FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
[ ] 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.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1374613
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13855 Stowe Drive, Poway, California 92064
(Address of principal executive offices)
(Issuer's telephone number) (858) 375-2030.
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(Former name, former address and former fiscal year, if changed since last
report)
Checkmark whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Exchange Act during the past 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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 28,813,334 shares of Issuer's voting
common stock were outstanding on May 1, 2006.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PAGE
SPACEDEV, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2006
INDEX PAGE
PART I -- FINANCIAL INFORMATION 1
ITEM 1. FINANCIAL STATEMENTS 1
Consolidated Balance Sheets 1
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 18
Overview 18
Selection of Significant Contracts 20
Results of Operations 21
Liquidity and Capital Resources 25
Cash Position 26
Critical Accounting Standards 26
Recent Accounting Pronouncements 27
Risk Factors 27
ITEM 3. CONTROLS AND PROCEDURES 39
PART II -- OTHER INFORMATION 39
ITEM 1. LEGAL PROCEEDINGS 39
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 39
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 39
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 39
ITEM 5. OTHER INFORMATION 40
ITEM 6. EXHIBITS 40
SIGNATURES 42
PAGE
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPACEDEV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
At March 31,. . . . . . . . 2006 2005
--------------------------- ----------- ----------
ASSETS
CURRENT ASSETS
Cash. . . . . . . . . $ 1,142,595 $5,412,949
Accounts receivable . 5,769,883 620,048
Inventory (Note 2). . 3,014,626 -
Other current assets. 213,122 11,306
--------------------------- ----------- ----------
TOTAL CURRENT ASSETS . . . 10,140,226 6,044,303
FIXED ASSETS - NET . . . . 3,280,171 293,590
GOODWILL (NOTE 5). . . . . 12,246,362 -
OTHER ASSETS . . . . . . . 898,762 117,115
--------------------------- ----------- ----------
$26,565,521 $6,455,008
--------------------------- ----------- ----------
--------------------------- ----------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 1
SPACEDEV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
At March 31,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 2005
-------------------------------------------------------------------------- ------------- -------------
LIABILITIES AND STOCKHOLDERSEQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses (Note 3(a)). . . . . . . . . . $ 2,159,367 $ 400,261
Accrued payroll, vacation and related taxes. . . . . . . . . . . . . 1,500,497 248,805
Billings in excess of costs incurred and estimated earnings (Note 2) 1,635,230 -
Other accrued liabilities (Note 2) . . . . . . . . . . . . . . . . . 2,199,130 268,505
-------------------------------------------------------------------------- ------------- -------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 7,494,224 917,571
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES. . . . . . . . . . 113,282 413
DEFERRED GAIN - ASSETS HELD FOR SALE (NOTE 3(A)). . . . . . . . . . . . . 801,359 918,631
-------------------------------------------------------------------------- ------------- -------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,408,865 1,836,615
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERSEQUITY
Convertible preferred stock, $.001 par value, 10,000,000
shares authorized, and 253,610 and 250,000 shares
issued or outstanding, respectively (Note 4)
Series C Convertible preferred stock (Note 4(a)) . . . . . . . . . . 249 250
Series D-1 Convertible preferred stock (Note 4 (b)). . . . . . . . . 5 -
Common stock, $.0001 par value; 100,000,000 and 50,000,000 shares
authorized, and 28,710,496 and 21,373,980 shares issued
and outstanding, respectively (Note 4) . . . . . . . . . . . . 2,870 2,137
Additional paid-in capital (Note 4). . . . . . . . . . . . . . . . . 32,863,959 18,962,806
Additional paid-in capital - stock options . . . . . . . . . . . . . - 750,000
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . - (250,000)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . (14,710,427) (14,846,800)
-------------------------------------------------------------------------- ------------- -------------
TOTAL STOCKHOLDERSEQUITY. . . . . . . . . . . . . . . . . . . . . . . . . 18,156,656 4,618,393
-------------------------------------------------------------------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERSEQUITY. . . . . . . . . . . . . . . . . $ 26,565,521 $ 6,455,008
-------------------------------------------------------------------------- ------------- -------------
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The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 2
SPACEDEV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three-Months Ending March 31,. . . . . . . . . . . . . 2006 % 2005 %
------------------------------------------------------- ------------ ------------ ----------- ------
NET SALES. . . . . . . . . . . . . . . . . . . . . . . $ 7,174,778 100.0% $1,806,889 100.0%
TOTAL COST OF SALES *. . . . . . . . . . . . . . . . . 5,265,106 73.4% 1,396,835 77.3%
GROSS MARGIN . . . . . . . . . . . . . . . . . . . . . 1,909,672 26.6% 410,054 22.7%
------------------------------------------------------- ------------ ------------ ----------- ------
OPERATING EXPENSES
Marketing and sales . . . . . . . . . . . . . . . . 643,560 9.0% 145,017 8.0%
Research and development. . . . . . . . . . . . . . 81,777 1.1% 8,472 0.1%
General and administrative. . . . . . . . . . . . . 1,230,733 17.2% 190,998 10.6%
------------------------------------------------------- ------------ ------------ ----------- ------
TOTAL OPERATING EXPENSES * . . . . . . . . . . . . . . 1,956,070 344,487
------------------------------------------------------- ------------ -----------
INCOME/(LOSS) FROM OPERATIONS. . . . . . . . . . . . . (46,398) -0.6% 65,567 3.6%
NON-OPERATING INCOME/(EXPENSE)
Interest income . . . . . . . . . . . . . . . . . . 33,615 0.5% 7,960 0.4%
Interest expense. . . . . . . . . . . . . . . . . . (5,283) -0.1% (1,222) -0.1%
Gain on building sale (Note 3(a)) . . . . . . . . . 29,318 0.4% 29,318 1.6%
------------------------------------------------------- ------------ ------------ ----------- ------
TOTAL NON-OPERATING INCOME . . . . . . . . . . . . . . 57,650 0.8% 36,056 2.0%
------------------------------------------------------- ------------ ------------ ----------- ------
INCOME BEFORE TAXES. . . . . . . . . . . . . . . . . . 11,252 0.2% 101,623 5.6%
INCOME TAX PROVISION . . . . . . . . . . . . . . . . . 4,235 0.1% 400 0.0%
NET INCOME . . . . . . . . . . . . . . . . . . . . . . $ 7,017 0.1% $ 101,223 5.6%
------------------------------------------------------- ------------ ------------ ----------- ------
NET INCOME PER SHARE:
Net income. . . . . . . . . . . . . . . . . . . . $ 0 $ 0
------------------------------------------------------- ------------ -----------
Weighted-Average Shares Outstanding . . . . . . . 27,276,451 21,291,972
FULLY DILUTED NET INCOME PER SHARE:
Net income. . . . . . . . . . . . . . . . . . . . $ 0 $ 0
------------------------------------------------------- ------------ -----------
Fully Diluted Weighted-Average Shares Outstanding. 36,225,300 29,908,287
------------------------------------------------------- ------------ -----------
* The following table shows how the Company's stock option expense would be allocated to all expenses.
