benson
|
5,459,407
|
(4)
|
12.69%
|
James
W. Benson
|
4,216,407
|
(5)
|
9.80%
|
Scott
F. Tibbitts
|
1,449,194
|
|
3.41%
|
Curt
Dean Blake
|
207,490
|
(6)
|
0.49%
|
Scott
McClendon
|
197,460
|
(7)
|
0.46%
|
General
Howell M. Estes, III
|
189,667
|
(8)
|
0.44%
|
Robert
S. Walker
|
128,046
|
(9)
|
0.30%
|
Scott
Hubbard
|
-
|
|
0.00%
|
Hans
Steininger
|
5,979,846
|
(10)
|
14.07%
|
OHB
Technology AG
|
7,973,129
|
(11)
|
18.76%
|
Loeb
Partners Corporation
|
4,792,300
|
(12)
|
11.27%
|
Laurus
Master Fund, Ltd.
|
4,226,687
|
(13)
|
9.99%
|
Executive
Officers and Directors as a group (10 Persons)
|
16,748,496
|
(14)
|
34.05%
|
The
business address for each of these persons is 13855 Stowe Drive, Poway, CA
92064, with the exception of Susan Benson, whose address is 13592 Ranch Creek
Lane, Poway, CA 92064, OHB Technology AG, whose address is Karl-Ferdinand-Braun
Str. 8, D-28359 Bremen/Germany, Laurus Master Fund, whose address is 335 Madison
Avenue, 10th Floor, New York, NY 10017, and Loeb Partners Corporation, whose
address is 61 Broadway, New York, NY 10006.
(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 10,
2008, these additional shares are deemed to be outstanding for the purpose
of computing the percentage of common stock owned by such persons, but are
not deemed outstanding for the purpose of computing the percentage owned
by any other person. Percentages are based on total outstanding
shares of 42,450,363 on March 10,
2008.
|
(2)
|
Represents
242,500 shares in which he has indirect ownership interest, these shares
are held by The Quanstar Group LLC. Mr. Sirangelo also holds
vested options to purchase up to an aggregate of 1,900,000
shares.
|
(3)
|
Includes
vested options to purchase up to an aggregate of 2,125,000
shares.
|
(4)
|
Represents
2,967,700 shares held directly by Ms. Susan Benson as a result of a
stipulated order entered May 24, 2005 identifying the shares as a separate
property asset of Ms. Benson, plus beneficial ownership in 1,702,294
shares held jointly with James W. Benson, as to which she shares voting
and investing power with Mr. Benson, indirect beneficial ownership
interest in 289,413 shares held in Space Development Institute (where Ms.
Benson is a member of the Board of Directors along with James W. Benson),
as to which she shares voting and investing power with Mr. Benson, and
beneficial ownership in vested options issued in the name of James W.
Benson on 500,000 shares (which may constitute as community property with
James W. Benson). Excludes approximately 1.8 million shares held by
children of Ms. Benson, for which Ms. Benson disclaims beneficial
ownership.
|
(5)
|
Represents
1,724,700 shares held directly by Mr. James W. Benson as a result of a
stipulated order entered May 24, 2005 identifying the shares as a separate
property asset of Mr. Benson, plus beneficial ownership in
1,702,294 shares held jointly with Susan C. Benson, as to which he shares
voting and investing power with Ms. Benson, indirect beneficial ownership
interest in 289,413 shares held in Space Development Institute (where Mr.
Benson is a member of the Board of Directors along with Susan C. Benson),
as to which he shares voting and investing power with Ms. Benson, and
beneficial ownership in vested options to purchase up to an aggregate of
500,000 shares (which may constitute as community property with Susan C.
Benson). Excludes approximately 1.8 million shares held by
children of Mr. Benson, for which Mr. Benson disclaims beneficial
ownership.
|
(6)
|
Includes
vested options to purchase up to an aggregate of 127,000 common
shares.
|
(7)
|
Includes
vested options to purchase up to an aggregate of 172,000 common
shares.
|
(8)
|
Includes
vested options to purchase up to an aggregate of 123,000 common
shares.
|
(9)
|
Includes
vested options to purchase up to an aggregate of 97,000 common
shares.
|
(10)
|
Hans
Steininger is the Chief Executive Officer of MT Aerospace AG and is listed
as beneficial owner of the shares owned by
it.
|
(11)
|
Includes
5,979,846 shares held by their subsidiary MT Aerospace
AG.
|
(12)
|
Includes
3,750,000 shares that Loeb purchased from the Company in November 2007,
500,000 shares purchased in a private transaction with Mr. Benson in
February 2008, as well as 542,300 shares purchased on the open market. The
following table details the holdings of Loeb and its
affiliates:
|
|
SpaceDev
|
Market
|
Benson
|
Total
|
Loeb
Arbitrage Fund
|
1,350,880
|
-
|
212,549
|
1,563,429
|
Loeb
Partners Corporation
|
197,663
|
23,920
|
-
|
221,583
|
Loeb
Offshore Fund Ltd.
|
314,925
|
-
|
41,438
|
356,363
|
Loeb
Arbitrage B Fund LP
|
443,869
|
10,920
|
52,033
|
506,822
|
Loeb
Offshore B Fund Ltd.
|
130,163
|
9,660
|
18,980
|
158,803
|
Loeb
Marathon Fund, LP
|
787,794
|
298,290
|
104,248
|
1,190,332
|
Loeb
Marathon Offshore Fund, Ltd.
|
524,706
|
199,510
|
70,752
|
794,968
|
Total
|
3,750,000
|
542,300
|
500,000
|
4,792,300
|
(13)
|
Includes
vested warrants and convertible preferred shares in the amount of
7,263,626 adjusted down by approximately 5,636,000 to maintain the 9.99%
blocker on the beneficial ownership mandated in the Series D-1 preferred
stock agreement as well as the 4.99% blocker on the beneficial ownership
mandated in the Series C preferred stock
agreement.
|
(14)
|
Executive
Officers and Directors as a group include our ten Board members, two of
whom are also Executive Officers.
|
Equity
Compensation Plan Information
The
following table reflects information as of December 31, 2007 regarding our
equity compensation securities.
|
(a)
|
(b)
|
(c)
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights.
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
Equity
compensation plans approved by security holders
|
7,358,726
|
$1.11
|
2,215,773
|
Equity
compensation plans not approved by security holders
|
3,800,000
|
1.35
|
-
|
Total
|
11,158,726
|
$1.24
|
2,215,773
|
The
options granted to our executives, under the equity compensation plans not
approved by security holders, are fully vested and exercisable on the date of
grant, have an exercise price of $1.00 to $1.40 per share, which was the closing
sale price reported on the OTCBB on the date of grant, and will expire five to
ten years after the date of grant. Some of the shares subject to the
options are subject to sale restrictions that expire upon the achievement of
certain milestones or four years from the date of grant, whichever comes
first. Subject to certain limitations, these options may be exercised by
means of a net exercise provision by surrendering shares with a fair market
value equal to the exercise price upon exercise.
ITEM
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
James W.
Benson, our Director, and Susan C. Benson are married.
On
January 31, 2006, we entered into a non-competition agreement with Scott
Tibbitts, pursuant to which Mr. Tibbitts has agreed not to be employed by or
have any interest in an entity that engages in a similar business to Starsys
related to the aerospace industry for three years, shall not solicit any
business from any of our past or present customers, not solicit or encourage any
of our employees to leave or reduce his or her employment, not to encourage a
consultant under contract with us to cease or diminish his or her work with us,
not to use our intellectual property other than for the benefit of us and not to
make any negative or disparaging statements regarding us to any third
party. Mr. Tibbitts has received $100,000 and $97,511 in 2007 and
2006, respectively under this non-competition agreement, and will continue to
receive compensation at an annual rate of $100,000 until the contract expires in
January 2009, as long as he abides by the covenant not to compete.
Director
Independence
We have a
desire for a majority of our board to be comprised of “independent
directors.” We are striving to enhance our board and move toward a
majority of “independent directors.” In determining whether a Board
member is “independent,” we apply the definition of “independence” as set by the
listing standards for the Nasdaq Stock Market and SEC rules. Accordingly, Curt
Dean Blake, General Howell Estes, III, Scott Hubbard, Scott McClendon, and
Robert Walker currently meet the definition of “independent
director.”
All
members of our Audit Committee, Compensation Committee and Nominating and
Corporate Governance Committee are independent in accordance with Nasdaq
independence standards for members of these Committees.
Exhibit
No.
|
Description
|
Filed
Herewith
|
Incorporated
by Reference
|
Form
|
Date
Filed with SEC
|
Exhibit
No.
|
3.1
|
Certificate
of Incorporation of SpaceDev, Inc., a Delaware corporation
|
|
X
|
8-K
|
|
3.1
|
3.2
|
Bylaws
of SpaceDev, Inc., a Delaware corporation
|
|
X
|
8-K
|
|
3.2
|
3.3
|
|
|
X
|
8-K
|
|
4.2
|
3.4
|
|
|
X
|
8-K
|
|
10.1
|
4.1
|
|
|
X
|
8-K/A
|
|
99.1
|
10.1
|
|
|
X
|
8-K
|
|
10.1
|
10.2
|
Consent
to Sublease between Gateway and SpaceDev dated April 1,
2005
|
|
X
|
8-K
|
|
10.2
|
10.3
|
|
|
X
|
10-KSB
|
|
10.40
|
10.4
|
Common
Stock Purchase Warrant issued June 3, 2003 by SpaceDev to
Laurus Master Fund, Ltd.
|
|
X
|
8-K
|
|
10.3
|
10.5
|
|
|
X
|
8-K
|
|
10.4
|
10.6
|
|
|
X
|
8-K
|
|
10.2
|
10.8
|
1999
Stock Option Plan *
|
|
X
|
SB-2
|
|
4.8
|
10.9
|
First
Amendment to 1999 Stock Option Plan *
|
|
X
|
SB-2
|
|
4.14
|
10.10
|
1999
Employee Stock Purchase Plan *
|
|
X
|
10-SB
|
|
6.7
|
10.11
|
2004
Equity Incentive Plan *
|
|
X
|
S-8
|
|
99.1
|
10.12
|
First
Amendment to 1999 Employee Stock Purchase Plan *
|
|
X
|
10-KSB
|
|
10.39
|
10.13
|
|
|
X
|
8-K
|
|
10.1
|
10.14
|
|
|
X
|
8-K
|
|
10.2
|
10.15
|
|
|
X
|
8-K
|
|
10.4
|
10.16
|
|
|
X
|
8-K
|
|
10.5
|
10.17
|
|
|
X
|
8-K
|
|
99.2
|
|
|
|
|
|
|
|
10.18
|
Form
of Common Stock Warrant (Omicron et. al.)
|
|
X
|
8-K
|
|
99.4
|
10.19
|
|
|
X
|
8-K
|
|
99.1
|
10.20
|
|
|
X
|
8-K
|
|
99.3
|
10.21
|
Amendment
No. 2 to the SpaceDev 2004 Equity Incentive Plan *
|
|
X
|
8-K
|
|
99.5
|
10.22
|
|
|
X
|
8-K/A
|
|
99.2
|
10.23
|
Lease
Agreement between RE Hill Properties Louisville, LLC and Quartz Mountain
Properties, LLC and SpaceDev dated August 25, 2006
|
|
X
|
10-KSB
|
|
10.23
|
10.24
|
Lease
Agreement between W&G Associates and Starsys, Inc. dated February 8,
2007
|
|
X
|
10-KSB
|
|
10.24
|
10.25
|
Stock
Purchase Agreement, entered into as of September 14, 2007, by and between
SpaceDev, Inc. and MT Aerospace AG and OHB Technology AG.
|
|
X
|
8-K
|
|
99.1
|
10.26
|
Stockholder
Agreement, entered into as of September 19, 2007, by and between SpaceDev,
Inc. and MT Aerospace AG and OHB Technology AG.
|
|
X
|
8-K
|
|
99.2
|
10.27
|
Stock
Purchase Agreement, entered into as of December 4, 2007, by and between
SpaceDev, Inc. and Loeb Partners Corporation.
|
|
X
|
8-K
|
|
99.1
|
10.28
|
Stockholder
Agreement, entered into as of December 4, 2007, by and between SpaceDev,
Inc. and Loeb Partners Corporation.
|
|
X
|
8-K
|
|
99.2
|
10.29
|
|
|
X
|
8-K
|
|
99.1
|
10.30
|
Amendment
to the Stockholder Agreement, dated as of December 12, 2007 (but entered
into December 19, 2007), by and among SpaceDev, Inc. and MT Aerospace AG
and OHB Technology AG.
|
|
X
|
8-K
|
|
99.2
|
14.1
|
Code
of Ethics
|
|
X
|
10-KSB
|
|
10.15
|
21.1
|
|
|
X
|
10-KSB
|
Mar.
28, 2008 |
21.1
|
23.1
|
Consent
of PKF, Certified Public Accountants A Professional
Corporation
|
|
X
|
10-KSB |
Mar.
28, 2008 |
23.1
|
31.1
|
Rule
13a-14(a) certification of Principal Executive Officer
|
X
|
|
|
|
|
31.2
|
Rule
13a-14(a) certification of Principal Financial Officer
|
X
|
|
|
|
|
32.1
|
Rule
13a-14(b) certification of Chief Executive Officer
|
X
|
|
|
|
|
32.2
|
Rule
13a-14(b) certification of Chief Financial Officer
|
X
|
|
|
|
|
*
|
Management
contract or compensatory plan or
arrangement.
|
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The
following are the fees billed us by our auditors, PKF, Certified Public
Accountants, A Professional Corporation, respectively, for services rendered by
them during 2007 and 2006:
|
2007
|
2006
|
Audit
Fees
|
166,262
|
$ 101,690
|
Audit
Related Fees
|
17,312
|
82,445
|
Tax
Fees
|
21,370
|
24,088
|
All
Other Fees
|
17,000
|
285
|
Total
|
$ 221,944
|
$ 208,508
|
The
increase in fees was due to our acquisition of Starsys Research Corporation in
January 2006 for which fees were not billed until 2007. The acquisition added
additional complexities and consolidation issues to the Company's reporting
requirements.
