U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission file number 000-28947
SPACEDEV, INC.
(Name of small business issuer in its charter)
Colorado 84-1374613
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification number)
13855 Stowe Drive, Poway, California 92064
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (858) 375-2030
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
each class is registered
None. None.
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $4,890,743
The aggregate market value of the voting stock held by non affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock as of March 14, 2005 was $1.735, based on the last
sale price of $1.72 as reported by the NASD Over the Counter Bulletin Board.
As of March 14, 2005, Registrant had outstanding 21,363,980 shares of common
stock, its only class of common equity outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]
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TABLE OF CONTENTS
TABLE OF CONTENTS II
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PART I 1
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ITEM 1. DESCRIPTION OF BUSINESS 1
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Forward Looking Statements 1
General 2
Business Strategy 7
Products and Services; Market 8
Components and Raw Materials 11
Competition 11
Regulation 11
Employees 13
Intellectual Property 14
ITEM 2. DESCRIPTION OF PROPERTY 14
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ITEM 3. LEGAL PROCEEDINGS 15
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
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PART II 16
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 16
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Market Information 16
Holders 16
Dividends 16
Equity Compensation Plan Information 17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 18
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Overview 18
Selection of Significant Contracts 19
Results of Operations 22
Liquidity and Capital Resources 31
Critical Accounting Standards 32
Cash Position 33
Recent Accounting Pronouncements 36
Forward-Looking Statements and Risk Analysis 37
ITEM 7. FINANCIAL STATEMENTS 39
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 39
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ITEM 8A. CONTROLS AND PROCEDURES 41
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PART III 42
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ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT 42
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Committees Of The Board Of Directors And Meeting Attendance 47
ITEM 10. EXECUTIVE COMPENSATION 48
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Executive Officer Compensation 48
Director Compensation 50
Employment Agreements 51
Employee Benefits 52
Section 16(A) Beneficial Ownership Reporting Compliance 53
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 53
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 56
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 57
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 60
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SIGNATURES 62
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CONSOLIDATED FINANCIAL STATEMENTS F-1
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II
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
FORWARD LOOKING STATEMENTS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without limitation the disclosures made under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," in
our General Registration Statement on Form 10SB12G/A filed January 28, 2000 and
in our other periodic reports (e.g., Form 10-KSB, Form 10-QSB and Form 8-K).
In addition to historical information, the following discussion and other
parts of this document may contain forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We undertake no obligation to publicly update any
of the forward-looking statements after the date of this report to conform such
statements to actual results or to changes in our expectations.
Actual results could differ materially from those anticipated by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the level of sales to key
customers; the economic conditions affecting our industry; actions by
competitors; fluctuations in the price of raw materials; the availability of
outside contractors at prices favorable to the Company; our dependence on
single-source or a limited number of suppliers; our ability to protect our
proprietary technology; market conditions influencing prices or pricing; an
adverse outcome in potential litigation, claims and other actions by or against
us; U.S. government budget cuts; technological changes and introductions of new
competing products; fluctuations in economic conditions; terrorist attacks or
acts of war, particularly given the acts of terrorism against the United States
on September 11, 2001 and subsequent military responses by the United States in
Afghanistan and Iraq; mission disasters such as the loss of the space shuttle
Columbia on February 1, 2003 during its re-entry into earth's atmosphere;
ability to retain key personnel; changes in market demand; exchange rates;
productivity; weather; and market and economic conditions in the areas of the
world in which we operate and market our products. These are some of the factors
that we think could cause our actual results to differ materially from expected
and historical events.
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GENERAL
SpaceDev, Inc. (the "Company," "SpaceDev," "we," "us" or "our") is engaged
in the conception, design, development, manufacture, integration and operations
of space technology subsystems, systems, products and services. We are
currently focused on the commercial and military development of low-cost
microsatellites, nanosatellites and related subsystems, hybrid rocket propulsion
for space and launch vehicles, as well as the associated engineering technical
services to government, aerospace and other commercial enterprises. Our
products and solutions are sold directly to these customers and include
sophisticated micro- and nanosatellites, hybrid rocket-based launch vehicles,
orbital Maneuvering and orbital Transfer Vehicles as well as safe sub-orbital
and orbital hybrid rocket-based propulsion systems. We are also developing
commercial hybrid rocket motors for possible use in small launch vehicles,
targets and sounding rockets, and small high performance space vehicles and
subsystems.
Our approach is to provide smaller spacecraft - generally 250 kg (550
pounds) mass and less - and cleaner, safer hybrid propulsion systems to
commercial, 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 successfully concluded or are successfully
concluding contracts from such esteemed government, university and commercial
customers as the Air Force Research Laboratory, Boeing, the California Space
Authority, the Defense Advanced Research Projects Agency, NASA's Jet Propulsion
Laboratory, Lockheed Martin, Lunar Enterprise Corporation, Malin Space Science
Systems, the Missile Defense Agency (formerly the "Ballistic Missile Defense
Organization"), the National Reconnaissance Office, Scaled Composites and the
University of California at Berkeley via NASA.
We were incorporated under the laws of the State of Colorado on December
23, 1996 as Pegasus Development Group, Inc. ("PDGI"). SpaceDev, LLC of Colorado
was originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed on August 22, 1997. On October 22, 1997, PDGI issued 8,245,000 of its
$0.0001 par value common stock for 100 percent (1,000,000 shares) of SpaceDev's
common stock owned by SpaceDev, LLC. Upon the acquisition of the SpaceDev
stock, SpaceDev was merged into PDGI and, on December 17, 1997, PDGI changed its
name to SPACEDEV, INC. After the merger, SpaceDev, LLC, changed its name to SD
Holdings, LLC on December 17, 1997. We became a publicly traded company in
October 1997 and are currently trading on the Nasdaq Over-the-Counter Bulletin
Board ("OTCBB") under the symbol of "SPDV."
In February 1998, we acquired Integrated Space Systems, in San Diego.
Integrated Space Systems was fully integrated into SpaceDev. Most of the
Integrated Space Systems employees were former commercial Atlas launch vehicle
engineers and managers who worked for General Dynamics in San Diego. As SpaceDev
employees, they primarily develop systems and products based on hybrid rocket
motor technology and launch vehicle systems. Integrated Space Systems was
dissolved in 2003.
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In August 1998, we acquired a license to the patents and intellectual
property produced by American Rocket Company. The acquisition provided us
access to a large cache of hybrid rocket documents, designs and test results.
The American Rocket Company specialized in the design, development and testing
of hybrid rocket technology (solid fuel plus liquid oxidizer) for small sounding
rockets and launch vehicles.
In late 1998, we bid and won a government-sponsored research and
development contract, which was directly related to our strategic commercial
space interests. We competed with seven other industry teams and we were one of
five firms selected by NASA's Jet Propulsion Laboratory to perform a mission and
spacecraft feasibility assessment study for the proposed 200-kg Mars
MicroMissions. The final report was delivered to the Jet Propulsion Laboratory
in March 1999 and, as a result, we now offer lunar and Mars commercial
deep-space missions based on this and subsequent innovative space system
designs.
In mid-1999, we won an R&D contract from the National Reconnaissance Office
to study small hybrid-based "micro" kick-motors for small-satellite orbital
transfer applications. During the contract, we successfully developed three
Secondary Payload Orbital Transfer Vehicle design concepts. We subsequently
created a prototype, which led to the development of our capability to apply the
Secondary Payload Orbital Transfer Vehicle concept to our subsequent Maneuvering
and orbit Transfer Vehicle development programs.
In November 1999, we won a $4.9 million mission contract by the Space
Sciences Laboratory at the University of California at Berkeley. We were
competitively selected to design, build, integrate, test and operate, for one
year, a small NASA-sponsored scientific, Earth-orbiting spacecraft called
CHIPSat. CHIPSat is the first and, to our knowledge, only successful mission of
NASA's low-cost University-Class Explorer series to date. Due to additional
NASA and customer reviews, additional work, schedule extensions and a fee for
one year of satellite operations, the CHIPSat contract award was increased by
approximately $2.5 million in 2001 and 2002, bringing the total contract value
for design, build, launch and operations to approximately $7.4 million. CHIPSat
launched as a secondary payload on a Delta-II rocket on January 12, 2003.
CHIPSat is the world's first orbiting Internet node. The satellite achieved
3-axis stabilization with all individual components and systems successfully
operating and continues to work well in orbit. After more than two years. The
CHIPSat program generated approximately $2.1 million, $3.2 million, $1.7
million, $0.4 million and $0.1 million of revenue in 2000, 2001, 2002, 2003 and
2004, respectively.
On March 22, 2000, the California Spaceport Authority and the California
Space and Technology Alliance awarded us a grant of approximately $100,000 to be
used for test firing our hybrid rocket motors. California's Western Commercial
Space Center also awarded us approximately $200,000 to help build and equip its
satellite and space vehicle manufacturing facilities. These capabilities were
used to expand our project and technology base.
In July 2000, the National Reconnaissance Office granted us two separate
follow-on competitive awards of approximately $400,000 each for further hybrid
rocket engine design, test, evaluation, and development. Our work for the
National Reconnaissance Office has helped fund two innovative hybrid rocket
motor potential products:
- a family of small versatile orbital Maneuver and orbit Transfer Vehicles
using clean, safe hybrid rocket propulsion technology; and,
- a protoflight hybrid propulsion module for a 50-kg class microsatellite.
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Both of those contracts were successfully completed.
In September 2001, Scaled Composites awarded us a contract for a
proprietary hybrid propulsion development program for Scaled's "SpaceShipOne,"
valued in excess of $1 million. The entire contract, awarded upon the submitted
designs, was valued at approximately $2.2 million. The contract was indicative
of an increased demand for our hybrid motor technology and expertise in the
space industry. Work on this project generated approximately $1.2 million and
$397,000 of revenue in 2002 and 2003, respectively. In September of 2003,
SpaceDev was selected by Scaled Composites as the sole supplier of hybrid
propulsions systems, and was awarded the follow-on SpaceShipOne propulsion
contract. We generated approximately $115,000 of revenue in 2003 and $686,000
of revenue in 2004 from this contract and related engineering change orders,
with approximately $180,000 from engineering change orders and approximately
$506,000 from the contract.
- On December 17, 2003, which corresponded with the 100th anniversary of
the Wright Brothers flight, our hybrid propulsion system, which we believe
is the world's largest of its kind, aboard SpaceShipOne, successfully
powered a pilot toward space on its historic first powered supersonic
flight. After being released by the White Knight, a carrier aircraft, the
SpaceShipOne Test Pilot flew the ship to a stable, 0.55 mach gliding flight
condition, started a pull-up, and fired our hybrid rocket motor. Nine
seconds later, SpaceShipOne broke the sound barrier and continued its steep
powered ascent. The climb was very aggressive, accelerating forward at more
than 3-g while pulling upward at more than 2.5-g. At motor shutdown, 15
seconds after ignition, SpaceShipOne was climbing at a 60-degree angle and
flying near 1.2 Mach (930 mph). The test pilot then continued the maneuver
to a vertical climb, achieving zero speed at an altitude of 68,000 feet.
- On June 21, 2004, our proprietary hybrid rocket motor technology
successfully powered SpaceShipOne on its fourth and most important
history-making flight to space. At approximately 7:45 AM PDT on Monday,
June 21st, SpaceDev powered SpaceShipOne well beyond the 50 mile altitude
required to be considered a space flight, and created the world's first
private sector astronaut. After being released by the White Knight,
SpaceShipOne's test pilot, Mike Melvill, fired the rocket motor at the
planned altitude and the rocket motor then propelled SpaceShipOne to over
328,000 feet in approximately 80 seconds, flying near Mach 5.0.
- On September 29, 2004 and October 4, 2004, our hybrid propulsion
technology helped propel Scaled Composites/Paul Allen's SpaceShipOne into
space flight history as the craft garnered the $10 Million Ansari X Prize,
a contest created to stimulate the development of the private sector human
space flight industry. We provided several critical components and the
hybrid rocket technology for the craft's motor, including igniter, injector
and main operating valve, which successfully performed as expected and
powered SpaceShipOne on its historic manned flight. SpaceShipOne exceeded
the altitude requirement on both scheduled flights as required by the
Ansari X Prize competition. The hybrid propulsion system burned full
duration and pilot Brian Binnie steered SpaceShipOne high above the Mojave,
California desert to a height of 367,442 feet altitude (69.5 miles), which
far exceeded the required 328,000 feet altitude - a sky-high goal required
by the X Prize Foundation of St. Louis, Missouri. The altitude is generally
considered to be the threshold of space.
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Although we were not the recipient of the Ansari X Prize, it was a contest
designed to jumpstart the space tourism industry through competition among the
most talented entrepreneurs and rocket experts in the world. SpaceShipOne was
built and launched with private funds from Paul Allen. The craft was able to
carry equivalent weight of three people to 100 kilometers (62.5 miles) and
return safely to earth. The competition followed in the footsteps of more than
100 aviation incentive prizes offered between 1905 and 1935 credited with
spawning today's multibillion-dollar air transport industry. By helping
SpaceShipOne succeed, we were instrumental in moving the private space community
closer to realizing its vision of creating safe, affordable, commercial human
space flight.
On April 4, 2002, SpaceDev, Inc., an Oklahoma corporation, was formed for
the purpose of investigating and developing commercial space products in the
state of Oklahoma. We currently have no plans to develop this business in
Oklahoma and our subsidiary there remains dormant.
On April 30, 2002, the Company was awarded Phase I of a contract to develop
a Shuttle-compatible propulsion module for the Air Force Research Laboratory. We
received an award for Phase II of the contract on March 28, 2003. We are using
the project to further expand our Maneuvering and Orbital Transfer Vehicle
technology and product line to satisfy government space transportation
requirements. The first two phases of the contract have an estimated value of
approximately $2.5 million, of which $100,000 was awarded for Phase I. Phase II
of the contract is cost-plus fixed fee. In order to complete Phase II, we
requested and were granted approximately four months of additional time and
approximately $240,000 of additional funding, memorialized by a contract
amendment executed on July 7, 2004. In addition to the Phase I and Phase II
awards, there is an option worth approximately $800,000, which was initiated on
May 3, 2004. The additional funding to complete AFRL Phase II came in part from
the original $1 million option; thereby reducing the option to approximately
$800,000. An additional effort to develop a miniaturized Shuttle-compatible
propulsion module has been added to this contract and is worth approximately
$150,000.
On July 9, 2003, we were awarded a contract by the Missile Defense Agency
to explore the use of microsatellites in national missile defense. It was a
precursor contract to the $43 million contract mentioned below. Our
microsatellites are operated over the Internet and are capable of pointing and
tracking targets in space or on the ground. This study explored fast response
microsatellite launch and commissioning; small, low-power passive sensors;
target acquisition and tracking; formation flying and local area networking
within a cluster of microsatellites; and an extension of our proven use of the
Internet for on-orbit command, control and data handling. The contract was
successfully concluded on February 27, 2004. The total contract value was
$800,000. This contract was considered an investigatory phase by MDA.
Also, on July 9, 2003, we were awarded a Phase I Small Business Innovation
Research contract by Air Force Research Lab to design and effectively begin the
development of our small launch vehicle. The SpaceDev Small Launch Vehicle will
be designed to responsively and affordably lift up to 1,000 pounds to Low Earth
Orbit. The SpaceDev Small Launch Vehicle concept is based on a proprietary
combination of technologies to increase the performance of hybrid rocket motor
technology. Hybrid rocket motors are a combination of solid fuel and liquid
oxidizer, and can be relatively safe, clean, non-explosive, and storable, and
can be throttled, shut down and restarted. This contract was valued at
approximately $100,000, and was a fixed price, milestone-based agreement, which
was completed in about one year. The Phase II of this SBIR was awarded on
September 29, 2004 and is worth approximately $1,557,000. The contract outlines
the development and test firing of our large Common Core Booster for the
SpaceDev Small Launch Vehicle. Congress has awarded us approximately $3.0
million in additional funding for this project, which we expect will be
available by mid-2005. We believe that there is additional interest by Congress
in providing further funding to expand and accelerate the scope of the work;
however, there can be no assurance that such work will be awarded to us.
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Also, on July 9, 2003, we were awarded a Phase I contract to develop micro
and nanosatellite bus and subsystem designs. This Air Force Research Laboratory
Small Business Innovation Research contract, valued at approximately $100,000,
has enabled us to explore the further miniaturization of our unique and
innovative microsatellite subsystems. It has also enabled us to explore ways to
reduce the time and cost to build small satellites through further
standardization in order to help define de facto standards for payload hardware
and software interfaces. The contract is fixed price, milestone-based and was
completed in about one year. On August 23, 2004, we were awarded the Phase II
of this Small Business Innovation Research grant, which was later amended on
September 8, 2004 to shorten the length of the overall contract, worth
approximately $739,000 for carry-forward work.
On July 24, 2003, we were awarded a contract by Lunar Enterprise of
California for a first phase project to begin developing a conceptual mission
and spacecraft design for a lunar lander program. The unmanned mission is being
designed to put a small dish antenna near the south pole of the Moon. From that
location it will be in near-constant sunlight for solar power generation, and
should be able to perform multi-wavelength astronomy while communicating with
ground stations on Earth. The contract value was $100,000 and was completed by
November 2003. We were awarded a follow-on phase to further analyze launch
opportunities, spacecraft design, trajectory possibilities, potential landing
areas, available technologies for a small radio astronomy system, and
communications and data handling requirements on July 20, 2004 in the amount of
$150,000. The contract has been completed.
On December 18, 2003, we were awarded a contract by the Defense Advanced
Research Projects Agency for the study of Novel Satcom Microsat Constellation
Deployment. The contract was a milestone-based, fixed price contract with total
consideration of approximately $200,000. On August 6, 2004, an additional
$39,849 was added to the contract for increased scope, bringing the total
contract value on this fixed price effort to approximately $240,000. The
contract has been completed.
On March 31, 2004, we were awarded a five-year, cost-plus-fixed fee
indefinite delivery/indefinite quantity contract for up to $43,362,271 to
conduct a microsatellite distributed sensing experiment, an option for a laser
communications experiment, and other microsatellite studies and experiments as
required in support of the Advanced Systems Deputate of the Missile Defense
Agency. This effort will be accomplished in a phased approach, with the first
Task Order for approximately $1.1 million awarded on April 1, 2004 and completed
by September 30, 2004. The second Task Order for approximately $8.3 million was
awarded on October 20, 2004. The principal place of performance will be Poway,
California. We expect to complete the work under the contract before March
2009. Government contract funds will not expire at the end of the current
government fiscal year. The microsatellite distributed sensing experiment is
intended to design and build up to six responsive, affordable, high performance
microsatellites to support national missile defense. The milestone-based,
multiyear, multiphase contract had an effective start date of March 1, 2004.
Approximately $1.14 million of revenue was generated under the first phase of
this contract. The first phase or "Task Order," resulted in a detailed mission
and microsatellite design. The second phase or "Task Order," was signed on
October 20, 2004 with an effective date of October 1, 2004. The second Task
Order is expected to be completed by January 2006. The overall contract calls
for us to analyze, design, develop, fabricate, integrate, test, operate and
support a networked cluster of three formation-flying boost phase and midcourse
tracking microsatellites, with an option to design, develop, fabricate,
integrate, test, operate and support a second cluster of three formation flying
microsatellites to be networked on-orbit with high speed laser communications
technology. The third phase is anticipated to begin on or before February 2006.
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BUSINESS STRATEGY
Our strategy is based on the belief that innovative advancements in
technology and the application of standard business processes and practices will
make access to space much more practical and affordable. We believe these
factors will cause growth in certain areas of space commerce and will create new
space markets and increased demand for our proprietary products.
Our business strategy is to:
- Introduce commercial business practices into the space arena, use
off-the-shelf technology in innovative ways and standardize hardware and
software to reduce costs and to increase reliability and profits;
- Start with small, practical and profitable projects, and leverage
credibility and profits into larger and ever more bold initiatives -
utilizing partnerships where appropriate;
- Bid, win and leverage government programs to fund our Research and
Development and product development efforts;
- Integrate our smaller, low cost commercial spacecraft and hybrid space
transportation systems to provide one-stop turnkey payload and/or data
delivery services to target customers;
- Apply our low cost space products to new applications and to create new
users, new markets and new revenue streams;
- Produce and fly commercial missions, in conjunction with partners and
investors, throughout the inner solar system in the commercial beyond earth
orbit "space";
- Join or establish a team to build a safe, affordable sub-orbital,
passenger space plane to help initiate the space tourism business; and,
- Establish a team to build a safe, affordable orbital passenger vehicle as
a potential shuttle replacement.
We believe that our business model, emphasizing smaller satellites,
commercial approaches, technological simplicity, architectural and interface
standardization and horizontal integration (i.e., "whole product"), provides the
following advantages:
- Enables small-space customers to contract for end-to-end mission
solutions, reducing the need for and complexity of finding other
contractors for different project tasks;
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- Decreases schedule time and lowers total project costs, thereby providing
greater value and increases return on investment for us and our customers;
and,
- Creates barriers to entry by and competition from competitors.
PRODUCTS AND SERVICES; MARKET
We currently have two primary lines of space products and services on which
we believe a sound foundation and profitable, cash generating business can be
built:
- Our Spacecraft Products and Services - Microsatellites & Nanosatellites,
BD-II Spacecraft Buses, and Maneuvering and orbital Transfer Vehicles; and,
- Our Propulsion Products and Services - Hybrid Propulsion and Launch
Vehicle Systems.
These products and services are being marketed and sold directly into
primarily domestic government, university, military and commercial markets. We
consider ourselves a project company rather than a product company today,
although products are generated from projects. Our long term goal and vision is
to migrate from a project company to a product company. Our business is not
seasonal to any significant extent; however, our business follows normal
industry trends such as increased demand during bullish economic periods, or
slow-downs in demand during periods of recession.
In addition, we are working with partners to create new markets that can
generate new space-related service, media, tourism and commercial revenue
streams. While we believe that certain space market opportunities are still
several years away, we are currently working with industry-leading partners to
develop unique enabling technology for the potentially very large sub-orbital
manned space plane tourism market; and, creating a new unmanned Beyond Earth
Orbit commercial market with spacecraft derived from our NASA JPL Mars
MicroMission and Boeing Lunar Orbiter mission design contracts.
OUR SPACECRAFT PRODUCTS AND SERVICES
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Microsatellites & Nanosatellites - We design and build small, light,
high-performance, reliable and affordable micro- and nanosatellites. The primary
benefit of micro- and nanosatellites is lower cost and weight. Since we can
dramatically reduce manufacturing costs and the costs to launch the satellites
to earth-orbit and deep space, we can pass those cost savings on to our
customers. Small, inexpensive satellites were once the exclusive domain of
scientific and amateur groups; however, smaller satellites are now a viable
alternative to larger, more expensive ones, as they provide cost-effective
solutions to traditional problems. We design and build low cost,
high-performance space-mission solutions involving microsatellites (generally
less than 100 kg) and even smaller satellites (less than 50 kg). Our approach is
to provide smaller spacecraft and compatible low cost, safe hybrid propulsion
space systems to a growing market of commercial, government and potentially
international customers.
BD-II (Boeing Delta-II compatible) spacecraft buses - We have a qualified
microsatellite bus available to sell as a standard, fixed-price product to
government and commercial customers needing an affordable satellite for small
payloads. We began developing this product in 1999, when we were selected as
the mission designer, spacecraft bus provider, integrator and mission operator
of the University of California at Berkeley Space Sciences Laboratory's Cosmic
Hot Interstellar Plasma Spectrometer ("CHIPS") mission. CHIPSat was launched at
4:45 PM PST on January 12, 2003 from Vandenberg Air Force Base in California.
The satellite achieved 3-axis stabilization with all individual components and
systems successfully operating and continues to work well in orbit.
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Maneuvering and orbital Transfer Vehicle - Our Maneuvering and orbital
Transfer Vehicle system is a family of small, affordable, elegantly simple,
throttleable, and restartable propulsion and integrated satellite products. Our
Maneuvering and orbital Transfer Vehicle can be used as a standard propulsion
module to transport a customer's payload to different orbits. The Maneuvering
and orbital Transfer Vehicle provides the change in velocity and maneuvering
capabilities to support a wide variety of applications for on-orbit maneuvering,
proximity operations, rendezvous, inspection, docking, surveillance, protection,
inclination changes and orbital transfers.
Spacecraft and Subsystem Design - We also provide reliable, affordable
access to space through innovative solutions currently lacking in the
marketplace. Our approach is to provide smaller spacecraft - generally 250 kg
mass and less - and compatible hybrid propulsion space systems to commercial,
university and government customers. The small spacecraft market is supported by
the evolution and enabling of microelectronics, common hardware & software
interface standards, and smaller launch vehicles. Reduction of the size and mass
of traditional spacecraft electronics has reduced the overall spacecraft size,
mass, and volume over the past 10 to 15 years. For example, our miniature flight
computer is only 24 cubic inches and provides 300 million instructions per
second of processing power versus a competitor's more "traditional" solution
that requires about 63 cubic inches and only provides 10 MIPS.
Microsatellite & Nanosatellite Launches - To support the growth in customer
demand within the small satellite market, we work with launch providers to
identify and market affordable launch opportunities and to provide customers
with a complete on-orbit data delivery service that combines our spacecraft and
hybrid propulsion products. These innovative, low-cost, turnkey launch solutions
will allow us to provide one-stop shopping for launch services, spacecraft,
payload accommodation, total flight system integration and test and mission
operations. The customer only needs to provide the payload, and we have the
capacity to perform all the tasks required for the customer to get to orbit and
to begin collecting their data
Mission Control and Operations - Our mission control and operations center,
located in our headquarters building near San Diego, coupled with our mission
control and operations package, is uniquely Internet-based and allows for the
operation and control of missions from anywhere in the world that has access to
the Internet. CHIPSat was the first U.S. mission to use end-to-end satellite
operations with TCP/IP and FTP. While this concept has been analyzed and
demonstrated by the NASA OMNI team, CHIPSat is the first to implement the
concept as the only means of satellite communication. A formation flying
cluster or constellation of TCP/IP-based microsatellites, similar to the cluster
of microsats we are developing for the Missile Defense Agency, can be designed
to communicate directly with each other, as in a wide area network in space.
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.
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OUR PROPULSION PRODUCTS AND SERVICES
----------------------------------------
Hybrid Rocket Propulsion and Launch Vehicle Systems - We provide a wide
variety of safe, clean, simple, reliable, cost-effective hybrid propulsion
systems to safely and inexpensively enable satellites and on-orbit delivery
systems to rendezvous and maneuver on-orbit and deliver payloads to sub-orbital
altitudes. Hybrid rocket propulsion is a safe and low-cost technology that has
tremendous benefits for current and future space missions. Our hybrid rocket
propulsion technology features a simple design, is restartable, is throttleable
and is easy to transport, handle and store.
Hybrid Orbital Vehicle - we have begun designing a reuseable, piloted,
sub-orbital space ship that could be scaled to safely and economically transport
passengers to and from low earth orbit, including the International Space
Station. The name of the vehicle is the SpaceDev DreamChaser(TM). We signed a
non-binding Space Act Memorandum of Understanding with NASA Ames Research
Center, 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. One possibility for collaboration is the SpaceDev
DreamChaser(TM) project, which is currently being discussed with NASA Ames.