Cost of Sales . . . . . . . . . . . . . . . . . . . $ - $ -
Marketing and sales . . . . . . . . . . . . . . . . - -
Research and development. . . . . . . . . . . . . . - -
General and administrative. . . . . . . . . . . . . 90,701 -
------------------------------------------------------- ------------ ------------
$ 90,701 $ -
------------------------------------------------------- ------------ ------------
------------------------------------------------------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 3
SPACEDEV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three-Months Ending March 31,. . . . . . . . . . . . . . 2006 2005
--------------------------------------------------------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . $ 7,017 $ 101,223
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . 147,370 29,061
Gain on disposal of building sale. . . . . . . (29,318) (29,318)
Stock option expense and stock awards. . . . . 92,876 -
Change in operating assets and liabilities . . (3,481,569) 135,217
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES. . . (3,263,624) 236,183
CASH FLOWS FROM INVESTING ACTIVITIES
Other assets, capitalized acquisition costs . . . . (1,066,564) -
Purchases of fixed assets . . . . . . . . . . . . . (324,256) (43,269)
--------------------------------------------------------- ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . (1,390,820) (43,269)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable . . . . . . . . (4,675,832) (8,997)
Principal payments on capitalized lease obligations (8,815) (883)
Dividend payments on Series D-1 Preferred . . . . . (98,774) -
Employee stock purchase plan. . . . . . . . . . . . 42,767 9,846
Proceeds from issuance of preferred stock . . . . . 4,764,296 151,468
Proceeds from issuance of common stock. . . . . . . 23,359 -
--------------------------------------------------------- ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . 47,001 151,434
--------------------------------------------------------- ------------ -----------
NET (DECREASE)/INCREASE IN CASH. . . . . . . . . . . . . (4,607,443) 344,348
--------------------------------------------------------- ------------ -----------
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . 5,750,038 5,068,601
--------------------------------------------------------- ------------ -----------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . $ 1,142,595 $5,412,949
--------------------------------------------------------- ------------ -----------
--------------------------------------------------------- ------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 4
SPACEDEV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D.
(UNAUDITED)
--------------------------------------------------- ------ --------
Three-Months Ending March 31,. . . . . . . . . . . 2006 2005
--------------------------------------------------- ------ --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . $5,283 $313,978
--------------------------------------------------- ------ --------
NONCASH INVESTING AND FINANCING ACTIVITIES:
During the three-months ending March 31, 2006 and 2005 the Company converted
$34,516 and $11,303 of employee stock purchase plan contributions into
24,885 and 7,915 shares of common stock, respectively.
During the three-months ending March 31, 2006 and 2005 the Company declared
dividends payable of $41,967 and $42,226, repectively to the holders of its
Series C preferred stock.
During the three-months ending March 31, 2005 the Company paid dividends valued
at $60,967 in the form of 39,589 shares of common stock to the holders of
its Series C preferred stock.
During the three-months ending March 31, 2006 the Company declared and paid
dividends payable of $98,774 to the holders of its Series D-1 preferred
stock.
During the three-months ending March 31, 2006, the Company financed $125,687 in
fixed assets through a capital lease obligation.
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The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of SpaceDev, Inc. ("the
Company") include the accounts of the Company and its subsidiary, Starsys,
Inc. and its inactive subsidiary SpaceDev Oklahoma, an Oklahoma corporation.
In the opinion of management, the consolidated financial statements reflect all
normal and recurring adjustments, which are necessary for a fair presentation of
the Company's financial position, results of operations and cash flows as
of the dates and for the periods presented. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. Consequently, these statements
do not include all disclosures normally required by generally accepted
accounting principles of the United States of America for annual financial
statements nor those normally made in an Annual Report on Form 10-KSB.
Accordingly, reference should be made to the Company's Form 10-KSB filed on
March 28, 2006 and other reports the Company filed with the U.S. Securities
and Exchange Commission for additional disclosures, including a summary of
the Company's accounting policies, which have been modified, as a result of
the Company's acquisition of Starsys Research Corporation, to include a
"percentage-of-completion" method of revenue recognition and inventory policies.
The consolidated results of operations for the three-months ending March 31,
2006 are not necessarily indicative of results that may be expected for the
fiscal year ending December 31, 2006 or any future period, and the Company
makes no representations related thereto.
On March 31, 2004, the Company was awarded a contract from the Missile Defense
Agency for approximately $43.3 million. The microsatellite distributed sensing
experiment was intended to analyze, design, develop, fabricate, integrate, test,
operate and support a networked cluster of three formation-flying boost phase
and midcourse tracking microsatellites and a second cluster of microsatellites
with laser communication technology to support national missile defense. We were
informed in 2005 that the Missile Defense Agency had re-routed the part of the
contract related to the laser communications experiment to another program and
that they would not be exercising their option for the additional microsats at
this time; however, the contract vehicle remained at $43.3 million and left open
the opportunity for some other purchase to take its place. We estimate that the
second cluster would have represented approximately $10 million of the $43.3
million contract, and have reduced our current backorder accordingly. We believe
the remaining unbilled contract backlog amount of approximately $22.4 million to
be secure. The Company has recognized approximately $10.9 million in revenue
under this contract through March 31, 2006.
Management intends to seek and obtain new government and commercial contracts,
use its revolving credit facility only for specially funded programs, if at all,
and possibly raise additional equity or debt capital in a public or private
offering or fund-raising effort in 2006 or beyond. 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 or on terms that are favorable to the Company. Management
believes that, if current contracts remain on schedule and are funded as
expected, they will be sufficient to fund the Company through 2006.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities and the results of
operations during the reporting period. Actual results could differ materially
from those estimates.
PAGE 6
2. ACCOUNTING POLICIES
(a) Revenue Recognition
The Company's revenues for the three-months ending March 31, 2006 were derived
from United States government cost plus fixed fee (CPFF) contracts, some fixed
price contracts and some commercial sales of component and subsystem products
that the Company acquired in its acquisition of Starsys, which is compared to
primarily CPFF contracts for the same three-month period in 2005. Revenues from
the CPFF contracts during the first three-months ending March 31, 2006 and 2005
were recognized as expenses were incurred. Estimated contract profits are taken
into earnings in proportion to revenues recorded. Time and material revenues are
recognized as services are performed and costs incurred. Certain fixed price
contracts were prepared according to the "percentage-of-completion" method of
accounting for long-term contracts. The amount of revenues recognized is that
portion of the total contract amount that the actual cost expended bears to the
anticipated final total cost based on current estimates of cost to complete the
project (cost-to-cost method). Total cost that is anticipated to exceed the
contract amount, that is, the excess of cost over contract amount is immediately
recognized as a loss on the contract. Recognition of profit commences on an
individual project only when cost to complete the project can reasonably be
estimated and after there has been some meaningful performance achieved on the
project. Recognition of losses on projects are taken as soon as the loss is
reasonably determinable and accrued on the balance sheet in other accrued
liabilities. The current accrual for potential losses on exiting projects
represents approximately $1.6 million. As projects are completed, the accrual is
adjusted as projects move toward completion and more accurate estimates are
established. Changes in job performance, job conditions, and estimated
profitability, including those arising from contract penalty provisions (when
applicable), and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
Contract costs include all direct material, direct labor and sub-contractor
costs, other costs such as supplies, tools and travel which are specifically
related to a particular contract. All other selling, general and administrative
costs are expensed as incurred.