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-KSB and for any other services that were normally provided by
PKF 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. The 2007 and 2006 fees in this category related to specific research of
accounting treatment under new FASB rules as well as capital
raises.
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 not
otherwise included in Audit Fees, Audit Related Fees or Tax
Fees. Included in such Other Fees were fees for services rendered by
PKF in connection with our private and public offerings conducted during such
periods.
Our Audit
Committee has considered whether the provision of the non-audit services
described above is compatible with maintaining PKF'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 (without exception, required to be) approved by the Audit
Committee of our Board of Directors.
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.
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.
Mark
N. Sirangelo, Chairman of the Board of Directors and Chief Executive Officer
(Principal Executive Officer)
Richard
B. Slansky, Director, President, and Chief Financial Officer (Principal
Financial and Accounting Officer)
James W. Benson,
Director
Gen. Howell M. Estes, III,
Director
Contents
CONSOLIDATED
FINANCIAL STATEMENTS
Report of Independent
Registered Public Accounting Firm
|
F-2
|
Financial
Statements
|
|
Consolidated
Balance Sheets
|
F-3
|
Consolidated
Statements of Operations
|
F-4
|
Consolidated
Statements of Stockholders' Equity
|
F-5
|
Consolidated
Statements of Cash Flows
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-8
|
Report of
Independent Registered Public Accounting Firm
Board of
Directors and Stockholders
SpaceDev,
Inc.
We have
audited the accompanying consolidated balance sheets of SpaceDev, Inc. and
Subsidiaries as of December 31, 2007 and 2006 (Restated), and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years 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
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal controls over financial reporting.
Our audits included consideration of internal controls over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstance, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. 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 audits provide 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, 2007 and 2006 (Restated), and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
As
discussed in Note 1, to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R), Shared-Based Payment, as of
January 1, 2006.
/s/
PKF
San
Diego,
California PKF
A Professional
Corporation
SpaceDev,
Inc.
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
2006
(Restated)
|
|
Assets
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents (Notes 1(o) and 9(a))
|
|
$ |
6,521,003 |
|
|
$ |
1,438,146 |
|
Accounts
receivable, net (Notes 1(d) and 9(b))
|
|
|
6,433,285 |
|
|
|
7,289,720 |
|
Inventory
(Note 1(q))
|
|
|
1,006,229 |
|
|
|
309,205 |
|
Other
current assets (Note 1(n))
|
|
|
702,120 |
|
|
|
599,565 |
|
Total
Current Assets
|
|
|
14,662,637 |
|
|
|
9,636,636 |
|
Fixed Assets - Net
(Notes 1(f) and 2)
|
|
|
4,420,020 |
|
|
|
3,793,365 |
|
Intangible
Assets (Note 3)
|
|
|
746,392 |
|
|
|
841,133 |
|
Goodwill
(Note 3)
|
|
|
11,233,665 |
|
|
|
11,233,665 |
|
Other
Assets (Note 1 (n))
|
|
|
1,045,272 |
|
|
|
626,086 |
|
Total
Assets
|
|
$ |
32,107,986 |
|
|
$ |
26,130,885 |
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
1,491,116 |
|
|
$ |
1,755,985 |
|
Current
portion of notes payable (Note 4(a))
|
|
|
86,385 |
|
|
|
- |
|
Current
portion of capitalized lease obligations (Note 8(a))
|
|
|
76,500 |
|
|
|
35,441 |
|
Accrued
payroll, vacation and related taxes
|
|
|
1,424,462 |
|
|
|
1,184,457 |
|
Billings
in excess of costs and deferred revenue (Note 1(r))
|
|
|
2,463,366 |
|
|
|
2,816,072 |
|
Revolving
line of credit (Note 4(b))
|
|
|
- |
|
|
|
805,172 |
|
Other
accrued liabilities (Note 1(e) and 8(b))
|
|
|
1,632,768 |
|
|
|
1,602,561 |
|
Total
Current Liabilities
|
|
|
7,174,597 |
|
|
|
8,199,688 |
|
Notes
Payable, Less Current Maturities (Note 4(a))
|
|
|
91,822 |
|
|
|
50,193 |
|
Capitalized
Lease Obligations, Less Current Maturities (Note 8(a))
|
|
|
251,799 |
|
|
|
136,709 |
|
Deferred
Gain (Note 8(c))
|
|
|
596,133 |
|
|
|
713,405 |
|
Other
Long Term Liabilities - Deferred Rent
|
|
|
643,168 |
|
|
|
160,782 |
|
Total
Liabilities
|
|
|
8,757,519 |
|
|
|
9,260,777 |
|
Commitments
and Contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Note 7)
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, $.001 par value, 10,000,000 shares authorized, and
251,659 and 252,963 shares issued and outstanding,
respectively
|
|
|
|
|
|
|
|
|
Series
C convertible preferred stock (Note 7(a))
|
|
|
248 |
|
|
|
248 |
|
Series
D-1 convertible preferred stock (Note 7(b))
|
|
|
3 |
|
|
|
4 |
|
Common
stock, $.0001 par value; 100,000,000 shares authorized, and 42,306,871 and
29,550,342 shares issued and outstanding, respectively (Note
7(c))
|
|
|
4,231 |
|
|
|
2,954 |
|
Additional
paid-in capital
|
|
|
40,441,249 |
|
|
|
33,150,566 |
|
Accumulated
deficit
|
|
|
(17,095,264 |
) |
|
|
(16,283,664 |
) |
Total
Stockholders’ Equity
|
|
|
23,350,467 |
|
|
|
16,870,108 |
|
Total Liabilities
and Stockholders' Equity
|
|
$ |
32,107,986 |
|
|
$ |
26,130,885 |
|
The accompanying notes are an integral part of these consolidated
financial statements.
SpaceDev, Inc.
|
|
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
% |
|
|
|
2006
(Restated)
|
|
|
|
% |
|
Net
Sales (Note 1(e))
|
|
$ |
34,697,613 |
|
|
|
100.0 |
% |
|
$ |
32,555,570 |
|
|
|
100.0 |
% |
Cost
of Sales*
|
|
|
25,897,718 |
|
|
|
74.6 |
% |
|
|
25,720,581 |
|
|
|
79.0 |
% |
Gross
Margin
|
|
|
8,799,895 |
|
|
|
25.4 |
% |
|
|
6,834,989 |
|
|
|
21.0 |
% |
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
and sales
|
|
|
3,304,137 |
|
|
|
9.5 |
% |
|
|
2,196,838 |
|
|
|
6.7 |
% |
Research
and development (Note 1(g))
|
|
|
300,159 |
|
|
|
0.9 |
% |
|
|
284,346 |
|
|
|
0.9 |
% |
General
and administrative
|
|
|
5,079,403 |
|
|
|
14.6 |
% |
|
|
5,328,023 |
|
|
|
16.4 |
% |
Total
Operating Expenses*
|
|
|
8,683,699 |
|
|
|
25.0 |
% |
|
|
7,809,207 |
|
|
|
24.0 |
% |
Income/(Loss)
from Operations
|
|
|
116,196 |
|
|
|
0.3 |
% |
|
|
(974,218 |
) |
|
|
-3.0 |
% |
Non-Operating
Income/(Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
81,156 |
|
|
|
0.2 |
% |
|
|
83,362 |
|
|
|
0.3 |
% |
Interest
expense
|
|
|
(207,516 |
) |
|
|
-0.6 |
% |
|
|
(65,713 |
) |
|
|
-0.2 |
% |
Gain
on building sale (Note 8(c))
|
|
|
117,272 |
|
|
|
0.3 |
% |
|
|
117,274 |
|
|
|
0.4 |
% |
Loan
fee (Note 4(b))
|
|
|
(389,479 |
) |
|
|
-1.1 |
% |
|
|
(114,600 |
) |
|
|
-0.4 |
% |
Total
Non-Operating Income/(Expense)
|
|
|
(398,567 |
) |
|
|
-1.1 |
% |
|
|
20,323 |
|
|
|
0.1 |
% |
Loss
Before Income Taxes
|
|
|
(282,371 |
) |
|
|
-0.8 |
% |
|
|
(953,895 |
) |
|
|
-2.9 |
% |
Income
tax (benefit) provision (Notes 1(h) and 5)
|
|
|
(9,809 |
) |
|
|
0.0 |
% |
|
|
19,290 |
|
|
|
0.1 |
% |
Net
Loss
|
|
$ |
(272,562 |
) |
|
|
-0.8 |
% |
|
$ |
(973,185 |
) |
|
|
-3.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(272,562 |
) |
|
|
|
|
|
|
(973,185 |
) |
|
|
|
|
Less:
Preferred dividend payments
|
|
|
(539,038 |
) |
|
|
|
|
|
|
(610,287 |
) |
|
|
|
|
Net
Loss Available to Common Stockholders
|
|
|
(811,600 |
) |
|
|
|
|
|
|
(1,583,472 |
) |
|
|
|
|
Net
Loss Per Share: (Note 1(j))
|
|
$ |
(0.03 |
) |
|
|
|
|
|
$ |
(0.06 |
) |
|
|
|
|
Weighted-Average
shares outstanding
|
|
|
32,290,096 |
|
|
|
|
|
|
|
28,666,059 |
|
|
|
|
|
Fully
Diluted Net Loss Per Share:
|
|
$ |
(0.03 |
) |
|
|
|
|
|
$ |
(0.06 |
) |
|
|
|
|
Weighted-Average
shares used in calculation
|
|
|
32,290,096 |
|
|
|
|
|
|
|
28,666,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
The following table shows how the Company's stock option expense would be
allocated to all expenses.
|
|
Cost
of sales
|
|
$ |
218,028 |
|
|
|
|
|
|
$ |
24,339 |
|
|
|
|
|
Marketing
and sales
|
|
|
74,284 |
|
|
|
|
|
|
|
4,840 |
|
|
|
|
|
Research
and development
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
General
and administrative
|
|
|
115,782 |
|
|
|
|
|
|
|
104,200 |
|
|
|
|
|
|
|
$ |
408,094 |
|
|
|
|
|
|
$ |
133,379 |
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SpaceDev,
Inc.
|
|
Consolidated
Statements of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
248,460 |
|
|
$ |
248 |
|
|
|
24,606,275 |
|
|
$ |
2,460 |
|
|
$ |
22,541,994 |
|
|
$ |
(14,575,489 |
) |
|
$ |
7,969,213 |
|
Prior
period adjustment (Note 1(s))
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(124,703 |
) |
|
|
(124,703 |
) |
|
|
|
248,460 |
|
|
$ |
248 |
|
|
|
24,606,275 |
|
|
$ |
2,460 |
|
|
$ |
22,541,994 |
|
|
$ |
(14,700,192 |
) |
|
$ |
7,844,510 |
|
Preferred
stock issued for cash (Note 7(a) and 7(b))
|
|
|
5,150 |
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
|
|
3,587,984 |
|
|
|
- |
|
|
|
3,587,989 |
|
Common
stock issued for acquisition and acquisition costs (Note
3)
|
|
|
- |
|
|
|
- |
|
|
|
4,046,756 |
|
|
|
406 |
|
|
|
5,943,641 |
|
|
|
- |
|
|
|
5,944,047 |
|
Common
stock issued for cash from employee stock purchase plan (Note
6(b))
|
|
|
- |
|
|
|
- |
|
|
|
104,845 |
|
|
|
10 |
|
|
|
133,256 |
|
|
|
- |
|
|
|
133,266 |
|
Common
stock issued from conversion of preferred stock (Note 7(a) and
7(b))
|
|
|
(647 |
) |
|
|
(1 |
) |
|
|
50,676 |
|
|
|
5 |
|
|
|
74,995 |
|
|
|
- |
|
|
|
74,999 |
|
Common
stock issued from employee stock options (Notes 6(b) and
7(e))
|
|
|
- |
|
|
|
- |
|
|
|
230,281 |
|
|
|
21 |
|
|
|
173,193 |
|
|
|
- |
|
|
|
173,214 |
|
Common
stock issued for services (Note 7(c))
|
|
|
- |
|
|
|
- |
|
|
|
1,500 |
|
|
|
1 |
|
|
|
2,175 |
|
|
|
- |
|
|
|
2,176 |
|
Common
stock issued from warrants (Note 7(d))
|
|
|
- |
|
|
|
- |
|
|
|
200,000 |
|
|
|
20 |
|
|
|
209,980 |
|
|
|
- |
|
|
|
210,000 |
|
Common
stock issued under revolving credit facility (Note 4(b))
|
|
|
- |
|
|
|
- |
|
|
|
310,009 |
|
|
|
31 |
|
|
|
349,969 |
|
|
|
- |
|
|
|
350,000 |
|
Common
stock issued from conversion of declared dividends (Note 7(a) and
7(b))
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Stock
option expense under SFAS 123(R) (Notes 6(b) and 7(e))
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
133,379 |
|
|
|
- |
|
|
|
133,379 |
|
Declared
dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(610,287 |
) |
|
|
(610,287 |
) |
Net
Loss (Restated)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(973,185 |
) |
|
|
(973,185 |
) |
|
|
|
252,963 |
|
|
|
252 |
|
|
|
29,550,342 |
|
|
|
2,954 |
|
|
|
33,150,566 |
|
|
|
(16,283,664 |
) |
|
|
16,870,108 |
|
Common
stock issued for cash (Note 7(c))
|
|
|
- |
|
|
|
- |
|
|
|
11,723,129 |
|
|
|
1,174 |
|
|
|
7,525,550 |
|
|
|
- |
|
|
|
7,526,724 |
|
Common
stock issued for cash from employee stock purchase plan (Note 6(b) and
7(c))
|
|
|
- |
|
|
|
- |
|
|
|
126,351 |
|
|
|
13 |
|
|
|
92,564 |
|
|
|
- |
|
|
|
92,577 |
|
Repurchase
of preferred stock (Note 7(a) and 7(b))
|
|
|
(1,304 |
) |
|
|
(1 |
) |
|
|
22,914 |
|
|
|
2 |
|
|
|
(1,263,893 |
) |
|
|
- |
|
|
|
(1,263,892 |
) |
Common
stock issued from employee stock options (Notes 6(b) and
7(e))
|
|
|
- |
|
|
|
- |
|
|
|
100,849 |
|
|
|
10 |
|
|
|
38,446 |
|
|
|
- |
|
|
|
38,456 |
|
Common
stock issued from warrants (Note 7(d))
|
|
|
- |
|
|
|
- |
|
|
|
500,000 |
|
|
|
50 |
|
|
|
289,950 |
|
|
|
- |
|
|
|
290,000 |
|
Common
stock issued under revolving credit facility (Note 4(b))
|
|
|
- |
|
|
|
- |
|
|
|
283,286 |
|
|
|
28 |
|
|
|
199,972 |
|
|
|
- |
|
|
|
200,000 |
|
Stock
option expense under SFAS 123(R) (Notes 6(b) and 7(e))
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
408,094 |
|
|
|
- |
|
|
|
408,094 |
|
Declared
dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(539,038 |
) |
|
|
(539,038 |
) |
Net
Loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(272,562 |
) |
|
|
(272,562 |
) |
|
|
|
251,659 |
|
|
$ |
251 |
|
|
|
42,306,871 |
|
|
$ |
4,231 |
|
|
$ |
40,441,249 |
|
|
$ |
(17,095,264 |
) |
|
$ |
23,350,467 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SpaceDev, Inc.