Unlike the more complex SpaceShipOne, for which SpaceDev provided critical
proprietary hybrid rocket motor propulsion technologies and components, the
SpaceDev DreamChaser(TM) would be crewed and launch vertically, like most launch
vehicles, and would glide back for a normal horizontal runway landing. The
sub-orbital SpaceDev DreamChaser(TM) will have an altitude goal of approximately
160 km (about 100 miles) and will be powered by a single, high performance
hybrid rocket motor, under parallel development by us for the SpaceDev
Streaker(TM), a family of small, expendable launch vehicles, designed to
affordably deliver small satellites to low earth orbit. The SpaceDev
DreamChaser(TM) will use motor technology being developed for the SpaceDev
Streaker(TM) booster stage, the most powerful motor in the Streaker family. The
SpaceDev DreamChaser(TM) motor will produce approximately 100,000 pounds of
thrust, about six times the thrust of the SpaceShipOne motor, but less than
one-half the thrust of the 250,000 pounds of thrust produced by hybrid rocket
motors developed several years ago by the American Rocket Company. Our
non-explosive hybrid rocket motors use synthetic rubber as the fuel, and nitrous
oxide for 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 non-toxic and do not
detonate like solid or liquid rocket motors.
Mission Analysis and Design - We can provide end-to-end mission design and
analysis, including the design of the mission and its science, commerce or
technology demonstration goals, the design of an appropriate space vehicle
(satellite or spacecraft), prototype development, construction and testing of
the spacecraft, integration of one or more payloads (instruments, experiments or
technologies) into the spacecraft, integration of the spacecraft onto the launch
vehicle (rocket), the launch and the mission control and operations during the
life of the mission. Many of our products and services are now qualified or are
nearing qualification to assist with missions that orbit the earth, travel to
another planetary body, or cruise through space taking measurements and
transmitting valuable data back to Earth.
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COMPONENTS AND RAW MATERIALS
Although we may experience a shortage of certain parts and components
related to our products, we have many alternative suppliers and distributors and
are not dependent on any individual supplier or distributor. Furthermore, we
have not experienced difficulty in our ability to obtain our parts or component
materials, nor do we expect this to be an issue in the future.
COMPETITION
We compete for sales of our products and services based on price,
performance, technical features, contracting approach, reliability,
availability, customization, and, in some situations, geography. Our primary
competition for low-cost propulsion systems using clean, safe, commercially
available hybrid rocket motor technology comes from Cesaroni Technology
Incorporated in Canada and their affiliates. While Lockheed Martin has
demonstrated large-scale hybrid rocket capability, and there are a number of
smaller enterprises, especially academic-based organizations, in the domestic
market currently investigating various aspects of hybrid rocket technology,
to-date we have seen limited competitive pressures arising from these
organizations.
The primary domestic competition for unmanned earth-orbiting
microsatellites, unmanned deep space micro-spacecraft and microsatellite
subsystems as well as software systems comes from other small companies such as
AeroAstro, Orbital Sciences and Spectrum Astro. The most established
international competitors are Surrey Satellite Technology Limited in the United
Kingdom, OHB Systems in Germany, an OHB Technology AG Company, and EADS Astrium
with locations throughout Western Europe. Swedish Space Corporation is also able
to compete in the small-satellite arena, particularly in the European market. In
addition to private companies, there are a limited number of universities in the
United States that have the capability to produce reasonably simple
microsatellites; these include, Weber State in Ogden, Utah and Colorado
University in Boulder, Colorado.
While we believe that our product and service offerings provide a wide
breadth of solutions for our customers and prospective customers, some of our
competitors compete across many of our product lines. Several of our current
and potential competitors have greater resources, including technical and
engineering resources. We are not aware of any established large companies
(e.g., Northrop Grumman, Lockheed Martin, Boeing), which have expressed
corporate goals to design and build inexpensive micro-spacecraft for a mission,
which would be our direct competition.
We also compete with each of our competitors for qualified engineers. There
is 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.
REGULATION
Our business activities are regulated by various agencies and departments
of the U.S. government and, in certain circumstances, the governments of other
countries. Several government agencies, including NASA and the United States
Air Force, maintain Export Control Offices to ensure that any disclosure of
scientific and technical information complies with the Export Administration
Regulations and the International Traffic in Arms Regulations ("ITAR"). Exports
of the Company's products, services and technical data require either Technical
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Assistance Agreements or licenses from the United States Department of State,
depending on the level of technology being transferred. This includes recently
published regulations restricting the ability of United States-based companies
to complete offshore launches, or to export certain satellite components and
technical data to any country outside the United States. The export of
information with respect to ground-based sensors, detectors, high-speed
computers, and national security and missile technology items are controlled by
the Department of Commerce. The government is very strict with respect to
compliance and has served notice that failure to comply with the ITAR and/or the
Commerce Department regulations may subject guilty parties to fines of up to $1
million and/or up to 10 years imprisonment per violation. The failure of the
Company to comply with any of the foregoing regulations could have serious
adverse effects as dictated by the rules associated with compliance to the ITAR
regulations. Also, our ability to successfully market and sell into
international markets may be severely hampered due to ITAR regulation
requirements. Our conservative position is to consider any material beyond
standard marketing material to be regulated by ITAR regulations. In 2003, we
began an active and comprehensive internal and external ITAR training program
provided by our regulatory consulting firm, Q International Group, and the
Society for International Affairs, both for our employees and our Empowered
Official, Mr. Slansky. We also introduced in 2003 an Internal Export Compliance
Control Program for defense articles and defense services controlled by the U.S.
Department of State under ITAR.
In addition to the standard local, state and national government
regulations that all businesses must adhere to, the space industry has specific
regulations. In the 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 geared toward
domestic government customers are regulated by the National Telecommunications
Information Agency and any of our products sold internationally, if any, are
regulated by the International Telecommunications Union. All launch vehicles
that are launched from a launch site in the United States must pass certain
launch range safety regulations that are administered by the 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. For international
approvals, the Federal Communications Commission and National Telecommunications
and Information Administration obtain these approvals from the International
Telecommunication Union. These regulations have been in place for a number of
years to cover the large number of non-government commercial space missions that
have been launched and put into orbit in the last 15 to 20 years. Any
commercial deep space mission that we might perform would be subject to these
regulations. Presently, we are not aware of any additional or unique government
regulations related to commercial deep space missions.
We are also required to obtain permits, licenses, and other authorizations
under federal, state, local and foreign statutes, laws or regulations or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the clean-up or other
remediation thereof. Presently, we do not have a requirement to obtain any
special environmental licenses or permits.
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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
supports interplanetary spacecraft missions and radio and radar astronomy
observations for the exploration of the solar system and the universe. The
network also supports selected Earth-orbiting missions. The network is a
facility of NASA, and is managed and operated for NASA by the Jet Propulsion
Laboratory. The Telecommunications and Mission Operations Directorate manages
the program within the Jet Propulsion Laboratory. Coordination for the use of
this facility is arranged with the Telecommunications and Mission Operations
Command.
Also, as some of our projects with the Department of Defense proceed, we
may need special clearances to continue working on and advancing our projects.
Classified programs generally will require that we comply with various Executive
Orders, Federal laws and 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 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 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 seek. 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 substantial additional expense. It
is uncertain whether we will be able to recover any of the costs of these
systems from our customers. Many of these classified programs are regulated by
Executive Orders, various Federal laws and regulations and customer
requirements. The failure of the Company to comply with any of the foregoing
Executive Orders, Federal laws and regulations and customer requirements could
have serious adverse effects. Also, our ability to successfully market and sell
into the Department of Defense markets may be severely hampered if we are unable
to meet classified program requirements. There is no assurance that we will be
able to successfully pass the criteria required in order to win a classified
program or to maintain current contracts, such as our Missile Defense Agency
contract (which may become classified), and there is no assurance that we will
maintain that status once it has been obtained. This year we began an active
program to complete the steps required in order to win preliminary certification
for classified programs. A number of our employees have received preliminary
and permanent security clearances. We received preliminary certification for
classified computer system processing in early 2005.
EMPLOYEES
At December 31, 2004, we employed approximately thirty (30) persons full
and part-time, most of whom are spacecraft, propulsion, systems, mechanical and
electrical engineers. We expect to hire other personnel as necessary for
completion of projects, product development, quality assurance, sales and
marketing, finance and administration. In addition, due to the nature of our
business, it may become necessary to lay off employees whose work is no longer
required to maintain operations in order to prevent cost overruns. We do not
anticipate any such lay-offs in the near future. We do not have any collective
bargaining agreements with our employees, and we believe our employee-relations
are good.
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INTELLECTUAL PROPERTY
We rely, in part, on patents, trade secrets and know-how to develop and
maintain our competitive position and technological advantage. 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. In this regard, we have filed patent applications relating
to our hybrid propulsion and satellite technology. There can be no assurance
that such applications will be granted. We have and intend to continue entering
into confidentiality agreements with our employees, consultants and vendors;
enter into license agreements with third parties; and, generally, seek to
control access to and distribution of our intellectual property.
In August 1998, we acquired rights to intellectual property (including
three patents and trade secrets) from an individual who had acquired them from
the former American Rocket Company, which specialized in hybrid rocket
technology. We are obligated to issue warrants to this individual to purchase a
minimum of 100,000 and a maximum of 3,000,000 shares of our common stock over
ten years beginning at the inception of the agreement, depending on our annual
revenues directly related to sales of hybrid technology-based products from the
original technology acquisition. To date, we have issued warrants to purchase a
total of 100,000 shares of our common stock under the agreement, of which, none
of the warrants have been exercised and 25,000 warrants expired unexercised. We
acquired some of our expertise in hybrid propulsion technology from the American
Rocket Company; however, we are using our own technology to develop the
responsive, affordable SpaceDev Streaker(TM) small launch vehicle under an Air
Force contract.
ITEM 2. DESCRIPTION OF PROPERTY
In January 2003, we entered into a sale and leaseback of our 25,000 square
foot facility in Poway, California. Our facility includes a small Spacecraft
Assembly and Test facility with an 1,800 square foot Class 100,000 clean room,
avionics development lab, machine shop with rocket motor casting capability,
mechanical assembly lab, and mission control and operations center. Key uses of
our California facility are program and project conferences and meetings,
engineering design, engineering analysis, spacecraft assembly, avionics labs and
software labs and media outreach. We also have an Internet-based Mission
Control and Operations Center in our building. Our facility allows for
efficient design, assembly and test for our projects and of our products and
technologies.
We originally purchased our headquarter facility in December 1998, and as
noted above we sold the facility and entered into a sale-leaseback in January
2003. The rent is approximately $26,000 per month with a 3.5% COLA increase
annually. We are responsible for property tax and liability insurance on the
facility. We were required to make an advance payment in the form of a security
deposit of approximately $25,700, which we carry as an asset on our balance
sheet. Our Chief Executive Officer, Mr. Benson, provided a guarantee for the
leaseback. [See Notes 2 and 9(c) to our consolidated financial statements for
additional information.] The original purchase price of the facility was $1.1
million, and the selling price of the facility was $3.2 million. The total debt
repayment from the transaction was approximately $2,407,000. The approximate
net proceeds to us for working capital purposes was $636,000.
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ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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QUARTERLY QUARTERLY
QUARTER ENDING HIGH LOW
3/31/2003. . . $ 0.55 $ 0.41
-------------- ---------- ----------
6/30/2003. . . $ 0.75 $ 0.33
9/30/2003. . . $ 1.80 $ 0.55
12/31/2003 . . $ 1.15 $ 0.81
3/31/2004. . . $ 1.85 $ 0.92
6/30/2004. . . $ 2.38 $ 1.04
9/30/2004. . . $ 2.46 $ 1.43
12/31/2004 . . $ 2.42 $ 1.51
3/14/2005* . . $ 1.97 $ 1.55
* March 14, 2005 high and low from 01/01/2005 to 03/14/2005.
HOLDERS
As of March 14, 2005, there were over 300 holders of record of our common
stock. We estimate the total number of beneficial owners of our common stock to
be in excess of 4,500 holders. We believe that the number of beneficial owners
is substantially greater than the number of record holders because a significant
portion of our outstanding common stock is held in broker "street names" for the
benefit of individual investors.
DIVIDENDS
We have never paid a cash dividend on our Common Stock. We accrued
dividends on our Preferred Stock from August 25, 2004 through December 31, 2004
of approximately $61,000. The accrued dividends became payable in January 2005
and were converted into shares of our common stock at a conversion rate of $1.54
per share. 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. Payment of future Preferred Stock dividends may be in cash or our
common stock.
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EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
------------------ --------------------------- ------------------- --------------------------
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding outstanding future issuance under
issuance options, warrants options, warrants equity compensation plans
and rights and rights (excluding securities
reflected in column (a))
------------------ --------------------------- ------------------- --------------------------
Equity
compensation plans 3,878,766 $ 1.05 1,263,897
approved by
security holders
------------------ --------------------------- ------------------- --------------------------
Equity . . . . . . 2,500,000 $ 2.00 0
compensation plans
not approved by
security holders
------------------ --------------------------- ------------------- --------------------------
Total. . . . . . . 6,378,766 $ 1.50 1,263,897
------------------ --------------------------- ------------------- --------------------------
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without limitation our General Registration Statement on Form 10SB12G/A filed
January 28, 2000 as well as any or all of our recent filings including prior
year 10-KSB and quarterly 10-QSB filings.
In addition to historical information, the following discussion and other
parts of this document may contain forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of the forward-looking statements. We
undertake no obligation to publicly update any of the forward-looking statements
after the date of this report to conform such statements to actual results or to
changes in our expectations.
Actual results could differ materially from those anticipated by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the level of sales to key
customers; the economic conditions affecting our industry; actions by
competitors; fluctuations in the price of raw materials; the availability of
outside contractors at prices favorable to the Company; our dependence on
single-source or a limited number of suppliers; our ability to protect our
proprietary technology; market conditions influencing prices or pricing; an
adverse outcome in potential litigation, claims and other actions by or against
us; technological changes and introductions of new competing products; the
current recession; U.S. government budget cuts; terrorist attacks or acts of
war, particularly given the acts of terrorism against the United States on
September 11, 2001 and subsequent military responses by the United States and
coalition forces; mission disasters such as the loss of the space shuttle
Columbia on February 1, 2003 during its re-entry into earth's atmosphere;
ability to retain key personnel; changes in market demand; exchange rates;
productivity; weather; and market and economic conditions in the areas of the
world in which we operate and market our products. These are some of the factors
that we think could cause our actual results to differ materially from expected
and historical events.
OVERVIEW
We are engaged in the conception, design, development, manufacture,
integration and operations of space technology systems, products and services.
We are currently focused on the commercial and military development of low-cost
microsatellites, nanosatellites and related subsystems, hybrid rocket propulsion
for space, launch and human flight vehicles as well as associated engineering
and technical services primarily to government agencies, and specifically the
Department of Defense. Our products and solutions are sold, mainly on a
project-basis, directly to these customers and include sophisticated micro- and
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nanosatellites, hybrid rocket-based launch vehicles, Maneuvering and orbital
Transfer Vehicles as well as safe sub-orbital and orbital hybrid rocket-based
propulsion systems. Although we believe there will be a commercial market for
our microsatellite and nanosatellite products and services in the long-term, the
early adopters of this technology appears to be the military and our "products"
are considered to be the outcome of specific projects. We are also developing
commercial hybrid rocket motors for possible use in small launch vehicles,
targets and sounding rockets and small high-performance space vehicles and
subsystems for commercial customers.
We were incorporated under the laws of the State of Colorado on December
23, 1996 as Pegasus Development Group, Inc. ("PDGI"). SpaceDev, LLC of Colorado
was originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed on August 22, 1997. On October 22, 1997, PDGI issued 8,245,000 of its
$.0001 par value common stock for 100 percent (1,000,000 shares) of SpaceDev's
common stock owned by SpaceDev, LLC. Upon the acquisition of the SpaceDev
stock, SpaceDev was merged into PDGI and, on December 17, 1997, PDGI changed its
name to SPACEDEV, INC. After the merger, SpaceDev, LLC, changed its name to SD
Holdings, LLC on December 17, 1997. We became a publicly traded company in
October 1997 and are trading on the Nasdaq Over-the-Counter Bulletin Board
("OTCBB") under the symbol "SPDV."
SELECTION OF SIGNIFICANT CONTRACTS
On March 31, 2004, we were awarded a $43,362,271, five-year,
cost-plus-fixed fee indefinite delivery/indefinite quantity contract to conduct
a microsatellite distributed sensing experiment, 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. This effort will be accomplished in a phased approach. The total
five-year contract has a ceiling amount of $43,362,271. The principal place of
performance will be at our facilities located in Poway, California. We expect
to complete the work under the contract before March 2009. Government contract
funds will not expire at the end of the current government fiscal year. The
microsatellite distributed sensing experiment is intended to design and build up
to six responsive, affordable, high performance microsatellites to support
national missile defense. The milestone-based, multiyear, multiphase contract
had an effective start date of March 1, 2004. The first phase was completed on
September 30, 2004 and resulted in detailed mission and microsat designs. The
first phase revenue was approximately $1.14 million. On October 1, 2004, the
second phase of the contract began with an approximate value of $8.3 million and
is expected to last approximately 18 months. The overall contract calls for us
to analyze, design, develop, fabricate, integrate, test, operate and support a
networked cluster of three formation-flying boost phase and midcourse tracking
microsatellites, with an option to design, develop, fabricate, integrate, test,
operate and support a second cluster of three formation flying microsats to be
networked on-orbit with high speed laser communications technology.
On December 18, 2003, we were awarded a contract by the Defense Advanced
Research Projects Agency for the study of Novel Satcom Microsat Constellation
Deployment. The contract was a milestone-based, fixed price contract with total
consideration of approximately $200,000. On August 6, 2004, an additional
$39,849 was added to the contract for increased scope bringing the total
contract value on this fixed price effort to approximately $240,000. We have
successfully completed this contract and the entire revenue of approximately
$240,000 was realized during the twelve-month period ending December 31, 2004.
We expect to either further expand this contract or obtain new contracts under
the Defense Advanced Research Projects Agency program(s); however, there can be
no assurance as to whether such contract(s) will be awarded to us, or, if
awarded, there can be no assurance as to the amounts or terms of the awards.
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On October 2, 2003, we were awarded an exclusive, follow-on contract to
provide the hybrid rocket motor systems and components for SpaceShipOne. We
provide our facilities, resources and a team of launch vehicle and hybrid
propulsion engineers and technical personnel in continued support of the
SpaceShipOne program. The contract called for us to use our best efforts to
satisfy the requirements of the SpaceShipOne program, based on our experience
with the prior phases. We provided re-usable flight test hardware, including a
bulkhead, commonly known as the SpaceDev bulkhead, machined in the flight
configuration, a main oxidizer valve of the current design and associated
interfaces and plumbing to the SpaceDev bulkhead, a motor control system,
igniter housings, pressure transducers, and thermocouples as required for input
to the motor control system. In addition, we produced and assembled test
motors, including but not limited to, all expendable or semi-reusable materials
as defined by our baseline design motor. We also provided on-site engineering
test support and post-test analysis. Provisions were made in the contract for
minimum monthly payments in the event of customer schedule slippage as well as
additional levels of support via engineering change orders, if required. The
total contract value was originally estimated at $615,000. Approximately
$686,000 of revenue was realized in the year ending December 31, 2004, with
approximately $180,000 from engineering change orders and the remaining $506,000
from the contract.
On July 24, 2003, we were awarded a contract by Lunar Enterprise of
California for a first phase project to begin developing a conceptual mission
and spacecraft design for a lunar lander program. The unmanned mission will be
designed to put a small dish antenna near the south pole of the Moon. From that
location it will be in near-constant sunlight for solar power generation, and
should be able to perform multi-wavelength astronomy while communicating with
ground stations on Earth. The contract value was $100,000 and was completed by
November 2003. We were awarded a follow-on phase to further analyze launch
opportunities, spacecraft design, trajectory possibilities, potential landing
areas, available technologies for a small radio astronomy system, and
communications and data handling requirements on July 20, 2004 in the amount of
$150,000. Although the complete project is currently unfunded, if the project
were to proceed past the analysis stage, the total mission cost could exceed
$50-$75 million. Again, we can give no assurance that any additional contracts
will be awarded to us from this contract. We successfully completed this stage
of the project, and revenues for the year ending December 31, 2004 were
approximately $150,000.
On July 9, 2003, we were awarded a contract by the Missile Defense Agency
to explore the use of microsatellites in national missile defense. It was a
precursor contract to the $43 million contract mentioned above. Our
microsatellites are operated over the Internet and are capable of pointing and
tracking targets in space or on the ground. This study explored fast response
microsatellite launch and commissioning; small, low-power passive sensors;
target acquisition and tracking; formation flying and local area networking
within a cluster of microsatellites; and an extension of our proven use of the
Internet for on-orbit command, control and data handling. The contract was
successfully concluded on February 27, 2004. The total contract value was
$800,000 with approximately $319,000 of revenue realized in 2004 and
approximately $481,000 of revenue realized in 2003. This contract was
considered an investigatory phase by MDA.
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Also, on July 9, 2003, we were awarded a Phase I Small Business Innovation
Research contract by Air Force Research Lab to design and effectively begin the
development of our small launch vehicle. The SpaceDev Small Launch Vehicle will
be designed to responsively and affordably lift up to 1,000 pounds to Low Earth
Orbit. The concept is based on a proprietary combination of technologies to
increase the performance of hybrid rocket motor technology. Hybrid rocket
motors are a combination of solid fuel and liquid oxidizer, and can be
relatively safe, clean, non-explosive, and storable, and can be throttled, shut
down and restarted. This contract was valued at approximately $100,000, and was
a fixed price, milestone-based agreement, which was completed in about one year.
Phase II of this Small Business Innovation Research grant was awarded on
September 29, 2004 and is worth approximately $1,557,000. The contract outlines
the development and test firing of our large Common Core Booster for the
SpaceDev Small Launch Vehicle. Congress has awarded us approximately $3.0
million in additional funding for this project, which we expect will be
available by mid-2005. We believe that there is additional interest by Congress
in providing further funding to expand and accelerate the scope of the work;
however, there can be no assurance that such work will be awarded to us.
Revenue from this project for the year ending December 31, 2004 was
approximately $58,000 for Phase I and approximately $161,000 for Phase II.
Revenue from this project for the year ending December 31, 2003 was
approximately $42,000 for Phase I.
Also, on July 9, 2003, we were awarded a Phase I contract to develop micro
and nanosatellite bus and subsystem designs. This Air Force Research Laboratory
Small Business Innovation Research contract was valued at approximately
$100,000, and enabled us to explore the further miniaturization of our unique
and innovative microsatellite subsystems. It also enabled us to explore ways to
reduce the time and cost to build small satellites through further
standardization in order to help define de facto standards for payload hardware
and software interfaces. The contract was fixed price, milestone-based and was
completed within one year. On August 23, 2004, we were awarded Phase II of this
Small Business Innovation Research, which was later amended on September 8,
2004, to shorten the length of the overall contract, worth approximately
$739,000 for carry-forward work. Revenues for the year ending December 31, 2004
were approximately $52,000 for Phase I and approximately $52,000 for Phase II.
Revenues for the year ending December 31, 2003 were approximately $48,000 for
Phase I.
On April 30, 2002, we were awarded Phase I of a contract to develop a
Shuttle-compatible propulsion module for the Air Force Research Laboratory. We
received an award for Phase II of the contract on March 28, 2003, and used the
project to further expand our product line to satisfy commercial and government
space transportation requirements. The first two phases of the contract
(including an additional add-on option) were worth approximately $2.5 million,
of which $100,000 was awarded for Phase I, and approximately $1.4 million was
awarded for Phase II. Phase II is a cost-plus fixed fee contract. In order to
complete Phase II, we requested and were granted approximately four months of
additional time and approximately $240,000 of additional funding, memorialized
by a contract amendment executed on July 7, 2004. In addition to the Phase I
and Phase II awards, there was an option worth approximately $800,000, which was
initiated on May 3, 2004, of which approximately $565,000 was funded and the
balance to complete Phase II remains unfunded. Part of the funding for Phase II
came from the original $1 million option; thereby reducing the option to
approximately $800,000. An additional effort to develop a miniaturized
Shuttle-compatible propulsion module has been added to this contract worth
approximately $150,000. Revenue for the year ending December 31, 2004 was
approximately $1.2 million for Phase II, including the exercised option, and
approximately $159,000 for the new add on contract. Revenue for the year
ending December 31, 2003 was approximately $997,000 for Phase II.
21
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In November 1999, we won a $4.9 million mission contract by the Space
Sciences Laboratory at the University of California at Berkeley. We were
competitively selected to design, build, integrate, test and operate, for one
year, a small NASA-sponsored scientific, Earth-orbiting spacecraft called
CHIPSat. CHIPSat is the first and, to our knowledge, only successful mission of
NASA's low-cost University-Class Explorer series to date. Due to additional
NASA and customer reviews, additional work, schedule extensions and a fee for
one year of satellite operations, the CHIPSat contract award was increased by
approximately $2.5 million in 2001 and 2002, bringing the total contract value
for design, build, launch and operations to approximately $7.4 million. CHIPSat
launched as a secondary payload on a Delta-II rocket on January 12, 2003.
CHIPSat is the world's first orbiting Internet node, achieved 3-axis
stabilization, meaning it was pointing and tracking properly, with all
individual components and systems successfully operating, and is continuing to
work well in orbit after more than two years. The CHIPSat program generated
approximately $2.1 million, $3.2 million, $1.7 million, $0.4 million and less
than $0.1 million of revenue in 2000, 2001, 2002, 2003 and 2004, respectively.
As of December 31, 2003, the total contract costs were expended, mainly as cost
of goods sold. There were minimal costs incurred in 2004. The original support
contract expired on December 31, 2003. CHIPSat is still operating successfully
and providing the University of California at Berkeley with new and interesting
data. The University of California at Berkeley requested to extend the program
and we negotiated a new time and materials contract in the first quarter of 2004
in the form of a purchase order with the University of California at Berkeley
for continuing support of this project. The contract will continue until the
University of California at Berkeley decides that no further relevant
information is forthcoming or funding is terminated, at which time the use of
the microsatellite will revert to NASA and then to us. Revenues for the year
ending December 31, 2004 and 2003 were approximately $25,000 and $356,000,
respectively.
In February 1998, our operations were expanded with the acquisition of
Integrated Space Systems, Inc., a California corporation founded for the purpose
of providing engineering and technical services related to space-based systems.
The Integrated Space Systems employee base, acquired upon acquisition, largely
consisted of former commercial Atlas launch vehicle engineers and managers who
worked for General Dynamics and expanded our then current employee base to 20
employees. Integrated Space Systems was purchased for approximately $3.6
million, paid in Rule 144 restricted common shares of SpaceDev. Goodwill of
approximately $3.5 million was capitalized and was to be amortized over a period
of 60 months, based on the purchase price exceeding the net asset value of
approximately $164,000. As a result of a change in corporate focus, on November
15, 2001, we determined that the unamortized balance of goodwill from Integrated
Space Systems, which was approximately $923,000, had become impaired and it was
written off. While the Integrated Space Systems segment did provide small
hybrid propulsion space systems and engineering services on separate contracts
(mainly with government agencies), the engineering service contracts had expired
and, therefore, would not be producing revenue or cash flow to support future
operations. We determined that all future business, contracts and proposals
would be sought after only in the SpaceDev name, making it a more efficient way
for us to manage and track multiple contracts and work on many different
business ventures at the same time within the same operating segment. All
activities have been integrated into SpaceDev, Inc. and we dissolved Integrated
Space Systems in December 2003.