(b) Inventory
Inventory is valued based on lower-of-cost-or-market method and is disbursed on
a FIFO (First-In, First-Out) basis, unless required by customer contract to be
distributed by specific identification for lot control purposes. Inventory
includes raw material inventory, finished goods inventory and work-in-process
inventory (which includes "costs and estimated earnings in excess of billings on
uncompleted contracts" and represents revenues recognized in excess of amounts
billed). 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. Time
and material revenues are recognized as services are performed and costs
incurred.
3. NOTES PAYABLE
a) Building and Settlement Notes
In December 2002, the Company entered an agreement to sell its interest in its
Poway, California headquarters facility. The transaction closed in January
2003. The escrow transaction included the sale of the land and building. Net
fixed assets were reduced by approximately $1.9 million and notes payable were
reduced by approximately $2.4 million while a deferred gain was recorded. In
conjunction with the sale, the Company entered into a lease agreement with the
buyer to leaseback its facilities. The Company's then Chief Executive Officer
provided a guarantee for the leaseback. The gain on the sale of the facility
was deferred and amortized in proportion to the gross rental charged to expense
over the lease term. Deferred gain of $1,172,720 is being amortized at the rate
of $117,272 per year for ten (10) years ending in January 2013. As of March 31,
2006, the deferred gain was $801,359. This amortization is included in the
Company's non-operating expenses and totaled $29,318 and $29,318 for the
three-months ending March 31, 2006 and 2005, respectively.
PAGE 7
Deferred Gain consisted of the following:
Three-Months Ended March 31, 2006
Original Deferred Gain $1,172,720
Less Amortization 2003 (107,499)
Less Amortization 2004 (117,272)
Less Amortization 2005 (117,272)
Less Amortization 2006 (29,318)
---------------------- -----------
$ 801,359
-----------
In 2001, the Company entered into three settlement loan agreements with various
vendors. The total of $171,402 for all three loans called for payments between
24 and 50 months with interest that ranges from 0% to 8%. At March 31, 2005,
the outstanding balances on these notes were $37,130 with interest expense for
the three-months ending March 31, 2005 of $539. (As of March 31, 2006, no notes
remained outstanding.)
b) 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"). 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 were repaid at the Company's option, in cash or through the
issuance of the Company's shares of common stock. The Convertible Note carries
an interest rate of 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. Availability of funds under the
revolving credit facility is based on the Company's accounts receivable, except
as waivers are provided by Laurus. Laurus has exercised its conversion rights
from time to time on outstanding balances. Laurus converted a total of 3,406,417
shares to reduce the debt by an aggregate of $2,500,000 since the inception of
the revolving credit facility. There was no outstanding balance on the
revolving credit facility at March 31, 2006 and 2005 and there have been no
conversions during the first three months of 2006 and 2005.
In conjunction with this transaction, Laurus was paid a fee of $20,000 for the
first year, which was expensed as additional interest expense in 2003. The
Company is required to pay a continuation fee of $10,000 each year thereafter.
In addition, Laurus received a warrant to purchase 200,000 shares of the
Company's common stock 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. In addition to the initial warrant, the
Company issued two additional warrants: 1) 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, which warrant was exercised
by Laurus on April 19, 2005; and, 2) 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 revolving credit facility with Laurus before the
end of the initial three year term for a fee; or, the agreement will expire on
June 3, 2006.
PAGE 8
4. STOCKHOLDER'S EQUITY - PREFERRED STOCK, COMMON STOCK AND WARRANTS
PREFERRED STOCK
a) Series C 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 "Series C Preferred Shares"), to Laurus for an aggregate purchase
price of $2,500,000 or $10.00 per share (the "Stated Value"). The Series C
Preferred Shares are convertible into shares of the Company's common stock at a
rate of $1.54 per share at any time after the date of issuance, and accrue
quarterly, cumulative dividends at a rate of 6.85%. The first payment was due
on January 1, 2005. As of March 31, 2006 and 2005, approximately $99,000 and
$42,000 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. On January
11, 2005, $60,967 of accrued dividends were paid in the form of 39,589 shares of
the Company's common stock. Also, on May 5, 2005, $56,301 of accrued dividends
were paid in the form of 36,559 shares of the Company's common stock from
dividends accrued and on September 28, 2005, $57,708 of accrued dividends were
paid in the form of 37,473 shares of the Company's common stock. The Series C
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 $1.48 per share 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 Series C Preferred Shares have a
liquidation right equal to the Stated Value upon the Company's dissolution,
liquidation or winding-up. The Series C Preferred Shares have no voting rights,
except as required by law.
In conjunction with the Series C Preferred Shares, the Company issued a
five-year common stock 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.
b) Series D-1 Preferred Stock.
On January 12, 2006, the Company entered into a Securities Purchase Agreement
with a limited number of institutional accredited investors, including Omicron
Capital, Tailwind Capital, Bristol Capital Management, Nite Capital and the
Laurus Master Fund, Ltd. On January 13, 2006, the Company issued and sold to
these investors 5,150 shares of our Series D-1 Amortizing Convertible Perpetual
Preferred Stock, par value $0.001 per share, for an aggregate purchase price of
$5,150,000, or $1,000 per share. The Company also issued various warrants to
these investors as described below. The Company paid cash fees and expenses of
$119,209 to a finder for the introduction of potential investors in this
financing, and paid $60,000 to the lead investor's counsel for legal expenses
incurred in the transaction. The preferred shares are convertible into shares
of the Company's common stock at a rate of $1.48 per share and accrue quarterly,
cumulative dividends at a rate of LIBOR plus 4% on the first day of the
applicable quarter with the first payment due on April 1, 2006. As of March 31,
2006, the Company accrued and paid approximately $99,000 for dividends in cash.