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
2006
(Restated)
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(272,562 |
) |
|
$ |
(973,185 |
) |
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,234,261 |
|
|
|
982,860 |
|
Gain
on disposal of building sale
|
|
|
(117,272 |
) |
|
|
(117,274 |
) |
Changes
in reserves
|
|
|
181,403 |
|
|
|
- |
|
Stock
option expense
|
|
|
408,094 |
|
|
|
133,379 |
|
Loss
on disposal of assets
|
|
|
11,081 |
|
|
|
- |
|
Non-cash
loan fee
|
|
|
369,704 |
|
|
|
114,600 |
|
Accrued
liabilities
|
|
|
32,655 |
|
|
|
- |
|
Common
stock issued for compensation and services
|
|
|
- |
|
|
|
2,175 |
|
Deferred
rent
|
|
|
160,305 |
|
|
|
20,813 |
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
856,436 |
|
|
|
(783,250 |
) |
Inventory
|
|
|
(852,024 |
) |
|
|
(58,136 |
) |
Other
assets
|
|
|
1,514 |
|
|
|
979,059 |
|
Accounts
payable and accrued expenses
|
|
|
(24,864 |
) |
|
|
(1,162,717 |
) |
Billings
in excess of costs incurred and deferred revenue
|
|
|
(352,706 |
) |
|
|
1,292,145 |
|
Other
accrued liabilities
|
|
|
25,153 |
|
|
|
(1,808,087 |
) |
Net
cash provided by (used in) operating activities
|
|
|
1,661,178 |
|
|
|
(1,377,618 |
) |
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Acquisition
costs, net of cash
|
|
|
- |
|
|
|
(1,408,134 |
) |
Issuance
of letter credit
|
|
|
(535,669 |
) |
|
|
|
|
Tenant
improvements reimbursement
|
|
|
374,830 |
|
|
|
|
|
Purchases
of fixed assets
|
|
|
(1,557,137 |
) |
|
|
(1,389,293 |
) |
Net
cash used in investing activities
|
|
|
(1,717,976 |
) |
|
|
(2,797,427 |
) |
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Principal
payments on notes payable
|
|
|
(97,052 |
) |
|
|
(4,675,832 |
) |
Principal
payments on capitalized lease obligations
|
|
|
(33,449 |
) |
|
|
(35,749 |
) |
(Payments)
proceeds from revolving credit facility
|
|
|
(805,172 |
) |
|
|
805,172 |
|
Employee
stock purchase plan
|
|
|
(38,456 |
) |
|
|
133,266 |
|
Dividend
payments on Series C and Series D-1 preferred
|
|
|
(570,081 |
) |
|
|
(610,287 |
) |
Other
assets, capitalized preferred stock issuance costs
|
|
|
- |
|
|
|
(175,000 |
) |
(Repurchase)/Issuance
of preferred stock
|
|
|
(1,263,894 |
) |
|
|
4,038,361 |
|
Net
proceeds from issuance of common stock
|
|
|
7,947,759 |
|
|
|
383,222 |
|
Net
cash provided by (used in) financing activities
|
|
|
5,139,655 |
|
|
|
(136,847 |
) |
Net
Increase/(Decrease) in Cash and Cash Equivalents
|
|
|
5,082,857 |
|
|
|
(4,311,892 |
) |
Cash
and Cash Equivalents at Beginning of Year
|
|
|
1,438,146 |
|
|
|
5,750,038 |
|
Cash
and Cash Equivalents at End of Year
|
|
$ |
6,521,003 |
|
|
$ |
1,438,146 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SpaceDev,
Inc.
|
|
Consolidated Statements of Cash
Flows |
|
|
2006
(Restated)
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
Interest
|
$ 207,516
|
$ 65,713
|
|
|
Income
Taxes
|
$
-
|
$ 19,290
|
|
|
|
|
|
|
|
Noncash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
During
2007 and 2006, the Company entered into capital leases in the amount of
approximately $190,000
|
and
$225,000, respectively.
|
|
|
|
|
|
|
|
During
2007 the Company licensed software in the amount of $188,000 through a
note payable.
|
|
|
|
|
|
|
|
During
2007 and 2006, the Company converted $92,564 and $133,266 of employee
stock purchase plan
|
contributions
into 126,351 and 104,845 shares of common stock,
respectively.
|
|
|
|
|
|
|
|
During
2007 and 2006, the Company declared preferred stock dividends payable of
$539,039 and $610,287,
|
respectively,
to the holders of its Series C and Series D-1 preferred
stock.
|
|
|
|
|
|
|
|
During
2007 and 2006, the Company issued 283,286 and 310,009 shares of its common
stock and
|
|
|
expensed
$311,372 and $114,600, as well as accrued $148,493 to be spread over the
next nine months
|
|
|
in
non-cash loan fees for the additional expenses incurred under its
revolving credit facilty with
|
|
|
the
Laurus Master Fund.
|
|
|
|
|
|
|
|
During
2007, the Company converted preferred stock amortization payments in the
amount of
|
$16,591
into 22,914 shares of common stock, for its preferred
stockholders.
|
The
accompanying notes are an integral part of these consolidated financial
statements.
1.
|
Summary
of Significant Accounting Policies
|
A
summary of the Company's significant accounting policies applied in the
preparation of the accompanying consolidated financial statements
follows.
|
(a) Nature of
operations
SpaceDev,
Inc., a Delaware corporation, (together with its subsidiaries, “SpaceDev” or the
“Company”), is a space technology company. SpaceDev is engaged in the
conception, design, development, manufacture, integration, sale, and operations
of space systems, subsystems, products and services, as well as the design,
manufacture, and sale of mechanical and electromechanical subsystems and
components for spacecraft. The Company is currently focused on the
commercial and military development of low-cost small satellites and related
subsystems, hybrid rocket propulsion for space and launch vehicles, subsystems
that enable critical spacecraft functions such as pointing solar arrays and
communication antennas and restraining, deploying and actuating moving
spacecraft components. The Company maintains its corporate
headquarters in California and operating centers in California, Colorado and
North Carolina and currently has approximately 185 full and part time
employees.
(b) Principles
of consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned active subsidiary, Starsys, Inc., a Colorado corporation, which was
acquired on January 31, 2006, and its wholly-owned inactive subsidiary Dream
Chaser, Inc., a Delaware corporation. As of December 31, 2007 and
2006, the Company had no partially owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
(c) Preparation
of consolidated financial statements
The
Company has a December 31 year end. The consolidated financial
statements for the years ended December 31, 2007 and 2006 have been
prepared in accordance with U.S. generally accepted accounting principles
(GAAP), which require management to make estimates and assumptions, including
estimates of future contract costs and earnings. Such estimates and assumptions
affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
earnings during the current reporting period. Management periodically assesses
and evaluates the adequacy and/or deficiency of estimated liabilities recorded
for various reserves, liabilities, contract risks and uncertainties. Actual
results could differ from these estimates. All financial amounts are stated in
U.S. dollars unless otherwise indicated.
(d) Accounts
receivable and allowances for uncollectible accounts
Accounts
receivable are stated at the historical carrying amount net of write-offs and
allowances for uncollectible accounts as well as costs and estimated earnings in
excess of billings on uncompleted contracts which represents approximately $1.4
million and $1.7 million at December 31, 2007 and 2006,
respectively. The Company establishes an allowance for uncollectible
accounts based on historical experience and any specific customer collection
issues that the Company has identified. Uncollectible accounts receivable are
written-off when a settlement is reached for an amount that is less than the
outstanding balance or when the Company has determined that balance will not be
collected. At December 31, 2007 and 2006, the allowance for
uncollectible accounts was approximately $62,000 and $75,000,
respectively.
(e)
|
Revenue,
expense, and profitability
recognition
|
The
Company's revenues in 2007 and 2006 were derived primarily from United States
government cost-plus fixed-fee (CPFF) contracts, United States government,
government related and non-government firm fixed price (FFP) contracts, and some
commercial sales of component and subsystem products. In 2007, approximately 53%
of revenues from U.S. government contracts were derived from cost-plus fixed-fee
contracts, 44% from firm fixed price contracts, and 3% from time-and-material
contracts compared to approximately 51%, 48%, and 1% in 2006,
respectively. The Company’s government and government related
revenue was approximately 73% of total revenue in 2007. The remaining
27% of total revenue in 2007 was comprised of commercial or non-governmental
revenue. SpaceDev considers the United States government (“Government”) a
major customer. Government revenue is revenue generated directly by
contracts with an agency of the federal government, i.e., where the Company is
the prime contractor. Government related revenue is revenue generated by
contracts where the Company’s customer is a prime contractor or subcontractor to
the government and the Company is a subcontractor to them, i.e., the ultimate
customer is a government agency.
The
portion of the Company’s revenue which is based on fixed price contracts are
calculated on a proportional performance basis (also referred to herein as
“percentage-of-completion”) based upon assumptions regarding the estimated total
costs for each contract. Such revenues are recorded based on the percentage that
costs incurred to date bear to the most recent estimates of total costs to
complete each contract. Estimating future costs and, therefore, revenues
and profits, is a process requiring a high degree of management judgment,
including management’s assumptions regarding future operations as well as
general economic conditions. In the event of a change in total estimated
contract cost or profit, the cumulative effect of such change is recorded in the
period the change in estimate occurs. Frequently, the period of
performance of a contract extends over a long period of time and, as such,
revenue recognition and the Company’s profitability from a particular contract
may be adversely affected to the extent that estimated cost to complete or
incentive or award fee estimates are revised, delivery schedules are delayed or
progress under a contract is otherwise impeded. Accordingly, the Company’s
recorded revenues and gross profits from period to period can
fluctuate.
The
output from the Company’s contracts is generally based on milestones or
performance targets set by the Company and its customers. The
Company’s contracts are negotiated with milestone payments that may not coincide
with level of effort or output measurement; thereby, creating the potential for
a mismatch of costs and revenues on the front side or back side of the
project. An example might be a contract with a large up-front
milestone payment for simply establishing a program plan. The Company
attempts to appropriately match revenue with expense, so in this instance, it
would be inappropriate to recognize a milestone payment as revenue, since the
proportional level of effort or cost incurred would have not yet been
expended.
Certain
contracts include provisions for increased or decreased revenue and profit based
on performance against established targets. When the Company has incentive and
award fees, they are included in estimated contract revenue at the time the
amounts can be reasonably determined and are reasonably assured based upon
historical experience and other objective criteria. If performance under such
contracts were to differ from previous assumptions, current period revenues and
profits would be adjusted and could therefore fluctuate
significantly.
Revenues
from CPFF contracts are recognized as expenses are
incurred. Estimated contract profits are taken into earnings in
proportion to revenues recorded. Time-and-material revenues are
recognized as services are performed and costs incurred.
Recognition
of losses on projects are taken as soon as the loss is reasonably determinable
and accrued on the balance sheet in other accrued liabilities. The
current accrual for potential losses on existing projects represents
approximately $316,000. The accrual is adjusted as projects move
toward completion and more accurate estimates are
established. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions (when applicable), and final contract settlements may result in
revisions to costs and income, and are recognized in the period in which the
revisions are determined. Contract costs include all direct material,
direct labor and subcontractor costs, and other costs such as supplies, tools
and travel which are specifically related to a particular
contract. All other selling, general and administrative costs are
expensed as incurred.