RESULTS OF OPERATIONS
Please refer to the consolidated financial statements, which are a part of
this report, for further information regarding the results of operations.
YEAR ENDING DECEMBER 31, 2004 -VS.- YEAR ENDING DECEMBER 31, 2003
During the year ending December 31, 2004, we had net sales of approximately
$4,891,000 as compared to net sales of approximately $2,956,000 for the same
period in 2003. Sales increased primarily due to our new government contracts
22
PAGE
and few delays in finalizing follow-on contracts for the current Missile Defense
Agency task orders. Sales in 2004 reflected our completion of the Missile
Defense Agency Phase 0 and Task Order 1 on the Missile Defense Agency contract
of approximately $319,000 and $1,140,000, respectively, as well as the start of
Task Order II for approximately $574,500 of our $43 million contract. We had
ongoing contracts with the Air Force Research Laboratory and the Small Business
Innovation Research contract Phase II, the option to that contract and an add-on
contract totaled approximately $1.4 million. Other ongoing work from
SpaceShipOne totaled approximately $686,000. We had a new Defense Advanced
Research Projects Agency contract that had revenues which totaled approximately
$240,000 and our Air Force Research Laboratory Small Business Innovation
Research work for Phase I and II had revenues which totaled approximately
$323,000. We also had smaller projects with approximately $208,500 in revenue,
which included CHIPSat, and the lunar lander project as well other smaller
projects. Sales in 2003 reflected the substantial completion of CHIPSat and the
completion of the original SpaceShipOne contract, the Air Force Research
Laboratory Small Business Innovation Research Phase I and the Missile Defense
Agency Phase 0 work, while SpaceShipOne began on October 2, 2003, a new contract
with the Missile Defense Agency began on July 9, 2003, a new contract with the
Air Force Research Laboratory began on July 9, 2003 and a new contract with
Lunar Enterprises began on July 24, 2003. The total value of the Missile
Defense Agency contract, the Air Force Research Laboratory contract and the
Lunar Enterprises contract was approximately $800,000, $1.4 million and
$100,000, respectively. Revenues for the year ending December 31, 2003 were
comprised of approximately $29,600 and $997,000 from the Air Force Research
Laboratory Small Business Innovation Research (Phase I and II) contracts,
respectively; $397,000 and $115,000 from the original and new SpaceShipOne
contracts), respectively; $250,000 and $481,000 from the Missile Defense Agency
(Phase I and II) contracts, respectively; $356,000 from the CHIPSat program;
$100,000 from the contract by Lunar Enterprises of California; and approximately
$234,400 from all other programs.
For the year ending December 31, 2004, we had costs of sales (direct and
allocated costs associated with individual contracts) of approximately
$3,821,000, or 78.12% of net sales, as compared to approximately $2,415,000, or
81.69% of net sales, during the same period in 2003. The increase in cost of
sales was primarily due to higher revenue combined with the implementation of
stronger cost controls and project monitoring. Also, we altered our cost
allocation method in the second quarter of 2003 as we completed CHIPSat, our
main fixed price contract at the time, and began work on our new Air Force
Research Laboratory and Missile Defense Agency cost plus contracts. We continue
to focus efforts on developing project management skills and reports to assist
in the efficient and effective management of our projects. The gross margin
percentage for the year ending December 31, 2004 was 21.88% of net sales, an
increase of 3.57% of net sales, as compared to 18.31% of net sales for the
period in 2003.
We experienced a decrease of approximately $505,000 in operating expenses
from approximately $1,431,000, or 48.42% of net sales, in the year ending
December 31, 2003 to approximately $926,000, or 18.93% of net sales, for the
year ending December 31, 2004. Operating expenses include general and
administrative expenses, marketing and sales expenses and research and
development expenses, as well as stock and stock option based compensation
expenses.
- Marketing and sales expenses increased during 2004 (but decreased as a
percentage of sales), from approximately $395,000, or 13.36% of net sales,
for the year ending December 31, 2003, to approximately $419,000, or 8.56%
of net sales, during the same period in 2004. The total dollar value
increased by approximately $24,000, mainly due to our decision to expand
our marketing and sales department, with partial costs of our Vice
President of New Business Development and our Chief Executive Officer being
charged to marketing and sales expenses.
23
PAGE
- Research and development expenses decreased approximately $242,000 during
2004. Although we focus our efforts on government funded development and
rarely do pure research, we devote certain resources to building our
intellectual property portfolio. We incurred research and development
expenses of approximately $281,000, or 9.51% of net sales, during the year
ending December 31, 2003. We decreased non-funded research and development
expenditures in 2004 to approximately $39,400. During 2003, approximately
$192,000 of research and development costs were related to our hybrid
rocket propulsion design system and technologies outside the scope of our
SpaceShipOne contract and the remaining $89,000 was related to our
satellite bus design and development effort. In 2004, we continued to fund
a small amount of hybrid rocket propulsion design and development
independent of any contract.
- We had no expenses from stock and stock option based compensation during
the year ending December 31, 2004, compared to approximately $9,000, or
0.31% of net sales, for the same period in 2003. See "Critical Accounting
Policies" below.
- General and administrative expenses decreased approximately $279,000 from
approximately $746,000, or 25.23% of net sales, for the year ending
December 31, 2003 to approximately $467,000, or 9.56% of net sales, for the
same period in 2004. This decrease is attributed to better controls and
internal procedures, reduced overhead costs and more of the actual overhead
costs being more finely classified as cost of goods sold.
Non-operating expense/(income) consisted of interest expense, non-cash debt
discount expense and deferred gain on the sale of our building, as well as other
loan fees and expenses.
- Interest expense for the year ending December 31, 2004 and 2003 was
approximately $52,000, or 1.06% of net sales, and $91,000, or 3.09% of net
sales, respectively. The decrease was due to a reduction in debt with fewer
notes payable. We continue to pay interest expense on certain capital
leases and settlement notes, although the balances continue to decline. We
accrued interest expense on our related party note, which was paid in full
during 2004, and on our revolving credit facility, which also had a zero
balance at December 31, 2004. We accrued and paid interest on our related
party note of approximately $29,000 for the year ending December 31, 2004
and accrued $47,000 for the year ending December 31, 2003. We also accrued
and paid approximately $4,700 of interest on our various capital leases and
notes payable and accrued and paid approximately $18,300 and $12,000 of
interest on our revolving credit facility for the years ending December 31,
2004 and 2003, respectively. For the year ending December 31, 2003, we
accrued and paid approximately $18,000 of interest on our convertible notes
and accrued approximately $14,000 of interest, $42,000 of fees and $126,000
of non-cash loan fees on our revolving credit facility. We began generating
interest income in 2004 of approximately $19,500, or 0.40% of net sales,
due to increasing cash balances.
24
PAGE
- We recognized approximately $117,000 and $107,500 of the deferred gain on
the sale of the building during the years ending December 31, 2004 and
2003, respectively, and we will continue to amortize the remaining deferred
gain of approximately $948,000 into non-operating income over the remainder
of the lease. In relation to the gain we received on the building, we also
accrued an income tax payable expense of $40,000 at March 31, 2003 of which
none remained at December 31, 2004 or 2003, respectively. The reduction of
the income tax payable in 2003 was due to a change in estimate based on the
loss we experienced during the year.
- We realized loan fees related to our revolving credit facility
(approximately $2,480,000) and expenses related to the conversion of
previous notes payable (approximately $774,000) into common stock at below
fair market value for a total of approximately $3,254,000 and $258,000 for
the year ending December 31, 2004 and 2003. We do not anticipate additional
expenses related to similar note to equity conversions in the upcoming
quarters of 2005.
- In conjunction with our convertible notes, we recorded a convertible note
debt discount of $475,000 related to warrants that accompanied the
convertible debt issue in 2002; however, since we made a partial repayment
and the note holders converted the remaining balance and forfeited half of
their warrants, the debt discount amount was reduced from $475,000 to
$237,500. The reduction is exclusively attributable to forfeiture of half
of the original warrants. During the year ending December 31, 2003, the
convertible debt was eliminated. A debt discount adjustment of
approximately $234,000 was made and the ending balance of $112,500 was
recorded on the statement of operations for the year.
During the year ending December 31, 2004, we incurred a net loss of
approximately $3,027,000, or 61.89% of net sales, compared to a net loss of
approximately $1,246,000, or 42.15% of net sales, for the same period in 2003.
During the year ending December 31, 2004, we incurred a positive EBITDA
(earnings before interest taxes depreciation and amortization) of approximately
$228,000, or 4.66% of net sales, compared to a negative EBITDA of approximately
$723,000, or 24.46% of net sales, for the year ending December 31, 2003.
The following table reconciles Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) to net loss for the twelve-months ending
December 31, 2004 and 2003, respectively:
FOR THE TWELVE-MONTHS ENDING . . . . . DECEMBER 31, 2004 December 31, 2003
(AUDITED) (Audited)
-------------------------------------- ------------------- -------------------
NET INCOME (LOSS). . . . . . . . . . . $ (3,027,054) $ (1,246,067)
-------------------------------------- ------------------- -------------------
Interest Income. . . . . . . . . . . . (19,497) -
Interest Expense . . . . . . . . . . . 52,077 91,493
Non-Cash Interest exp. (Debt Discount) - 112,500
Gain on Building Sale. . . . . . . . . (117,272) (107,498)
Loan Fee - Equity Conversion. . . . . 3,254,430 257,882
Provision for income taxes . . . . . . 1,600 1,600
Depreciation and Amortization. . . . . 83,531 166,971
-------------------------------------- ------------------- -------------------
EBITDA (LBITDA)* . . . . . . . . . . . $ 227,815 $ (723,119)
-------------------------------------- ------------------- -------------------
* Loss Before Interest, Taxes, Depreciation and Amortization.
25
PAGE
EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations). We believe that
EBITDA provides an important additional perspective on our operating results,
our ability to service our long-term obligations, our ability to fund continuing
growth, and our ability to continue as a going concern. The increase in the net
loss was mainly due to our revolving credit facility and the non-cash interest
expense in conversions under the revolving credit facility. For the eight
consecutive quarters in 2003 and 2004, we showed continued progress in total
revenue as well as in EBITDA.
[GRAPHIC OMITED]
26
PAGE
QUARTER ENDING DECEMBER 31, 2004 -VS.- QUARTER ENDING DECEMBER 31, 2003
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDING
(UNAUDITED)
THREE MONTHS ENDING DECEMBER 31,. . . . . . . 2004 % 2003 %
---------------------------------------------- ---------------- ------------ ---------- --------
NET SALES . . . . . . . . . . . . . . . . . . $ 1,445,174 100.00% $ 901,746 100.00%
---------------------------------------------- ---------------- ------------ ---------- -------
TOTAL COST OF SALES . . . . . . . . . . . . . 1,118,100 77.37% 732,573 81.24%
---------------------------------------------- ---------------- ------------ ---------- -------
GROSS MARGIN. . . . . . . . . . . . . . . . . 327,075 22.63% 169,173 18.76%
---------------------------------------------- ---------------- ------------ ---------- -------
OPERATING EXPENSES
Marketing and sales expense. . . . . . . . 101,001 6.99% 83,606 9.27%
Research and development . . . . . . . . . - 0.00% 8,743 0.97%
Stock and stock option based compensation. - 0.00% 4,485 0.50%
General and administrative . . . . . . . . 170,999 11.83% 84,050 9.32%
---------------------------------------------- ---------------- ------------ ---------- -------
TOTAL OPERATING EXPENSES. . . . . . . . . . . 271,999 18.82% 180,884 20.06%
INCOME/(LOSS) FROM OPERATIONS . . . . . . . . 55,075 3.81% (11,711) -1.30%
NON-OPERATING EXPENSE/(INCOME)
Interest expense/(income). . . . . . . . . (20,093) -1.39% 26,809 2.97%
Non-cash interest expense debt discount. . - 0.00% - 0.00%
Gain on Building Sale. . . . . . . . . . . (29,318) -2.03% (29,318) -3.25%
Loan Fee - Equity Compensation . . . . . . 797,636 55.19% 109,470 12.14%
---------------------------------------------- ---------------- ------------ ---------- -------
TOTAL NON-OPERATING EXPENSE/(INCOME). . . . . 748,225 51.77% 106,961 11.86%
LOSS BEFORE INCOME TAXES. . . . . . . . . . . (693,150) -47.96% (118,672) -13.16%
Income tax provision. . . . . . . . . . . . . 1,600 0.11% 1,600 0.18%
---------------------------------------------- ---------------- ------------ ---------- -------
NET LOSS. . . . . . . . . . . . . . . . . . . $ (694,750) -48.07% $(120,272) -13.34%
---------------------------------------------- ---------------- ------------ ---------- -------
NET LOSS PER SHARE:
Net loss. . . . . . . . . . . . . . . . . . $ (0.04) $ (0.01)
---------------------------------------------- ---------------- ------------ ---------- -------
Weighted-Average Shares Outstanding . . . . 19,545,951 16,282,485
---------------------------------------------- ---------------- ------------ ---------- -------
NOTE: THE NUMBERS PRESENTED IN THE CHART ABOVE WERE NOT AUDITED OR REVIEWED FOR
THE THREE-MONTH PERIODS ENDING DECEMBER 31, 2004 AND 2003, RESPECTIVELY. WE,
AND NOT OUR AUDITORS, ARE RESPONSIBLE FOR THEIR FAIR PRESENTATION IN CONFORMITY
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
27
PAGE
During the fourth quarter of 2004, we recorded our eighth consecutive
quarter of revenue growth and our fourth consecutive quarter of profit from
operations. During the three-month period ending December 31, 2004, we had net
sales of approximately $1,445,000 as compared to net sales of approximately
$902,000 for the same three-month period in 2003, an increase of over 60.0%.
Sales increased primarily due to the addition and expansion of our contracts
with customers such as the Air Force Research Laboratory and the Missile Defense
Agency, which created new revenue opportunities for us. Revenue increased
approximately 17% from approximately $1,230,000 in the third quarter of 2004,
mainly due to Task Order 2 of our Missile Defense Agency contract, which began
in October 2004. Revenues for the three-month period ending December 31, 2004
were comprised of approximately $575,000 from the Missile Defense Agency Task
Order 2, approximately $422,000 from the Air Force Research Laboratory Phase II
contract including the option and additional contract value, approximately
$204,000 from the two Small Business Innovation Research contracts listed above,
approximately $110,000 from the Lunar Enterprises project, approximately $76,000
from SpaceShipOne, approximately $40,000 from our Defense Advanced Research
Projects Agency contract and approximately $18,000 from all other programs.
During the same period of 2003, sales were comprised of approximately $336,000
from the Missile Defense Agency contract, approximately $321,000 from the Air
Force Research Laboratory Phase II contract, approximately $102,000 from the
SpaceShipOne contract, approximately $54,000 from two Air Force Research
Laboratory Small Business Innovation Research projects, approximately $30,000
form the contract with Lunar Enterprises, approximately $24,000 from the
completion of the CHIPSat program and approximately $35,000 from all other
programs.
For the three-months ending December 31, 2003, we had costs of sales
(direct and allocated costs associated with individual contracts) of
approximately $1,118,000, or 77% of net sales, as compared to approximately
$732,000, or 81% of net sales, during the same three-month period in 2003. The
increase in cost of sales was primarily attributable to the increase in revenue
on all programs and, in particular, to increases in cost plus contracts as a
percentage of total contracts, which derive revenue from costs spent. The gross
margin for the three-month period ending December 31, 2004 was approximately
$327,000, or 23% of net sales, an increase of 4% of net sales over the prior
year. The increase was mainly due to the improved management of our projects
and the influence of our fixed priced contracts, which generally carry higher
margins than our cost plus contracts.
We experienced an increase of approximately $91,000 in operating expenses
from approximately $181,000, or 20% of net sales, for the three-month period
ending December 31, 2003 to approximately $272,000, or 19% of net sales, for the
three-month period ending December 31, 2004, primarily due to an increase in
market and sales and general and administrative cost. Operating expenses
include general and administrative expenses, marketing and sales expenses and
research and development expenses as well as stock and stock option based
compensation expenses. Fluctuations in operating expenses for 2004 from 2003
are primarily attributable to the following:
- Marketing and sales expenses accounted for an increase of approximately
$17,000 in operating expenses during the fourth quarter of 2004 (but a
decrease as a percentage of sales), from approximately $84,000, or 9.27% of
net sales, for the three-months ending December 31, 2003, to approximately
$101,000, or 6.99% of net sales, during the same period in 2004. The total
dollar expenditure increased mainly due to our decision to expand our
marketing and sales department, with partial costs of our Vice President of
New Business Development and our Chief Executive Officer being charged to
marketing and sales expenses
28
PAGE
- Research and development expenses accounted for a decrease of
approximately $9,000 in operating expenses from no recorded research and
development expenses during the three-months ending December 31, 2004 to
approximately $9,000 during the same three-month period in 2003. Although
we focus our efforts primarily on government funded development and rarely
do pure research, we devote certain resources to building our intellectual
property portfolio. During 2003, our research and development costs were
related to our hybrid rocket propulsion design system and technologies
outside the scope of our SpaceShipOne contract.
- General and administrative expenses accounted for approximately $82,500
of the increase in operating expenses. General and administrative expenses
consist primarily of salaries for administrative personnel, fees for
outside consultants, rent, insurance, legal and accounting fees and other
overhead expenses. General and administrative expenses for the three-months
ending December 31, 2004 were approximately $171,000 compared to
approximately $88,500 (including approximately $4,500 for stock and stock
option based compensation) for the same three-month period in 2003. The
increase was primarily attributable to increased staff and support costs,
the implementation of our new accounting and project tracking system and
the addition of a government contract administrator.
Non-operating expense/(income) consists of interest expense, non-cash debt
discount expenses, deferred gain on the sale of our building, and other loan
fees and expenses.
- Interest expense/(income) for the three-month periods ending December 31,
2004 and 2003 was approximately ($20,000), or 1.4% of net sales, and
$27,000, or 3.9% of net sales, respectively. The improvement was due to a
reduction of interest on debt mainly from a repayment/conversion under our
revolving credit facility, an adjustment to reclassified interest expense
from the prior quarter and an increase in interest earned on growing cash
balances. Interest expense is comprised of interest on our note to our CEO,
interest on our revolving credit facility, interest on our convertible debt
and interest on our settlement notes/capital leases. For the three-month
period ending December 31, 2004 and 2003, interest expense on our note to
our CEO was approximately $0.00 and $19,000, respectively. For the
three-month period ending December 31, 2004 and 2003, interest expense on
our revolving credit facility/convertible debt was $11,000 and $18,000,
respectively. And interest expense on our settlement notes/capital leases
for the three-month periods ending December 31, 2004 and 2003 were
approximately $900 and $1,800 respectively. We also earned interest income
during the three-months ending December 31, 2004 of approximately $13,400
from our growing cash balances and reclassified approximately $18,500 from
interest expensed in the prior quarter.
- We recognized approximately $29,000 of the deferred gain on the sale of
the building during the three-months ending December 31, 2004 and 2003,
respectively, and we will continue to amortize the remaining deferred gain
of approximately $948,000 into non-operating income over the remainder of
the lease.
- We recognized approximately $798,000 in non-cash interest expense and
loan fees of which approximately $763,000 was related to our revolving
credit facility and approximately $35,000 was related to the conversion of
notes to common stock below fair market value for the three-month period
ending December 31, 2004. We anticipate no additional expenses related to
similar note to equity conversions in the upcoming quarters of 2005.
29
PAGE
During the three-month period ending December 31, 2004, we incurred a net
loss of approximately $695,000, or 48% of net sales, compared to a loss of
approximately $120,000, or 13% of net sales, for the same three-months ending in
2003. During the three-month period ending December 31, 2004, we incurred a
positive EBITDA (earnings before interest taxes depreciation and amortization)
of approximately $83,000, or 5% of net sales, compared to a positive EBITDA of
approximately $2,200, or 1% of net sales, for the same three-months ending in
2003. The following table reconciles EBITDA to net loss for the three-months
ending December 31, 2004 and 2003, respectively:
FOR THE THREE-MONTHS ENDING. . . . . . DECEMBER 31, 2004 December 31, 2003
(UNAUDITED) (Unaudited)
-------------------------------------- ------------------- -------------------
NET INCOME/(LOSS). . . . . . . . . . . $ (694,750) $ (120,272)
-------------------------------------- ------------------- -------------------
Interest Expense/(Income). . . . . . . (20,093) 26,809
Non-Cash Interest exp. (Debt Discount) - -
Gain on Building Sale. . . . . . . . . (29,318) (29,318)
Loan Fee - Equity Conversion. . . . . 797,636 109,470
Provision for income taxes . . . . . . 1,600 1,600
Depreciation and Amortization. . . . . 28,250 13,948
-------------------------------------- ------------------- -------------------
EBITDA . . . . . . . . . . . . . . . . $ 83,325 $ 2,237
-------------------------------------- ------------------- -------------------
EBITDA should not be considered as an alternative to net income or loss (as
an indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations). We believe that
EBITDA provides an important additional perspective on our operating results,
our ability to service our long-term obligations, our ability to fund continuing
growth, and our ability to continue as a going concern.
[GRAPHIC OMITED]
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LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION FOR YEAR ENDED DECEMBER 31, 2004 -VS.- YEAR ENDED DECEMBER
31, 2003
Net increase in cash during the year ending December 31, 2004 was
approximately $4,477,000 compared to a net increase of approximately $564,000
for the same period in 2003. Net cash used in operating activities totaled
approximately $110,000 for the year ending December 31, 2004, a decrease of
approximately $925,000 as compared to approximately $1,035,000 used in operating
activities during the same period in 2003. The improvement in cash position was
mainly due to our improved operating performance, an increase in accounts
receivable from new and existing contracts and a reduction in work-in-process
due to the shift from fixed price contracts to cost plus fixed fee contracts, as
well as a few other small improvements.
Net cash used in investing activities totaled approximately $225,000 for
the year ending December 31, 2004, compared to approximately $3,111,000 provided
by investing activities during the same period in 2003. The increase in cash
used in investing activities is attributable to the sale of the building on
January 31, 2003 and the purchase of fixed assets, primarily computer hardware
and software tools, in 2004.
Net cash provided by financing activities totaled approximately $4,812,000
for the year ending December 31 2004, which is an increase of approximately
$6,323,000 from the approximately $1,511,000 used in financing activities during
the same period in 2003. This is primarily attributable to the cash raised by
the sale of our preferred stock (approximately $2,500,000 of gross proceeds),
cash raised by the exercise of common stock options and warrants (approximately
$1,600,000) and advances/conversions under our revolving credit facility with
the Laurus Master Fund in 2004 (approximately $2,300,000).
At December 31, 2004, our cash, which includes cash reserves and cash
available for investment, was approximately $5,069,000, as compared to
approximately $592,000 at December 31, 2003, an increase of approximately
$4,477,000 mainly due to the issuance of our preferred stock in August 2004, the
exercise of stock options and warrants throughout the year and
advances/conversions under our revolving credit facility throughout the year.
As of December 31, 2004, our backlog of funded and non-funded business was
approximately $47 million, as opposed to approximately $2 million as of December
31, 2003. We expect approximately $8 million in revenue from the Missile
Defense Agency program in 2005. Although the Missile Defense Agency contract
was awarded to us, there can be no assurance that the contract will be continued
through all phases, and, if continued, that it will generate the amounts
anticipated.
During the year ending December 31, 2004, we completed work on our Air
Force Research Laboratory Phase II Small Business Innovation Research contract
worth approximately $1.6 million, as well as the negotiated a deferred option of
approximately $0.8 million and the addition of approximately $0.1 million. We
successfully powered SpaceShipOne in their quest to win the $10 million Ansari
X-Prize in October 2004. We completed Task Order 1 for the Missile Defense
Agency and won two Phase II Small Business Innovation Research awards related to
the Air Force Research Laboratory of approximately $2.3 million.
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Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
deferred tax asset of 2,350,000 and $2,190,000 as of December 31, 2004 and 2003,
respectively, consisted primarily of the income tax benefits from net operating
loss and capital loss carryforwards, amortization of goodwill and research and
development credits. A valuation allowance has been recorded to fully offset
the deferred tax asset as it is more likely than not that the assets will not be
utilized. The valuation allowance increased approximately $126,000 in 2004 from
$2,190,000 at December 31, 2003 to $2,318,000 at December 31, 2004.
At December 31, 2004, the Company has federal and state tax net operating
loss and capital loss carryforwards of approximately $4,826,000 and $2,146,000,
respectively. The federal and state tax loss carryforwards will expire in 2023
and 2013, respectively, unless previously utilized. The State of California
suspended the utilization of net operating loss for 2002 and 2003, and limited
them for 2004.
CRITICAL ACCOUNTING STANDARDS
Our revenues transitioned in 2003 and early 2004 from being based primarily
on fixed-price contracts, where revenues are recognized using the
percentage-of-completion method of contract accounting based on the ratio of
total costs incurred to total estimated costs, to primarily cost-plus fixed fee
contracts, where revenues are recognized as costs are incurred and services are
performed. Losses on contracts are recognized when they become known and
reasonably estimable (see Notes to the Consolidated Financial Statements).
Actual results of contracts may differ from management's estimates and such
differences could be material to the consolidated financial statements.
Professional fees are billed to customers on a time-and-materials basis, a
fixed-price basis or a per-transaction basis. Time-and-materials revenues are
recognized as services are performed. Deferred revenue represents amounts
collected from customers for services to be provided at a future date. Research
and development costs are expensed as incurred.
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based Compensation." We adopted SFAS No.
123 in 1997. We have elected to measure compensation expense for our
stock-based employee compensation plans using the intrinsic value method
prescribed by APB Opinion 25, "Accounting for Stock Issued to Employees" and
have provided pro forma disclosures as if the fair value based method prescribed
in SFAS No. 123 has been utilized. (See Notes to the Consolidated Financial
Statements.) We have valued our stock, stock options and warrants issued to
non-employees at fair value in accordance with the accounting prescribed in SFAS
No. 123, which states that all transactions in which goods or services are
received for the issuance of equity instruments shall be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation,
was published by the Financial Accounting Standards Board on December 31, 2002.
The effective date of FASB No. 148 is December 15, 2002. SFAS No. 123
prescribes a "fair value" methodology to measure the cost of stock options and
other equity awards. Companies may elect either to recognize fair value
stock-based compensation costs in their financial statements or to disclose the
pro forma impact of those costs in the footnotes. We have chosen the latter
approach. The immediate impact of SFAS No. 148 is more frequent and prominent
disclosure of stock-based compensation costs, starting with financial statements
for the year ended December 31, 2002 for companies whose fiscal year is the
calendar year. SFAS No. 148 also provides some flexibility for the transition
if a company chooses the fair-value cost recognition of employee stock options.
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CASH POSITION
Although we were cashflow positive in 2004, we raised over $4 million in
cash during the year, mainly through the sale of our preferred and common stock.
Our ability to increase cash generation from operations and thereby continue as
a going concern without the need to raise equity capital depends upon our
ability to ultimately implement our business plan, which includes (but is not
limited to) generating substantial new revenue from the Missile Defense Agency
by successfully performing under our $43 million contract and continuing to
attract and successfully complete other government and commercial contracts. The
Missile Defense Agency contract is staged, and we cannot guarantee that all
subsequent phases will be awarded or will be awarded to us. Recent budget cuts
may affect government spending on these space-based contracts.