Under the purchase agreement, from the date of the effectiveness of the initial
registration statement filed pursuant to the registration rights agreement
(February 15, 2006), until the one-year anniversary of that date, if: (1) on any
trading day during such period the volume weighted average price of the
Company's common stock for each of the 20 trading days immediately prior to such
date exceeds $1.63; and, (2) the average daily trading volume of the Company's
common stock exceeds $100,000 on each of those days, then the Company has the
option, subject to a number of additional conditions, to put to the investors
"units" at $1,000 per unit for an aggregate purchase price of up to $2,000,000
(or a lesser amount to the extent the preferred stock warrants issued at the
PAGE 9
initial closing of the financing, which are described below, have been exercised
to purchase these units). Each "unit" consists of one share of Series D-1
Preferred Stock and a common stock warrant, which entitles the holders to
purchase up to an aggregate of 440,829 shares of common stock at an exercise
price of $1.51 and otherwise has the same terms as the warrants described in the
following paragraph.
Certain warrants the Company issued to the Series D-1 investors at the closing
entitle the investors to purchase up to an aggregate of 1,135,138 shares of the
Company's common stock at an exercise price of $1.51 per share. The warrants
are exercisable for five years following the date of grant. The warrants have
"ratchet" anti-dilution provisions reducing the warrant exercise price if the
Company issues equity securities (other than in specified exempt transactions)
at an effective price below the warrant exercise price to such lower exercise
price.
The Company also issued certain other warrants to the Series D-1 investors at
the closing (the "preferred stock warrants"). These warrants entitle the holder
to purchase an aggregate number of 2,000 "units", which are identical to the
"units" described above, at an exercise price of $1,000 per unit. The preferred
stock warrants are exercisable from the effective date (February 15, 2006) until
the one-year anniversary of that date. If any units subject to the preferred
stock warrants remain unsold after (1) their expiration date and (2) the
exercise of the Company's put option, if applicable, and any holder of a
preferred stock warrant issued in the financing has exercised the warrant in
full, then the preferred stock warrant grants that holder the right to purchase
440,829 with a strike price of $1.51 per share, the warrant has a five year
expiration date once issued.
Other Provisions.
The purchase agreement contains a number of covenants by the Company, which
include:
- A grant of preemptive rights to the investors to participate in future
financings until the first anniversary of the closing date of the
financing;
- An agreement not to issue any shares of the Company's common stock or
securities or other rights to acquire shares of common stock until six (6)
months after the effective date, except under specified conditions intended
to ensure the terms are no less favorable to the Company than the terms of
this financing; and,
- An agreement not to effect any transaction involving the issuance of
securities convertible, exercisable or exchangeable for the Company's
common stock at a price per share or rate which may change over time, which
the Company refers to as a variable-rate transaction, so long as any shares
of Series D-1 Preferred Stock are outstanding.
In connection with this financing, Laurus consented to and waived certain
contractual rights in respect of the authorization and issuance of one or more
series of Series D-1 Preferred Stock and the other transactions described below,
and certain other transactions. The Company paid Laurus Capital Management,
L.L.C., and the manager of Laurus, $87,000 in connection with Laurus's delivery
of the consent and $1,000 to Laurus' counsel for their related fees.
PAGE 10
COMMON STOCK AND WARRANTS
The Company adopted FAS 123(R) to account for its stock-based compensation
beginning January 1, 2006. Previously, the Company elected to account for its
stock-based compensation plans under APB 25. The Company computed, for pro
forma disclosure purposes, the value of all options granted during the
three--months ending March 31, 2005 using the minimum value method as prescribed
by SFAS 123 and amended by SFAS 148. Under this method, the Company used the
risk-free interest rate at the date of grant, the expected volatility, the
expected dividend yield and the expected life of the options to determine the
fair value of options granted. The risk-free interest rates ranged from 6.0% to
6.5%, expected volatility was 117%, the dividend yield was assumed to be zero,
and the expected life of the options was assumed to be three to five years based
on the average vesting period of options granted.
If the Company had accounted for its options in accordance with SFAS 123(R) in
2005, the total value of options granted during the three-month period ending
March 31, 2005 would have been amortized on a pro forma basis over the vesting
period of the options. Thus, the Company's consolidated net income (loss) would
have been as follows:
Net Income (Loss). . . . . . . . . . . . . . . . . . . 2005
------------------------------------------------------- ----------
As reported. . . . . . . . . . . . . . . . . . . . . . $ 101,223
Add: Stock based employee compensation expense
included in reported net income. . . . . . . . . . . . $ -
Less: Stock based employee compensation expense
determined under the fair value based method for all
awards . . . . . . . . . . . . . . . . . . . . . . . . $(213,553)
------------------------------------------------------- ----------
Pro forma. . . . . . . . . . . . . . . . . . . . . . . $(112,330)
------------------------------------------------------- ----------
------------------------------------------------------- ----------
For the quarter ended March 31, 2006, the Company expensed approximately $91,000
of stock option expenses due to SFAS 123(R) in its financial statements.
5. GOODWILL
On January 31, 2006, SpaceDev acquired Starsys Research Corporation and in
accordance with U.S. generally accepted accounting principles, the merger was
accounted for using the purchase method of accounting. Under the purchase method
of accounting, the total estimated purchase price was allocated to Starsys' net
tangible assets and identifiable intangible assets based on their fair values as
of the date of completion of the merger. The excess of the purchase price over
those fair values was recorded as goodwill. Goodwill is not amortized but is
tested for impairment at least annually. The combined company will incur
additional amortization expense based on the identifiable amortizable intangible
assets acquired pursuant to the merger agreement and their relative useful
lives. Additionally, to the extent the value of goodwill or identifiable
intangible assets or other long-lived assets become impaired, the combined
company may be required to record material charges relating to the impairment.
The goodwill balance as of March 31, 2006 was approximately $12.2 million.
PAGE 11
The following is a schedule of the goodwill incurred on the Starsys acquisition.
-------------------------------- -----------
Starsys Total Assets . . . . . . $(7,851,494)
Starsys Total Liabilities. . . . 13,054,140
Cash to Starsys Stockholders . . 410,791
Equity to Starsys Stockholders . 5,576,846
Fees Associated with Acquisition 1,056,079
-------------------------------- -----------
$12,246,362
-------------------------------- -----------
-------------------------------- -----------
6. NEW ACCOUNTING PRONOUNCEMENTS
There were no recent Accounting Pronouncements that affected the Company during
the first quarter of 2006. For past pronouncements, please refer the Company's
10-KSB filed on March 28, 2006.
7. CHANGE IN ACCOUNTING PRINCIPLE AND ACCOUNTING FOR SHARE-BASED
COMPENSATION
The Company adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004) (123(R)) on January
1, 2006. Upon the adoption of SFAS No. 123(R), compensation costs associated
with share-based compensation and stock option awards will be recorded to
expense over the requisite period(s) associated with the stock or options. Prior
to the adoption of SFAS 123(R), the Company accounted for share-based
compensation and stock option awards issued to employees, directors and officers
under the recognition and measurement principles of Accounting Principles Board
(APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Generally, no share-based employee compensation expense was
recognized for stock option grants, as all options granted had an exercise price
equal to the fair market value of the underlying common stock at the date of
grant. Similarly, no compensation expense had been recognized under the
Company's 1999 Employee Stock Purchase Plan (ESPP).