The
majority of the Company’s revenue is derived from United States Government
Contracts. Such contracts have certain risks which include dependence on future
appropriations and administrative allotment of funds and changes in government
policies. Costs incurred under United States Government Contracts are subject to
audit. The Company believes that the results of such audits will not
have a material effect on its financial position or its results of
operations.
Fixed
assets, which include property, plant and equipment, are stated at cost. Major
improvements are capitalized while expenditures for maintenance, repairs and
minor improvements are charged to expense. When assets are retired or
otherwise disposed of, the assets and related accumulated depreciation and
amortization are eliminated from the accounts and any resulting gain or loss is
reflected in operations. Depreciation expense is determined using the
straight-line method based on their estimated useful lives of three-to-fifteen
years.
(g)
|
Research
and development
|
The
Company is engaged in design and development activities with its commercial and
government customers. The Company has Small Business Innovation
Research ("SBIR") grants from the government and continues to seek new SBIR
opportunities. Costs 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 approximately $300,000 and $284,000 in
non-reimbursable research and development costs during 2007 and 2006,
respectively.
The
Company accounts for income taxes using the asset and liability method. Under
this method, deferred tax assets and liabilities are recorded for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a tax rate
change on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date. The Company records valuation
allowances to reduce net deferred tax assets to the amount considered more
likely than not to be realized. Changes in estimates of future taxable income
can materially change the amount of such valuation allowances.
(i)
|
Stock-based
compensation
|
Prior to
January 1, 2006, the Company accounted for stock-based compensation to
employees in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to
Employees, and related interpretations. Under this method, no
compensation expense was recognized as long as the exercise price equaled or
exceeded the market price of the underlying stock on the measurement date of the
grant. The Company also followed the disclosure requirements of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. As of January 1, 2006, the Company adopted
SFAS No. 123(R), Share-Based Payment. During fiscal 2007 and
2006, the Company expensed stock options based on a calculation using the
minimum value method as prescribed by SFAS No. 123(R), otherwise known as the
Black-Scholes method. Under this method, the Company used a
risk-free interest rate at the date of grant, an expected volatility, an
expected dividend yield and an expected life of the options to determine the
fair value of options granted. The risk-free interest rate ranged from 3.03% to
4.79%, expected volatility ranged from 59.99% to 90.8% at the time all options
were granted, the dividend yield was assumed to be zero, and the expected life
of the options was assumed to be four years based on the average vesting period
of options granted. For the years ended December 31, 2007 and 2006,
the Company expensed approximately $408,000 and $133,000 of stock option
expenses due to SFAS No. 123(R) in its financial statements.
(j)
|
Net
income (loss) per common share
|
Basic
earnings per share are calculated using the weighted average number of shares
outstanding, according to the rules of SFAS No. 128, Earnings per Share during the
periods. Diluted earnings per share include the weighted-average
effect of all dilutive securities outstanding during the
periods. Diluted net loss per share was not computed in 2007 or 2006,
as the computation would result in anti-dilution. The total amount of
all dilutive securities not included in the earnings per share calculation were
19,264,658 and 19,473,030 which includes all options, warrants and convertible
preferred shares outstanding at December 31, 2007 and 2006,
respectively. Of the 19,264,658 and 19,473,030 dilutive securities
not included in the earnings per share calculation 16,865,901 and 17,047,530
were exercisable at December 31, 2007 and 2006, respectively.
(k)
|
Financial
instruments
|
The
Company's financial instruments consist primarily of cash, short-term notes
receivable, accounts receivable, capital leases, accounts payable, and notes
payable. These financial instruments are recorded on the balance
sheet at their respective carrying values, which approximate their fair
values.
The
Company currently operates in one business segment dedicated to space
technology. The Company does not report revenues by segment because
it is not practical for it to do so at this time.
(m)
|
New
accounting standards
|
In
September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements. This
statement defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. It provides a framework for measuring fair
value and requires additional disclosures about fair value measurements. This
statement applies only to fair value measurements already required or permitted
by other statements; it does not impose additional fair value measurements. This
statement is effective for fair value measurements in fiscal years beginning
after November 15, 2007. Currently, management does not expect this statement to
have a material impact on its financial condition or results of
operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115 (SFAS No. 159). SFAS No. 159 expands
opportunities to use fair value measurements in financial reporting and permits
entities to choose to measure many financial instruments and certain other items
at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value
option for eligible items that exist at the adoption date. Subsequent to the
initial adoption, the election of the fair value option should only be made at
initial recognition of the asset or liability or upon a re-measurement event
that gives rise to new-basis accounting. SFAS No. 159 does not affect any
existing accounting literature that requires certain assets and liabilities to
be carried at fair value nor does it eliminate disclosure requirements included
in other accounting standards. SFAS No. 159 is effective for the Company on
January 1, 2008. The Company is currently assessing the impact of SFAS No.
159 on its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and SFAS No. 160,
Noncontrolling interests in
Consolidated Financial Statements, an amendment of ARB No. 51. The
new standards require that a noncontrolling interest in a consolidated
subsidiary be displayed in the consolidated statement of financial position as a
separate component of equity. The new standards also indicate gains
and losses should not be recognized on sales of noncontrolling interests in
subsidiaries but that differences between sale proceeds and the consolidated
basis of accounting should be accounted for as charges or credits to
consolidated additional paid-in-capital. However, in a sale of a
subsidiary’s shares that results in the deconsolidation of the subsidiary, a
gain or loss would be recognized for the difference between the proceeds of that
sale and the carrying amount of the interest sold. Also, a new fair
value in any remaining noncontrolling ownership interest is
established. These statements are effective for the first annual
reporting period on or after December 15, 2008. The Company is currently
evaluating the provisions of SFAS No. 141 (R) and SFAS No. 160 and does not
expect there to be an impact to the Company’s current financial statements,
however future acquisitions could be impacted.
Other
current assets consist of a variety of prepaid and other cash advances for items
which are expected to occur within the next year. The following is a listing of
items that constitute the Company’s other current assets at December 31, 2007
and 2006.
|
|
|
|
|
2006
|
|
Financing
fees
|
|
$ |
421,986 |
|
|
$ |
303,174 |
|
Software
prepaid license
|
|
|
152,219 |
|
|
|
93,009 |
|
Insurance
prepaid
|
|
|
27,585 |
|
|
|
60,435 |
|
Property
tax prepayment
|
|
|
2,647 |
|
|
|
3,210 |
|
Rental
prepaid short term
|
|
|
78,573 |
|
|
|
40,103 |
|
All
other deposits
|
|
|
19,110 |
|
|
|
99,634 |
|
Total
other current assets
|
|
$ |
702,120 |
|
|
$ |
599,565 |
|
Other
assets consist of prepaid and other cash advances for items which are expected
to occur at a date beyond twelve months into the future. The following is a
listing of items that constitute the Company’s other assets at December 31, 2007
and 2006.
|
|
|
|
|
2006
|
|
Louisville
facility letter of credit
|
|
$ |
535,669 |
|
|
$ |
- |
|
Deposits
|
|
|
339,683 |
|
|
|
321,290 |
|
Deferred
expenses
|
|
|
169,920 |
|
|
|
116,666 |
|
Prepaid
Rent
|
|
|
- |
|
|
|
188,130 |
|
Total
other assets
|
|
$ |
1,045,272 |
|
|
$ |
626,086 |
|
(o)
|
Cash
and cash equivalents
|
Cash and
cash equivalents consist of cash on hand and highly liquid investments with
original maturities of three months or less.
In 2006,
the Company instituted a warranty policy to assume obligations in connection
with certain customer contracts. The Company records a liability for
the expected costs to service estimated warranty claims. Activity in the
warranty liability consisted of the following (See Note 8(b):
|
|
2007
|
|
|
2006
|
|
Balance
at January 1
|
|
$ |
76,000 |
|
|
$ |
- |
|
Accruals
during the year
|
|
|
557,187 |
|
|
|
76,000 |
|
Reductions
during the year
|
|
|
(127,203 |
) |
|
|
- |
|
Balance
at December 31
|
|
$ |
505,984 |
|
|
$ |
76,000 |
|
(q) Inventory
Inventory
is valued based on the lower-of-cost-or-market method and is disbursed on a
First-In, First-Out (FIFO) basis, unless required by customer contract to be
distributed by specific identification for lot control
purposes. Inventory includes raw material inventory, finished goods
inventory, and work-in-process inventory. Work-in-process inventory
includes, but is not limited to, program costs in excess of customer
requirements to pay. In those cases, costs may be held in
work-in-process while the Company negotiates for contract modifications to cover
those costs. If the negotiations result in revenues in excess of
those costs, the Company records a profit at the conclusion of the
program. If the negotiations result in revenues not in excess of
those costs or no additional funding, the Company records the full estimated
program loss at the time of the notification. The amount of such
program costs held in work-in-process inventory on December 31, 2007 was
approximately $289,000. The Company inventory detail
follows:
|
|
At
December 31,
|
|
Inventory
|
|
2007
|
|
|
2006
|
|
Raw
Material
|
|
$ |
570,432 |
|
|
$ |
309,205 |
|
Work
in Progress
|
|
|
528,614 |
|
|
|
- |
|
Finished
Goods
|
|
|
62,183 |
|
|
|
- |
|
Subtotal
|
|
|
1,161,229 |
|
|
|
309,205 |
|
Inventory
Allowance
|
|
|
(155,000 |
) |
|
|
- |
|
Inventory,
Net
|
|
$ |
1,006,229 |
|
|
$ |
309,205 |
|
Inventories
are reviewed for estimated obsolescence or unusable items and, if appropriate,
are written down to the net realizable value based upon assumptions about future
demand and market conditions. If actual future demand or market conditions are
less favorable than those the Company projects, additional inventory write-downs
may be required. These are considered permanent adjustments to the cost basis of
the inventory. In 2007, the Company established an inventory reserve
of $155,000 to cover such estimated obsolete items. The Company will
evaluate the inventory allowance on a regular basis and make adjustments to its
estimates as new information and experience dictate.
(r)
Billings in excess of costs and deferred revenue
Billings
in excess of costs incurred and estimated earnings represent the excess of
amounts billed over the amounts called for to be billed under the contractual
billing terms. At December 31, 2007 and 2006 billings in excess of
costs represented approximately $2.4 million and $2.8 million,
respectively. Costs in excess of billings represent the excess of
actual costs incurred to the amount that is billed to date and is included in
accounts receivable. (See Note 1(d), Accounts receivable and
allowances for uncollectible accounts.)
The
Company occasionally receives cash from customers in excess of revenues
recognized on certain contracts. These cash receipts are reported as deferred
revenues on the balance sheet.
(s)
Correction of an Error in Previously Issued Financial Statements
In 2003,
the Company entered into a ten year non-cancelable building lease with the buyer
in conjunction with the sale of its headquarters facility in Poway, CA. (See
Note 4(a), Building and
settlement notes, and Note 8(c), Building Lease.) The
Company identified in 2007 that it had incorrectly expensed the deferred rent
per SFAS No. 13, Accounting
for Leases, whereby the Company used its monthly expense instead of the
straight-line method to account for rental expenses over the term of the
lease. However, after detailed quantitative and qualitative review
using both the “rollover” and “iron curtain” approaches, as detailed in Staff
Accounting Bulletin (SAB) 108, the Company concluded that the differences
between the actual monthly expense and the straight-line amount were immaterial
based on the financial impact these deferred charges would have had on its
operating results in those years, taking into consideration the net losses and
net income recognized in those years.
Quantitative
Income Statement Analysis of Deferred Rent Adjustment (2003-2006)
Years
Ended
|
|
Net
Income
|
|
|
%
of
|
|
|
Deferred
Rent
|
|
|
Adjusted
Net
|
|
|
%
of
|
|
|
|
|
December
31,
|
|
(Loss)
|
|
|
Revenue
|
|
|
Adjustment
|
|
|
Income
(Loss)
|
|
|
Revenue
|
|
|
Difference
|
|
2003
|
|
$ |
(1,246,067 |
) |
|
|
-42.15 |
% |
|
$ |
48,904 |
|
|
$ |
(1,294,971 |
) |
|
|
-43.80 |
% |
|
|
1.65 |
% |
2004
|
|
$ |
(3,027,054 |
) |
|
|
-61.89 |
% |
|
$ |
43,464 |
|
|
$ |
(3,070,518 |
) |
|
|
-62.78 |
% |
|
|
0.89 |
% |
2005
|
|
$ |
501,264 |
|
|
|
5.57 |
% |
|
$ |
32,334 |
|
|
$ |
468,930 |
|
|
|
5.21 |
% |
|
|
0.36 |
% |
2006
|
|
$ |
(952,372 |
) |
|
|
-2.93 |
% |
|
$ |
20,813 |
|
|
$ |
(973,185 |
) |
|
|
-2.99 |
% |
|
|
0.06 |
% |
Furthermore,
the Company believes the impact to its balance sheet is
immaterial. Differences in the deferred rent would not be expected to
change an investor’s evaluation of the Company’s operations or its financial
condition. As shown in the table below, the differences were less
than 5% in 2003 and less than 2% in each of the following years.