In order to perform the Missile Defense Agency contract on schedule and to
successfully execute other existing and new business opportunities, we must
substantially increase our staff and hire new engineers or subcontract the work
to third parties. Although we are actively and aggressively seeking to hire
spacecraft and propulsion engineers to fulfill existing and new business demand,
there can be no assurance that we will be able to attract such engineering
resources or if we are able to attract them, that they will be available in the
timeframe needed or for a reasonable cost.
In addition, we need to continue developing project management expertise to
profitably execute on new business contracts and effectively and efficiently bid
on and win new business. We have no current need to draw any funds from our
revolving credit facility and we will only investigate the possibility of
raising additional capital if we have a compelling need to do so or as new
contracts and business opportunities materialize. New business opportunities
can come from a variety of sources, including state and federal grants and
government and commercial customer programs. However, there can be no assurance
that we will be able to obtain such new business contracts or, if such
contracts are available, that we can obtain then on terms favorable to the
Company. The likelihood of our success must be considered in light of the
expenses, difficulties and delays frequently encountered in connection with the
developing businesses, those historically encountered by us, and the competitive
environment in which we operate.
On January 31, 2003, we closed escrow on the sale of our facility in Poway,
California and entered into a ten-year leaseback. The selling price of the
facility was $3.2 million. The total debt repayment from the transaction was
approximately $2.4 million. The approximate net proceeds to us for working
capital purposes was approximately $636,000, which was used in operating the
business in 2003.
At the end of 2002, we raised $475,000 from certain of our directors and
officers by issuing 2.03% convertible debentures. The convertible debentures
entitled the holder to convert the principal and unpaid accrued interest into
our common stock when the note matured. The original maturity on the notes was
six (6) months from issue date; however, on March 19, 2003, the maturity date
was extended to twelve (12) months from issue date. The convertible debentures
were exercisable into common shares at a conversion price that equals the 20-day
average asking price less 10%, which was established when the debentures were
issued, or the initial conversion price. Concurrent with the issuance of the
convertible debentures, we issued warrants to purchase up to 1,229,705 shares of
our common stock to the subscribers. These warrants are exercisable for three
(3) years from the date of issuance at the initial exercise price, or the
initial conversion price on the debentures. On September 5, 2003, we repaid
one-half of the convertible notes, with the condition that the note holders
would convert the other half. Also, as a condition of the partial repayment,
the note holders were required to relinquish one-half of the 1,229,705 warrants
previously issued. As additional consideration for the transaction, the note
holders were offered 5% interest on their notes, rather than the stated 2.03%.
All the note holders accepted the offer and the convertible notes were retired
in 2003. Of the 614,853 remaining warrants, all were exercised in 2004 and none
remained outstanding at December 31, 2004.
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During the year ending December 31, 2003, we raised approximately $426,000
from accredited investors by selling 861,267 units of our common stock and
common stock purchase warrants under in a private placement offering made under
Section 4(2) of the Securities Act of 1933, and Rule 506, to accredited
investors only. We subsequently closed the Private Placement Offering. (See
Note 8 of the Consolidated Financial Statements.)
During the year ending December 31, 2004, we raised approximately
$6,375,000 in cash from accredited investors who converted debt into 2,991,417
shares of our common stock, through the exercise of options and warrant for
1,748,983 shares of our common stock and by selling 250,000 shares of our
preferred stock, which could be converted into 1,623,377 shares of our common
stock at a purchase price of $1.54 per share and which underlying common stock
was registered with the Securities and Exchange Commission on Form SB-2's during
2004.
We have sustained ourselves over the last few years with a mixture of
government and commercial contracts and capital raised in the private market.
In particular, we anticipated and received an award from the Air Force Research
Laboratory on March 28, 2003 and from the Missile Defense Agency on March 31,
2004. Both awards were cost-plus fixed fee contracts, which required us to
incur certain costs in advance of regular contract reimbursements. Although we
have needed a certain amount of cash to fund advance payments on the contract,
we have been entitled, as a small business concern, to recover our costs on a
weekly basis and we established the Laurus Master Fund revolving credit facility
at the end of the second quarter of 2003 to support our advance payment needs.
There was no balance on the revolving credit facility at December 31, 2004 and
we do not anticipate further need to draw on the revolving credit facility;
however, the revolving credit facility will remain in place pursuant to our
original agreement with the Laurus Master Fund until June 2007, unless sooner
terminated by either party. We would be required to pay Laurus a termination
fee for early termination of the revolving credit facility.
On March 31, 2004, we negotiated an amendment to our Secured Convertible
Note dated June 3, 2003 with the Laurus Master Fund to add a fixed conversion
price at $0.85 per share for the next $500,000 converted under the revolving
credit facility after the initial $1 million conversion. In exchange for the
amendment, Laurus granted us a six-month waiver to utilize the full revolving
credit facility in advance of eligible accounts. On August 25, 2004, we
negotiated an amendment to our Secured Convertible Note to add a fixed
conversion price at $1.00 per share for the next $1 million converted under the
revolving credit facility after the $500,000 mentioned above. In exchange for
the amendment, Laurus granted us a waiver to utilize the full revolving credit
facility in advance of eligible accounts and committed to convert the entire $1
million into equity by the end of the year. At December 31, 2004, Laurus had
converted approximately $2,272,000 of debt into 2,990,000 shares under the
revolving credit facility.
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We experienced a positive cash flow in 2004 for the first time in our
history. We also realized operating profit in 2004; however, we incurred a net
loss due to the non-cash expenses related to our revolving credit facility. We
anticipate that with our projected increase in revenue and backorders from near
term contracts, combined with our fiscally responsible budget and project
controls, that net positive cash flow from operations will continue and will be
sufficient to fund both operations and capital expenditures in 2005 and beyond.
There is no assurance, however, that we will sustain our current positive cash
flow or our operating profit now or in the future.
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RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS No. 123." SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
adoption of this Statement did not have a material effect on our consolidated
financial statements.
In November 2002, FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on
previously existing disclosure requirements for most guarantees. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under the guarantee and must disclose that information in
its financial statements. The provisions related to recognizing a liability at
inception of the guarantee for the fair value of the guarantor's obligations
does not apply to product warranties or to guarantees accounted for as
derivatives. FIN No. 45 also requires expanded disclosures regarding product
warranty expense. The initial recognition and initial measurement provisions
apply on a prospective basis to guarantees issued or modified after December 31,
2002. The adoption of this Statement did not have a material effect on the
consolidated financial statements.
In January 2003, FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51." This interpretation
provides guidance on: 1) the identification of entities for which control is
achieved through means other than through voting rights, known as "variable
interest entities" (VIEs); and 2) which business enterprise is the primary
beneficiary and when it should consolidate the VIE. This new model for
consolidation applies to entities: 1) where the equity investors (if any) do not
have a controlling financial interest; or 2) whose equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, this
interpretation requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE make additional
disclosures. This interpretation is effective for all new VIEs created or
acquired after January 31, 2003. For VIEs created or acquired prior to February
1, 2003, the provisions of the interpretation must be applied no later than the
beginning of the first interim or annual reporting period beginning after June
15, 2003. Certain disclosures are effective immediately. The adoption of this
Statement did not have an effect on the consolidated financial statements.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 requires that contracts with comparable characteristics be accounted for
similarly. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of this Statement did not have an effect on the consolidated
financial statements.
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In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this Statement did not
have a material effect on the consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share Based
Payment" (SFAS No. 123R), a revision to Statement No. 123, Accounting for
Stock-Based Compensation which supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. The revised SFAS 123 eliminates the alternative to
use Opinion 25's intrinsic value method of accounting and, instead, requires
entities to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards.
Furthermore, public entities are required to measure liabilities incurred to
employees in share-based payment transactions at fair value as well as estimate
the number of instruments for which the requisite service is expected to be
rendered. Any incremental compensation cost for a modification of the terms or
conditions of an award is measured by comparing the fair values before and after
the modification. We have yet to determine the effect SFAS No. 123R may have on
our financial statements, if any.
FORWARD-LOOKING STATEMENTS AND RISK ANALYSIS
During the first three-months of 2005, we submitted two bids for government
programs, continued our work with the United States Congress to identify
directed funding for our programs and are actively working to identify several
significant commercial programs. We believe that we will win some of these
opportunities, which would enable us to continue to enhance our backorder,
continue to grow and broaden our business base, although there can be no
assurance that these contracts will be awarded to us.
To date, we have maintained a mix of government and commercial business. In
2004, we had about 85% government and government-related work. In 2003, we had
about 82% government or government-related work. In 2005, we expect the ratio
to be about 90% government or government-related work. We will continue to do
both government and commercial business and anticipate the mix of government
revenues to continue to be above 70% for the next several years as we increase
our government and commercial marketing efforts for both of our technology and
product areas. 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 technology, products and services. Although we are
interested in exploring international revenue and contract opportunities, we are
restricted by export control regulations, e.g., International Traffic in Arms
Regulations, which may limit our ability to develop market opportunities outside
the United States.
While we do not expect a reduction of government sales, a majority of our
government work is contract related. We are beginning to develop commercial
products with the long-term idea and vision of becoming a product-oriented
company; however, in the short-term, a majority of our revenue is expected to
come from government cost plus fixed fee and some firm fixed price contracts.
Our definition of short-term is the next three to five years and long-term is
five to ten years and beyond. We anticipate winning contracts in both the
government and commercial market segments, although there can be no assurance
that the contracts will be awarded to us. If they are not awarded to us, based
on current trends and proposals, we believe that we can offset fluctuations in
one market segment with contracts from the other; however, our inability to win
business in both markets would have a negative effect on our business operations
and financial condition.
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We believe that we will experience an accelerated growth in sales over the
next few years. At this time, over 90% of the forecasted sales for 2005 are
under contract or near contract award. There is no guarantee and there can be
no assurance that we will win enough new business to achieve our targeted growth
projection or to maintain a positive cash flow position. Additionally, there is
no guarantee that awarded contracts will not be altered or terminated prior to
us recognizing our projected revenue from them. Many contracts have "exit
ramps", i.e., provides the customer the right to terminate the contract for any
of a variety of reasons, including but not limited to non-performance by us, or
are awarded in phases the award of which is not guaranteed to us. We do not
believe that any of our contracts will be terminated early; however, there can
be no assurance that they will not be terminated prior to completion or that all
phases of any of our contracts will be awarded to us. Finally, we do not
believe that significant capital expenditures will be required to achieve this
increase in sales; however, additional capital may be required to support and
sustain our growth.
During the year ended December 31, 2004, we raised approximately $6,375,000
through a combination of private sales of our preferred stock (approximately
$2,500,000), exercises of options and warrants (approximately $1,600,000) and
conversions on our revolving credit facility (approximately $2,300,000). During
the year ended December 31, 2003, we raised approximately $654,000 through a
combination of private sales of our stock (approximately $426,000) and
conversions on our revolving credit facility (approximately $228,000). To
execute our strategy of rapidly growing our Company with small, capable,
low-cost micro- and nanosatellites, hybrid propulsion products and new
commercial revenue sources, we may require additional funding in order to win
significant government and commercial programs. We believe investor or customer
funding of $10 to $30 million may be required in the future, which could come
from a combination of private and/or public equity placements or government and
commercial customers. Our intent is to only raise additional capital now when
it is required or makes sense to do so. We do not have any ongoing private or
public equity offerings and the Board has not authorized any additional
financings at this time.
We have sufficient capital to operate our business currently. The amount
of capital we may need to raise in the future is dependent upon many factors.
For example, the need for additional capital may be greater if (i) we do not
enter into future agreements with our customers on the terms we anticipate; (ii)
our net operating profit reverts to a deficit due to significant unanticipated
expenses; or (iii) we incur additional unexpected research and development costs
for our microsatellite products or our hybrid-related propulsion systems to meet
changed or unanticipated market, regulatory, or technical requirements. If
these or other events occur, there is no assurance that we could raise
additional capital on favorable terms, on a timely basis or at all. If
additional capital is not raised, it could have a significant negative effect on
our business operations and financial condition in the long term.
Our ability to execute a public offering of our common stock or otherwise
obtain funds is subject to numerous factors beyond our control, including,
without limitation, a receptive securities market and appropriate governmental
clearances. No assurances can be given that we will remain profitable or cash
flow positive, or that any additional public offering will occur, that we will
be successful in obtaining additional funds from any source or be successful in
implementing an acceptable exit strategy on behalf of our investors. Moreover,
additional funds, if obtainable at all, may not be available on terms acceptable
to us when such funds are needed or may be on terms which are significantly
adverse to our current stockholders. The unavailability of funds when needed
could have a material adverse effect on us.
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Our business partially depends on activities regulated by various agencies
and departments of the United States government and other companies and agencies
that rely on the federal government. Recently, in response to terrorists'
activities and threats aimed at the United States, transportation, mail,
financial, and other services have been slowed or stopped altogether. Further
delays or stoppages in transportation, mail, financial, or other services could
have a material adverse effect on our business, results of operations, and
financial condition. Furthermore, we may experience a small increase in
operating costs, such as costs for transportation, insurance, and security as a
result of the activities and potential activities. The United States economy in
general is being adversely affected by the terrorist activities and potential
activities, and any economic downturn could adversely impact our results of
operations, impair our ability to raise capital, or otherwise adversely affect
our ability to grow our business. Conversely, because of the nature of our
products, there may be opportunities for us to offer solutions to the government
that may address some of the problems that the country faces at this time with
respect to terrorism, national defense and national security.
ITEM 7. FINANCIAL STATEMENTS
Please see our audited financial statements for the period ended December
31, 2004 as compared to the period ended December 31, 2003 attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
In 2003, we changed our principal independent accountants due to their
decision, at the time, not to register with the Public Company Accounting
Oversight Board established by the Sarbanes-Oxley Act of 2002, which was charged
with the responsibility of overseeing the audits of public companies that are
subject to the federal securities laws. Under the Sarbanes-Oxley Act of 2002,
the Public Company Accounting Oversight Board's duties included the
establishment of a registration system for public accounting firms. All public
accounting firms were required to register with the Public Company Accounting
Oversight Board if they wished to prepare or issue audit reports on United
States public companies, or to play a substantial role in the preparation or
issuance of such reports. Once registered, public accounting firms were
required to file periodic reports with the Public Company Accounting Oversight
Board. At the end of the first quarter of 2003, we were informed by our
independent auditor, Nation Smith Hermes Diamond, Accountants and Consultants,
P.C. ("Nation Smith"), that it may not register with the Public Company
Accounting Oversight Board and, as a result, would not be able to continue to
act as our independent auditor once the rules were in effect. Nation Smith did
not resign its position as a result of any disagreements with us on accounting
or financial disclosure issues.
Effective June 3, 2003, we confirmed with Nation Smith that they would no
longer be representing us as our accountants, except to provide consent herein.
As of that date, we informed Nation Smith that we were engaging a new audit firm
as our accountants.
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Nation Smith last reported on Registrant's financial statements as of
February 13, 2003 and reviewed our Form 10-QSB for the first quarter of 2003.
The report, which covered the two fiscal years ended December 31, 2002, was an
unqualified report modified for going concern. While Nation Smith expressed
concern as to the Registrant's ability to remain a going concern, neither the
report nor the financial statements for the periods contained any other adverse
opinion or disclaimer of opinion, nor were they modified as to audit scope or
accounting principles.
Our Board of Directors ratified the change of independent accountants on
June 3, 2003.
During our fiscal year 2002 and the subsequent interim period through June 3,
2003, there were no disagreements with Nation Smith on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved, to Nation Smith's satisfaction, would have
caused it to make reference to the subject matter of the disagreement in
connection with its report.
During fiscal year 2002 and the subsequent interim period through June 3,
2003, there were no reportable events (as defined in Regulation S-B Item
304(a)(1)(v)).
During fiscal year 2002 and the subsequent interim period through June 3,
2003, Nation Smith did not advise us that the internal controls necessary for us
to develop reliable financial statements did not exist.
During fiscal year 2002 and the subsequent interim period through June 3,
2003, Nation Smith did not advise us that any information had come to their
attention which had led them to no longer be able to rely on management's
representation, or that had made Nation Smith unwilling to be associated with
the financial statements prepared by management.
During fiscal year 2002 and the subsequent interim period through June 3,
2003, Nation Smith did not advise us that the scope of any audit needed to be
expanded significantly or that more investigation was necessary.
During fiscal year 2002 and the subsequent interim period through June 3,
2003, Nation Smith did not advise us that there was any information which the
accountants concluded would materially impact the fairness and reliability of
either (i) a previously issued audit report or the underlying financial
statements, or (ii) the financial statements issued or to be issued covering
the fiscal period(s) subsequent to the date of the most recent financial
statements covered by an audit report (including information that, unless
resolved to the accountant's satisfaction, would prevent it from rendering an
unqualified audit report on those financial statements).
We requested that Nation Smith furnish us with a letter addressed to the
SEC stating whether or not it agrees with the above statements. A copy of such
letter, dated June 9, 2003, was filed as Exhibit 16.1 to our Form 8-K filing of
the same date.
We engaged PKF, Certified Public Accountants, A Professional Corporation
("PKF"), as our new independent accountants on June 3, 2003 for the fiscal year
ending December 31, 2003, and to review our quarterly financial statements for
the periods ending June 30, 2003 and September 30, 2003. Prior to June 3, 2003,
we had not consulted with PKF regarding (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our financial statements, and no
written report or oral advice was provided to us by PKF concluding there was an
important factor to be considered by us in reaching a decision as to an
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accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304 of
Regulation S-B, or a reportable event, as that term is defined in Item
304(a)(1)(iv) of Regulation S-B.
ITEM 8A. CONTROLS AND PROCEDURES
Within 90 days of the filing date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in the
reports that we file under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure. There
have been no significant changes in our internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our
evaluation, including any significant actions regarding any deficiencies. We
intend to review our controls and procedures regularly with our management and
Board of Directors.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Our management and directors' business activities are under the control of
our Board of Directors. Our Chief Executive Officer, James W. Benson, our
President and Chief Financial Officer, Richard B. Slansky, our Vice President of
Engineering, Frank Macklin, and our Vice President of New Business Development
and Project Management, Randall K. Simpson, manage the Company's daily
operations. Our Board currently consists of eight directors. Mr. Slansky was
added to the Board of Directors in November 2004. J. Mark Grosvenor was added
and resigned from the Board of Directors in 2003. Below is a list of our
executive officers and directors.
NAME POSITION HELD
--------------------------------------------------------------------------------
James W. Benson Chief Executive Officer,
13855 Stowe Drive Director, Chairman of the Board
Poway, California 92064
Richard B. Slansky President, Chief Financial Officer,
13855 Stowe Drive Director, Corporate Secretary
Poway, CA 92064
Frank Macklin Vice President, Engineering
13855 Stowe Drive
Poway, California 92064
Randall K. Simpson Vice President, New Business
13855 Stowe Drive Development & Project Management
Poway, California 92064
Stuart Schaffer Director
13855 Stowe Drive
Poway, CA 92064
Wesley T. Huntress* Director
13855 Stowe Drive
Poway, California 92064
Curt Dean Blake* Director
13855 Stowe Drive
Poway, California 92064
General Howell M. Estes, III (USAF Retired)* Director
13855 Stowe Drive
Poway, California 92064
Robert S. Walker* Director
13855 Stowe Drive
Poway, California 92064
Scott McClendon * Director
13855 Stowe Drive
Poway, California 92064
* Denotes Independent Director
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The following is a summary of the business experience of our officers and
directors as well as other key employees.
James W. Benson, age 60, is our founder and has served as our Chief
Executive Officer and Chairman of the Board since inception. Mr. Benson started
the trend of successful computer entrepreneurs moving into the entrepreneurial
space arena. In 1984, Mr. Benson founded Compusearch Corporation (later renamed
Compusearch Software Systems) in McLean, Virginia. The company was based on the
first development of software algorithms and applications for personal computers
and networked servers to create full text indexes of massive government
procurement regulations and to provide instant full text searches for any word
or phrase; the first instance of large scale, commercial implementation of
PC-based full text searching, which later grew to encompass such systems as
worldwide web search engines. Seeing related opportunities in document and
image management, Mr. Benson started the award-winning ImageFast Software
Systems in 1989, which later merged with Compusearch. In 1995, Mr. Benson sold
Compusearch and ImageFast, and retired at age fifty. After months of research,
Mr. Benson started SpaceDev, Inc., a Nevada corporation, which was acquired by
us in October 1997. Mr. Benson holds a Bachelor of Science degree in Geology
from the University of Missouri. He founded the non-profit Space Development
Institute, and introduced the $5,000 Benson Prize for Amateur Discovery of Near
Earth Objects. He is also Vice-Chairman and private sector representative on
NASA's national Space Grant Review Panel, and is a member of the American
Society of Civil Engineers subcommittee on Near Earth Object Impact Prevention
and Mitigation.
Richard B. Slansky, age 48, is our President, Chief Financial Officer,
Director and Corporate Secretary and joined us on February 10, 2003 as Chief
Financial Officer and Corporate Secretary. In November 2004, he 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.
Previously, Mr. Slansky served as Chief Financial Officer, Vice President of
Finance, Administration and Operations and Corporate Secretary for Path 1
Network Technologies, Inc., a company focused on merging broadcast and cable
quality video transport with IP networks from May 2000 to July 2002. Before his
tenure at Path 1, Mr. Slansky served as President, Chief Financial Officer and
member of the Board of Directors of Nautronix, Inc., a marine
electronics/engineering services company, from January 1999 to May 2000. Prior
to Nautronix, Mr. Slansky served as Chief Financial Officer of Alexis
Corporation, an international pharmaceutical research products technology
company, from August 1995 to January 1999. He also served as President and Chief
Financial Officer of C-N Biosciences, formerly Calbiochem, from July 1989 to
July 1995. Mr. Slansky is currently serving on the Board of Directors of two
privately held high technology companies, one closely held, private real estate
company and the Girl Scouts of San Diego and Imperial Counties. 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.
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Frank Macklin, age 48, was appointed as our Vice President of Engineering
in 2004. Mr. Macklin has been our chief engineer of hybrid propulsion systems
and the technical leader for our National Reconnaissance Office funded SPOTV
Hybrid System Definition study, and is acting chief engineer for our Maneuvering
and orbital Transfer Vehicle Hybrid Technology Development and X-Motor
Development. Mr. Macklin was a founder of Integrated Space Systems, Inc., which
was acquired by SpaceDev in 1998. Prior to his work at Integrated Space
Systems, Mr. Macklin worked at the General Dynamics Space Systems Division in
San Diego from January 1987 to December 1994. During his tenure at General
Dynamics, Mr. Macklin integrated a new guidance system onto the new generation
of Atlas launch vehicles and became intimately familiar with all aspects of
vehicle flight software and hardware. He also designed and implemented diverse
ground guidance performance and analysis software systems, became a complete
end-to-end systems expert, and served as the guidance system expert on the elite
"tiger team" sent to support all launches. Prior to General Dynamics, Mr.
Macklin served as a member of the Peacekeeper developmental launch team at
Vandenberg Air Force Base from March 1984 to December 1986, where he was
responsible for the $30M guidance and control system, led a group of 30 industry
engineers and gave the final guidance system go/no-go for launch. Mr. Macklin
is a California State registered professional electrical engineer with more than
20 years of experience with launch vehicles, ground launch control systems,
launch sites and launch teams. Mr. Macklin received his BSEE from San Diego
State University and is a California Board Certified Professional Engineer.
Randall K. Simpson, age 58, is our Vice President of New Business
Development and Project Management and joined us in January 2004. Mr. Simpson
has over 30 years of diversified experience in business development, product
definition, engineering development and support for aerospace, commercial and
international customers. From October 2000 to January 2004, Mr. Simpson served
as Assistant Vice President of Program Management for Alvarion, Inc., a high
technology commercial communications firm. From March 1997 to September 2000,
Mr. Simpson was Vice President of Engineering for Cubic Defense Systems, an
engineering and production company providing military training ranges, laser
instrumentation products, space avionics and battlefield communications
equipment. From November 1992 to February 1997, Mr. Simpson was Program
Director for Advanced Test Systems and Engineering Director for GDE Systems,
which develops, integrates and produces test equipment for advanced electronic
aircraft, munitions, space launch, satellite and telecommunications systems.
Mr. Simpson began his career at General Dynamics/Convair where he held various
positions. Mr. Simpson received both his BSEE and MSEE from San Diego State
University.
Stuart Schaffer, age 45, was appointed to our Board of Directors on May 17,
2002. Mr. Schaffer is currently VP Marketing, for Overture Performance
Marketing -- a business unit of Overture Services, which is a subsidiary of
Yahoo! Mr. Schaffer was our vice president of product development and marketing
from May 2002 to August 2003. From 1998 to 2001, Mr. Schaffer acted as vice
president of marketing for Infocus Corporation, a fully reporting company, where
he managed all aspects of the marketing mix for market-share leading digital
projection business throughout the Americas region. In that position, Mr.
Schaffer revitalized the Proxima brand, managed a multi-million dollar annual
advertising, communications and program budget, directed multiple outside and
in-house agencies, led product marketing teams in defining and delivering both
mobile and conference room digital projector product lines, developed channel
strategies and programs for both value-added and volume channels, served as
primary press spokesperson for the company, established a market intelligence
structure focused on developing customer and industry knowledge and spearheaded
merger teams to ensure the smooth transition of the merger between the Infocus
and Proxima marketing organizations. Prior to Infocus, Mr. Schaffer worked for
the Hewlett-Packard Company from 1985 to 1998, where he held various positions
in Business Development, Marketing and Business Planning. Mr. Schaffer has
worked with the Leukemia & Lymphoma Society, on a volunteer basis, as an
Assistant Coach and Mentor. Mr. Schaffer has an MBA from Harvard University and
a BS degree in physics from Harvey Mudd College.
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Wesley T. Huntress, age 63, was elected to our Board of Directors as an
independent director at our annual shareholder meeting held June 30, 1999, and
is a member of our Audit Committee and Compensation Committee. Dr. Huntress is
currently Director of the Geophysical Laboratory at the Carnegie Institution of
Washington in Washington, DC, where he leads an interdisciplinary group of
scientists in the fields of high-pressure science, astrobiology, petrology and
biogeochemistry. Prior to his appointment at Carnegie, Dr. Huntress served the
Nation's space program as the Associate Administrator for Space Science at NASA
from October 1993 through September 1998 where he was responsible for NASA's
programs in astrophysics, planetary exploration, and space physics. During his
tenure, NASA space science produced numerous major discoveries, and greatly
increased the launch rate of missions. These discoveries include the discovery
of possible ancient microbial life in a Mars meteorite; a possible subsurface
ocean on Jupiter's moon Europa; the finding that gamma ray bursts originate at
vast distances from the Milky Way and are extraordinarily powerful; discovery of
massive rivers of plasma inside the Sun; and a wealth of announcements and
images from the Hubble Space Telescope, which have revolutionized astronomy as
well as increased public interest in the cosmos. Dr. Huntress also served as a
Director of NASA's Solar System Exploration Division from 1990 to 1993, and as
special assistant to NASA's Director of the Earth Science and Applications from
1988 to 1990. Dr. Huntress came to NASA Headquarters from Caltech's Jet
Propulsion Laboratory ("JPL"). Dr. Huntress joined JPL as a National Research
Council resident associate after receiving is B.S. in Chemistry from Brown
University in 1964 and his Ph.D. in Chemical Physics from Stanford in 1968. He
became a permanent research scientist at JPL in 1969. He and his JPL team
gained an international reputation for their pioneering studies of chemical
evolution in interstellar clouds, comets and planetary atmospheres. At JPL Dr.