As noted above, in the first quarter 2006, the Company adopted SFAS No. 123(R),
which requires companies to measure an equity instrument based on the grant-date
fair value of the award and expense the value. The Company uses the
Black-Scholes pricing model to determine the fair value of its options on the
measurement date. The cost is recognized over the requisite period (usually the
vesting period). During the first quarter 2006, the Company had stock option
expense of $90,701 related to a new officer stock option award coincident with
the Starsys merger. Without the adoptions of SFAS No. 123(R), the Company's
operating income, net income and net income per share would have been increased
to the pro forma non-GAAP amounts indicated below:
PAGE 12
SPACEDEV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - SUPPLEMENTAL SCHEDULE
(UNAUDITED)
Three-Months Ending March 31,. . . . . . . . . . . . . 2006 % 2005 %
------------------------------------------------------- ------------ -------- ----------- -------
GAAP OPERATING INCOME. . . . . . . . . . . . . . . . . $ (46,398) -0.6% $ 65,567 3.6%
FAS 123(R) stock option expense . . . . . . . . . . 90,701 1.3% - 0.0%
------------------------------------------------------- ------------ -------- ----------- -------
NON-GAAP OPERATING INCOME. . . . . . . . . . . . . . . 44,303 0.6% 65,567 3.6%
------------------------------------------------------- ------------ -------- ----------- -------
NON-OPERATING INCOME/(EXPENSE)
Interest income . . . . . . . . . . . . . . . . . . 33,615 0.5% 7,960 0.4%
Interest expense. . . . . . . . . . . . . . . . . . (5,283) -0.1% (1,222) -0.1%
Gain on building sale . . . . . . . . . . . . . . . 29,318 0.4% 29,318 1.6%
------------------------------------------------------- ------------ -------- ----------- -------
TOTAL NON-OPERATING INCOME . . . . . . . . . . . . . . 57,650 0.8% 36,056 2.0%
------------------------------------------------------- ------------ -------- ----------- -------
NON-GAAP NET INCOME BEFORE TAXES . . . . . . . . . . . $ 101,953 1.4% $ 101,623 5.6%
------------------------------------------------------- ------------ -------- ----------- -------
INCOME TAX PROVISION . . . . . . . . . . . . . . . . . 4,235 0.1% 400 0.0%
NON-GAAP NET INCOME. . . . . . . . . . . . . . . . . . $ 97,718 1.4% $ 101,223 5.6%
------------------------------------------------------- ------------ -------- ----------- -------
NET INCOME PER SHARE:
Non-GAAP Net Income Per Share . . . . . . . . . . $ 0.00 0.0% $ 0.00 0.0%
------------------------------------------------------- ------------ -------- ----------- -------
Weighted-Average Shares Outstanding . . . . . . . 27,276,451 21,291,972
FULLY DILUTED NET INCOME PER SHARE:
Non-GAAP Fully Diluted Income Per Share . . . . . $ 0.00 $ 0.00
------------------------------------------------------- ------------ -----------
Fully Diluted Weighted-Average Shares Outstanding. 36,225,300 29,908,287
------------------------------------------------------- ------------ -----------
------------------------------------------------------- ------------ -----------
The Company believes that evaluating its ongoing operating results with these
non-GAAP measurements may be useful as a supplement to its standard GAAP
financial measurement presentation. Accordingly, the Company has chosen certain
non-GAAP financial information to evaluate its ongoing operations and for
internal planning and forecasting purposes. The Company believes that non-GAAP
financial measures should be considered in addition to, and not a substitute
for, financial information prepared in accordance with GAAP. The Company
presents such non-GAAP financial measures in reporting its financial results to
provide additional and supplemental disclosure to evaluate operating results.
Whenever the Company uses a non-GAAP financial measurement, it provides a
reconciliation of the non-GAAP financial measure to the most closely applicable
GAAP financial measurement.
8. UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma combined statements of operations give effect
to the merger of SpaceDev and Starsys using the purchase method of accounting,
as required by Statement of Financial Accounting Standard No. 141, "Business
Combinations." The Company acquired Starsys Research Corporation on January 31,
2006 and is "accounting acquirer" for accounting purposes. Under this method of
accounting, the combined company will allocate the purchase price to the fair
value of assets of Starsys deemed to be acquired, including identifiable
intangible assets and goodwill. The purchase price allocation is subject to
revision when the combined company obtains additional information regarding
asset valuation. The unaudited pro forma combined statements of operations are
based on respective historical consolidated financial statements and the
accompanying notes of the Company, and those of Starsys included herein.
PAGE 13
The unaudited pro forma combined statements of operations for the three months
ended March 31, 2006 assume the merger took place on January 1, 2006 and
combines SpaceDev's historical statement of operations for the year ended
December 31, 2005 with Starsys' historical statement of operations for the year
ended December 31, 2005 as if the merger took place on January 1, 2005. The
unaudited pro forma combined statements of operations should be read in
conjunction with the related notes included in this Form 10-QSB and the
consolidated audited financial statements of SpaceDev, Inc. The unaudited pro
forma combined statements of operations are not necessarily indicative of what
the actual results of operations and financial position would have been had the
merger taken place on January 1 of each period presented and do not indicate
future results of operations.