Quantitative
Balance Sheet Analysis of Deferred Rent Adjustment (2003-2006)
|
|
|
|
|
|
|
|
%
Total
|
|
|
Accrued
Value of
|
|
|
Total
|
|
|
%
Adjusted
|
|
|
|
|
Years
Ended
|
|
Total
|
|
|
Total
|
|
|
Liabilities
to
|
|
|
Deferred
Rent
|
|
|
Adjusted
|
|
|
Liabilities
to
|
|
|
|
|
December
31,
|
|
Assets
|
|
|
Liabilities
|
|
|
Total
Assets
|
|
|
Adjustments
|
|
|
Liabilities
|
|
|
Total
Assets
|
|
|
Difference
|
|
2003
|
|
$ |
1,084,819 |
|
|
$ |
3,157,447 |
|
|
|
291.06 |
% |
|
$ |
48,904 |
|
|
$ |
3,206,351 |
|
|
|
295.57 |
% |
|
|
4.51 |
% |
2004
|
|
$ |
6,090,434 |
|
|
$ |
1,754,777 |
|
|
|
28.81 |
% |
|
$ |
92,368 |
|
|
$ |
1,847,145 |
|
|
|
30.33 |
% |
|
|
1.52 |
% |
2005
|
|
$ |
11,008,649 |
|
|
$ |
3,039,436 |
|
|
|
27.61 |
% |
|
$ |
124,702 |
|
|
$ |
3,164,138 |
|
|
|
28.74 |
% |
|
|
1.13 |
% |
2006
|
|
$ |
26,130,885 |
|
|
$ |
9,115,261 |
|
|
|
34.88 |
% |
|
$ |
145,515 |
|
|
$ |
9,260,776 |
|
|
|
35.44 |
% |
|
|
0.56 |
% |
To
correct this error, the Company adjusted beginning retained earnings on its
December 31, 2006 balance sheet by approximately $125,000, without amending
prior filings. The Company restated its comparative balance sheets and income
statements for the fiscal year ended December 31, 2006. The impact on the
Company’s financial statements going forward will be to reduce the deferred
rental accrual by the difference between the rental expense actually paid by the
Company and the rental expense calculated on a straight line basis using SFAS
No. 13. (See Note
8(c))
2. Fixed
Assets, Net
Fixed
assets consisted of the following:
|
|
|
|
|
2006
|
|
Capital
leases
|
|
$ |
642,079 |
|
|
$ |
452,481 |
|
Computer
equipment
|
|
|
1,981,425 |
|
|
|
952,895 |
|
Building
improvements
|
|
|
1,228,630 |
|
|
|
1,959 |
|
Furniture
and fixtures
|
|
|
3,398,825 |
|
|
|
2,546,039 |
|
Rocket
motor test center
|
|
|
1,374,683 |
|
|
|
1,205,468 |
|
|
|
|
8,625,642 |
|
|
|
5,158,842 |
|
Less
accumulated depreciation and amortization
|
|
|
(4,205,622 |
) |
|
|
(1,365,478 |
) |
|
|
$ |
4,420,020 |
|
|
$ |
3,793,364 |
|
Depreciation
and amortization expense for fixed assets was approximately $1.2 million and
$1.0 million for the years ended December 31, 2007 and 2006,
respectively. Of the above depreciation, approximately $50,000 and
$20,000, for the years ended December 31, 2007 and 2006, respectively, was for
depreciation on equipment under capital leases.
3. Acquisitions
The following is a schedule of the goodwill incurred in the
Starsys acquisition.
Starsys
Research Total Assets
|
|
$ |
(7,851,494 |
) |
Starsys
Research Total Liabilities
|
|
|
13,054,140 |
|
Cash
to Starsys Stockholders
|
|
|
410,791 |
|
Equity
to Starsys Stockholders
|
|
|
5,576,846 |
|
Fees
Associated with Acquisition
|
|
|
1,056,079 |
|
Total
Goodwill
|
|
$ |
12,246,362 |
|
In 2006,
the Company reduced its Goodwill from approximately $12.2 million to
approximately $11.2 million by identifying approximately $1.0 million in fixed
assets and intangible assets, which are being amortized over their estimated
useful lives. The weighted average amortization period for these intangible
assets is approximately 10 years.
Starsys
shareholders received approximately $411,000 in cash and approximately 3.8
million shares of the Company's common stock at the consummation of the
merger. The Company also paid approximately $705,000 in Starsys
transaction expenses connected to the merger, and reclassified from Other Assets
to Investment in Subsidiaries approximately $500,000 in certain legal and
accounting expenses incurred during the merger. In addition, the
Company recognized approximately $350,000 of deferred tax liability associated
with the acquisition of intangible assets.
On
September 8, 2005, the Company made a secured loan in the principal amount of
$1.2 million to Starsys Research Corporation. The loan accrued interest at 8%
per annum and matured on January 31, 2006 upon the closing of the acquisition.
No principal or interest payments were made before maturity. The loan
was secured by a security interest in all of the assets of
Starsys. In addition, Starsys had agreed to pay the Company a
placement agent fee and to reimburse the Company expenses in the aggregate
amount of $120,000. The principal amount, as well as the other amounts listed
above, was deemed forgiven when the loan became an inter-company account at the
closing of the merger.
Following
the merger, the pre-merger Starsys shareholders were potentially entitled to
receive additional performance consideration, based on the achievement by the
Starsys business of specific financial performance criteria for fiscal years
2005, 2006 and 2007. This consideration could have originally
consisted of up to an aggregate of $1,050,000 in cash and shares of the
Company's common stock valued at up to $18 million, subject to reduction for
some merger related expenses and to escrow arrangements, as
follows:
|
For
the fiscal year ended December 31, 2005, up to $350,000 in cash and up to
an aggregate number of shares of the Company's common stock equal to (A)
up to $3.0 million divided by (B) the volume weighted average price of the
Company's common stock for the 20 trading days preceding the date of the
audit opinion for the fiscal year ended December 31, 2005, but not less
than $2.00 per share. This portion of the additional performance
consideration was not earned;
|
|
For
the fiscal year ended December 31, 2006, up to $350,000 in cash and up to
an aggregate number of shares of the Company's common stock equal to (A)
up to $7.5 million divided by (B) the volume weighted average price of the
Company's common stock for the 20 trading days preceding the date of the
audit opinion for the fiscal year ended December 31, 2006, but not less
than $2.50 per share. This portion of the additional
performance consideration was not earned;
and,
|
|
For
the fiscal year ending December 31, 2007, up to $350,000 in cash and up to
an aggregate number of shares of the Company's common stock equal to (A)
up to $7.5 million divided by (B) the volume weighted average price of the
Company's common stock for the 20 trading days preceding the date of the
audit opinion for the fiscal year ending December 31, 2007, but not less
than $3.00 per share. This portion of the additional
performance consideration was not
earned.
|
Although
Starsys was insolvent at the time of acquisition, the Company believed Starsys
had a real value in excess of book value. If not for Starsys’
liquidity and profitability problems, its fair value would have been even
greater. The Company entered into a competitive negotiation on
purchase price with Starsys in the late summer and early fall of
2005. Starsys had defaulted on a bank loan with Vectra
Bank. Starsys had engaged an investment banker to find a
solution. SpaceDev was one of four interested parties, and the
Company’s offer turned out to be the most attractive, in part, due to the
ability for Starsys to remain a separate entity, at least for the period of the
earn out. The Company developed the above pricing formula for the
acquisition based on an enterprise value of a healthy aerospace company, which
included Starsys’ expectation of future performance. The Company
originally agreed to a cash payment ($1.5 million), an amount of SpaceDev common
stock ($7.5 million) and debt relief at closing followed by future years
potential earn out.
Based on
Starsys’ projections, earn out criteria were established and an enterprise value
of approximately $32 million was established. The Company arrived at
this from several calculations, including a multiple of revenues, industry
comparables, discounted cash flow analyses and the desire for a competitive
bid. The enterprise value assumptions included Starsys reaching
revenue and EBITDA goals in 2005, 2006 and 2007 that Starsys had
proposed. The assumptions were based on Starsys’ ability to overcome
their historical cash flow and profitability problems related to certain fixed
price development contracts. It was the Company’s determination that
the purchase price of Starsys was fair and reasonable at the time of the
acquisition, with sufficient protection in the earn out structure to provide
value to the Starsys shareholders (if the earn out was reached) and yet
protection to the SpaceDev shareholders (if the earn out was not
reached).
Starsys
shareholders may be entitled to receive additional performance consideration for
a particular fiscal year if the Company breaches specified covenants of the
merger agreement and is unable to cure the breach within the applicable cure
period set forth in the merger agreement.
Approximately
one-half of the shares issued to Starsys shareholders at the closing were placed
in escrow to satisfy any indemnification obligations of the Starsys shareholders
under the merger agreement and to pay reasonable expenses of the shareholder
agent. In June 2007, shares in the amount of 1,729,666 (out of a total of the
1,797,746 shares in escrow) were released to the former Starsys shareholders and
the remaining 68,080 shares of SpaceDev common stock are being held in escrow to
pay reasonable expenses of Mr. Scott Tibbitts, the shareholder
representative.
The
following condensed balance sheet at January 26, 2006, which was used as the
opening balance sheet for the acquisition at January 31, 2006, illustrates the
amount of goodwill specifically allocated and assigned to major tangible and
intangible assets. The remaining amount of goodwill of approximately
$11.2 million is recorded as a long term asset and is evaluated by the Company
each year for possible impairment.
Starsys
Research Corporation
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and Accounts Receivable
|
|
$ |
5,293,867 |
|
|
|
|
|
$ |
5,293,867 |
|
Other
current assets
|
|
|
620,829 |
|
|
|
|
|
|
620,829 |
|
Fixed Assets -
Net
|
|
|
1,903,825 |
|
|
|
97,420 |
|
|
|
2,001,245 |
|
Intangible
Assets
|
|
|
- |
|
|
|
927,978 |
|
|
|
927,978 |
|
Goodwill
|
|
|
- |
|
|
|
11,233,665 |
|
|
|
11,233,665 |
|
Other
Assets
|
|
|
32,972 |
|
|
|
- |
|
|
|
32,972 |
|
Total
Assets
|
|
$ |
7,851,493 |
|
|
$ |
12,259,063 |
|
|
$ |
20,110,556 |
|
Liabilities
and Net Assets Acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
1,704,690 |
|
|
$ |
- |
|
|
$ |
1,704,690 |
|
Notes
payable
|
|
|
5,983,300 |
|
|
|
- |
|
|
|
5,983,300 |
|
Capitalized
lease obligations
|
|
|
31,555 |
|
|
|
- |
|
|
|
31,555 |
|
Accrued
payroll, vacation and related taxes
|
|
|
993,066 |
|
|
|
- |
|
|
|
993,066 |
|
Billings
in excess of costs and deferred revenue
|
|
|
1,531,280 |
|
|
|
- |
|
|
|
1,531,280 |
|
Provision
for anticipated loss
|
|
|
1,596,250 |
|
|
|
- |
|
|
|
1,596,250 |
|
Other
accrued liabilities
|
|
|
1,556,059 |
|
|
|
- |
|
|
|
1,556,059 |
|
Total
Liabilities
|
|
|
13,396,200 |
|
|
|
- |
|
|
|
13,396,200 |
|
Net
Assets Acquired
|
|
$ |
(5,544,707 |
) |
|
$ |
12,259,063 |
|
|
$ |
6,714,356 |
|
Through
this acquisition, the Company purchased approximately $928,000 of intangible
assets subject to amortization; these assets were given a weighted average
amortization period of approximately 10 years, and the values
assigned were as follows:
Ø
|
$ 25,000
was assigned to non-compete
agreements;
|
Ø
|
$153,000
was assigned to patents;
|
Ø
|
$150,000
was assigned to trademarks;
|
Ø
|
$500,000
was assigned to trade secrets; and
|
Ø
|
$100,000
to customer lists.
|
The
current amount of intangible assets is $746,392, net, as reported in the
Company’s Consolidated Financial Statements. The Company also
concluded that no one asset was deemed sufficient to warrant separate
classification within the footnotes. The Company recorded no
intangible assets not subject to amortization other than
goodwill. Both goodwill and the deferred tax liability associated
with the acquisition mentioned above were approximately $11.2 million and
$350,000, respectively.
4. Notes
Payable
(a) Building
and settlement notes
In 2007,
the Company entered into a three-year licensing and financing agreement with
Microsoft, totaling approximately $188,000, related to certain business software
and equipment. The note called for monthly payments over a three year
term with interest of 2.53% per annum. At December 31, 2007, the
outstanding balance on this obligation was approximately $156,000.
In
addition, a Deferred Compensation Agreement was recorded stemming from an
agreement with a former employee entered into during 2005 for a royalty that was
to be calculated based on several factors including length of service and
revenue related to a specific design that was developed for the
Company. At December 31, 2007, the calculated obligation was
approximately $22,000 with scheduled payments to be made in January
2008.
|
|
|
|
|
2006
|
|
Financing
Agreement
|
|
$ |
156,219 |
|
|
$ |
- |
|
Deferred
Compensation Agreement
|
|
|
21,988 |
|
|
|
50,193 |
|
Total
Notes Payable
|
|
$ |
178,207 |
|
|
$ |
50,193 |
|
Less
current portion
|
|
$ |
(86,385 |
) |
|
$ |
- |
|
Long
term portion
|
|
$ |
91,822 |
|
|
$ |
50,193 |
|
(b) Revolving
credit facility
On
September 29, 2006, the Company entered into a $5.0 million financing
arrangement with Laurus Master Fund, Ltd. (“Laurus”). The financing
is effected through a revolving note for up to $5.0 million, although the exact
principal balance at any given time will depend on draws made by the Company on
the facility. The Company borrows against the facility under an
investment formula based on accounts receivable at an advance rate equal to 90%
of eligible receivables and the lesser of: (a) 50% of eligible inventory
(calculated on the basis of the lower-of-cost-or-market, on a first-in-first-out
basis); or (b) $1.0 million, provided, however, that no more than $500,000 of
such eligible inventory may be in the form of work-in-process
inventory. There was no balance on this revolving credit facility at
December 31, 2007 and the balance at December 31, 2006 was approximately
$805,000.