Huntress served as co-investigator for the ion mass spectrometer experiment in
the Giotto Halley's Comet mission, and as an interdisciplinary scientist for the
Upper Atmosphere Research Satellite and Cassini missions. He also assumed a
number of line and research program management assignments while at JPL, and
spent a year as a visiting professor in the Department of Planetary Science and
Geophysics at Caltech.
Curt Dean Blake, age 47, was appointed to our Board of Directors as an
independent director on September 5, 2000. He serves as our Audit Committee
Chairman and is a member of our Nominating/Corporate Governance Committee. Mr.
Blake is CEO of GotVoice, Inc., a startup company in the voicemail consolidation
and messaging business. From 1999 to 2002, Mr. Blake provided consulting
services to various technology companies, including Apex Digital, Inc. and
SceneIt.com. Mr. Blake acted as the Chief Operating Officer of the Starwave
Corporation from 1993 until 1999, where he managed business development,
finance, legal and business affairs, and operations for the world's most
successful collection of content sites on the Internet. During that time, he
developed business strategies, financial models, and structured and negotiated
venture agreements for Starwave's flagship site, ESPN Sportszone, at that time
the highest traffic destination site on the Internet. He also developed and
negotiated venture agreements with the NBA, NFL, Outside Magazine and NASCAR to
create sites around these brands. Mr. Blake negotiated the sale of a
controlling interest in Starwave Corporation to Disney/ABC. Prior to Starwave,
Mr. Blake worked at Corbis from 1992 to 1993, where he led the acquisitions and
licensing effort to fulfill Bill Gates' vision of creating the largest taxonomic
database of digital images in the world. Mr. Blake acted as General Counsel to
Aldus Corporation from 1989 to 1992, where he was responsible for all legal
matters of the $125 million public corporation and its subsidiaries. Prior to
that, Mr. Blake was an attorney at Shidler, McBroom, Gates and Lucas, during
which time he was assigned as onsite counsel to the Microsoft Corporation, where
he was primarily responsible for the domestic OEM/Product Support and Systems
Software divisions. Mr. Blake has an MBA and JD from the University of
Washington.
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General Howell M. Estes, III (USAF Retired), age 63, was appointed to our
Board of Directors as an independent director on April 2, 2001, and is a member
of our Nominating/Corporate Governance Committee and of our Compensation
Committee. General Estes retired from the United States Air Force in 1998 after
serving for 33 years. At that time he was the Commander-in-Chief of the North
American Aerospace Defense Command ("CINCNORAD") and the United States Space
Command ("CINCSPACE"), and the Commander of the Air Force Space Command
("COMAFSPC") headquartered at Peterson AFB, Colorado. In addition to a Bachelor
of Science Degree from the Air Force Academy, he holds a Master of Arts Degree
in Public Administration from Auburn University and is a graduate of the Program
for Senior Managers in Government at Harvard's JFK School of Government. Gen.
Howell Estes is the President of Howell Estes & Associates, Inc., a wholly owned
consulting firm to CEOs, Presidents and General Managers of aerospace and
telecommunications companies worldwide. He serves as Vice Chairman of the Board
of Trustees at The Aerospace Corporation. He served as a consultant to the
Defense Science Board Task Force on SPACE SUPERIORITY and more recently as a
commissioner on the U.S. Congressional Commission to Assess United States
National Security Space Management and Organization (the "Rumsfeld Commission").
Robert S. Walker, age 62, was appointed to our Board of Directors as an
independent director on April 2, 2001. He currently sits on our
Nominating/Corporate Governance Committee. Mr. Walker has acted as Chairman of
Wexler & Walker Public Policy Associates in Washington, D.C. since January 1997.
As a former Congressman (1977-1997), Chairman of the House Science Committee,
Vice Chairman of the Budget Committee, and a long-time member of the House
Republican leadership, Walker became a leader in advancing the nation's space
program, especially the arena of commercial space, for which he was the first
sitting House Member to be awarded NASA's highest honor, the Distinguished
Service Medal. Bob Walker is a frequent speaker at conferences and forums. His
main issues include the breadth and scope of space regulation today, and how
deregulation could unleash the telecommunications, space tourism, broadcast and
Internet industries. Mr. Walker currently sits on the boards of directors of
Aerospace Corporation, a position he has held since March 1997. Wexler & Walker
is a Washington-based, full-service government relations firm founded in 1981.
Wexler & Walker principals have served in Congress, in the White House and
federal agencies, as congressional staff, in state and local governments and in
political campaigns. Wexler & Walker is a leader on the technology issues of the
twenty-first century. During 2002, we incurred consulting fees with Hill and
Knowlton, Inc., an affiliate of Wexler & Walker, in an aggregate amount of
approximately $56,000. No fees were paid to Wexler & Walker in 2003.
Scott McClendon, age 66, was appointed to our Board of Directors as an
independent director on July 19, 2002. He currently sits on our Audit Committee
and our Compensation Committee. McClendon currently sits on the Board of
Directors for Overland Storage, Inc., a public company, where he acts as
chairman of the Board. He became the chairman after serving as president and
chief executive officer from October 1991 to March 2001. Prior to joining
Overland Storage, Inc., Mr. McClendon was employed by Hewlett-Packard Company
for over 32 years in various positions of engineering, manufacturing, sales and
marketing. In addition to SpaceDev and Overland Storage, Mr. McClendon is
currently serving on the Board of Directors of Procera Networks, Inc., a public
company, and Sicommnet, Inc., privately held high technology company. Mr.
McClendon received a Bachelor of Science degree in electrical engineering in
June 1960, and a Master of Science degree in electrical engineering in June 1962
from Stanford University School of Engineering.
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One of our independent directors currently sits on the board of directors
of another Reporting Company. "Reporting Companies" include companies with a
class of securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934, as amended (the "1934 Act") or subject to the requirements of
Section 15(d) of the 1934 Act, or any company registered as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE
We have a standing audit committee comprised of Messrs. Blake, McClendon
and Dr. Huntress. In 2004, we established a nominating and governance committee
comprised of Retired General Estes, Mr. Walker and Dr. Huntress and a
compensation committee comprised of Messrs. Blake and McClendon and Retired
General Estes. The Company does not maintain any pension, retirement or other
arrangements other than as disclosed in the following table for compensating its
Directors. Our Board of Directors took action five (5) times during the last
fiscal year, with all five (5) being at regular or special meetings attended by
the members of the Board either personally or telephonically. There were no
unanimous written consents in 2004. Our Audit Committee took separate action
five (5) times during the last fiscal year, each time at a regular or special
meeting attended by a quorum of the members of the committee either personally
or telephonically. The Nominating and Corporate Governance Committee and the
Compensation Committee met once to approve their respective charters.
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ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE OFFICER COMPENSATION
During the fiscal years ended December 31, 2002, 2003 and 2004, the Company
granted options to certain of its officers as compensation for their services
pursuant to the Company's stock option plan. Total compensation paid to
officers of the Company for its past three fiscal years is set forth below:
SUMMARY COMPENSATION TABLE
Long Term Compensation
--------------------------------------------------------
Annual Compensation Awards Payouts
---------------------- ---------- ---------
Name and Principal Position(1) Year Salary Bonus Other Annual Restricted Securities LTIP Payouts All Other
($) ($) Compensation Stock Award(s) Underlying ($) Compensation
($) ($) Options/ SARs # ($)
------------------------------ ---- ------- ------ ------------- -------------- ------------ ------------ -----------
James W. Benson, CEO (2) . . . 2002 141,325 - - - 10,000(2) - -
. . . . . . . . . . . . . . . 2003 150,000 - - - - - -
. . . . . . . . . . . . . . . 2004 177,923 40,000 3,894 - - - -
Richard B. Slansky, President, 2002 - - - - - - -
. . . . . . . . . CFO. . . . .2003 94,625 - 1,183 - 355,000(3) - -
. . . . . . . . . . . . . . . 2004 150,000 - 27,672 - 395,000(3) - -
Randall K. Simpson, V.P. . . . 2002 - - - - - - -
..New Business Development. . ..2003 - - - - - - -
. . . . . . . . . . . . . . . 2004 114,231 - - - 250,000(4) - -
Frank Macklin, V.P. . .. . . . 2002 - - - - - - -
.. Engineering. . ..2003 - - - - - - -
. . . . . . . . . . . . . . . 2004 109,110 - 4,067 - 50,000(5) - -
------------------------------ ---- ------- ------ ------------- -------------- ------------ ------------ -----------
------------------------------ ---- ------- ------ ------------- -------------- ------------ ------------ -----------
(1) The table includes information as to the Chief Executive Officer and
highest paid officers of the Company for the last fiscal year, including persons
whose information would have been required but for the fact that they were not
serving as officers of the Company at its fiscal year end. For purposes of the
table, only persons whose total annual salary and bonus exceeded $100,000 have
been included.
(2) Mr. Benson was awarded 10,000 options in 2001 as a part of an annual
award of options to our employees. The options are incentive stock options and
were granted with an exercise price equal to 110% of the fair market value of
our common stock on the date of grant.
(3) Mr. Slansky was awarded up to 385,000 options in 2003 as part of his
employment agreement, with 25,000 vested immediately, 180,000 vesting in
six-month increments over five years and the remaining based on performance
criteria established by the CEO. The timeframe for certain performance criteria
lapsed in 2003 and 30,000 options not earned were forfeited; thereby, reducing
Mr. Slansky's potential securities underlying options to a maximum of 355,000,
as illustrated above. Mr. Slansky was awarded up to 395,000 options in 2004 as
part of an overall option normalization and based on positions held; and these
options vest based on the following: options on 197,500 shares vesting in
six-month increments over five years and the remaining vest based on performance
criteria established by the CEO, as approved by the Board.
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(4) Mr. Simpson was awarded up to 250,000 options in 2004 as part of his
employment agreement, with 125,000 vesting in six-month increments over five
years and the remaining vest based on performance criteria established by the
CEO or President, as approved by the Board.
(5) Mr. Macklin was awarded up to 50,000 options in 2004 as part of an
overall option normalization and based on positions held; and these options vest
based on six-month increments over five years.
During the last fiscal year and as of December 31, 2004, the Company granted
stock options to executive officers as set forth in the following table:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
------------------
Name . . . . . . . Number of Securities % of Total Options/SARs Exercise of Base Expiration
Underlying Granted to Employees in Price ($/Sh) Date
Options/SARs Fiscal Year
Granted (#)
------------------ -------------------- ----------------------- ---------------- ------------
James W. Benson 0 0 0 0
Richard B. Slansky 395,000 18% 0.92 3/25/2010
Randall K. Simpson 250,000 11% 1.19 1/26/2010
Frank Macklin 50,000 2% 0.92 3/25/2010
------------------ -------------------- ----------------------- ---------------- ------------
As of December 31, 2004, the Company had vested and unvested securities
underlying stock options to executive officers as set forth in the following
table:
Option/SAR Grants Ended December 31, 2004
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SARs at FY-End (#) Options/SARs at FY- End ($)
-------------------------------------- ---------------------------------
Exercisable/ Exercisable/
Name . . . . . . . Shares Acquired on Value Realized Unexercisable Unexercisable(1)
Exercise (#) ($)
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
James W. Benson. . 0 0 255,000/ 254,734/
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
1,000,000 375,000
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
Richard B. Slansky 0 0 276,250/ 184,860/
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
473,750 359,590
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
Randall Simpson 0 0 12,500/ 14,875/
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
237,500 282,625
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
Frank Macklin 0 0 8,000/ 48,583/
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
45,000 41,400
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
(1) For purposes of determining whether options are "in-the-money," we
defined fair market value as the five-day weighted average of the closing price
of our common stock on the Over-The-Counter Bulletin Board as of March 14,
2005, or $1.72 per share. All the options listed on the table are
"in-the-money", except unvested options on 750,000 of Mr. Benson's shares.
49
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PERQUISITES
We provide our Chief Executive Officer, Mr. Benson, with a few perquisites
including a cell phone with basic coverage and charges, an annual membership to
alpha trader.com, annual air travel club memberships and a monthly hosting on
web site works. Although the value of these perks is not substantial, we
believe these perks are an important component of chief executive officer
compensation.
DIRECTOR COMPENSATION
At our annual meeting on July 16, 2000, our Board of Directors adopted a
compensation plan for independent directors whereby they receive options for
attending meetings of the Board as follows: each such director received an
option to purchase 5,000 shares for each of two telephonic meetings attended per
year, and an option to purchase 10,000 shares for each of two meetings attended
in person per year. These directors did not receive additional compensation for
attending meetings in excess of those described above until March 2004. In
addition to the above, independent directors received $5,000 in options on the
date of election or appointment. All such options were issued pursuant to our
1999 Incentive Stock Option Plan at fair market value as of the date of the
meeting attended, vested 50% on the first anniversary date of the date of grant
and 50% on the second anniversary date of the date of grant and expire on the
five-year anniversary of the grant date.
On March 25, 2004, our Board of Directors modified our compensation plan
for independent directors. Under the modified plan, non-employee directors will
receive options for attending meetings of the Board as follows: each director
shall receive an option to purchase 6,000 shares for each telephonic meeting
attended and an option to purchase 12,000 shares for each meeting attended in
person, with a cap of options on 36,000 shares per year. Our non-employee
directors will also receive compensation for attending committee meetings as
follows: each director shall receive an option to purchase 5,000 shares for each
Audit Committee meeting attended, each director shall receive an option to
purchase 2,500 shares for each Compensation Committee meeting attended and each
director shall receive an option to purchase 2,500 shares for each
Nominating/Governance Committee meeting attended, which options shall not be
subject to a cap. In addition to the above, non-employee directors receive
options for 5,000 shares on the date of election or appointment. All such
options will be issued pursuant to the Plan at fair market value as of the date
of the meeting attended, will vest 50% on the first anniversary date of the
date of grant and 50% on the second anniversary date of the date of grant and
will expire on the three-year anniversary of the grant date.
The following table sets forth the remuneration paid to our directors
during the fiscal year ended December 31, 2004. We do not pay directors who are
also officers of the Company additional compensation for their service as
directors.
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Cash Compensation Security Grants
--------------------------------- ---------------
Annual Meeting Consulting Number of Number of
Retainer Fees Fees/Other Shares Securities
Fees Fees Underlying
Options/SARs
----------------------------- -------- ------- ---------- --------- ------------
Name
----------------------------- -------- ------- ---------- --------- ------------
James W. Benson . . . . . . . - - - - -
----------------------------- -------- ------- ---------- --------- ------------
Richard B. Slansky. . . . . . - - - - -
----------------------------- -------- ------- ---------- --------- ------------
Stuart Schaffer . . . . . . . - - - - -
----------------------------- -------- ------- ---------- --------- ------------
Wesley T. Huntress. . . . . . - - - - 75,000
----------------------------- -------- ------- ---------- --------- ------------
Curt Dean Blake . . . . . . . - - - - 74,000
----------------------------- -------- ------- ---------- --------- ------------
General Howell M. Estes, III. - - - - 30,000
----------------------------- -------- ------- ---------- --------- ------------
Robert S. Walker. . . . . . . - - - - 18,000
----------------------------- -------- ------- ---------- --------- ------------
Scott McClendon . . . . . . . - - - - 75,000
----------------------------- -------- ------- ---------- --------- ------------
EMPLOYMENT AGREEMENTS
On November 21, 1997, we entered into a five-year employment agreement with
our CEO, Mr. Benson. This agreement provides for compensation of salary and
stock as well as stock options. This agreement also prohibits Mr. Benson from
competing with us, disclosing any confidential information, or soliciting any of
our employees or customers for one year after termination of employment. Our
Board of Directors revised Mr. Benson's employment agreement at its meeting on
July 16, 2000. This employment contract supersedes the previous agreement. The
term of this revised employment contract is for a period of five (5) years from
July 16, 2000. The revised agreement provides for the grant of options to
purchase up to 4,000,000 shares of our common stock upon the occurrence of
certain events, of which options for 2,500,000 have been granted, 500,000 of
which are currently vested.
On May 17, 2002, we entered into an "at-will" employment agreement with Mr.
Schaffer. The agreement provided for Mr. Schaffer's compensation of salary,
benefits and options to purchase up to 450,000 shares of our common stock. On
July 2, 2003, we entered into a Confidential Separation Agreement and General
Release with Mr. Schaffer. The agreement provided for Mr. Schaffer to receive
salary and benefits until August 8, 2003 and for the resignation of Mr. Schaffer
as an officer, but not as a director. In exchange for a release of claims and
other promises set forth in the agreement, Mr. Schaffer retained certain
exercise rights on his vested options of 90,000 shares until the earlier of (i)
eighteen (18) months from his resignation as a member of our Board of Directors
or other subsequent consulting relationship with us, or (ii) July 19, 2008.
After August 8, 2004, Mr. Schaffer was eligible for stock options related to
attending Board Meetings, even though he is not considered an independent
director due to his recent employment with us.
On February 14, 2003, we entered into an "at-will" employment agreement
with Mr. Slansky. The agreement provided for Mr. Slansky's compensation of
salary, benefits, performance bonuses and options to purchase up to 385,000
shares of our common stock, (which was subsequently reduced to 355,000 due to a
missed vesting incentive for options on 30,000 shares). The agreement also
provided for severance under certain termination provisions and prohibits Mr.
Slansky from soliciting our employees or competing with us if he were to leave
the Company.
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On November 17, 2003, we entered into an "at-will" employment relationship
with Mr. Dario ("Dan") DaPra to become our Vice President of Engineering. Our
offer letter provided for Mr. DaPra's compensation of salary, benefits and
options to purchase up to 250,000 shares of our common stock. The offer letter
also provided for severance under certain termination provisions and prohibits
Mr. DaPra from soliciting our employees or competing with us. Mr. DaPra
resigned on March 5, 2004 and subsequently entered into a Confidential
Separation Agreement and General Release with us. The Agreement provided for
Mr. DaPra to receive one-half pay through April 30, 2004 in lieu of severance,
and to retain options on 40,000 shares of our stock with the ability to exercise
those options until October 31, 2004.
EMPLOYEE BENEFITS
At our 1999 Annual Stockholder Meeting, the shareholders adopted an
Incentive Employee Stock Option Plan under which the Board of Directors had the
ability to grant our 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 provide for preferential tax treatment, are only available to
employees, including officers and affiliates, and may not be issued to
non-employee directors. The exercise price of the Incentive Stock Options must
be 100% of the fair market value of the stock on the date the option is granted.
Pursuant to our plan, the exercise price for the non-statutory stock options
will not be less than 85% of the fair market value of the stock on the date the
option is granted. We are required to reserve an amount of common shares equal
to the number of shares, which may be purchased as a result of awards made under
the Plan at any time.
At the 2000 Annual Stockholder Meeting, the shareholders approved an
amendment to the Stock Option Plan of 1999, increasing the number of shares
eligible for issuance under the Plan to 30% of the then outstanding common stock
and allowing the Board of Directors to make annual adjustments to the Plan to
maintain a 30% ratio to outstanding common stock at each annual meeting of the
Board of Directors. The Board, at its annual meetings in 2001 and 2002, made no
adjustment, as a determination was made that the number of shares then available
under the Plan was sufficient to meet the Company's needs. All shares issuable
under the 1999 Incentive Stock Option Plan have been issued or in reserve
subject to outstanding awards under the plan. The plan is, therefore, no longer
in use except as necessary for the exercise of those outstanding options.
At our 2004 Annual Stockholder Meeting, held on August 5, 2004, the
stockholders adopted a 2004 Equity Incentive Plan. The 2004 Equity Incentive
Plan authorized and reserved for issuance under the Plan 2,000,000 shares of our
common stock. The 2004 Equity Incentive Plan is an important part of our total
compensation program because competitive benefit programs are a critical
component of our efforts to attract and retain qualified employees, directors
and consultants. Options granted under the plan may be Incentive Stock
Options or non-statutory stock options, as determined by the Board of Directors
or a committee appointed by the Board of Directors at the time of grant. Limited
rights and stock awards may also be granted under the Plan. As of December 31,
2004, 6,184,698 shares were authorized for issuance under the 1999 Stock Option
Plan and the 2004 Equity Incentive Plan, 3,878,766 of which are currently
subject to outstanding options and awards and options on 1,005,035 shares were
exercised in 2004. During 2004, we issued non-statutory options to purchase
272,000 shares to our independent directors for attendance at our 2004 Board of
Directors meetings.
The Stock Option Plan of 1999 was registered with the U.S. Securities &
Exchange Commission on Form S-8. Shares issuable under the 2004 Equity Incentive
Plan were registered on Form S-8 on March 28, 2005.
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PAGE
In addition to the 1999 Stock Option Plan and the 2004 Equity Incentive
Plan, our shareholders adopted the 1999 Employee Stock Purchase Plan, which
authorized our Board of Directors to make twelve consecutive offerings of our
common stock to our employees. The 1999 Employee Stock Purchase Plan has been
instituted and the first employees enrolled in the plan in August 2003. The
first shares of common stock were issued under the Plan in February 2004 and
every six-month anniversary thereafter. The 1999 Employee Stock Purchase Plan
expired in June 2005; however, the Board authorized a one-year extension of the
plan at their meeting in November 2004, while the Compensation Committee reviews
the value of the plan to employees and the desire for its continuance.
We also offer a variety of health, dental, vision, 401(k) and life
insurance benefits to our employees in conjunction with our co-employment
partner, Administaff.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based upon a review on the Forms 3 and 4 furnished to us with respect to
our most recent fiscal year, each of the Directors and/or Executive Officers
timely filed his initial Form 3 and Form 4 under Section 16(a) of the Securities
and Exchange Act of 1934 during 2003 with the following exceptions: Mr. Benson
filed a Form 4 a few days late after transferring his indirect ownership of 1.2
million shares to his children in February 2004. The shares were held by SD
Holdings LLC which was dissolved on November 6, 2003. Mr. Schaffer filed a Form
4 a few days late after exercising a warrant in September 2004, which he
received as part of a convertible debt offering. Mr. Slansky filed a Form 4 a
few months late after receiving a small amount of stock from under our 1999
Employee Stock Purchase Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of March 14, 2005 concerning
the beneficial ownership of the Company's common stock 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 the Company's outstanding Common Stock, and
(iv) the directors and officers as a group. Except as otherwise indicated, the
persons named in the table have sole voting and investing power with respect to
all shares of Common Stock owned by them.
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PAGE
Title of Name and Address of Amount and Percent of
Class Beneficial Owner Nature of Class(1)
Beneficial
Ownership(1)
---------- ---------------------- ---------------- -----------
.0001 par Susan C. Benson 4,875,853(2) 22.55%
value 13855 Stowe Drive
common Poway, California 92064
stock
.0001 par James W. Benson, CEO 4,865,854(3) 22.51%
value and Chairman
common 13855 Stowe Drive
stock Poway, California 92064
.0001 par Richard B. Slansky 397,544(4) 1.83%
value President and CFO
common 13855 Stowe Drive
stock Poway, California 92064
.0001 par Frank Macklin 243,073(5) 1.14%
value 13855 Stowe Drive
common Poway, California 92064
stock
.0001 par Randall K. Simpson 28,366(6) 0.13%
value 13855 Stowe Drive
common Poway, California 92064
stock
.0001 par J. Mark Grosvenor 1,330,376(7) 6.04%
value 13855 Stowe Drive
common Poway, California 92064
stock
.0001 par Wesley T. Huntress Jr. 124,015(8) 0.58%
value Director
common 13855 Stowe Drive
stock Poway, California 92064
.0001 par Curt Dean Blake 169,430(9) 0.79%
value Director
common 13855 Stowe Drive
stock Poway, California 92064
.0001 par General Howell M. 88,167(10) 0.41%
value Estes III, Director
common 13855 Stowe Drive
stock Poway, California 92064
.0001 par Robert S. Walker 77,167(11) 0.36%
value Director
common 13855 Stowe Drive
stock Poway, California 92064
.0001 par Stuart Schaffer, Director 218,206(12) 1.02%
value 13855 Stowe Drive
common Poway, California 92064
stock
.0001 par Scott McClendon 64,460(13) 0.30%
value Director
common 13855 Stowe Drive
stock Poway, California 92064
---------- ---------------------- ---------------- -----------
.0001 par Officers and Directors as 6,276,282(14) 27.84%
value a group (10 Persons)
common
stock
---------- ---------------------- ---------------- -----------
---------- ---------------------- ---------------- -----------
54
PAGE
(1) Where persons listed on this table have the right to obtain additional
shares of Common Stock through the exercise of outstanding options or warrants
or the conversion of convertible securities within 60 days from March 14, 2004,
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 21,363,980
on March 14, 2005.
(2) Represents 4,372,147 shares held directly by Ms. Susan Benson as a
result of a marital separation agreement between Mr. James W. Benson and Ms.
Susan C. Benson plus 248,706 shares held in Space Development Institute and
vested options on 255,000 shares. In addition, Ms. Benson has unvested options
on 1,000,000 shares. Mr. and Ms. Benson disclaim ownership of shares held by
their children. Mr. and Ms. Benson executed and filed a property settlement
agreement on November 18, 2004 and hold their stock in sole and separate name.
(3) Represents 4,362,147 shares held directly by Mr. James W. Benson as a
result of a marital separation agreement between Mr. James W. Benson and Ms.
Susan C. Benson plus 248,707 shares held in Space Development Institute and
vested options on 255,000 shares. In addition, Mr. Benson has unvested options
on 1,000,000 shares. Mr. and Ms. Benson disclaim ownership of shares held by
their children. Mr. and Ms. Benson executed and filed a property settlement
agreement on November 18, 2004 and hold their stock in sole and separate name.
(4) Mr. Slansky owns 83,544 shares of which 38,462 shares he purchased for
cash in a private transaction with Mr. Skarupa, the Company's former Vice
President of Operations and an additional 38,462 shares Mr. Slansky bought by
exercising his warrant rights which were also purchased from Mr. Skarupa. In
addition, Mr. Slansky has vested options on 314,000 shares. Mr. Slansky also
holds 436,000 unvested options which are not expected to vest within the next 60
days.
(5) Mr. Macklin owns 230,073 shares and vested options on 13,000 shares.
Mr. Macklin also holds 40,000 unvested options which will not vest within the
next 60 days.
(6) Mr. Simpson owns 3,366 shares of our common stock, vested options on
25,000 shares of our common stock and also holds 225,000 unvested options which
will not vest within the next 60 days.
(7) Mr. Grosvenor owns 665,188 shares of our common stock plus 665,188
vested warrants that he purchased in our private placement. On May 6, 2003, Mr.
Grosvenor was granted options on 19,615 shares, which he forfeited upon his
resignation from the Board on September 15, 2003.
(8) Mr. Huntress owns 8,868 shares of our common stock. Mr. Huntress also
owns 115,147 vested options, which he received as compensation for his
participation on our Board of Directors. In addition, Mr. Huntress has unvested
options on 61,500 shares which will not vest within the next 60 days.
(9) Mr. Blake owns 30,612 shares of our common stock plus 30,612 vested
warrants that he purchased in our private placement. Mr. Blake also owns
108,206 vested options, which he received as compensation for his participation
on our Board of Directors. In addition, Mr. Blake has unvested options on
55,500 shares which will not vest within the next 60 days.
(10) General Estes III owns 88,167 vested options, which he received as
compensation for his participation on our Board of Directors. In addition,
General Estes III has unvested options on 28,500 shares which will not vest
within the next 60 days.