PAGE 14
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
MARCH 31, 2006
SPACEDEV STARSYS PRO FORMA ADJUSTMENTS PRO FORMA
------------ ----------- ----------------------- ------------
NET SALES. . . . . . . . . . . . . . $ 2,889,592 $5,920,870 $ (51,345) $ 8,759,117
------------------------------------- ------------ ----------- ----------------------- ------------
COST OF SALES. . . . . . . . . . . . 2,097,469 4,443,218 - 6,540,687
------------------------------------- ------------ ----------- ----------------------- ------------
GROSS MARGIN . . . . . . . . . . . . 792,123 1,477,652 (51,345) 2,218,430
OPERATING EXPENSES
Marketing and sales expense . . . 497,614 265,300 (51,345) 711,569
Research and development. . . . . 67,412 9,082 - 76,494
General and administrative. . . . 364,718 1,176,493 - 1,541,211
------------------------------------- ------------ ----------- ----------------------- ------------
TOTAL OPERATING EXPENSES . . . . . . 929,744 1,450,875 (51,345) 2,329,274
------------------------------------- ------------ ----------- ----------------------- ------------
INCOME/(LOSS) FROM OPERATIONS. . . . (137,621) 26,777 - (110,844)
------------------------------------- ------------ ----------- ----------------------- ------------
NON-OPERATING INCOME/(EXPENSE)
Interest income . . . . . . . . . 33,615 28,306 - 61,921
Interest expense. . . . . . . . . (110) (27,656) - (27,766)
Gain on building sale . . . . . . 29,318 - - 29,318
------------------------------------- ------------ ----------- ----------------------- ------------
TOTAL NON-OPERATING INCOME/(EXPENSE) 62,823 650 - 63,473
------------------------------------- ------------ ----------- ----------------------- ------------
INCOME/(LOSS) BEFORE INCOME TAXES. . (74,798) 27,427 - (47,371)
Income tax provision . . . . . . . . 4,200 35 - 4,235
------------------------------------- ------------ ----------- ----------------------- ------------
NET INCOME/(LOSS). . . . . . . . . . $ (78,998) $ 27,392 $ - (51,606)
------------------------------------- ------------ ----------- ----------------------- ------------
NET INCOME/(LOSS) PER SHARE:
Net Income/(Loss) . . . . . . . $ (0.00) $ 0.05 $ - $ (0.00)
------------------------------------- ------------ ----------- ----------------------- ------------
Shares Outstanding . . . . . . . . . 28,710,496 520,000 (520,000) 28,710,496
------------------------------------- ------------ ----------- ----------------------- ------------
------------------------------------- ------------ ----------- ----------------------- ------------
PAGE 15
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
DECEMBER 31, 2005
SPACEDEV STARSYS PRO FORMA ADJUSTMENTS PRO FORMA
------------ ------------ ----------------------- ------------
NET SALES. . . . . . . . . . . . . . $ 9,005,011 $17,762,730 $ - $26,767,741
------------------------------------- ------------ ------------ ----------------------- ------------
COST OF SALES. . . . . . . . . . . . 6,905,902 14,721,176 - $21,627,078
------------------------------------- ------------ ------------ ----------------------- ------------
GROSS MARGIN . . . . . . . . . . . . 2,099,109 3,041,554 - $ 5,140,663
OPERATING EXPENSES
Marketing and sales expense . . . 673,636 - 673,636
General and administrative. . . . 1,113,973 6,000,676 - 7,114,649
------------------------------------- ------------ ------------ ----------------------- ------------
TOTAL OPERATING EXPENSES . . . . . . 1,787,609 6,000,676 - 7,788,285
------------------------------------- ------------ ------------ ----------------------- ------------
INCOME/(LOSS) FROM OPERATIONS. . . . 311,500 (2,959,122) - (2,647,622)
------------------------------------- ------------ ------------ ----------------------- ------------
NON-OPERATING INCOME/(EXPENSE)
Interest income . . . . . . . . . 105,840 - - 105,840
Rental income . . . . . . . . . . - 88,146 88,146
Interest expense. . . . . . . . . (2,873) (506,525) - (509,398)
Gain on building sale . . . . . . 117,272 - - 117,272
Loan fee - equity compensation. . (28,875) - - (28,875)
------------------------------------- ------------ ------------ ----------------------- ------------
TOTAL NON-OPERATING INCOME/(EXPENSE) 191,364 (418,379) - (227,015)
------------------------------------- ------------ ------------ ----------------------- ------------
INCOME/(LOSS) BEFORE INCOME TAXES. . 502,864 (3,377,501) - (2,874,637)
Income tax provision . . . . . . . . 1,600 - - 1,600
------------------------------------- ------------ ------------ ----------------------- ------------
NET INCOME/(LOSS). . . . . . . . . . $ 501,264 $(3,377,501) $ - (2,876,237)
------------------------------------- ------------ ------------ ----------------------- ------------
NET INCOME/(LOSS) PER SHARE:
Net Income/(Loss) . . . . . . . $ 0.02 $ (6.49) $ (0.08)
------------------------------------- ------------ ------------ ----------------------- ------------
Shares Outstanding . . . . . . . . . 29,030,858 520,447 5,357,143 34,388,001
------------------------------------- ------------ ------------ ----------------------- ------------
------------------------------------- ------------ ------------ ----------------------- ------------
The unaudited pro forma combined consolidated information reflects our best
estimates. The actual results of operations may have differed from the pro forma
amounts reflected herein because of various factors, including, without
limitation, access to additional information, changes in value and changes in
operating results. However, the Company believes that any final adjustments will
not be material to the statement of operations.
9. SUBSEQUENT EVENTS
On April 1, 2006, the Company was awarded the third task order on a $43-million
contract with the Missile Defense Agency to conduct a micro-satellite
Distributed Sensing Experiment (DSE), as well as other micro-satellite studies,
as required. The second Task Order was awarded on October 20, 2004 (although
PAGE 16
effective October 1, 2004) and was completed on March 31, 2006. The commencement
of Phase III of this contract followed a successful DSE Critical Design Review
held from March 7 through March 8, 2006. The third Task Order was awarded for a
total of $1,547,266 and will run through May 31, 2006.
PAGE 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without limitation our fiscal year 2005 Form 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 those identified in the "Risk
Factors" subsection below.
OVERVIEW
We are engaged in the conception, design, development, manufacture,
integration and operations of space technology systems, products and services.
Our historic SpaceDev operations 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 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 acquired Starsys Research Corporation on January 31, 2006 in a tax-free
forward triangular merger, renamed the company Starsys, Inc., and now hold it as
a wholly-owned subsidiary of SpaceDev. Starsys is engaged in the design and
manufacture of mechanical and electromechanical subsystems and components for
spacecraft. Starsys' subsystems enable critical spacecraft functions such as
pointing solar arrays and communication antennas and restraining, deploying and
actuating moving spacecraft components. Starsys manufactures a wide range of
products that include bi-axis gimbals, flat plate gimbals, solar array pointing
mechanisms, deployable booms, separation systems, thermal louvers, actuators,
restraint devices and cover systems. Starsys' products are sold both as
"off-the-shelf" catalog products, which represent previously qualified devices
with spaceflight history, and as custom systems that are developed for specific
applications. Starsys' products are typically sold directly to spacecraft
manufacturers. Starsys' customer base is segregated into three major segments:
PAGE 18
(1) domestic and international commercial spacecraft (communication and imaging
satellites), (2) civil spacecraft (NASA) that are primarily scientific in nature
and (3) defense spacecraft that support the United States' military capability.
Starsys also offers products to non-space customers, including aerospace,
maritime, and industrial customers.
Starsys' engineering and manufacturing capabilities position the company to
provide both mechanical and electromechanical subsystems for spacecraft.
Starsys' strategy is to identify opportunities to develop products from custom
mechanical and electromechanical subsystems. To extend the product life cycle,
Starsys has developed and expanded a "product platforms" business model. Product
platforms are subsystems for which non-recurring and development engineering
have been completed and for which there is continued customer demand. Starsys'
product offerings currently include High Output Paraffin ("HOP") actuators,
hinges, battery bypass switches, thermal louvers, bi-axial gimbals and solar
array drives, among others. The product life cycle for this type of product
within the space industry is approximately 15 years.