The
facility bears interest at a rate equal to prime plus 2%. This rate increases or
decreases on the date the Prime Rate adjusts. Interest is payable
monthly. Interest is due on the first business day of each month from
October 2006 through maturity. The term of the facility is scheduled
to end on September 29, 2009. At inception, Laurus received, as a
loan fee, 310,009 unregistered shares of the Company’s common stock valued at
$350,000 plus cash fees of $175,000. The value of these shares was determined
based on the $1.13 average trading price for the stock during the preceding ten
business days and was expensed over the first year of the
note. Laurus received an additional 283,286 unregistered shares of
the Company’s common stock valued at $200,000 at the first anniversary of the
facility. The value of these shares was determined based on the
average trading price for the stock during the preceding ten business days,
which was $0.72 per share, and the expense will be amortized over the second
year of the note. The Company will issue additional restricted shares
of its common stock worth, in the aggregate, $200,000 to Laurus on the second
anniversary date of the facility, if the facility remains in
place. The pricing of these additional shares will be based on the
applicable preceding ten business day average trading price.
Laurus
agreed that when it can resell the unregistered shares under Rule 144, its
resale on any one day cannot exceed 10% of the daily trading volume. The 310,009
and 283,286 shares previously granted under this revolving credit facility, and
referenced above, were registered for resale on a registration statement, which
was declared effective on February 14, 2008. The facility is not
convertible into any class of the Company’s securities at any time during its
term. In addition, Laurus is strictly prohibited from engaging in any
short sales of the Company’s common stock during the term of the
facility.
The
facility is a secured debt, collateralized by substantially all of the Company's
and its subsidiaries' assets. The facility contains certain default
provisions. In the event of a default by the Company, the Company
will be required to pay an additional fee per month until the default is
cured. Laurus has the option of accelerating the entire principal
balance and requiring the Company to pay a premium in the event of an uncured
default.
The
facility requires the Company to deposit all funds (other than certain
refundable deposits and proceeds from financings) into a lockbox that will be
swept on a daily basis to reduce any outstanding facility balance. Any funds in
excess of any outstanding facility balance are transferred to the Company on a
daily basis.
The
Company paid to certain persons designated by Laurus the amount of $9,500 for
legal fees and expenses in structuring the facility, conducting due diligence
and escrow fees. In addition, the Company paid a finder’s fee in the
amount of $35,000 and paid Laurus a facility fee of 3.5%, or approximately
$140,000, of the facility amount, which facility fee is being expensed over the
life of the note.
5. Income
Taxes
At
December 31, 2007, the Company had federal and state tax net operating loss
carryforwards (“NOL”) of approximately $9,380,000 and $9,590,000,
respectively. These amounts include acquired federal and state NOL's
of Starsys of $3,810,000 and $5,700,000. The federal and state tax
loss carryforwards will begin to expire in 2019 and 2011, respectively, unless
previously utilized.
At
December 31, 2007, the Company had federal and state research and development
tax credit carryforwards of approximately $2,640,000 and $40,000,
respectively. The federal research tax credits will begin to expire
in 2018. The state research tax credits will carryforward
indefinitely.
The
future utilization of the Company’s net operating loss and research and
development credit carryforwards to offset future taxable income may be subject
to an annual limitation as a result of ownership changes that may have occurred
previously or that could occur in the future. The Company has not yet
determined whether such an ownership change has occurred; however the Company is
in the process of completing a Section 382 analysis regarding the possible
limitation of the net operating loss and research and development credits.
Management has projected that any Section 382 limitation would exceed
$1,000,000, and, based on this projection, believes that the related deferred
tax assets will continue to exist. When the Section 382 analysis
is completed, the Company plans to update its unrecognized tax benefits under
FIN 48. The Company expects the Section 382 analysis to be completed
within the next twelve months.
Pursuant
to Internal Revenue Code Sections 382 and 383, the Company’s use of its net
operating loss and tax credit carryforwards relating to Starsys will be limited
as a result of cumulative changes in ownership of more than 50% over a
three-year period which occurred in 2006. The Section 382 limitation
relating to Starsys amounts to $241,707.
In June
2006, the FASB issued Interpretation No. 48, or FIN 48, Accounting for
Uncertainty in Income Taxes — an Interpretation of FAS 109.
FIN 48 provides clarification for the financial statement measurement and
recognition of tax positions that are taken or expected to be taken in a tax
return. The Company adopted FIN 48 effective January 1, 2007 and is in
the process of completing a FIN 48 analysis. The adoption of
FIN 48 is not expected to impact the Company’s financial condition,
results of operations or cash flows for the year ended December 31,
2007.
As a
result of the adoption of SFAS No. 123(R), the Company will recognize excess tax
benefits associated with the exercise of stock options directly to stockholders’
equity only when realized. Accordingly, deferred tax assets are not
recognized for net operating loss carryforwards resulting from excess tax
benefits. As of December 31, 2007, deferred tax assets do not include
$255,000 of these excess tax benefits from employee stock option exercises that
are a component of the Company’s net operating loss
carryforwards. Additional paid in capital will be increased up to
$255,000 if such excess tax benefits are realized.
The
Company also recorded a valuation allowance of $4,500,000 related to federal and
state loss and tax credit carryforwards and other temporary differences of
Starsys. The tax benefit of these carryforwards, if and when
realized, will first reduce the existing value of goodwill up to a total of
$4,500,000, then, if applicable, remaining amounts will be applied first to
other intangible assets with any excess amount recognized as an income tax
benefit.
Significant
components of the Company's deferred tax assets are shown below. A
valuation allowance has been established to offset the deferred tax assets, as
realization of such assets has not met the more likely than not threshold
required under SFAS No. 109.
|
|
|
|
|
2006
|
|
Current
deferred tax assets:
|
|
|
|
|
|
|
Accrued
vacation
|
|
$ |
242,000 |
|
|
$ |
246,500 |
|
Deferred
gain on sale of building
|
|
|
38,700 |
|
|
|
38,700 |
|
|
|
|
118,100 |
|
|
|
285,000 |
|
Warranty
reserve
|
|
|
259,100 |
|
|
|
29,400 |
|
Other
|
|
|
66,103 |
|
|
|
166,100 |
|
Total
current deferred tax assets
|
|
|
724,003 |
|
|
|
765,700 |
|
Non-current
deferred tax assets
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
|
3,624,800 |
|
|
|
3,715,800 |
|
Deferred
gain on sale of building
|
|
|
203,900 |
|
|
|
252,300 |
|
Tax
credit carryforwards
|
|
|
2,689,300 |
|
|
|
3,537,700 |
|
Total
non-current deferred tax assets
|
|
|
6,518,000 |
|
|
|
7,505,800 |
|
Non-current
deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed
Assets and Intangibles
|
|
|
(205,600 |
) |
|
|
(744,600 |
) |
Other
|
|
|
(255,303 |
) |
|
|
(241,500 |
) |
Total
net non-current deferred tax assets
|
|
|
6,057,097 |
|
|
|
6,519,700 |
|
Total
deferred tax assets
|
|
|
6,781,100 |
|
|
|
7,285,400 |
|
Valuation
allowance
|
|
|
(6,781,100 |
) |
|
|
(7,285,400 |
) |
|
|
$ |
- |
|
|
$ |
- |
|
Significant
components of the provision for income taxes for the years ended December 31,
2007 and 2006 are as follows:
|
|
2007
|
|
|
2006
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$ |
(10,863 |
) |
|
$ |
15,000 |
|
State
|
|
|
1,054 |
|
|
|
4,290 |
|
|
|
|
(9,809 |
) |
|
|
19,290 |
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
- |
|
|
|
- |
|
State
|
|
|
- |
|
|
|
- |
|
Income
tax (benefit) expense
|
|
$ |
(9,809 |
) |
|
$ |
19,290 |
|
Reconciliation
of the statutory federal income tax benefit to the Company's effective tax
benefit:
|
|
|
|
|
2006
|
|
Statutory
U.S. federal rate
|
|
|
35.00 |
% |
|
|
35.00 |
% |
State
income taxes - net of federal benefit
|
|
|
-1.89 |
% |
|
|
3.79 |
% |
Permanent
differences
|
|
|
-53.37 |
% |
|
|
-14.42 |
% |
NOL
and tax credit prior year true up
|
|
|
-160.99 |
% |
|
|
-15.99 |
% |
Other
|
|
|
2.94 |
% |
|
|
.82 |
% |
Tax
Credits
|
|
|
0.00 |
% |
|
|
91.18 |
% |
Federal
refund received
|
|
|
3.83 |
% |
|
|
0.00 |
% |
Change
in valuation allowance
|
|
|
177.94 |
% |
|
|
-100.38 |
% |
Provision
for income taxes
|
|
|
3.46 |
% |
|
|
0.00 |
% |
6. Employee
Benefit Plans
(a) Profit
sharing 401(k) plan
The
Company's amended 401(k) retirement savings plan allowed each eligible employee
to voluntarily make pre-tax salary contributions up to 93% of their compensation
or statutory limits per year, whichever is lower, for the years ended December
31, 2007 and 2006. The Company has elected to make a matching
contribution of 10% of employee contributions, which matching portion vests over
five years as specified in the plan amendment. During 2007 and 2006,
the Company contributed $19,257 and $24,698 to the Plan,
respectively.
Upon the
merger with Starsys, the Company assumed responsibility for the Starsys 401(k)
retirement saving plan, which allows each eligible Starsys employee to make
elective deferrals to the Plan and elect to reduce his or her compensation in an
amount of 2% up to a maximum of 100% of compensation (to the maximum allowable
contribution permitted by IRS Code which was $15,500 for 2007), for
contributions to this Plan as an elective deferral. There is a four year vesting
period for the Company’s match (25% each year for four years). The
Company elected to make matching contributions on employee contributions at a
rate of 25% on the first 4% of employee contributions. During 2007
and 2006, the Company contributed $68,757 and $76,218 to the Plan.
In 1999,
the Company adopted a stock option plan under which its Board of Directors had
the ability to grant its employees, Directors and affiliates Incentive Stock
Options, Non-Statutory Stock Options and other forms of stock-based
compensation, including bonuses or stock purchase rights. Incentive
Stock Options, which provided for preferential tax treatment, were only
available to employees, including Officers and affiliates, and were not issued
to non-employee Directors. The exercise price of the Incentive Stock
Options is 100% of the fair market value of the stock on the date the options
are granted. Pursuant to the plan, the exercise price for the
non-statutory stock options was to be not less than 95% of the fair market value
of the stock on the date the option was granted.
In 2000,
the Company amended the 1999 Stock Option Plan, increasing the number of shares
eligible for issuance under the Plan to 30% of the then outstanding common stock
to 4,184,698 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 has not made any such
adjustment since.
In 2004,
the Company adopted the 2004 Equity Incentive Plan authorizing options on
2,000,000 shares. It was first amended in August 2005 increasing the authorized
options under the plan by 2,000,000 for a total of 4,000,000 shares and was
further amended on January 31, 2006 increasing the authorized options by
3,000,000 for a total of 7,000,000 under the plan. As of December 31,
2007, 11,184,698 shares were authorized for issuance under both the 1999 and
2004 plans, 7,358,726 of which were subject to outstanding options and awards
and 1,610,199 of which have been exercised for the Company's common
stock.
During
2007, the Company issued non-statutory options to purchase an aggregate of
50,000 shares; 10,000 shares to each of its five independent Directors as
partial compensation for their 2007 service. In addition, the Company
issued non-statutory options to purchase 50,000 shares to a new independent
member of the board as a one-time grant.
(c)
Employee stock purchase plan
In 1999,
the Company adopted the 1999 Employee Stock Purchase Plan with 1,000,000 shares
reserved under the plan and authorized the Board of Directors to make twelve
consecutive semiannual offerings of common stock to its employees. The first
shares of common stock were issued under the Plan in February
2004. The exercise price for the Employee Stock Purchase Plan will
not be less than 95% of the fair market value of the stock on the date the stock
is purchased. During 2007 and 2006, the Company converted
approximately $93,000 and $134,000 of employee contributions under the Employee
Stock Purchase Plan, and approximately 126,000 and 105,000 shares were issued
under the plan as of December 31, 2007 and 2006, respectively. The
1999 Employee Stock Purchase Plan was to expire in June 2005; however, the Board
of Directors extended the plan until June 30, 2010 or until all of the shares
have been bought under the plan, whichever comes first.
7. Stockholders'
Equity
a) Series
C Preferred Stock.
On August
25, 2004, the Company issued 250,000 shares of its Series C Non-Redeemable
Convertible Preferred Stock, par value $0.001 per share (the "Series C Preferred
Stock"), to Laurus for an aggregate purchase price of $2.5 million or $10.00 per
share (the "Stated Value"). The Series C Preferred Stock was
originally convertible into shares of the Company's common stock at a rate of
$1.54 per share. On September 21, 2007, the Company adjusted the
fixed conversion price from $1.54 to $0.62 per share due to a common stock
financing with OHB Technology AG and MT Aerospace AG (See Note 7(c) Common Stock
below). The Company had not previously re-priced the Series C
Preferred Stock when the Series D-1 Preferred Stock was issued and the June 2007
warrant offer to preferred stockholders was made due to Laurus’ participation in
those transactions. The Company has received verbal and written
waivers from Laurus on these previous transactions.