55
PAGE
(11) Mr. Walker owns 77,167 vested options, which he received as
compensation for his participation on our Board of Directors. In addition, Mr.
Walker has unvested options on 22,500 shares will not vest within the next 60
days.
(12) Mr. Schaffer owns 128,206 shares of which 64,103 were converted from
warrants. In 2003, as part of the Company's convertible debt repayment, Mr.
Schaffer forgave 64,103 warrants and converted $25,000 of his debt to the
Company into 64,103 shares. Mr. Schaffer also owns 90,000 vested options, which
he received as part of his compensation package as Vice President of Product
Development and Marketing.
(10) Mr. McClendon owns 64,460 vested options, which he received as
compensation for his participation on our Board of Directors. In addition, Mr.
McClendon has unvested options on 56,000 shares which will not vest within the
next 60 days.
(11) Officers and directors as a group include our eight Board members, two
of whom are also officers of the Company, and Messrs. Simpson, and Macklin, who
are officers of the company.
Change in Control
James W. Benson, our Chief Executive Officer and Chairman of the Board of
Directors, and Susan Benson, our former Corporate Secretary, are married but
separated. They filed a property settlement agreement on November 18, 2004.
Mr. and Ms. Benson hold their ownership in SpaceDev as sole and separate
property and are therefore listed separately in the beneficial ownership table.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
James W. Benson, our Chief Executive Officer and Chairman of the Board of
Directors, and Susan Benson, our former Corporate Secretary, are married but
separated. Mr. Benson has personally guaranteed the building lease on our
facility and has placed his home in Poway as collateral.
One of our independent directors, Robert S. Walker, is a principal of
Wexler & Walker Public Policy Associates, a Washington-based, full-service
government relations firm founded in 1981. Wexler & Walker principals have
served in Congress, in the White House and federal agencies, as congressional
staff, in state and local governments and in political campaigns. Wexler &
Walker is a leader on the technology issues of the twenty-first century. We did
not incur consulting fees with Hill and Knowlton, Inc., an affiliate of Wexler &
Walker, in 2003 or 2004.
In December 2001, we entered into a consulting agreement with one of our
independent directors, Curt D. Blake, pursuant to which Mr. Blake agreed to
perform certain services for us and identify and qualify significant investors
and potential acquisition targets for us. Under the agreement, Mr. Blake was to
receive compensation, in cash and non-statutory stock options, for his services.
In addition, Mr. Blake was to receive a cash finder's fee plus a common stock
grant for all monies raised as a result of introductions made by him. However,
as a result of the independence rules imposed by the Sarbanes-Oxley Act of 2002,
Mr. Blake voluntarily terminated his agreement with us on November 25, 2002. We
made no payments to Mr. Blake in 2004 and 2003, other than reimbursement of
Board-related travel expenses.
56
PAGE
From October 14, 2002 through November 14, 2002, we sold an aggregate of
$475,000 of 2.03% convertible debentures to three of our then directors and
officers. The total funding was completed on November 14, 2002. The convertible
debentures entitled the holder to convert the principal and unpaid accrued
interest into our common stock when the note matured. The notes originally were
set to mature six (6) months from issue date and were subsequently extended to
twelve (12) months from issue date on March 19, 2003. The convertible debentures
were exercisable into a number of our common shares at a conversion price that
equaled the 20-day average asking price less 10%, which was established when the
note was issued. Concurrent with the issuance of the convertible debentures, we
issued to the subscribers, warrants to purchase up to 1,229,705 shares of our
common stock. These warrants were exercisable for three (3) years from the date
of issuance at the initial exercise price. Upon issuance, the warrants were
valued using the Black-Scholes pricing model based on the expected fair value at
issuance and the estimated fair value was recorded as debt discount. See Note
8(c) to our Consolidated Financial Statements for discussion of the terms of the
warrants. The debt discount was amortized as additional interest expense over
the term of the convertible debentures. On September 5, 2003, we repaid one-half
of the convertible notes, with the condition that the note holders would convert
the other half. Also, as a condition of the partial repayment, the note holders
were required to relinquish one-half of the previously issued warrants. Finally,
as additional consideration for the transaction, the note holders were offered
5% interest on their notes, rather than the stated 2.03% for a total of $18,161
of interest expense. All the note holders accepted the offer and the convertible
notes were retired. As of December 31, 2003, we recorded a credit of $88,408, as
debt discount recovery; therefore, for the year ending December 31, 2003, the
debt discount expense was $112,500. The Company also expensed $131,411 for
non-cash loan fee expense related to the convertible note. Fair market value of
the stock was determined by discounting the closing market price on the date of
the transaction by 20%, based on the nature of the restricted securities. Of the
614,852 remaining warrants, all were exercised in 2004 and none remained
outstanding at December 31, 2004.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
ITEM EXH. NO.
----------------------------------------------------------------------------------------------------------- --------
SpaceDev's Articles of Incorporation(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1
SpaceDev's Articles of Amendment to Articles of Incorporation dated November 4, 1997
Authorizing Series B Preferred Stock(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2
SpaceDev's Articles of Amendment to Articles of Incorporation dated December 17, 1997
Changing Name to SpaceDev, Inc. (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3
SpaceDev's Bylaws(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4
SpaceDev's Articles of Amendment to Articles of Incorporation dated July 21, 2003
Increasing the Authorized Shares of Common Stock (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5
Certificate of Designations dated as of August 25, 2004, by and between SpaceDev,
Inc. and the Laurus Master Fund, Ltd.(13). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6
Form of Common Stock Certificate(1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1
Form of Non-Qualified Stock Option(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2
Form of Incentive Stock Option(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3
Form of Re-Pricing Warrant(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4
57
PAGE
Form of Warrant(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5
1999 Stock Option Plan(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6
First Amendment to 1999 Stock Option Plan(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7
1999 Employee Stock Purchase Plan(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8
Form of Warrant from November 2, 2000 Private Placement (4). . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9
Common Stock Purchase Warrant-Phillips Aerospace (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.10
Note Purchase Agreement for Series A Subordinated Convertible Notes (6). . . . . . . . . . . . . . . . . . . . . 4.11
Form of Series A Subordinated Convertible Note (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.12
Form of Warrant for Series A Subordinated Convertible Note Offering (6). . . . . . . . . . . . . . . . . . . . . 4.13
Form of Certificate of Series C Preferred Stock (13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.14
2004 Equity Incentive Plan(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.15
Certificate of Series C Preferred Stock, Dated August 25, 2004, by and among SpaceDev and Laurus(13). . . . . . 4.16
Form of Warrant, Dated August 25, 2004, by and among SpaceDev and Laurus(13) . . . . . . . . . . . . . . . . . . 4.17
Common Stock Exchange Agreement Between SpaceDev and SIL (1) . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1
Mutual Rescission and Release of Share Acquisition Agreement (1) . . . . . . . . . . . . . . . . . . . . . . . . 10.2
Share Exchange Agreement Between SpaceDev and ISS (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3
Agreement of License and Purchase of Technology Between SpaceDev and AMROC (1) . . . . . . . . . . . . . . . . . 10.4
Firm Fixed Price Agreement Number 108252 Between SpaceDev and Regents of the University of California (1). . . . 10.5
Employment Agreement of James W. Benson (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6
Employment Agreement between ISS and Charles H. Lloyd (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.7
Deed of Counter-Indemnity dated August 28, 1999 (3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8
Financial Advisory Services Agreement, dated June 18, 2001 (5) . . . . . . . . . . . . . . . . . . . . . . . . . 10.9
Consultant/Advisory Services Agreement, dated June 18, 2001 (5). . . . . . . . . . . . . . . . . . . . . . . . . 10.10
Employment Agreement between SpaceDev, Inc. and Stuart Schaffer, dated May 17, 2002(7) . . . . . . . . . . . . . 10.11
First Amendment to Employment Agreement with Stuart Schaffer, dated May 17, 2002(7). . . . . . . . . . . . . . . 10.12
Employment Agreement between SpaceDev, Inc. and Emery Skarupa, dated May 24, 2002(7) . . . . . . . . . . . . . . 10.13
Confidential Separation Agreement and General Release of Claims, dated May 31, 2002(7) . . . . . . . . . . . . . 10.14
Code of Business Conduct and Ethics(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.15
Employment Agreement between SpaceDev and Richard B. Slansky, dated Feb. 10, 2003(7) . . . . . . . . . . . . . . 10.16
Second Amendment to Series A Subordinated Convertible Note - Benson1, dated Mar. 25, 2003(7) . . . . . . . . . . 10.17
Second Amendment to Series A Subordinated Convertible Note - Benson2, dated Mar. 25, 2003(7) . . . . . . . . . . 10.18
Second Amendment to Series A Subordinated Convertible Note - Benson3, dated Mar. 25, 2003(7) . . . . . . . . . . 10.19
Second Amendment to Series A Subordinated Convertible Note - Benson4, dated Mar. 25, 2003(7) . . . . . . . . . . 10.20
Second Amendment to Series A Subordinated Convertible Note - Skarupa, dated Mar. 25, 2003(7) . . . . . . . . . . 10.21
Second Amendment to Series A Subordinated Convertible Note - Schaffer, dated Mar. 25, 2003(7). . . . . . . . . . 10.22
58
PAGE
Confidential Separation Agreement and General Release of Claims with Mr. Schaffer, dated July 2, 2003(8) . . . . 10.23
AFRL Small Vehicle Launch Technology SBIR contract(9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.24
AFRL Small Satellite Bus Technologies SBIR contract(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.25
AFRL Small Shuttle Compatible Propulsion Module contract(9). . . . . . . . . . . . . . . . . . . . . . . . . . . 10.26
MDA Advanced Systems Deputate for the Microsatellite Experiment(9) . . . . . . . . . . . . . . . . . . . . . . . 10.27
MDA Advanced Systems Deputate for the Microsatellite Experiment (Modification) (9) . . . . . . . . . . . . . . . 10.28
Lunar Enterprises of California contract(9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.29
Hybrid Rocket Motor Systems and Components contract*(9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.30
Third Amendment to Series A Subordinated Convertible Note - Benson1, dated Sept. 5, 2003(9) . . . . . . . . . . 10.31
Third Amendment to Series A Subordinated Convertible Note - Benson2, dated Sept. 5, 2003(9) . . . . . . . . . . 10.32
Third Amendment to Series A Subordinated Convertible Note - Benson3, dated Sept. 5, 2003(9) . . . . . . . . . . 10.33
Third Amendment to Series A Subordinated Convertible Note - Benson4, dated Sept. 5, 2003(9) . . . . . . . . . . 10.34
Third Amendment to Series A Subordinated Convertible Note - Skarupa, dated Sept. 5, 2003(9) . . . . . . . . . . 10.35
Third Amendment to Series A Subordinated Convertible Note - Schaffer, dated Sept. 5, 2003(9) . . . . . . . . . . 10.36
Employment Offer between SpaceDev and Dario Emanuel DaPra, dated November 17, 2003(10) . . . . . . . . . . . . . 10.37
Employment Offer between SpaceDev and Randall K. Simpson, dated Jan. 16, 2004(10). . . . . . . . . . . . . . . . 10.38
Confidential Separation Agreement and General Release of Claims with Mr. DaPra, dated March 18, 2004(10) . . . . 10.39
Missile Defense Agency Contract with SpaceDev, dated March 31, 2004(10). . . . . . . . . . . . . . . . . . . . . 10.40
Amendment No. 1 to Note with the Laurus Master Fund, dated March 31, 2004(10). . . . . . . . . . . . . . . . . . 10.41
Waiver Letter from Laurus Master Fund, dated March 31, 2004(10). . . . . . . . . . . . . . . . . . . . . . . . . 10.42
First Task Order Under Missile Defense Agency Contract with SpaceDev, dated April 1, 2004(10). . . . . . . . . . 10.43
Separation Agreement and General Release, by and between SpaceDev and Jeffrey Janicik dated June 18, 2004 (12). . 10.44
Modification to Small Shuttle Compatible Propulsion Module contract with AFRL dated July 7, 2004(12) . . . . . . 10.45
Lunar Enterprises of California contract with SpaceDev dated July 20, 2004(12) . . . . . . . . . . . . . . . . . 10.46
List of Subsidiaries of the Company(10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.47
Security Purchase Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(13) . . . . . . . . . . . . 10.48
Registration Rights Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(13) . . . . . . . . . . . 10.49
Letter Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(13) . . . . . . . . . . . . . . . . . 10.50
Air Force Research Laboratories contract with SpaceDev dated as of August 23, 2004(14). . . . . . . . . . . . . 10.51
Air Force Research Laboratories Statement of Work(14)*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.52
Small Business Innovation Research contract between the Air Force Research Lab and SpaceDev,
Dated September 29, 2004(15). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.53
Second Task Order Under Missile Defense Agency Contract with SpaceDev, dated October 20, 2004*(15) . . . . . . . 10.54
AFRL SBIR "mini-mo" contract extension with SpaceDev dated August 20, 2004*(15). . . . . . . . . . . . . . . . . 10.55
Air Force Research Laboratories amended contract with SpaceDev dated as of September 28, 2004(15). . . . . . . . 10.56
Consent of Independent Registered Accounting Firm (2004) - Form 10-KSB, dated March 28, 2005, PKF. . . . . . . . 23.1
Consent of Independent Registered Accounting Firm (2004) - Form S-8, file 333-47338 dated March 28, 2005, PKF. . 23.2
Consent of Independent Registered Accounting Firm (2004) - Form S-8, dated March 28, 2005, PKF. . . . . . . . . 23.3
Certificate of James W. Benson Pursuant to Rule 13a-14(a) promulgated under the Securities and
Exchange act of 1934 as amended. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.1
Certificate of Richard B. Slansky Pursuant to Rule 13a-14(a) promulgated under the Securities and
and Exchange act of 1934 as amended. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.2
Certificate of James W. Benson Pursuant to Section 1350 of Chapter 63 of Title 18 U.S. Code. . . . . . . . . . . 32.1
Certificate of Richard B. Slansky Pursuant to Section 1350 of Chapter 63 of Title 18 U.S. Code . . . . . . . . . 32.2
59
PAGE
* Registrant requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with the
Commission.
(b) Reports on Form 8-K:
We have filed six reports on Form 8-K, since fiscal year ended December 31,
2003. These reports, dated August 30, 2004, September 1, 2004, October 5, 2004,
October 26, 2004, November 19, 2004 and November 23, 2004, disclosed: 1) our
Securities Purchase Agreement with the Laurus Master Fund whereby we issued
250,000 shares of our Series C Convertible Preferred Stock to Laurus; 2) a
contract that we received from the Air Force Research Laboratory to continue
working on Phase II of a small satellite bus technology; 3) a continuation
contract that we received from the Air Force Research Laboratory to proceed with
Phase II of a small launch vehicle program; 4) the award of a second Task Order
from the Missile Defense Agency to continue working on a distributed sensing
experiment; 5) the announcement that Mr. Slansky was promoted to our President
and appointed to our Board of Directors; and 6) the property settlement
agreement between our founding Chairman and CEO, Mr. Benson, and his wife, Ms.
Susan Benson.
(1) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Form 10-SB (File #0-28947).
(2) Incorporated by reference to Exhibit 10.1 previously filed as an Exhibit to
Registrant's Form 10-QSB filed on August 10, 2000.
(3) Incorporated by reference to Exhibit 10.2 previously filed as an Exhibit to
Registrant's Form 8-K filed on September 20, 2000.
(4) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Form 10-KSB filed on April 2, 2001.
(5) Incorporated by reference to Exhibits 10.1 and 10.2 previously filed as an
Exhibit to Registrant's Form 8-K filed on July 19, 2001.
(6) Incorporated by reference to Exhibits 4.11, 4.12 and 4.13 previously filed
as an Exhibit to Registrant's Form 10-QSB filed on November 14, 2002.
(7) Incorporated by reference to Exhibits 10.11, 10.12, 10.13, 10.14, 10.15,
10.16, 10.17, 10.18, 10.19, 10.20, 10.21 and 10.22 previously filed as an
Exhibit to Registrant's Form 10-KSB on March 28, 2003.
(8) Incorporated by reference to Exhibit 3.5, 4.8, 4.14 and 10.27 previously
filed as an Exhibit to Registrant's Form SB-2 on July 25, 2003.
(9) Incorporated by reference to Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6,
10.7, 10.8, 10.9, 10.10, 10.11, 10.12 and 10.13 previously filed as an
Exhibit to Registrant's Form 10-QSB on November 12, 2003.
(10) Incorporated by reference to Exhibits 10.37, 10.38, 10.39, 10.40, 10.41,
10.42, 10.43, and 21 previously filed as an Exhibit to Registrant's Form
10-KSB filed on April 6, 2004.
(11) Incorporated by reference to Registrant's Form Schedule 14A Information
Proxy Statement, filed July 7, 2004.
(12) Incorporated by reference to Exhibits 10.1, 10.2 and 10.3 previously filed
as an Exhibit to Registrant's Form 10-QSB on August 9, 2004.
(13) Incorporated by reference to Exhibits 3.1, 4.1, 4.2, 10.1, 10.2 and 10.3
previously filed as an Exhibit to Registrant's Form 8-K filed on August 30,
2004.
(14) Incorporated by reference to Exhibits 10.1 and 10.2 previously filed as an
Exhibit to Registrant's Form 8-K filed on September 1, 2004.
(15) Incorporated by reference to Exhibits 10.1, 10.2, 10.3, and 10.4 previously
filed as an Exhibit to Registrant's Form 10-QSB on November 15, 2004.
60
PAGE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following are the fees billed us by our auditors, PKF and Nation Smith
Hermes Diamond, P.C. ("Nation Smith"), respectively, for services rendered
thereby during 2004 and 2003:
2004 2003
------- -------
Audit Fees . . . . $44,000 $55,025
------------------ ------- -------
Audit Related Fees $ - $ -
------------------ ------- -------
Tax Fees . . . . . $ 7,800 $ 7,850
------------------ ------- -------
All Other Fees . . $28,522 $ 5,093
------------------ ------- -------
Total. . . . . . . $82,326 $69,971
------------------ ------- -------
------------------ ------- -------
60
PAGE
Audit Fees consist of the aggregate fees billed for professional services
rendered for the audit of our annual financial statements and the reviews of the
financial statements included in our Forms 10-QSB and for any other services
that were normally provided by PKF and Nation Smith in connection with our
statutory and regulatory filings or engagements.
Audit Related Fees consist of the aggregate fees billed for professional
services rendered for assurance and related services that were reasonably
related to the performance of the audit or review of our financial statements
and were not otherwise included in Audit Fees.
Tax Fees consist of the aggregate fees billed for professional services rendered
for tax compliance, tax advice and tax planning. Included in such Tax Fees were
fees for preparation of our tax returns and consultancy and advice on other tax
planning matters.
All Other Fees consist of the aggregate fees billed for products and services
provided by PKF and Nation Smith and not otherwise included in Audit Fees, Audit
Related Fees or Tax Fees. Included in such Other Fees were fees for services
rendered by PKF or Nation Smith in connection with our private and public
offerings conducted during such periods.
Our Audit Committee has considered whether the provision of the non-audit
services described above is compatible with maintaining PKF's and Nation Smith's
independence and determined that such services are appropriate.
Before the auditors are engaged to provide us audit or non-audit services, such
engagement is approved by the Audit Committee of our Board of Directors.
61
PAGE
SIGNATURES
In accordance with section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPACEDEV, INC.
Date: March 28, 2005 By: /s/James W. Benson
--------------------
James W. Benson, CEO
Date: March 28, 2005 By: /s/Richard B. Slansky
-----------------------
Richard B. Slansky, President and CFO
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Date: March 28, 2005 By: /s/James W. Benson
--------------------
James W. Benson, Chairman of the
Board of Directors
Date: March 28, 2005 By: /s/Richard B. Slansky
-----------------------
Richard B. Slansky, Director
Date: March 28, 2005 By: /s/Scott McClendon
-------------------
Scott McClendon, Director
Date: March 28, 2005 By: /s/Gen. Howell M. Estes, III
----------------------------
Gen. Howell M. Estes, III, Director
Date: March 28, 2005 By: /s/Stuart E. Schaffer
--------------------
Stuart E. Schaffer, Director
Date: March 28, 2005 By: /s/Robert S. Walker
---------------------
Robert S. Walker, Director
Date: March 28, 2005 By: /s/Curt D. Blake
------------------
Curt D. Blake, Director
Date: March 28, 2005 By: /s/Wesley T. Huntress
-----------------------
Wesley T. Huntress, Director
62
PAGE
SPACEDEV, INC.
AND SUBSIDIARY
CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3 to F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity (Deficit) F-6 to F-8
Consolidated Statements of Cash Flows F-9 to F-10
Notes to Consolidated Financial Statements F-11 to F-31
F-1
PAGE
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 SUBSIDIARY as of December 31, 2004 and 2003, respectively, and the related
consolidated statements of operations, stockholders' equity (deficit) 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. 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 SUBSIDIARY as of December 31, 2004 and 2003, 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.