The acquisition of Starsys fundamentally changed our profile. Starsys is a
mature operating company with 2005 revenues of approximately $18 million and
2005 losses of approximately $3.4 million. We believe there are numerous
potential synergies between the historic SpaceDev business, and Starsys'
business, including but not limited to providing SpaceDev with a production
capability as its technologies migrate from advanced systems to products, access
to quality facilities and a strong market of aerospace engineers, a
diversification of customers and revenues, and the ability to bid on larger and
more vertically integrated programs and projects.
Our historic SpaceDev business 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.
During the first three months of 2006, 85% of our net sales were generated
from direct government contracts, 7% was generated from government-related work
through subcontracts with others, and 8% was generated from commercial
contracts. For the same three month period in 2005, approximately 95% of our net
sales were generated by government or government-related work. We will continue
to seek both government and commercial business and anticipate that net sales
from government sources will continue to represent in excess of 80% of our net
sales for the next several years. 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 increased international revenue and contract
opportunities, we are restricted by export control regulations, including
International Traffic in Arms Regulations, which may limit our ability to
develop market opportunities outside the United States on some of our products.
At this time, over 70% of our forecasted sales for 2006 are under contract
or near contract award. We may not be able to win enough new business to
achieve our targeted growth projection or to maintain a positive cash flow
position. During the first three months of 2006 we submitted approximately
twenty-five bids for government or commercial programs ranging from $25,000 to
$350 million and continued our work with the United States Congress to identify
directed funding for our programs.
PAGE 19
In order to perform the Missile Defense Agency contract (described below)
on schedule and 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. We are actively seeking to hire
spacecraft and propulsion engineers, and we are investigating various
partnership arrangements to increase resource availability.
SELECTION OF SIGNIFICANT CONTRACTS
On July 18, 2005, we were awarded a subcontract to provide scientific,
engineering, development and programmatic support to the development and
demonstration of innovative SSA (space situational awareness) nanosatellite
(<15kg) spacecraft. SSA is the ability to search, identify and monitor
spacecrafts for the purpose of obtaining space superiority. The subcontract
covers the conceptual/preliminary phase of development and includes all aspects
of potential systems from the platforms and associated payloads to the links and
nodes and ground support. The cost plus fixed fee subcontract resulted in
revenues of approximately $120,000. We completed this subcontract in December
2005. In January 2006, we submitted a proposal for the next phase subcontract
and, in March 2006, we were awarded the subcontract in the amount of
approximately $1.2 million and began work on this phase.
On February 28, 2006, we were awarded two important Boom Technology
contracts for advance research and development of a self-deployed articulated
boom for approximately $950,000 and a jack screw deployed boom for approximately
$1.5 million by the Air Force Research Laboratory. AFRL placed these contracts
with Starsys which will leverage the significant technical talent and advances
Starsys engineers have already made in this critical space technology.
On April 1, 2006, we were awarded the third task order on 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 in
support of the Advanced Systems Deputate of the Missile Defense Agency, which
contract was originally awarded on March 31, 2004. The microsatellite
distributed sensing experiment is now intended to analyze, design, develop,
fabricate, integrate, test, operate and support a networked cluster of three
formation-flying boost phase and midcourse tracking microsatellites to support
national missile defense. The milestone-based, multiyear, multiphase contract
had an effective start date of March 1, 2004. This effort is being accomplished
in a phased approach. The first phase, or "Task Order," for approximately $1.1
million was completed on September 30, 2004 and resulted in a general mission
and microsatellite design. The second Task Order for approximately $8.3 million
was awarded in October 2004 and was originally expected to be completed by
January 2006 but was extended at the request of the Missile Defense Agency, and
subsequently completed on March 31, 2006. The second Task Order resulted in a
detailed mission and microsatellite design, as exemplified by a successful
Critical Design Review in March 2006. In addition to the three networked
microsat under our second Task Order, the $43 million contract also envisioned
an option for a second three microsats using laser communication technology. We
were informed in 2005 that the Missile Defense Agency had re-routed the laser
communications experiment to another program and that they would not be
exercising their option for the additional microsats at this time; however, the
contract vehicle remained at $43 million and left open the opportunity for some
other purchase to take its place. We estimate that the second cluster would
have represented approximately $10 million of the $43 million contract, and have
reduced our current backorder accordingly. We believe the remaining unbilled
contract backlog amount of approximately $25 million to be secure. The third
Task Order was awarded on April 1, 2006 for a total of $1,547,266 and will run
through May 31, 2006. We expect either a modification to the third Task Order
or a fourth Task Order to be awarded by the Missile Defense Agency before the
end of May 2006, which is expected to fund the program through the end of the
government fiscal year. We expect continued modifications to the current phase
throughout 2006 and 2007.
PAGE 20
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. Due to
our January 2006 acquisition of Starsys, all 2006 -vs.- 2005 comparisons are of
limited meaningfulness and usefulness.
THREE-MONTHS ENDING MARCH 31, 2006 -VS.- THREE-MONTHS ENDING MARCH 31, 2005
During the three-months ending March 31, 2006, we had net sales of
approximately $7,175,000 as compared to net sales of approximately $1,807,000
for the same period in 2005. Sales increased primarily due to our acquisition
of Starsys on January 31, 2006 which has generated revenues of approximately
$4.3 million, as well as the further work on our existing government contracts
of approximately $2.9 million, particularly our contract with the Missile
Defense Agency which generated revenues in excess of approximately $2.4 million.
For the three months ended March 31, 2006, revenue from government and
government related work was approximately $6,489,000 and revenue from commercial
customers was approximately $686,000. Our government customers include but are
not limited to the Missile Defense Agency, the Air Force Research Laboratory,
NASA, and the U.S. Army. Our government related work customers include but are
not limited to General Dynamics, Northrop Grumman and Raytheon. Commercial
customers include, Lockheed Martin and Sumitomo. Revenue for the three-months
ended March 31, 2005 primarily represented $1,444,000 of work on the second Task
Order for the Missile Defense Agency contract. Ongoing Small Business Innovation
Research contracts with the Air Force Research Laboratory represented sales of
approximately $310,000 in the three-months ending March 31, 2005.
For the three-months ended March 31, 2006, we had costs of sales (direct
and allocated costs associated with individual contracts) of approximately
$5,265,000 or 73.5% of net sales, as compared to approximately $1,397,000, or
77.3% of net sales, during the same period in 2005. The increase in cost of
sales and the improved gross margin percentage were both due to the higher
margin contracts and products sold by Starsys. We continue to focus efforts on
managing our growth including but not limited to recruiting new talented
engineers, developing and acquiring project management skills and creating or
expanding systems to assist in the efficient and effective management of our
projects.