The
Company accrues quarterly, cumulative dividends on the Series C Preferred Stock
at a rate of 6.85% per annum. As of December 31, 2007 and 2006, the
Company declared dividends payable of approximately $170,000 for each twelve
month period to the holders of its Series C Preferred Stock. These dividends are
payable in cash or shares of common stock at the holder's option with the
exception that dividends may be paid in shares of common stock for up to 25% of
the aggregate dollar trading volume if the fair market value of the Company's
common stock for the 20-days preceding the conversion date exceeds 120% of the
conversion rate. Accrued dividends were paid in cash during 2007 and
2006. On December 31, 2007, accrued but unpaid dividends were
approximately $43,000; these accrued dividends were paid in cash in January
2008.
The
Series C Preferred Stock is redeemable by the Company in whole or in part at any
time after issuance for (a) 115% of the Stated Value if the average closing
price of the common stock for the 22 days immediately preceding the date of
redemption does not exceed $0.62 per share (adjusted in September 2007 related
to the sale of common stock to OHB Technology AG and MT Aerospace AG) or (b) the
Stated Value if the average closing price of the common stock for the 22 days
immediately preceding the date of redemption exceeds $0.62 per share (adjusted
in September 2007 related to the sale of common stock to OHB Technology AG and
MT Aerospace AG). The Series C Preferred Shares have a liquidation right equal
to the Stated Value upon the Company's dissolution, liquidation or
winding-up. The Series C Preferred Shares have no voting rights,
except as required by law.
In
conjunction with the Series C Preferred Shares, the Company issued a five-year
common stock warrant to Laurus for the purchase of 487,000 shares of the
Company's common stock at an exercise price of $1.77 per share.
b) Series
D-1 Preferred Stock.
On
January 12, 2006, the Company entered into a Securities Purchase Agreement with
a limited number of institutional accredited investors, including Tailwind
Capital, Bristol Capital Management, Nite Capital, Laurus and Omicron Capital,
(which has since transferred its preferred shares to Portside Growth &
Opportunity Fund and Rockmore Investment Master Fund). On January 13,
2006, the Company issued and sold to these investors 5,150 shares of Series D-1
Amortizing Convertible Perpetual Preferred Stock, par value $0.001 per share,
for an aggregate purchase price of $5.15 million, or $1,000 per
share. As of December 31, 2007, approximately 3,199 shares of Series
D-1 Preferred Stock remain outstanding and approximately 1,951 shares of Series
D-1 Preferred Stock had been repurchased through voluntary amortization,
converted to the Company’s common stock or redeemed by investor request at a
discount. In total, 75 shares of Series D-1 Preferred Stock were
converted into 50,676 shares of the Company's common stock, 1,709 shares of
Series D-1 Preferred Stock have been repaid through voluntary amortization, as
provided for in the Agreement, and 167 shares of Series D-1 Preferred Stock have
been repurchased through an investor request at a 15% discount. The
Company also issued various warrants to these investors as described
below. The Company paid cash fees and expenses of approximately
$119,000 to a finder for the introduction of potential investors in this
financing, and paid $60,000 to the lead investor's counsel for legal expenses
incurred in the transaction. The preferred shares are convertible
into shares of the Company's common stock at a rate of $1.48 per share and
accrue quarterly, cumulative dividends at a rate of LIBOR plus 4% on the first
day of the applicable quarter. As of December 31, 2007, the Company
had accrued Series D-1 dividends of approximately $76,000, which were paid in
January 2008.
Certain
warrants the Company issued to the Series D-1 investors at the closing entitled
the investors to purchase up to an aggregate of 1,135,138 shares of the
Company's common stock at an exercise price of $1.51 per
share. On May 31, 2007, the Company offered to the
holders of these warrants the opportunity to exercise the warrants at a
specially reduced price to be calculated as 80% times the volume weighted
average price (VWAP) of its common stock for the 20 trading days preceding the
warrant holder’s acceptance of the offer. Although this written offer expired by
its terms on June 15, 2007, the Company orally extended the offer to June 29,
2007 and Laurus accepted, exercising 500,000 of its 639,203 warrants of this
series for $290,000 cash. The VWAP for the 20 trading days preceding
June 29, 2007 was $0.725 per share making the strike price of the common stock
warrant $0.58 which is 80% of the $0.725. Due to a ratchet
anti-dilution provision in the warrants of this series, the exercise price of
the remaining 635,138 warrants in the series (which includes 139,203 warrants
still owned by Laurus) was reduced to $0.58 per share as a result of this
transaction, and otherwise the remaining warrants remain in full force and
effect in accordance with their original terms. The warrants are exercisable for
five years following the date of grant. The warrants feature a net exercise
provision, which enables the holder to choose to exercise the warrant without
paying cash. However, this right is available only if a registration statement
or prospectus covering the shares subject to the warrant is not
available. The warrants will continue to have the anti-dilution
provisions reducing the warrant exercise price, if the Company issues equity
securities (other than in specified exempt transactions) at an effective price
below the warrant exercise price, to such lower exercise price. The Company
refers to these warrants as the common stock warrants.
·
|
The purchase agreement contains a number of covenants by
the Company, which includes an agreement not to effect any transaction
involving the issuance of securities convertible, exercisable or
exchangeable for the Company's common stock at a price or rate per share
which floats (i.e., which may change over time), without the consent of a
majority of the Series D-1 preferred stockholders, so long as any shares
of Series D-1 Preferred Stock are outstanding, subject to certain
conditions.
|
In
connection with the Series D-1 Preferred Stock financing, Laurus consented to
and waived certain contractual rights. The Company paid Laurus
Capital Management, L.L.C., and the manager of Laurus Master Fund, an amount of
$87,000 in connection with Laurus' delivery of the consent and waiver, and paid
$1,000 to Laurus' counsel for their related fees.
OHB and MT
Aerospace
In
September 2007, the Company raised $4.4 million in cash by selling 7,095,566
shares of common stock to OHB Technology AG, a German space technology company,
and MT Aerospace AG, a subsidiary of OHB Technology AG, in a private transaction
at a purchase price of $0.62 per share. The price was determined as a
premium of 11% to the closing price of the Company’s common stock on September
12, 2007, which was $0.56 per share.
In
addition, on December 19, 2007, the Company raised an additional $658,000 in
cash by selling 877,563 shares of the Company’s common stock to OHB Technology
AG and MT Aerospace AG at $0.75 per share, in connection with a separate
financing and their preemptive right to maintain a 19% ownership in the
Company.
The
common stock issued is restricted. The Company also entered into a Stockholder
Agreement with the investors, which provides the investors with the right, after
one year, to demand that the Company file a registration statement with the
Securities and Exchange Commission to cover re-sales of the common stock from
time to time by the investors. In addition, subject to existing
rights of other stockholders, the Company provided the investors with rights to
participate in future financings.
The
investors agreed not to solicit the Company’s customers and clients in the
United States for the same products and services provided by the Company. The
investors agreed not to purchase additional shares of common stock or cause
others to do so, except as expressly provided in the Stockholder
Agreement. The Stockholder Agreement expires on the earlier
of: (1) ten years, (2) a change of control of the Company, or (3)
when the investors own less than 4.99% of the Company.
Also,
pursuant to the Stockholder Agreement, the Company agreed to elect a qualified
representative of OHB Technology AG (or any qualified replacement) to its Board
of Directors and to nominate this representative of OHB Technology AG for
election by the stockholders. This obligation will continue until the
expiration of the Stockholder Agreement. Pursuant to this provision,
the Company elected Hans Steininger to its Board of Directors on November 8,
2007. In addition, per the Stockholder Agreement, for two years OHB
Technology AG and MT Aerospace AG agreed to vote their shares of common stock in
favor of the nominees to the Company’s Board of Directors that have been
recommended for election by the Board of Directors. OHB Technology AG
and MT Aerospace AG agreed to, following this two year period, continue voting
their shares of common stock in favor of any nominees recommended by the
Company’s Board of Directors (1) if such nominee is a current member of the
Board of Directors or (2) if the slate of nominees that is recommended for
election by the Board of Directors includes the Stockholder’s
nominee.
Loeb
Partners
On
December 4, 2007, the Company and Loeb Partners Corporation entered into a Stock
Purchase Agreement covering the issuance and sale of 3,750,000 shares of the
Company’s common stock at a purchase price of $0.75 per share. The
Company received gross proceeds from the sale of approximately $2.8 million in
cash.
The
Common Stock is restricted. In addition, pursuant to a Stockholder
Agreement, Loeb agreed not to sell the common stock for one year. The
Company also provided Loeb with the right, after one year, to demand that the
Company file a registration statement with the Securities and Exchange
Commission to cover re-sales of the common stock from time to time by Loeb
Partners. In addition, subject to existing rights of other
stockholders, the Company provided Loeb Partners with rights to participate in
future financings.
Pursuant
to a Stockholder Agreement, for one year, Loeb Partners agreed to vote the
common stock in favor of nominees recommended by the Company’s Board of
Directors and after one year, Loeb Partners has agreed to continue to vote the
common stock in favor of current members of the Board of
Directors. Further, Loeb has agreed not to purchase additional shares
of common stock or cause others to do so, except as expressly provided in the
Stockholder Agreement. The Stockholder Agreement expires on the
earlier of: (1) ten years; (2) a change of control of the Company; or
(3) when Loeb Partners owns less than 4.99% of the Company.
As of
December 31, 2007, the Company had warrants outstanding issued as part of its
private placements and other equity raising ventures, as well as for commercial
services rendered, that allow the holders to purchase up to 1,922,138 shares of
common stock at prices between $0.58 and $2.58 per share. The
warrants expire at various times through January 11, 2011.
(e) Stock
options
The
employment agreement with Mr. Sirangelo sets forth the terms of his employment
with the Company as Chief Executive Officer and provides for, among other
matters: a base salary, performance-based cash bonuses based on the
achievement of specific goals set forth in the agreement and an option to
purchase up to 1,900,000 shares of the Company's common stock.
The
employment agreement with Mr. Slansky amends and restates his employment
agreement dated February 10, 2003. This agreement sets forth the
terms of his continued employment with the Company as President and Chief
Financial Officer and provides for, among other matters: a base
salary, performance-based cash bonuses based on the achievement of specific
goals set forth in the agreement and an option to purchase up to 1,400,000
shares of the Company's common stock.
The
options granted to each executive under the 2005 agreements were fully vested
and exercisable on the date of grant, have an exercise price of $1.40 per share,
which was the closing sale price, reported on the OTCBB on the date of grant,
and will expire five years after the date of grant, unless they expire sooner as
a result of termination of employment. Some of the shares subject to
the options are subject to sale restrictions that expire upon the achievement of
certain milestones or four years from the date of grant, whichever comes
first. Subject to certain limitations, these options may be exercised
by means of a net exercise provision by surrendering shares with a fair market
value equal to the exercise price upon exercise.
James W.
Benson resigned as Chairman and Chief Technology Officer in September 2006. Mr.
Benson remains a member of the Company’s Board of Directors. Most of the options
granted to Mr. Benson, during his employment with the Company, expired on April
2, 2007. Non-plan options on 500,000 shares were vested prior to his
departure and were not tied to any employment obligation and those options
remain outstanding. Mr. Benson’s vested outstanding options have an
exercise price of $1.00 and are scheduled to expire on January 18,
2010.
The
following tables provide information regarding all plan and non-plan Company
stock options:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Options
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Exercise
Price
|
|
|
|
|
10,322,560 |
|
|
$ |
1.27 |
|
Granted
|
|
|
3,307,000 |
|
|
|
1.17 |
|
Exercised
|
|
|
(230,281 |
) |
|
|
(0.83 |
) |
Expired
|
|
|
(1,004,181 |
) |
|
|
(1.35 |
) |
|
|
|
12,395,098 |
|
|
|
1.27 |
|
Granted
|
|
|
1,208,500 |
|
|
|
0.73 |
|
Exercised
|
|
|
(100,883 |
) |
|
|
(0.50 |
) |
Cancelled/Expired
|
|
|
(2,343,989 |
) |
|
|
(1.28 |
) |
|
|
|
11,158,726 |
|
|
$ |
1.24 |
|
The
weighted average fair value of options granted to employees under the 1999 Stock
Option Plan and the 2004 Equity Incentive Plan during 2007 and 2006 were $0.73
and $1.17, respectively. At December 31, 2007 and 2006, there were
11,158,726 and 12,395,098 options outstanding at a weighted average exercise
price of $1.24 and $1.27 per share, respectively. The weighted
average remaining life of outstanding options under the plans at December 31,
2007 and 2006 was 2.75 years and 3.50 years, respectively. The aggregate
intrinsic value of options exercised during 2007 and 2006 was approximately
$120,000 and $145,000, respectively. The aggregate intrinsic value of
options outstanding at December 31, 2007 and 2006 was approximately
$470,000 and $184,000, respectively. The intrinsic value
of options vested and exercisable at December 31, 2007 and 2006
was approximately $311,000 and $184,000, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range
of Exercise Price
|
|
|
Number
of Options Outstanding
|
|
|
Weighted-Average
Remaining Contractual Life of Options Outstanding
|
|
|
Number
of Options Exercisable
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining Contractual Life of Exercisable Options
Outstanding
|
|
$ |
0.42-0.50 |
|
|
|
235,000 |
|
|
|
0.72 |
|
|
|
235,000 |
|
|
$ |
0.46 |
|
|
|
0.72 |
|
|
0.51-1.00 |
|
|
|
4,597,639 |
|
|
|
2.82 |
|
|
|
2,505,186 |
|
|
|
0.85 |
|
|
|
2.06 |
|
|
1.01-1.50 |
|
|
|
5,170,365 |
|
|
|
2.87 |
|
|
|
4,864,061 |
|
|
|
1.38 |
|
|
|
2.88 |
|
|
1.51-2.00 |
|
|
|
1,013,500 |
|
|
|
2.30 |
|
|
|
1,013,500 |
|
|
|
1.71 |
|
|
|
2.30 |
|
|
2.01-2.50 |
|
|
|
102,222 |
|
|
|
2.73 |
|
|
|
102,222 |
|
|
|
2.11 |
|
|
|
2.73 |
|
|
2.51-4.80 |
|
|
|
40,000 |
|
|
|
3.59 |
|
|
|
40,000 |
|
|
|
4.00 |
|
|
|
3.59 |
|
|
|
|
|
|
11,158,726 |
|
|
|
2.75 |
|
|
|
8,759,969 |
|
|
$ |
1.24 |
|
|
|
2.52 |
|
The total
fair value of options that vested during 2007 and 2006 was approximately
$408,000 and $133,000, respectively.