/s/ PKF
San Diego, California PKF
February 10, 2005 Certified Public Accountants
A Professional Corporation
F-2
PAGE
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,. . . . . . . . . . . . . 2004 2003
-------------------------------------- ---------- ----------
ASSETS
CURRENT ASSETS
Cash (Note 10(a)). . . . . . . . . $5,068,601 $ 592,006
Accounts receivable (Note 10(b)) . 620,097 187,062
Inventory. . . . . . . . . . . . . 0 9,961
Work in Progress . . . . . . . . . 0 110,490
-------------------------------------- ---------- ----------
Total current assets. . . . . . . . . 5,688,698 899,519
FIXED ASSETs - Net (Notes 1(g) and 2) 279,381 137,532
CAPITALIZED SOFTWARE COSTS . . . . . 0 -
OTHER ASSETS. . . . . . . . . . . . . 122,355 47,768
-------------------------------------- ---------- ----------
TOTAL ASSETS. . . . . . . . . . . . . $6,090,434 $1,084,819
-------------------------------------- ---------- ----------
-------------------------------------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
PAGE
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 2003
---------------------------------------------------------------------- ------------- -------------
LIABILITIES AND STOCKHOLDERSEQUITY
CURRENT LIABILITIES
Current portion of notes payable (Note 4(a)) . . . . . . . . . . . $ 36,670 $ 41,464
Current portion of capitalized lease obligations (Note 9(a)) . . . 3,784 10,332
Notes payable - related party (Note 4(b)). . . . . . . . . . . . . 0 80,000
Accounts payable and accrued expenses. . . . . . . . . . . . . . . 338,809 311,606
Accrued payroll, vacation and related taxes. . . . . . . . . . . . 195,045 84,001
Revolving line of credit (Note 4(c)) . . . . . . . . . . . . . . . 0 748,893
Employee Stock Purchase Plan (Note (7(b)). . . . . . . . . . . . . 9,332 5,498
Other accrued liabilities (Note 9(b)). . . . . . . . . . . . . . . 207,262 248,530
---------------------------------------------------------------------- ------------- -------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 790,902 1,530,324
NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 4(A)). . . . . . . . . . 9,457 46,127
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES (NOTE 9(A)). . 1,469 5,253
NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES (NOTE 4(B)). . 0 505,522
DEFERRED GAIN - ASSETS HELD FOR SALE (NOTE 2) . . . . . . . . . . . . 947,949 1,065,221
DEFERRED REVENUE (NOTE 1(F)). . . . . . . . . . . . . . . . . . . . . 5,000 5,000
---------------------------------------------------------------------- ------------- -------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 1,754,777 3,157,447
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERSEQUITY (DEFICIT)
Convertible preferred stock, $.001 par value, 10,000,000 shares
authorized, and 250,000 shares issued and outstanding (Note 8(a)). 250 -
Common stock, $.0001 par value; 50,000,000 shares authorized, and
21,153,660 and 16,413,260 shares issued and outstanding,
respectively (Note 8(b)) . . . . . . . . . . . . . . . . . . . . . 2,114 1,641
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 18,739,090 9,243,507
Additional paid-in capital - stock options (Note 8(d)) . . . . . . 750,000 750,000
Deferred compensation (Note 8(d)). . . . . . . . . . . . . . . . . (250,000) (250,000)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . (14,905,797) (11,817,776)
---------------------------------------------------------------------- ------------- -------------
TOTAL STOCKHOLDERSEQUITY (DEFICIT). . . . . . . . . . . . . . . . . . 4,335,657 (2,072,628)
---------------------------------------------------------------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . . . . . . . $ 6,090,434 $ 1,084,819
---------------------------------------------------------------------- ------------- -------------
---------------------------------------------------------------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
PAGE
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ending December 31, . . . . . . . . . . . . . 2004 % 2003 %
---------------------------------------------------- ------------ ------------ ------------ -------
NET SALES . . . . . . . . . . . . . . . . . . . . . $ 4,890,743 100.00% $ 2,956,322 100.00%
---------------------------------------------------- ------------ ------------ ------------ -------
COST OF SALES . . . . . . . . . . . . . . . . . . . 3,820,683 78.12% 2,414,997 81.69%
---------------------------------------------------- ------------ ------------ ------------ -------
GROSS MARGIN. . . . . . . . . . . . . . . . . . . . 1,070,060 21.88% 541,325 18.31%
OPERATING EXPENSES
Marketing and sales expense. . . . . . . . . . . 418,831 8.56% 394,974 13.36%
Research and development . . . . . . . . . . . . 39,473 0.81% 281,280 9.51%
Stock and stock option based compensation. . . . 0 0.00% 9,170 0.31%
General and administrative . . . . . . . . . . . 467,471 9.56% 745,993 25.23%
---------------------------------------------------- ------------ ------------ ------------ -------
TOTAL OPERATING EXPENSES. . . . . . . . . . . . . . 925,775 18.93% 1,431,417 48.42%
---------------------------------------------------- ------------ ------------ ------------ -------
INCOME/(LOSS) FROM OPERATIONS . . . . . . . . . . . 144,285 2.95% (890,092) -30.11%
---------------------------------------------------- ------------ ------------ ------------ -------
NON-OPERATING EXPENSE/(INCOME)
Interest income. . . . . . . . . . . . . . . . . (19,497) -0.40% - 0.00%
Interest expense . . . . . . . . . . . . . . . . 52,077 1.06% 91,492 3.09%
Non-cash interest expense debt discount (Note 5) 0 0.00% 112,500 3.81%
Gain on Building Sale (Note 4(a)). . . . . . . . (117,272) -2.40% (107,499) -3.64%
Loan Fee - Equity Compensation (Note 4(c) & 5) . 3,254,430 66.54% 257,882 8.72%
---------------------------------------------------- ------------ ------------ ------------ -------
TOTAL NON-OPERATING EXPENSE/(INCOME). . . . . . . . 3,169,739 64.81% 354,375 11.99%
---------------------------------------------------- ------------ ------------ ------------ -------
LOSS BEFORE INCOME TAXES. . . . . . . . . . . . . . (3,025,454) -61.86% (1,244,467) -42.10%
Income tax provision (Notes 1(j) and 6) . . . . . . 1,600 0.03% 1,600 0.05%
---------------------------------------------------- ------------ ------------ ------------ -------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . $(3,027,054) -61.89% $(1,246,067) -42.15%
---------------------------------------------------- ------------ ------------ ------------ -------
---------------------------------------------------- ------------ ------------ ------------ -------
NET LOSS PER SHARE:
Net loss . . . . . . . . . . . . . . . . . . . $ (0.16) $ (0.08)
-------------------------------------------------------------------------------------------------------
Weighted-Average Shares Outstanding. . . . . . 18,610,141 16,092,292
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
PAGE
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock Common Stock
--------------- -------------
Shares Amount Shares Amount
---------------------------------------------------------------------------- --------------- ------------- ---------- -------
BALANCE AT JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . - $ - 14,477,640 $ 1,447
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . . . - - 861,267 86
Common stock issued from notes on revolving credit facility (Note 4( c)) . . - - 415,000 42
Common stock issued for services (Note 8 (b)). . . . . . . . . . . . . . . . - - 7,500 1
Common stock issued from convertible debt program (Note 5 and 8(c)). . . . . - - 614,853 61
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . - - 37,000 4
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . . . - - - -
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
---------------------------------------------------------------------------- --------------- ------------- ---------- -------
BALANCE AT DECEMBER 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . - - 16,413,260 1,641
Preferred Stock stock issued for cash (Note 8(a)). . . . . . . . . . . . . . 250,000 250 - -
Common stock issued for cash from employee stock purchase plan (Note 8(b)) . - - 14,010 1
Common stock issued from notes on revolving credit facility (Note 4( c)) . . - - 2,991,417 299
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . - - 1,005,035 100
Common stock issued from private placement memorandum warrants (Note 8(b)) . - - 115,085 12
Common Stock issued from convertible debt program warrants (Note 5 and 8(c)) - - 614,853 61
Declared Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
---------------------------------------------------------------------------- --------------- ------------- ---------- -------
BALANCE AT DECEMBER 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . 250,000 $ 250 21,153,660 $ 2,114
---------------------------------------------------------------------------- --------------- ------------- ---------- -------
---------------------------------------------------------------------------- --------------- ------------- ---------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
PAGE
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
Additional
Additional Paid-In
Paid-in Capital - Deferred
Capital Stock Options Compensation
---------------------------------------------------------------------------- ------------ -------------- -------------
BALANCE AT JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,302,803 $ 750,000 $ (250,000)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . . . 425,856 - -
Common stock issued from notes on revolving credit facility (Note 4( c)) . . 354,679 - -
Common stock issued for services (Note 8 (b)). . . . . . . . . . . . . . . . 9,169 - -
Common stock issued from convertible debt program (Note 5 and 8(c)). . . . . 368,850 - -
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . 19,650 - -
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . . . (237,500)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
---------------------------------------------------------------------------- ------------ -------------- -------------
9,243,507 750,000 (250,000)
BALANCE AT DECEMBER 31, 2003
Preferred Stock stock issued for cash (Note 8(a)). . . . . . . . . . . . . . 2,366,250
Common stock issued for cash from employee stock purchase plan (Note 8(b)) . 12,626 - -
Common stock issued from notes on revolving credit facility (Note 4( c)) . . 4,752,079 - -
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . 1,264,649 - -
Common stock issued from private placement memorandum warrants (Note 8(b)) . 88,738 - -
Common Stock issued from convertible debt program warrants (Note 5 and 8(c)) 1,011,241 - -
Declared Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
- - -
Net loss - - -
---------------------------------------------------------------------------- ------------ -------------- -------------
BALANCE AT DECEMBER 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . $18,739,090 $ 750,000 $ (250,000)
---------------------------------------------------------------------------- ------------ -------------- -------------
---------------------------------------------------------------------------- ------------ -------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
PAGE
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT)
Accumulated
Deficit Total
---------------------------------------------------------------------------- ------------- ------------
BALANCE AT JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . $(10,571,710) $(1,767,459)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . . . - 425,942
Common stock issued from notes on revolving credit facility (Note 4( c)) . . - 354,721
Common stock issued for services (Note 8 (b)). . . . . . . . . . . . . . . . - 9,170
Common stock issued from convertible debt program (Note 5 and 8(c)). . . . . - 368,911
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . - 19,654
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . . . - (237,500)
-
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,246,067) (1,246,067)
---------------------------------------------------------------------------- ------------- ------------
-
BALANCE AT DECEMBER 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . (11,817,776) (2,072,628)
Preferred Stock stock issued for cash (Note 8(a)). . . . . . . . . . . . . . - 2,366,500
Common stock issued for cash from employee stock purchase plan (Note 8(b)) . - 12,627
Common stock issued from notes on revolving credit facility (Note 4( c)) . . - 4,752,378
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . - 1,264,749
Common stock issued from private placement memorandum warrants (Note 8(b)) . - 88,750
Common Stock issued from convertible debt program warrants (Note 5 and 8(c)) - 1,011,302
Declared Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60,967) (60,967)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,027,054) (3,027,054)
---------------------------------------------------------------------------- ------------- ------------
BALANCE AT DECEMBER 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . $(14,905,797) $ 4,335,657
---------------------------------------------------------------------------- ------------- ------------
---------------------------------------------------------------------------- ------------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
PAGE
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, . . . . . . . . . . . . . . . . . 2004 2003
----------------------------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . $(3,027,054) $(1,246,067)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . 83,531 166,971
Gain on disposal of building . . . . . . . . . . . . (117,272) (107,499)
Non-cash interest expense - convertible debt program 773,802 131,411
Non-cash loan fees . . . . . . . . . . . . . . . . . 2,480,628 126,471
Common stock issued for compensation and services. . - 9,170
Change in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . (433,035) (104,737)
Work in Progress . . . . . . . . . . . . . . . . . 110,490 (110,490)
Prepaid and other current assets . . . . . . . . . (74,587) (33,888)
Inventory. . . . . . . . . . . . . . . . . . . . . 9,961 (8,232)
Convertible debt notes payable . . . . . . . . . . - 130,661
Costs in excess of billings and estimated earnings - 281,175
Interest on revolving line of credit . . . . . . . 18,349 13,601
Accounts payable and accrued expenses. . . . . . . 27,203 (286,874)
Accrued payroll, vacation and related taxes. . . . 111,044 (90,187)
Customer deposits and deferred revenue . . . . . . - (69,402)
Provision for anticipated loss . . . . . . . . . . - (11,044)
Interest - related party . . . . . . . . . . . . . 29,256 47,023
Other accrued liabilities. . . . . . . . . . . . . (102,235) 126,919
----------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. . . . (109,919) (1,035,018)
----------------------------------------------------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in investing activities:
Proceeds from the sale of building. . . . . . . . . . - 3,150,124
Purchases of fixed assets . . . . . . . . . . . . . . (225,380) (39,292)
----------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . . . . (225,380) 3,110,832
----------------------------------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable . . . . . . . . . (41,464) (2,432,595)
Principal payments on capitalized lease obligations . (10,332) (35,764)
Payments on notes payable - related party . . . . . . (427,280) (199,997)
Proceeds from revolving credit facility . . . . . . . 1,504,508 963,542
Employee Stock Purchase Plan. . . . . . . . . . . . . 16,460 5,498
Proceeds from issuance of preferred stock . . . . . . 2,366,500 -
Proceeds from issuance of common stock. . . . . . . . 1,403,502 445,596
----------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. . . . 4,811,894 (1,511,456)
----------------------------------------------------------- ------------ ------------
Net increase in cash . . . . . . . . . . . . . . . . . . . 4,476,595 564,358
----------------------------------------------------------- ------------ ------------
CASH AT BEGINNING OF YEAR. . . . . . . . . . . . . . . . . 592,006 27,648
----------------------------------------------------------- ------------ ------------
CASH AT END OF YEAR. . . . . . . . . . . . . . . . . . . . $ 5,068,601 $ 592,006
----------------------------------------------------------- ------------ ------------
----------------------------------------------------------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
PAGE
SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, . . . . . . . . . . . . . 2004 2003
--------------------------------------------------- -------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . $313,978 $41,726
Income Taxes . . . . . . . . . . . . . . . . . $ 1,600 $ 1,600
--------------------------------------------------- -------- -------
NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ending December 31, 2004 and 2003, the Company issued 2,991,417
and 415,000 shares of its common stock, respectively, to the Laurus Master
Fund from conversions under its revolving credit facility, thereby
realizing a corresponding reduction in current liabilities of approximately
$2,271,750 and $228,500, respectively. The Company recorded additional
non-cash loan fees of $2,480,628 and $126,471, respectively, and charged
these fees to expense.
During the year ending December 31, 2004, the Company issued 614,853 shares of
its common stock to the participates in its' prior convertible debt program
from conversions of warrants, thereby receiving cash in the amount of
$187,500. The Company recorded additional non-cash loan fees of $773,802
and charged these fees to expense.
During 2004 the Company converted $12,627 of employee stock purchase plan
contributions into 14,010 shares of common stock.
During 2004 the Company declared dividends payable of $60,967 to the holder's of
its preferred stock.
During 2003, the Company issued 7,500 shares of restricted stock for employee
awards and services and for summer & student interns, and recorded expenses
of $9,170.
During 2003, the Company issued 861,267 shares of stock under the Company's
Private Placement Memorandum for cash of $425,942.
During 2003, the Company eliminated its convertible debt by repaying half of the
notes in cash ($237,500) and having the note holders convert the other half
into 614,853 shares of the Company's common stock. The Company recorded
additional loan fees of $131,411 and charged these fees to equity.
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
PAGE
SPACEDEV, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows.
(a) Nature of operations
SPACEDEV, INC. (the "Company") is engaged in the conception, design,
development, manufacture, integration and operations of SPACE TECHNOLOGY
SYSTEMS, products and services. The Company is currently focused on the
development of low-cost microsatellites, nanosatellites and related subsystems,
and hybrid rocket propulsion as well as associated engineering and technical
services, primarily to government agencies, and specifically to the United
States Department of Defense. The Company's products and solutions are sold,
mainly on a project-basis, directly to these customers, and include
sophisticated micro- and nanosatellites, hybrid rocket-based orbital Maneuvering
and orbital Transfer Vehicles as well as safe sub-orbital and orbital hybrid
rocket-based propulsion systems. The Company believes there will be an evolving
and developing commercial market for its space technology systems (e.g., its
microsatellite and nanosatellite products and services) in the long-term. In the
short-term, the early adopters of this technology appear to be in the United
States Department of Defense and the Company's "products" are considered to be
the outcome of specific projects. The Company is also designing and developing
commercial hybrid rocket motors and small high performance space vehicles and
subsystems for commercial and military customers.
The Company was incorporated under the laws of the State of Colorado on December
23, 1996 as Pegasus Development Group, Inc. ("PDGI"). SpaceDev, LLC of Colorado
was originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed on August 22, 1997. On October 22, 1997, PDGI issued 8,245,000 of its
$0.0001 par value common stock for 100 percent (1,000,000 shares) of SpaceDev's
common stock owned by SpaceDev, LLC. Upon the acquisition of the SpaceDev stock,
SpaceDev was merged into PDGI and, on December 17, 1997, PDGI changed its name
to SPACEDEV, INC. After the merger, SpaceDev, LLC, changed its name to SD
Holdings, LLC on December 17, 1997. For accounting purposes, the transaction was
accounted for as a reverse merger with the Company as the acquirer. Since
SpaceDev had minimal assets prior to the merger, the transaction was accounted
for as the sale of the Company's common stock for net assets of $1,232. The
Company became publicly traded in October 1997 and is currently trading on the
Over-the-Counter Bulletin Board ("OTCBB") under the symbol "SPDV."
In February 1998, the Company's operations were expanded with the acquisition of
Integrated Space Systems, Inc. ("ISS"), a California corporation founded for the
purpose of providing engineering and technical services related to space-based
systems. The ISS employee base, acquired upon acquisition, largely consisted of
former Atlas and General Dynamics personnel and enlarged the Company's then
current employee base to 20 employees. ISS was purchased for approximately $3.6
million, paid in Rule 144 restricted common shares of SpaceDev. Goodwill of
approximately $3.5 million was capitalized and was to be amortized over a period
of sixty (60) months, based on the purchase price exceeding the net asset value
of approximately $164,000. As a result of a change in corporate focus, on
November 15, 2001, the Company determined that the unamortized balance of
goodwill from ISS, which was approximately $923,000, had become impaired and it
was written-off. While the ISS segment did provide small hybrid propulsion
space systems and engineering services on separate contracts (mainly with
government agencies), the engineering service contracts had expired and,
therefore, would not be producing revenue or cash flow to support future
operations. The Company determined that all future business, contracts and
proposals would be sought after only in the SpaceDev name, making it a more
efficient way for it to manage and track multiple contracts and work on many
different business ventures at the same time within the same operating segment.
The Company filed for dissolution of ISS in December 2003, since all activities
had been integrated into SpaceDev, Inc.
F-11
PAGE
The Company had working capital of $4,897,796 and incurred an operational profit
of $144,285 as well as a net loss of $3,027,054 for the year ended December 31,
2004. For the year ended December 31, 2003, the Company had a working capital
deficit of $630,805 and a loss from operations of $890,092 as well as a net loss
of $1,246,067. On March 31, 2004, the Company was awarded a $43,362,271 contract
from the Missile Defense Agency. Management intends to continue obtaining new
commercial and government contracts and discontinue the utilization of its
revolving credit facility. The Company may raise additional equity capital in a
public or private offering in certain circumstances. There can be no assurance
that existing contracts will be completed successfully or that new contracts or
additional debt or equity financing that may be needed to fund operations will
be available or, if available, obtained in sufficient amounts necessary to meet
the Company's needs. Management does believe that current contracts will be
sufficient to fund the Company through 2005 and beyond.
(b) Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned inactive subsidiary, SpaceDev Oklahoma, Inc., and former
wholly-owned inactive subsidiary Integrated Space Systems, Inc., a California
corporation. Integrated Space Systems was dissolved in December 2003 after all
activities had been integrated into SpaceDev, Inc.
(c) Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions, including estimates of anticipated contract costs and
revenues utilized in the earnings recognition process, that affect the reported
amounts in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
(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. 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, 2004 and 2003,
the allowance for uncollectible accounts was $32,637 and $17,500 respectively.
F-12
PAGE
(e) Software Development Costs
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalized the direct costs and allocated overhead
associated with a software development product. Initial costs were capitalized
as development costs prior to the design of a detailed program or working model.
Costs incurred subsequent to the product release and development costs performed
under contract were charged to operations. Beginning in the second quarter
2002, and completing in 2003, capitalized software costs were amortized over
their estimated useful life of eighteen months using the straight-line method.
Periodically, and at least annually, management performs a review for impairment
in accordance with SFAS No. 144. As of December 31, 2003, the Company had fully
amortized the capitalized software costs.
(f) Revenue recognition
The Company's revenues in 2004 and 2003 were derived primarily from United
States government cost plus fixed fee (CPFF) contracts compared to a
predominance of fixed price contracts prior to 2003. Revenues from the CPFF
contracts during 2004 and 2003 were recognized as expenses were incurred.
Estimated contract profits were taken into earnings in proportion to revenues
recorded. Revenues under certain long-term fixed price contracts, which provide
for the delivery of minimal quantities or require significant amounts of
development effort in relation to total contract value, would be recorded upon
achievement of performance milestones or using the cost-to-cost method of
accounting where revenues and profits would be recorded based on the ratio of
costs incurred to estimated total costs at completion. Losses on contracts would
be recognized when estimated costs were reasonably determined. Actual results of
contracts may differ from management's estimates and such differences could be
material to the consolidated financial statements. Professional fees are billed
to customers on a time and materials basis, a fixed price basis or a
per-transaction basis depending on the terms and conditions of the specific
contract. Time and material revenues are recognized as services are performed
and costs are incurred.
Deferred revenue represents amounts collected from customers for projects,
products or services to be provided at a future date.
(g) Depreciation and amortization
Fixed assets are depreciated over their estimated useful lives of three-to-five
years using the straight-line method of accounting.
In December 2002, the Company entered an agreement to sell its interest in its
only facility, which closed in January 2003. The escrow transaction included
the sale of the land and building at 13855 Stowe Drive, Poway, CA 92064. In
conjunction with the sale of its only facility in December 2002, the Company
entered into a non-cancelable operating lease with the buyer to lease-back its
facilities for ten years. The base rent is increased by 3.5% per year (see Note
2).
F-13
PAGE
(h) Research and development
The Company is engaged in design and development activities with its commercial
and government customers. The Company has SBIR (Small Business Innovation
Research) 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 $39,473 in non-reimbursable research and development costs
during 2004, as compared to $281,280 in non-reimbursable research and
development costs during 2003.
(i) Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense was $1,113 and $1,460 in 2004 and 2003,
respectively. Although the direct cost of advertising is low, the Company
incurs costs related to general public relations and website development as part
of its general and administrative expenses.
(j) Income taxes
Deferred income taxes are recognized for the tax consequences in future years of
the differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the years in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the combination of the tax payable for the year and the
change during the year in deferred tax assets and liabilities.
(k) Stock-based compensation
In October 1995, the FASB (Financial Accounting Standards Board) issued SFAS
(Statements of Financial Accounting Standards) No. 123, "Accounting for
Stock-Based Compensation." The Company adopted SFAS No. 123 in 1997. The Company
has elected to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB
(Accounting Principles Board) Opinion No. 25, "Accounting for Stock Issued to
Employees," and has provided pro forma disclosures as if the fair value based
method prescribed in SFAS No. 123 had been utilized. See Note 8(d). During
December 2002, FASB issued SFAS No. 148 "Accounting for Stock Based Compensation
- Transition and Disclosure," which amends SFAS No. 123 to require companies to
elect to recognize fair value stock based compensation costs in their financial
statements or to disclose the pro forma impact of those costs in the footnotes.
If the Company had accounted for these options in accordance with SFAS No. 123,
the total value of options granted during 2004 and 2003 would be amortized on a
pro forma basis over the vesting period of the options. Thus, the Company's
consolidated net loss would have been as follows:
F-14
PAGE
Years Ending December 31
--------------------------------------------------------------------------- ------------ ------------
Net Loss: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 2003
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,027,054) $(1,246,067)
ADD: Stock based employee compensation expense
included in reported net income - -
DEDUCT: Stock based employee compensation expense determined under
the fair value based method for all awards . . . . . . . . . . . . $ (390,773) $ (234,525)
--------------------------------------------------------------------------- ------------ ------------
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,417,827) $(1,480,592)
--------------------------------------------------------------------------- ------------ ------------
--------------------------------------------------------------------------- ------------ ------------
Loss per Share:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.16) $ (0.08)
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.18) $ (0.09)
--------------------------------------------------------------------------- ------------ ------------
(l) Common stock, stock options and warrants to non-employees
The Company has valued its stock, stock options and warrants issued to
non-employees at fair value in accordance with the accounting prescribed in SFAS
No. 123, which states that all transactions in which goods or services are
received for the issuance of equity instruments shall be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
(m) Net loss per common share
Net loss per common share has been computed on the basis of the weighted average
number of shares outstanding, according to the rules of SFAS No. 128, "Earnings
per Share." Diluted net loss per share has not been presented, as the
computation would result in anti-dilution.
(n) Financial instruments
The Company's financial instruments consist primarily of cash, T-bills, accounts
receivable, capital leases and notes payable. These financial instruments are
stated at their respective carrying values, which approximate their fair values.
(o) Segment reporting
The Company merged its Space Missions Division business segment and ISS business
segment in 2002 and closed ISS in 2003. The Company has one other inactive
subsidiary, SpaceDev Oklahoma, Inc. The Company follows the requirement of SFAS
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131").
F-15
PAGE
(p) New accounting standards
In December 2004, FASB issued SFAS No. 123 (revised 2004) "Share Based Payment"
(SFAS No. 123R), a revision to Statement No. 123, Accounting for Stock-Based
Compensation which supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. The revised SFAS 123 eliminates the alternative to use Opinion 25's
intrinsic value method of accounting and, instead, requires entities to
recognize the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards.
Furthermore, public entities are required to measure liabilities incurred to
employees in share-based payment transactions at fair value as well as estimate
the number of instruments for which the requisite service is expected to be
rendered. Any incremental compensation cost for a modification of the terms or
conditions of an award is measured by comparing the fair values before and after
the modification. The Company has yet to determine the effect SFAS No. 123R may
have on its financial statements, if any.
Effective as of December 31, 2004, the Company adopted the revised
interpretation of Financial Accounting Standards Board (FASB) Interpretation No.
46 (FIN 46), "Consolidation of Variable Interest Entities," (FIN 46-R). FIN 46-R
requires that certain variable interest entities be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The Company does not have any
investments in entities it believes are variable interest entities for which the
Company is the primary beneficiary.
(q) Inventory
Inventories are valued at the lower of cost or market using the average cost
method, which approximates the first-in, first-out method of inventory
valuation.
2. FIXED ASSETS
In December 2002, the Company entered an agreement to sell its interest in its
only facility. As of December 31, 2002 the Company listed a receivable held for
sale of $3,150,124 which was realized when the transaction closed in January
2003. The escrow transaction included the sale of the land and building at
13855 Stowe Drive, Poway, CA 92064.
In conjunction with the sale, the Company entered into a lease agreement with
the buyer to lease-back its facilities (see Note 9(c)). The gain on the sale of
the facility was deferred and will be amortized over the remaining term of the
lease. Deferred gain of $1,172,720 will be amortized on a straight-line basis
over ten (10) years beginning February 2003 and ending in February 2013. This
amortization will be included in the Company's non-operating income and expense.
F-16
PAGE
Fixed assets consisted of the following:
December 31, . . . . . . . . . . . . . . 2004 2003
---------------------------------------- ---------- ----------
Capital leases . . . . . . . . . . . . . $ 153,097 $ 153,097
Computer equipment . . . . . . . . . . . 383,512 163,721
Building improvements. . . . . . . . . . 14,124 9,488
Furniture and fixtures . . . . . . . . . 6,224 5,271
---------------------------------------- ---------- ----------
556,957 331,577
Less accumulated depreciation
and amortization. . . . . . . . . . . (277,576) (194,045)
---------------------------------------- ---------- ----------
$ 279,381 $ 137,532
---------------------------------------- ---------- ----------
---------------------------------------- ---------- ----------
Depreciation and amortization expense for fixed assets was approximately $83,500
and $53,000 for the years ending December 31, 2004 and 2003, respectively.
Depreciation and amortization expense was higher during 2004 due to the purchase
of new fixed assets, mainly new computer hardware and software, during 2004. Of
the above depreciation, approximately $33,000 and $28,000, for the year ending
December 31, 2004 and 2003, respectively, was for depreciation on equipment
under capital leases.
3. ACQUISITIONS
All acquisitions have been accounted for using the purchase method of accounting
and intangible assets were amortized using the straight-line method. Initial
purchase price included stock issued at the date of acquisition, direct
acquisition costs and any guaranteed future consideration.
(a) AMROC
On August 14, 1998, the Company entered an Agreement for License and Purchase of
Technology from American Rocket Company (AMROC) with an unrelated individual who
had obtained ownership of such technology from AMROC. The intellectual property
acquired was hybrid rocket technology that has been modified and may be used in
the future operations of the Company. Upon execution of the Agreement, the
Company issued the seller a warrant to purchase 25,000 shares of restricted
common stock at a strike price equal to 50% of the market price of the common
stock on the issuance date. This warrant expired in 2003 having been
unexercised.
For each of the three years following the Agreement date, the licensor received
warrants to purchase 25,000 shares of restricted common stock. In the fourth
through tenth year following the Agreement date, the licensor may receive a
warrant to purchase a number of shares, if revenue is generated from the
acquired technology. All revenue based warrants are earned at a rate of one
share per $125 of revenue generated from the technology acquired. Under the
terms of the Agreement, the minimum number of shares to be issued is 100,000 and
the maximum consideration shall not exceed warrants to purchase 3,000,000 shares
of common stock or $6,000,000 in recognized value. Recognized value is the sum
of (a) the cumulative difference between the market price of the common stock
and the strike price and (b) the cumulative difference between the market price
on the date of exercise and the strike price for each warrant previously
exercised. To date, no revenue has been generated from the acquired technology.
F-17
PAGE
The Company valued the warrants using the fair value method as prescribed by
SFAS No. 123. Under this method, the Company used the risk-free interest rate
at the date of grant, the expected volatility of the stock, the expected
dividend yield on the stock and the expected life of the warrants to determine
the fair value of the warrants. The risk-free rate of interest used to value
the initial issuance was 5.4 percent, a zero percent dividend yield was assumed
and the expected life of the warrants was five years from the date of issuance.
This calculation resulted in a fair value of $24,500 and was used as the value
of the intangible assets acquired. All warrants are immediately exercisable
after issuance and expire on the fifth anniversary of their issuance.
Other intangible assets consisted of the following:
December 31, 2004 2003
--------------------------------------------------- ----- ----------
Other intangibles . . . . . . . . . . . . . . . . . $ 0 $ 116,292
Less accumulated amortization . . . . . . . . . . . 0 (116,292)
--------------------------------------------------- ----- ----------
$ 0 $ 0
--------------------------------------------------- ----- ----------
--------------------------------------------------- ----- ----------
The Company's intangible assets were fully amortized in 2003. Amortization
expense was approximately $11,000 for 2003.
4. NOTES PAYABLE
(a) Building and settlement notes
In December 2002, the Company entered into an agreement to sell its ownership
interest in its only facility. The transaction closed in January 2003. The
escrow transaction included the sale of the land and building at 13855 Stowe
Drive, Poway, CA 92064. In conjunction with the sale, the Company entered into a
lease agreement with the buyer to leaseback its facilities. Net fixed assets
were reduced by approximately $1.9 million and notes payable were reduced by
approximately $2.4 million, while a deferred gain was recorded. The Company's
Chief Executive Officer provided a guarantee for the leaseback. 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, 2004 and 2003, the deferred gain was
$947,949 and $1,065,221, respectively. This amortization will be included in
the Company's non-operating income and expense and totaled $117,272 in 2004 and
$107,499 in 2003.
Deferred Gain consisted of the following:
December 31, 2004 2003
----------------- ----------- -----------
Deferred Gain $1,172,720 $1,172,720
Less Amortization (224,771) (107,499)
----------------- ----------- -----------
$ 947,949 $1,065,221
----------------- ----------- -----------
----------------- ----------- -----------
F-18
PAGE
In 2001, the Company entered into three settlement loan agreements with various
vendors. The total of $171,402 for all three loans called for payment between
24 and 50 months with interest that ranged from 0% to 8%. At December 31, 2004
and 2003, the outstanding balances on these notes were $46,127 and $87,591, with
interest expense of $3,258 and $4,956, respectively.
Future minimum principal payments on notes payable are as follows:
Year Ending December 31,
------------------------ -------
2005 . . . . . . . . . . $36,670
2006 . . . . . . . . . . 9,457
2007 . . . . . . . . . . 0
------------------------ -------
Total Settlement Notes $46,127
------------------------ -------
------------------------ -------
(b) Related parties
The Company had a note payable to its CEO. At December 31, 2004 and 2003, the
balances were $0 and $585,522, respectively, with accrued interest of 10%. The
note was amended on March 20, 2000 to call for annual payments of not less than
$80,000 per year with interest at 10%. As part of the Company's preferred stock
offering (see Note 8(a)), the note was paid in full during the third quarter of
2004.
Interest expense on this note was $29,256 and $47,023 for 2004 and 2003,
respectively.
(c) Revolving Credit Facility.
On June 3, 2003, the Company entered into a Security Agreement, Secured
Convertible Note, Registration Rights Agreement and Common Stock Purchase
Warrant, with the Laurus Master Fund, Ltd. ("Laurus"), which were filed on Form
8-K dated June 18, 2003. Pursuant to the agreements, the Company received a $1
million revolving credit facility in the form of a three-year Convertible Note
secured by its assets subject to the amount of eligible accounts receivables.
The net proceeds from the Convertible Note were used for general working capital
purposes. Advances on the Convertible Note are repaid at the Company's option,
in cash or through the issuance of the Company's shares of common stock provided
the market price is 118% of the fixed conversion price or greater. The
Convertible Note carries an interest rate of Wall Street Journal Prime plus
0.75% on any outstanding balance. In addition, the Company is required to pay a
collateral management payment of 0.55% of the average aggregate outstanding
balance during the month plus an unused line payment of 0.20% per annum.
Approximately $19,500 in interest and approximately $5,000 in fees were expensed
under the revolving credit facility in 2004. There was no outstanding balance
on the revolving credit facility at December 31, 2004.
The Company filed a Form SB-2 registration statement on July 25, 2003 in
connection with this transaction. The shares were registered with the Securities
and Exchange Commission ("SEC") for public resale on August 6, 2003. Once the
market price exceeded 118% of the fixed conversion price, which occurred on or
about July 21, 2003, the Company obtained the ability to pay amounts outstanding
under the revolving credit facility in cash or shares of its common stock at the
fixed conversion price.
F-19
PAGE
The Convertible Note includes a right of conversion in favor of Laurus. Laurus
has exercised its conversion rights from time to time on outstanding balances.
When Laurus chooses to exercise its conversion rights, the Convertible Note is
convertible into shares of the Company's common stock at a fixed conversion
price, subject to adjustments for stock splits, combinations and dividends and
for shares of common stock issued for less than the fixed conversion price
(unless exempted pursuant to the agreements). The Agreement was modified on
March 31, 2004 to provide for a six-month waiver of the accounts receivable
restrictions and a fixed conversion price to Laurus of $0.85 per share on the
first $500,000 after the first $1 million. The agreement was further modified
on August 25, 2004 to provide for a fixed conversion price to Laurus of $1.00
per share on the next $1 million. Thereafter, the fixed conversion price will
be adjusted after conversion of a total of $2.5 million to 103% of the then fair
market value of our common stock ("Adjusted Fixed Conversion Price").
Laurus converted 2,991,417 shares to reduce the Company's debt by $2,271,750 for
the twelve-month period ending December 31, 2004. Laurus converted a total of
3,406,417 shares to reduce the debt by $2,500,000 since the inception of the
revolving credit facility. For the twelve-month period ending December 31,
2004, the Company expensed $2,480,628 for the non-cash loan fee based on the
fair market value of the stock when Laurus converted and $2,607,099 for the
non-cash loan fee expense since the inception of the revolving credit facility.
The fair market value used in 2003 was established using a 20% discount to the
closing price on the date of conversion based on the restricted and
thinly-traded nature of the Company stock in 2003 and the fair market value used
in 2004 was established using the closing price on the date of conversion with
no discount taken due to the increased volume in the Company's stock.
Availability of funds under the revolving credit facility is based on the
Company's accounts receivable, except as waivers are provided by Laurus. An
initial three (3) month waiver was offered by Laurus, under which Laurus
permitted a credit advance up to $300,000, which amount would have otherwise
exceeded eligible accounts receivable during the period. Laurus subsequently
extended the waiver for two additional six (6) month periods, under which Laurus
permitted a credit advance up to $1 million, which amount would have otherwise
exceeded eligible accounts receivable during the period. The revolving credit
facility is secured by all of the assets of the Company.
In conjunction with this transaction, Laurus was paid a fee of $20,000 for the
first year, which was expensed as additional interest expense in 2003. The
Company was required to pay a continuation fee of $10,000 each year thereafter.
In addition, Laurus received a warrant to purchase 200,000 shares of the
Company's common stock for the initial $1 million revolving credit facility, as
stated herein. The warrant exercise price was computed as follows: $0.63 per
share for the purchase of up to 125,000 shares; $0.69 per share for the purchase
of an additional 50,000 shares; and $0.80 per share for the purchase of an
additional 25,000 shares. The warrant exercise price may be paid in cash, in
shares of the Company's common stock, or by a combination of both. The warrant
expiration date is June 3, 2008. The warrant exercise price and the number of
shares underlying the warrant are subject to adjustments for stock splits,
combinations and dividends.
F-20
PAGE
In addition to the initial warrant, the Company was obligated to issue an
additional five-year warrant to Laurus to purchase one share of common stock at
an exercise price equal to 125% of the Adjusted Fixed Conversion Price for every
ten dollars ($10) in principal of the Convertible Note converted into common
stock if and when over $1 million was converted under the revolving credit
facility. The value of the warrant was determined when issued, and was treated
as additional interest expense and is being amortized over the remaining term of
the Convertible Note, unless sooner terminated. On June 18, 2004, the Company
issued an additional warrant to purchase 50,000 shares at an exercise price of
$1.0625 per share in relation to the $500,000 revolving credit facility
expansion convertible at $0.85 per share. Since no more than an aggregate of
100,000 shares of the Company's common stock were authorized as additional
warrants under the Laurus Agreements, on August 25, 2004, the Company issued an
additional warrant to purchase 50,000 shares at an exercise price of $1.925 per
share in relation to the $1 million revolving credit facility expansion
convertible at $1.00 per share.
The Company may terminate its agreements with Laurus before the end of the
initial three year term and Laurus will release its security interests upon
payment to Laurus of all obligations, if the Company has: (i) provided Laurus
with an executed release of all claims which the Company may have under the
agreements; and, (ii) paid to Laurus an early payment fee in an amount equal to
(x) three percent (3%) of the Capital Availability Amount if such payment occurs
after the first anniversary (i.e., June 3, 2004) and prior to the second
anniversary of the Initial Term; and, (y) two percent (2%) of the Capital
Availability Amount if such payment occurs after the second anniversary and
prior to the end of the Initial Term. The early payment fee is also due and
payable by the Company to Laurus if the Company terminates its Agreement after
the occurrence of an Event of Default, as defined in the agreements.
As stated above, in conjunction with the Company's Preferred Stock financing on
August 25, 2004, Laurus agreed to extend the revolving credit facility reported
on Form 8-K filed June 18, 2003 from $1.0 million to $1.5 million. The first
$1.0 million converted under the revolving credit facility was converted last
year and earlier this year at a rate of $0.55 per share during 2003 and 2004.
On March 31, 2004, the conversion price for the next $500,000 under the
revolving credit facility was set at $0.85 per share. The next $1 million under
the revolving credit facility was convertible at a rate of $1.00 per share.
There was no balance on the revolving credit facility at December 31, 2004.
5. CONVERTIBLE DEBENTURES
From October 14, 2002 through November 14, 2002, the Company sold an aggregate
of $475,000 of 2.03% convertible debentures to various directors and officers of
the Company. The total funding was completed on November 14, 2002. The
convertible debentures entitled the holder to convert the principal and unpaid
accrued interest into the Company's common stock when the note matured. The
maturity on the notes was six (6) months from issue date. On March 25, 2003, an
amendment was executed which extended these notes an additional six (6) months.
The convertible debentures were exercisable into a number of the Company's
common shares at a conversion price that equals the 20-day average ask price
less 10%, which was, established when the note was issued, or the initial
conversion price.
Concurrent with the issuance of the convertible debentures, the Company issued
warrants to purchase up to 1,229,705 shares of the Company's common stock to the
subscribers. These warrants are exercisable for three (3) years from the date
of issuance at the initial exercise price which is equal to the 20-day average
ask price less 10%, which was established when the note was issued, or the
initial conversion price of the notes. Upon issuance, the issued warrants were
valued using the Black-Scholes pricing model based on the expected fair value at
issuance and the estimated fair value was recorded as debt discount. As a
result of the change to the maturity date of the convertible debt, the
amortization period for the debt discounts was also extended during the first
quarter in 2003.
F-21
PAGE
On September 5, 2003, the Company repaid one-half of the convertible notes, with
the condition that the note holders convert the other half. Also, as a condition
of the partial repayment, the note holders were required to relinquish one-half
of the previously issued warrants. Finally, as additional consideration for the
transaction, the note holders were offered 5% interest on their notes, rather
than the stated 2.03%. All the note holders accepted the offer and the
convertible notes were retired. As of December 31, 2003, the Company recorded a
credit of $88,408, as debt discount recovery; therefore, for the year ending
December 31, 2003, the debt discount expense was $112,500. The Company also
expensed $131,411 for non-cash loan fee expense. Fair market value of the stock
was determined by discounting the closing market price on the date of the
transaction by 20%, based on the nature of the restricted securities.
Convertible debentures - beginning balance . $ 475,000
Total interest expense incurred . . . . $ 20,236
Accrued interest paid - current year. . $ (18,161)
Accrued interest paid - prior year. . . $ (2,075)
Convertible debtures paid . . . . . . . $(237,500)
Convertible debtures converted. . . . . $(237,500)
-------------------------------------------------------
$(475,000)
-------------------------------------------------------
Convertible debentures - ending balance. . . $ 0
-------------------------------------------- ----------
Debt discount (Warrants) - beginning balance $ 475,000
Amount forfeited. . . . . . . . . . . . $(237,500)
Amount expensed prior year. . . . . . . $(125,000)
Amount expensed current year. . . . . . $(267,879)
Current year - adjustment . . . . . . . $ 155,379
-------------------------------------------------------
$(475,000)
-------------------------------------------------------
Debt discount (Warrants) - ending balance. . $ 0
-------------------------------------------- ----------
As of December 31, 2004, all of the warrants under the convertible debt program
had been converted to equity and the Company received approximately $50,000 in
cash, received the reduction in $187,500 in related party debt and expensed
$773,802 in non-cash loan fees.
6. INCOME TAXES
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
deferred tax asset of $2,350,000 and $2,190,000 as of December 31, 2004 and
2003, respectively, consisted primarily of the income tax benefits from net
operating loss and capital loss carryforwards, amortization of goodwill and
research and development credits. A valuation allowance has been recorded to
fully offset the deferred tax asset as it is more likely than not that the
assets will not be utilized. The valuation allowance increased approximately
$126,000 in 2004 from $2,190,000 at December 31, 2003 to $2,318,000 at December
31, 2004.
F-22
PAGE
Significant components of the benefit for income taxes for the years ended
December 31, 2004 and 2003 are as follows:
2004 2003
------ ------
Current
Federal . . . . . $ - $ -
State . . . . . . 1,600 1,600
------ ------
1,600 1,600
Deferred
Federal . . . . . - -
State . . . . . . - -
------ ------
- -
Income tax expense $1,600 $1,600
====== ======
At December 31, 2004, the Company had federal and state tax net operating loss
and capital loss carryforwards of approximately $4,826,000 and $2,146,000,
respectively. The federal and state tax loss carryforwards will expire in 2012
and 2007, respectively, unless previously utilized. The State of California has
suspended the utilization of net operating loss for 2003 and limited them in
2004.
A reconciliation of the statutory income tax rates and the Company's effective
tax rate is as follows:
Years Ended December 31,. . . . . . . . . . 2004 2003
--------------------------------------------- ------- -------
Statutory U.S. federal rate . . . . . . . . 35.0% 34.0%
--------------------------------------------- ------- -------
State income taxes - net of federal benefit 5.7% 5.8%
Permanent differences . . . . . . . . . . . (37.8%) -
Change in valuation allowance . . . . . . . (2.9%) (39.8%)
--------------------------------------------- ------- -------
Provision for income taxes. . . . . . . . . 0.0% 0.0%
--------------------------------------------- ------- -------
F-23
PAGE
The tax effects of temporary differences and carryforwards that give rise to
deferred tax assets consist of the following:
December 31,. . . . . . . . . . . . . 2004 2003
--------------------------------------- ------------ ------------
Deferred tax assets:
--------------------------------------- ------------ ------------
Loss carryforwards . . . . . . . . . $ 1,765,000 $ 1,588,000
Deferred gain on sale of building 416,000 435,000
Temporary differences. . . . . . . . 77,000 127,000
Research and development credits . . 92,000 40,000
--------------------------------------- ------------ ------------
Gross deferred tax assets . . . . . . 2,350,000 2,190,000
--------------------------------------- ------------ ------------
Deferred tax liability. . . . . . (32,000) -
--------------------------------------- ------------ ------------
Valuation allowance . . . . . . . . . (2,318,000) (2,190,000)
$ - $ -
--------------------------------------- ------------ ------------
--------------------------------------- ------------ ------------
As of December 31, 2004, the Company recorded a valuation allowance of $214,000
related to deferred tax assets created by the exercise and/or disposition of
employee stock options in recent periods. The deferred tax asset originating
from deductions for the exercise and/or disposition of stock options and the
related valuation allowance have been recorded against additional paid-in
capital and did not effect the net earnings for the period. Any tax benefits
realized from the reduction of this valuation allowance will be recorded to
additional paid-in capital.
Pursuant to Internal Revenue Code Section 382, the Company's use of its net
operating loss carryforwards may be limited as a result of cumulative changes in
ownership of more than 50% over a three year period.
The Company has unused U.S. and state tax credits of approximately $52,000 and
$39,000, that begin to expire 2013 and 2008, respectively.
7. EMPLOYEE BENEFIT PLAN
(a) Profit sharing 401(k) plan
During 2004, the Company amended their previous 401(k) retirement savings plan
from 1997 for its employees, which allows each eligible employee to voluntarily
make pre-tax salary contributions up to 93% of their compensation or $13,000 per
year, whichever is lower, for the year ending December 31, 2004. The Company
has elected to begin making a matching contribution of 10% of employee
contributions, which matching portion vests over 5 years as specified in the
plan amendment. During 2004 and 2003, the Company contributed $2,705 and $0
to the Plan.
F-24
PAGE
(b) Incentive stock option and employee stock purchase plans
At its 1999 Annual Stockholder Meeting, the shareholders adopted an Incentive
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 were granted. Pursuant to our plan, the exercise price for
the non-statutory stock options were not less than 85% of the fair market value
of the stock on the date the option was granted. The Company is required to
reserve an amount of common shares equal to the number of shares, which may be
purchased as a result of awards made under the Plan at any time.
At the 2000 Annual Stockholder Meeting, the shareholders approved an amendment
to the Stock Option Plan of 1999, increasing the number of shares eligible for
issuance under the Plan to 30% of the then outstanding common stock 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, at its annual meetings in 2004 and 2003, made no
adjustment, as a determination was made that the number of shares then available
under the Plan was sufficient to meet the Company's needs.
At the 2004 Annual Stockholder Meeting, the shareholders approved the 2004 Stock
Option Plan authorizing options on 2,000,000 shares be set apart under this
plan. As of December 31, 2004, 6,184,698 shares were authorized for issuance
under both plans, 3,878,766 of which were subject to outstanding options and
awards. Shares issuable under the 1999 plan were registered with the U.S.
Securities & Exchange Commission on Form S-8. A Form S-8 registration statement
for shares issuable under the 2004 plan will be filed simultaneously with this
report.
During 2004, the Company issued non-statutory options to purchase 287,000 shares
to its independent directors for attendance at its 2003 Board of Directors
meetings. In addition to the Stock Option Plan of 1999, the shareholders
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
offerings of our common stock to its employees. The 1999 Employee Stock
Purchase Plan has been instituted and the first employees enrolled in the plan
in August 2003. The first shares of common stock were issued under the Plan in
February 2004. The exercise price for the Stock Purchase Plan will not be less
than 85% of the fair market value of the stock on the date the stock is
purchased. During 2004 and 2003 employees contributed $16,464 and $6,440 to the
employee stock purchase plan, and 14,010 and 0 shares were issued under the plan
as of December 31, 2004 and 2003, respectively. The 1999 Employee Stock
Purchase Plan was to expire in June 2005; however, the Board of Directors
extended the plan for another year at their Board meeting in November 2004.
F-25
PAGE
8. STOCKHOLDERS' EQUITY
(a) Convertible preferred stock
On August 25, 2004, the Company entered into a Securities Purchase Agreement
with the Laurus Master Fund, Ltd., whereby the Company issued 250,000 shares of
its Series C Non-Redeemable Convertible Preferred Stock, par value $0.001 per
share (the "Preferred Stock"), to Laurus for an aggregate purchase price of
$2,500,000 or $10.00 per share (the "Stated Value"). The preferred shares are
convertible into shares of the Company's $0.0001 par value common stock at a
rate of $1.54 per share at any time after the date of issuance, and pay
quarterly, cumulative dividends at a rate of 6.85% with the first payment due on
January 1, 2005. As of December 31, 2004, approximately $61,000 has been
accrued for dividends and are payable in cash or shares of our common stock at
the holder's option with the exception that dividends must be paid in shares of
our common stock for up to 25% of the aggregate dollar trading volume if the
fair market value of the Company's common stock for the 20-days preceding the
conversion date exceeds 120% of the conversion rate. The preferred shares are
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 conversion does not exceed the
conversion rate or (b) the Stated Value if the average closing price of our
common stock for the 22 days immediately preceding the date of conversion
exceeds the Stated Value. The preferred shares have a liquidation right equal to
the Stated Value upon the Company's dissolution, liquidation or winding-up. The
preferred shares have no voting rights.
In conjunction with the Preferred Shares, the Company issued a five-year common
stock purchase 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. The Company
registered all of the shares of its common stock underlying the Preferred Shares
and the warrant, as well as an estimated number of shares payable as dividends
on the Preferred Shares, for resale.
(b) Common stock
During 2004 and 2003, the Company issued 0 and 7,500 shares, respectively, of
its common stock for employee awards and services and for summer and student
interns, and recorded expenses of $0 and $9,170, respectively. The fair value
of the shares issued was calculated using the closing price on the date of
issuance.
On November 5, 2000, the Company commenced a private placement offering (PPO)
for a maximum of 1,000,000 shares of the Company's $0.0001 par value common
stock and warrants to purchase an additional 1,000,000 shares of common stock
(the "Units"). The offering price of the Unit(s) was the five-day average of
the bid and ask price for the Company's common stock on the date of issuance,
with a minimum per Unit price of $1.00. The warrants allowed the holder to
acquire additional shares at $0.50 above the offering price of the shares. The
Company sold to one related-party investor under these terms.
On March 2, 2001, the PPO price was amended to the average of the high bid
prices on the date of issuance and four preceding days, with no minimum per
share price, and the warrants were amended to allow the holder to acquire
additional shares at the Unit price.
The Company sold 153,060 Units under the PPO during 2002 for $75,000.
F-26
PAGE
On January 16, 2003 and February 14, 2003, pursuant to an extension of the PPO,
the Company sold 665,188 and 196,079 Units, respectively. The Company received
approximately $326,000 and $100,000, respectively, for the Units sold under the
PPO during the first quarter 2003. The PPO was subsequently closed.
(c) Warrants
Concurrent with the issuance of the convertible debentures from October 2002
through November 2002, the Company issued to subscribers warrants to purchase up
to 1,229,705 shares of the Company's common stock. On September 5, 2003, the
Company repaid one-half of the convertible notes, with the condition that the
note holders would convert the other half. As a condition of the partial
repayment, the note holders were required to relinquish one-half of the
previously issued warrants reducing the total warrants issued under the
convertible debt program to 614,853. These warrants are exercisable for three
(3) years from the date of issuance at the initial exercise price, which is
equal to the 20-day average asking price less 10% established when the notes
were issued. Upon issuance the warrants were valued using the Black-Scholes
pricing model based on the expected fair value at issuance and the estimated
fair value was also recorded as debt discount. As of December 31, 2004, all of
the warrants under the convertible debt program had been converted and the
Company received $237,500 in cash and expensed $773,802 in non-cash loan fees.
As of December 31, 2004, the Company had other warrants outstanding issued as
part of its private placement and other equity raising ventures as well as
services that allow the holders to purchase up to 2,363,827 shares of common
stock at prices between $0.435 and $2.79 per share. The warrants may be
exercised any time within three (3) and five (5) years of issuance.
(d) Stock options
On November 21, 1997, the Company entered into a five (5) year employment
agreement with its CEO. As part of the employment agreement, the Company
granted options to the CEO to purchase up to 2,500,000 shares of the Company's
$0.0001 par value restricted common stock.
The options are subject to the following vesting conditions, which were amended
on January 21, 2000, and further amended on July 16, 2000 with an option for the
board to award an additional 1,500,000 options at a later date:
F-27
PAGE
Exercise
Number price per
Of shares Vesting Conditions share
---------------- --------- ----------------------------------------------------------- -----------------
Granted Options:
500,000. . . . . Currently vested $ 1.00
500,000. . . . . Obtaining $6,500,000 additional equity capital $ 1.50
500,000. . . . . Financing and executing a definitive space launch agreement $ .00
500,000. . . . . Launching of first lunar or deep-space mission $ 2.50
500,000. . . . . Successful completion of first lunar or deep-space mission $ 3.00
Options to be
Granted upon
the Occurrence
of Certain Events:
250,000. . . . . Upon the Company market capitalization reaching $250 million $ 5.00
500,000. . . . . Upon the Company market capitalization reaching $500 million $ 10.00
750,000. . . . . Upon the Company market capitalization reaching $1 billion $ 20.00
---------------- --------- ----------------------------------------------------------- -----------------
All options expire ten (10) years from date of second amendment i.e., July 16,
2000.
In accordance with APB 25, the Company recognized $500,000 of compensation
expense and $250,000 of deferred compensation in 1997. The options granted to
the CEO are subject to vesting conditions and have exercise prices between $1.00
and $3.00 per share.
On August 27, 2001, as part of an annual review process, an additional 10,000
options were granted to the CEO at the exercise price of $0.9469 per share with
a set vesting schedule of 3,333 shares per year after issuance with the third
year having 3,334 options vest. These options expire five (5) years from grant
date.
F-28
PAGE
The following summarizes stock option activity related to all of the option plan
and employee compensation agreements:
Weighted
Options Average
Outstanding Exercise Prices
---------------------------- ------------ ----------------
Balance at January 1, 2003 . 5,448,772 $ 0.91
Granted. . . . . . . . . . . 1,219,615 0.76
Exercised. . . . . . . . . . (37,000) 0.53
Expired. . . . . . . . . . . (1,006,580) 0.52
---------------------------- ------------ ----------------
Balance at December 31, 2003 5,624,807 1.39
Granted. . . . . . . . . . . 2,218,500 1.23
Exercised. . . . . . . . . . (1,005,035) 1.26
Expired. . . . . . . . . . . (459,506) 1.04
---------------------------- ------------ ----------------
Balance at December 31, 2004 6,378,766 $ 1.50
---------------------------- ------------ ----------------
---------------------------- ------------ ----------------
The weighted average fair value of options granted to employees under the 1999
Incentive Stock Option Plan and the 2004 Equity Incentive Plan during 2004 and
2003 was $1.23 and $0.76, respectively. At December 31, 2004 and 2003, there
were 1,900,460 and 2,266,520 options exercisable at a weighted average exercise
price of $0.83 and $1.05 per share, respectively. The weighted average
remaining life of outstanding options under the plan at December 31, 2004 was
4.40 years.
Weighted-Average Weighted-
Range of . . Remaining Contractual Average Exercisable Price
Exercise . . Number of Shares Life of Shares Number of Shares Exercisable
Price . . . . Outstanding Outstanding Exercisable Price
------------ --------------------- ------------------------- ----------------- ------------
0.42-0.99 . 2,317,413 3.92 1,036,607 $ 0.64
1.00-1.99. 2,459,131 4.53 861,631 1.05
2.00-2.99. 1,102,222 5.11 2,222 2.25
3.00-3.50. 500,000 5.05 - -
------------ --------------------- ------------------------- ----------------- ------------
6,378,766. . 4.40 1,900,460 $ 0.83
------------ --------------------- ------------------------- ----------------- ------------
------------ --------------------- ------------------------- ----------------- ------------
The Company has elected to account for its stock-based compensation plans under
APB 25. However, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 2004 and 2003 using the minimum value
method as prescribed by SFAS No. 123. Under this method, the Company used the
risk-free interest rate at date of grant, the expected volatility, the expected
dividend yield and the expected life of the options to determine the fair value
of options granted. The risk-free interest rates ranged from 6.0% to 6.5%;
expected volatility of 117% and the dividend yield was assumed to be zero, and
the expected life of the options was assumed to be three to five years based on
the average vesting period of options granted.
F-29
PAGE
9. COMMITMENTS AND CONTINGENCIES
(a) Capital leases
The Company leases certain equipment under non-cancelable capital leases, which
are included in fixed assets as follows:
December 31,. . . . . . . . . 2004 2003
----------------------------- ---------- ----------
Computer equipment. . . . . . $ 153,097 $ 153,097
Less accumulated depreciation (136,640) (103,857)
$ 16,457 $ 49,240
----------------------------- ---------- ----------
----------------------------- ---------- ----------
Future minimum lease payments are as follows:
Year Ending December 31, 2003
--------------------------------------- --------
2005. . . . . . . . . . . . . . . . . . $ 4,425
2006. . . . . . . . . . . . . . . . . . 1,526
2007. . . . . . . . . . . . . . . . . . -
2008. . . . . . . . . . . . . . . . . . -
Thereafter. . . . . . . . . . . . . . . -
--------------------------------------- --------
Total minimum lease payments. . . . . . 5,951
Amount representing interest. . . . . . 698
--------------------------------------- --------
Present value of minimum lease payments 5,253
Total obligation. . . . . . . . . . . . 5,253
Less current portion. . . . . . . . . . (3,784)
--------------------------------------- --------
Long-term portion . . . . . . . . . . . $ 1,469
--------------------------------------- --------
--------------------------------------- --------
(b) Other accrued liabilities
During 2004 and 2003, the Company accrued expenses in connection with current
projects, our preferred stock sale, and other commitments. The total of these
accruals were $207,262 and $248,530 as of December 31, 2004 and 2003,
respectively.
In November 2002, the Company entered an agreement to sell its interest in its
only facility. The transaction closed in January 2003. The escrow transaction
included the sale of the land and building at 13855 Stowe Drive, Poway, CA
92064. The fees that were incurred for the sale of the building were $121,311
and were recorded as other accrued liabilities. The fees include broker fees,
escrow and title fees and property taxes.
(c) Building lease
In conjunction with the sale of its only facility, the Company entered into a
non-cancelable operating lease with the buyer to lease-back its facilities for
ten (10) years (see Note 2). The base rent was $25,678 per month at lease
inception and is currently $26,577 as of December 31, 2004 and will continue to
increase by 3.5% per year. Mr. Benson, the Company's CEO, provided a guarantee
for the leaseback.
F-30
PAGE
10. CONCENTRATIONS
(a) Credit risk
The Company maintains cash balances at various financial institutions primarily
located in San Diego, California and New York, New York. The accounts at these
institutions are secured by the Federal Deposit Insurance Corporation up to
$100,000. The Company has not experienced any losses in such accounts.
(b) Customer
During 2004 and 2003, the Company had two and three major customers that
accounted for sales of approximately $3,737,000, or 76% and $1,782,600 or 60% of
consolidated revenue, respectively. At December 31, 2004 and 2003, the amount
receivable from these customers was approximately $612,900 and $160,200,
respectively.
(c) Contract
In November 1999, the Space Missions Division was awarded a turnkey mission
contract by the Space Sciences Laboratory at the University of California at
Berkeley worth as of December 31, 2002 approximately $7.2 million, including two
change orders worth approximately $412,000 on June 12, 2002 and October 7, 2002.
This contract represented 14% of the Company's revenue in 2003. The contract
concluded on December 31, 2003.
F-31
PAGE