8. Commitments
and Contingencies
(a) Capital
leases
The
Company leases certain equipment under non-cancelable capital leases, which are
included in fixed assets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
Computer
and office equipment
|
|
$ |
642,079 |
|
|
$ |
452,481 |
|
Less
accumulated depreciation
|
|
|
(263,778 |
) |
|
|
(226,535 |
) |
|
|
$ |
378,301 |
|
|
$ |
225,946 |
|
Future
minimum lease payments are as follows:
|
|
|
|
|
|
|
|
|
|
$ |
170,161 |
|
2009
|
|
|
194,442 |
|
2010
|
|
|
194,442 |
|
2011
|
|
|
156,247 |
|
2012
|
|
|
145,687 |
|
Thereafter
|
|
|
24,281 |
|
Total
minimum lease payments
|
|
|
885,260 |
|
Amount
representing interest
|
|
|
155,570 |
|
Present
value of minimum lease payments
|
|
|
729,690 |
|
|
|
|
|
|
Total
obligation
|
|
|
729,690 |
|
Less
current portion
|
|
|
(137,410 |
) |
Long-term
portion
|
|
$ |
592,280 |
|
(b) Other
accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
Warranty
accrual
|
|
$ |
505,984 |
|
|
$ |
76,000 |
|
Customer
deposits and other accruals
|
|
|
348,054 |
|
|
|
108,080 |
|
Provision
for anticipated loss
|
|
|
315,544 |
|
|
|
719,125 |
|
Legal,
royalty and customer accuals
|
|
|
125,664 |
|
|
|
316,231 |
|
Employee
accruals
|
|
|
125,000 |
|
|
|
145,847 |
|
Dividend
(Series D-1 preferred stock)
|
|
|
76,475 |
|
|
|
111,188 |
|
Dividend
(Series C preferred stock)
|
|
|
42,899 |
|
|
|
42,898 |
|
Deferred
rent
|
|
|
37,483 |
|
|
|
- |
|
Property
and income tax accruals
|
|
|
30,993 |
|
|
|
30,730 |
|
Employee
Stock Purchase Plan
|
|
|
24,672 |
|
|
|
52,462 |
|
Total
other accrued liabilities
|
|
$ |
1,632,768 |
|
|
$ |
1,602,561 |
|
|
|
|
|
|
2006
|
|
Long
term portion of deferred rent
|
|
$ |
643,168 |
|
|
$ |
160,782 |
|
(c) Building
lease
In
January 2003, the Company sold its headquarters building (the land and building)
at 13855 Stowe Drive, Poway, CA 92064. In conjunction with the sale, the
Company entered into a ten (10) year non-cancelable operating lease agreement
with the buyer to lease-back its facility. The base rent was
approximately $26,000 per month at lease inception and will increase by 3.5% per
year. The Company is straight lining the remaining lease payments over the
remainder of the lease per SFAS No. 13. Total expense for 2007 and 2006
amounted to approximately $361,000 for both periods (See Note
1(s)).
The gain
of $1,172,720 on the sale of the facility was deferred and is being amortized on
a straight-line basis over the ten (10) year term of the lease at the rate of
$117,272 per year. As of December 31, 2007 and 2006, the deferred gain was
approximately $596,000 and $713,000, respectively. This amortization is
included in the Company's non-operating income and expense and totaled
approximately $117,000 in 2007 and 2006.
Deferred
Gain consisted of the following:
|
|
|
|
|
2006
|
|
Deferred
Gain
|
|
$ |
1,172,720 |
|
|
$ |
1,172,720 |
|
Less
Amortization to date
|
|
|
(576,587 |
) |
|
|
(459,315 |
) |
|
|
$ |
596,133 |
|
|
$ |
713,405 |
|
In August
2006, the Company entered into a four month lease, (which was subsequently
extended several times to June 30, 2008), on a fabrication and test facility.
The additional facility is also located in Poway, California. It is
approximately 11,000 square feet and is dedicated to fabrication of the
Company's hybrid rocket motors. The cost to the Company was
approximately $39,000 in 2006 and $121,000 in 2007. The Company was
able to extend the facility lease on a short-term basis until June 30,
2007. Total monthly rent from January 2007 to June 2007 was
approximately $10,000 per month, for a total of approximately $60,000 for the
six month term ending on June 30, 2007. The facility lease was
further extended in June 2007 on a short-term basis until December 31, 2007, and
again in November 2007 until June 30, 2008. Total monthly rent from
January 2008 to June 2008 is approximately $11,000 per month, for a total of
approximately $66,000 for the six month term ending on June 30,
2008.
In August
2006, the Company entered into a ten-year lease on a 72,000 square foot
development and manufacturing facility located in the Colorado Technology Center
in Louisville, Colorado, for its subsidiary, Starsys, Inc. Starsys relocated
from its facility in Boulder, Colorado in March 2007. The new
facility is leased from RE Hill Properties, LLC and Quartz Mountain Properties,
LLC. The lease calls for a base monthly payment of $58,241 for the
initial lease year of February 2007 through January 2008. Subsequent
years include an escalation of 3% per year. Total lease payments will
be approximately $7.4 million over the remaining life of the lease.
In March
2007, the Company signed a new sixty-five (65) month lease for its Durham, North
Carolina manufacturing operations one mile east of the prior
location. In May 2007, the Company relocated the operations into the
new facility which has approximately 13,500 square feet of usable office and
laboratory space. The monthly lease payment is $11,236 through April
2008 with an annual increase. The lease included a deferred rent
clause that stipulated that the first five months from May 2007 to September
2007 did not require any payments. The total remaining lease
obligation under the terms of the lease is approximately $980,000.
|
|
|
|
|
|
$ |
1,319,121 |
|
2009
|
|
|
1,309,071 |
|
2010
|
|
|
1,370,827 |
|
2011
|
|
|
1,421,777 |
|
2012
|
|
|
1,402,186 |
|
Thereafter
|
|
|
3,593,805 |
|
Total
minimum lease payments
|
|
$ |
10,416,787 |
|
9. Concentrations
(a) Credit
risk
The
Company maintains cash balances at various financial institutions primarily
located in San Diego, California, Boulder, Colorado 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
balances in excess of the insured amount; however, the Company has not
experienced any losses in such accounts.
(b) Customer
Currently,
the Company’s revenues are not grouped by similar products or
services. For example, a customer purchasing a small satellite does
not know (and the Company does not track internally) the part of the order that
related to each product group (i.e., the customer purchases a small satellite
system or a mission solution). A small satellite system could have
propulsion, satellite bus technology and an electro-mechanical structure all in
one customer order. During 2007 and 2006, the Company had one major
customer, the U.S. government that accounted for sales of approximately $25.4 million, or 73% of
consolidated net sales, and $28.6 million, or 88% of consolidated net sales,
respectively. At December 31, 2007 and 2006, the amount receivable from these
customers was approximately $4.4 million and $1.0 million,
respectively.
10. Unaudited
Pro Forma Combined Consolidated Statements of Operations
The
following unaudited pro forma combined statements of operations give effect to
the merger of SpaceDev and Starsys using the purchase method of accounting, as
required by SFAS No. 141, Business
Combinations. The Company acquired Starsys Research
Corporation on January 31, 2006 and is the "accounting acquirer" for accounting
purposes. Under this method of accounting, the combined company
allocated the purchase price to the fair value of assets of Starsys deemed to be
acquired, including identifiable intangible assets and goodwill. The
unaudited pro forma combined statements of operations are based on respective
historical consolidated financial statements and the accompanying notes of the
Company.
The
unaudited pro forma combined statement of operations for the year ended December
31, 2006 assumes the merger took place on January 1, 2006. The unaudited pro
forma combined statements of operations should be read in conjunction with the
related notes included in this Form 10-KSB and the consolidated audited
financial statements of SpaceDev. The unaudited pro forma combined
statements of operations are not necessarily indicative of what the actual
results of operations and financial position would have been had the merger
taken place on January 1 of the period presented and do not indicate future
results of operations.
Pro
Forma Combined Consolidating and Consolidated Statement of
Operations
(Restated
and Unaudited)
For
the Twelve Months Ended
|
|
|
|
Consolidated
|
|
|
Pro
Forma Adjustments
|
|
|
Consolidated
Pro Forma
|
|
|
%
|
|
Net
Sales
|
|
$ |
34,397,113 |
|
|
$ |
(257,205 |
) |
|
$ |
34,139,909 |
|
|
|
100.00 |
% |
Cost
of Sales *
|
|
|
27,087,542 |
|
|
|
(91,380 |
) |
|
|
26,996,162 |
|
|
|
79.08 |
% |
Gross
Margin
|
|
|
7,309,572 |
|
|
|
(165,825 |
) |
|
$ |
7,143,747 |
|
|
|
20.92 |
% |
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales expense
|
|
|
2,430,673 |
|
|
|
(165,825 |
) |
|
|
2,264,848 |
|
|
|
6.63 |
% |
Research and development
|
|
|
279,063 |
|
|
|
- |
|
|
|
279,063 |
|
|
|
0.82 |
% |
General and administrative
|
|
|
5,638,502 |
|
|
|
- |
|
|
|
5,638,502 |
|
|
|
16.52 |
% |
Total
Operating Expenses *
|
|
|
8,348,238 |
|
|
|
(165,825 |
) |
|
|
8,182,413 |
|
|
|
23.97 |
% |
Income/(Loss)
from Operations
|
|
|
(1,038,666 |
) |
|
|
- |
|
|
|
(1,038,666 |
) |
|
|
-3.04 |
% |
Non-Operating
Income/(Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
111,668 |
|
|
|
- |
|
|
|
111,668 |
|
|
|
0.33 |
% |
Interest
expense
|
|
|
(88,196 |
) |
|
|
- |
|
|
|
(88,196 |
) |
|
|
-0.26 |
% |
Non-cash interest expense
|
|
|
(114,600 |
) |
|
|
- |
|
|
|
(114,600 |
) |
|
|
-0.34 |
% |
Gain on Building Sale
|
|
|
117,274 |
|
|
|
- |
|
|
|
117,274 |
|
|
|
0.34 |
% |
Total
Non-Operating Income/(Expense)
|
|
|
28,935 |
|
|
|
- |
|
|
|
28,935 |
|
|
|
0.08 |
% |
Income
(Loss) Before Income Taxes
|
|
|
(1,009,731 |
) |
|
|
- |
|
|
|
(1,009,731 |
) |
|
|
-2.96 |
% |
Income tax provision
|
|
|
19,290 |
|
|
|
- |
|
|
|
19,290 |
|
|
|
0.06 |
% |
Net
Income (Loss)
|
|
$ |
(1,029,021 |
) |
|
$ |
- |
|
|
$ |
(1,029,021 |
) |
|
|
-3.01 |
% |
Less:
Preferred Dividend Payments
|
|
|
(610,287 |
) |
|
|
- |
|
|
|
(610,287 |
) |
|
|
|
|
Adjusted
Net Income (Loss) for EPS Calculation
|
|
|
(1,639,308 |
) |
|
|
- |
|
|
|
(1,639,308 |
) |
|
|
|
|
Net
Income/(Loss) Per Share:
|
|
$ |
(0.06 |
) |
|
|
- |
|
|
$ |
(0.06 |
) |
|
|
|
|
Weighted-Average
Shares Outstanding
|
|
|
28,666,059 |
|
|
|
- |
|
|
|
28,666,059 |
|
|
|
|
|
Fully
Diluted Net Income/(Loss) Per Share:
|
|
$ |
(0.06 |
) |
|
|
- |
|
|
|
(0.06 |
) |
|
|
|
|
Fully Diluted Weighted-Average Shares Outstanding
|
|
|
28,666,059 |
|
|
|
- |
|
|
|
28,666,059 |
|
|
|
|
|
*
The following table shows how the Company's amortization expense of stock
options would be allocated to all expenses.
|
|
Cost of Sales
|
|
$ |
24,339 |
|
|
$ |
- |
|
|
$ |
24,339 |
|
|
|
0.07 |
% |
Marketing and sales
|
|
|
4,840 |
|
|
|
- |
|
|
|
4,840 |
|
|
|
0.01 |
% |
Research and development
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.00 |
% |
General and administrative
|
|
|
104,201 |
|
|
|
- |
|
|
|
104,201 |
|
|
|
0.31 |
% |
|
|
$ |
133,379 |
|
|
$ |
- |
|
|
$ |
133,379 |
|
|
|
0.39 |
% |
11.
Related Party Transactions
James W.
Benson, the Company’s former chief technology officer and former Chairman of the
Board of Directors, has personally guaranteed the building lease on the
Company’s Poway, California headquarters facility and has placed his home in
Poway as collateral. Mr. Benson remained a member of our Board of
Directors and one of our major shareholders. On September 26, 2006, Mr. Benson
resigned from his role as our chief technology officer in order to launch a new
independent venture, Benson Space Company, focused on the marketing of
commercial space tourism. SpaceDev currently has a study contract with
Benson Space Company which could lead to future business between the two
entities.