We experienced an increase of approximately $1,612,000 in operating
expenses from approximately $344,000, or 19.1% of net sales, for the
three-months ending March 31, 2005 to approximately $1,956,000, or 27.3% of net
sales, for the three-months ending March 31, 2006. Operating expenses include
general and administrative expenses, research and development expenses,
marketing and sales expenses, and amortization expense for stock options under
FASB 123(R).
- General and administrative expenses increased approximately $949,000 from
approximately $191,000, or 10.6% of net sales, for the three-months ending
March 31, 2005 to approximately $1,140,000, or 15.9% of net sales, for the
same three month period in 2006. This increase is attributed mainly to the
assumption of general and administrative costs from Starsys and the
addition of our new Chief Executive Officer. We do expect to recognize some
cost saving and efficiencies as the companies eliminate redundancies in
certain general and administrative functions.
- Research and development expenses increased during the first quarter of
2006, from approximately $8,000, or 0.1% of net sales, for the three-months
ending March 31, 2005, to approximately $82,000, or 1.1% of net sales,
during the same period in 2006. The total dollar value increased by
approximately $74,000, mainly due to a shift in cost categorization, as our
Chief Executive Officer became our Chief Technology Officer. We have begun
an effort to focus a limited amount of our resources on internal IR&D
efforts.
PAGE 21
- Marketing and sales expenses increased during the first quarter of 2006,
from approximately $145,000, or 8.0% of net sales, for the three-months
ending March 31, 2005, to approximately $644,000, or 9.0% of net sales,
during the same period in 2006. The total dollar increase of approximately
$499,000 was mainly due to our decision to bid on certain large proposals
in January and February 2006 as well as absorbing a larger marketing and
sales organization as part of the merger with Starsys.
- Our stock option expense is based on a calculation using the minimum value
method as prescribed by FAS 123(R), otherwise known as the Black-Scholes
method. Under this method, we used a risk-free interest rate at the date of
grant, an expected volatility, an expected dividend yield and an expected
life of the options to determine the fair value of options granted. The
risk-free interest rate was estimated at 4.0%, expected volatility was
86.7%, the dividend yield was assumed to be zero, and the expected life of
the options was assumed to be three years based on the average vesting
period of options granted. The total expense for the three months ended
March 31, 2006 was $90,701 as compared to no expense during the same period
in 2005, as we adopted FAS 123(R) on January 1, 2006.
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. Non-operating expenses decreased to the point that we
recorded non-operating income beginning in 2005.
Interest expense for the three-months ending March 31, 2006 and 2005 was
insignificant as we incurred no interest expense on our revolving credit
facility, which had a zero balance for the three-months ending March 31, 2006
and 2005. We began generating interest income in late 2004, and the first
quarters of 2006 and 2005, we recognized approximately $34,000 and $8,000,
respectively in interest income due to our cash management practices.
We recognized approximately $29,000 and $29,000 of the deferred gain on the
sale of the building during the three-months ending March 31, 2006 and 2005,
respectively, and we will continue to amortize the remaining deferred gain of
approximately $801,000 into non-operating income over the remainder of the
lease.
During the three-months ending March 31, 2006, we generated net income of
approximately $7,000, or 0.1% of net sales, despite recognizing over $90,000 in
non-cash charges related to expensing stock options under FAS 123(R), compared
to net income of approximately $101,000, or 5.6% of net sales, for the same
three-month period in 2005. During the three-months ending March 31, 2006, we
incurred a positive EBITDA (earnings before interest taxes depreciation and
amortization) of approximately $192,000, or 2.7% of net sales, compared to a
EBITDA of approximately $95,000, or 5.2% of net sales, for the three-months
ending March 31, 2005.
PAGE 22
The following table reconciles Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) to net income (loss) for the three-months
ending March 31, 2006 and 2005, respectively, and represents our ninth
consecutive quarter of positive and growing EBITDA:
FOR THE THREE MONTHS ENDING . . . . . MARCH 31, 2006 March 31, 2005
(UNAUDITED) (Unaudited)
NET INCOME. . . . . . . . . . . . . . $ 7,017 $ 101,223
------------------------------------- ---------------- ----------------
Interest Income . . . . . . . . . . . (33,615) (7,960)
Interest Expense. . . . . . . . . . . 5,283 1,222
Gain on Building Sale . . . . . . . . (29,318) (29,318)
Stock Option Expense . . . . . . . . 90,701 -
Provision for income taxes. . . . . . 4,235 400
Depreciation and Amortization . . . . 147,370 29,116
------------------------------------- ---------------- ----------------
EBITDA* . . . . . . . . . . . . . . . $ 191,673 $ 94,683
------------------------------------- ---------------- ----------------
* Earnings Before Interest, Taxes, Depreciation and Amortization.
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. Beginning in 2003
through the current quarter in 2006, we showed continued progress in total
revenue as well as in EBITDA.
[GRAPHIC OMITED]
PAGE 23
[GRAPHIC OMITED]
FOR THE THREE MONTHS ENDING. . . . . . . 3/31/04 6/30/04 9/30/04 12/31/04 3/31/05 6/30/05
(Unaudited). . . . . . . . . . . . . (Unaudited) (Unaudited) (Unaudited) (UNAUDITED) (UNAUDITED) (UNAUDITED)
NET INCOME (LOSS). . . . . . . . . . . . $ (442,549) $(1,286,866) $ (602,888) $ (694,750) $ 101,223 $ 110,938
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Interest Income. . . . . . . . . . . . . - - (5,619) (13,386) (7,960) (36,824)
Interest Expense . . . . . . . . . . . . 19,788 19,736 23,110 (6,707) 1,222 609
Non-Cash Interest exp. (Debt Discount) . 464,000 1,329,313 663,481 797,636 - 28,875
Gain on Building Sale. . . . . . . . . . (29,318) (29,318) (29,318) (29,318) (29,318) (29,318)
Stock option expense . . . . . . . . . . - - - - - -
Provision for income taxes . . . . . . . - - - 1,600 400 400
Depreciation and Amortization. . . . . . 15,954 16,533 22,749 28,250 29,061 35,077
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
EBITDA . . . . . . . . . . . . . . . . . $ 27,874 $ 49,398 $ 71,515 $ 83,325 $ 94,628 $ 109,758
---------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
CONTINUED:
FOR THE THREE MONTHS ENDING. . . . . . . 9/30/05 12/31/05 3/31/06
(Unaudited). . . . . . . . . . . . . (UNAUDITED) (UNAUDITED)
NET INCOME (LOSS). . . . . . . . . . . . $ 136,251 $ 152,851 $ 7,017
---------------------------------------- ------------ ------------ ---------
Interest Income. . . . . . . . . . . . . (24,848) (36,208) (33,615)
Interest Expense . . . . . . . . . . . . 452 590 5,283
Non-Cash Interest exp. (Debt Discount) . - - -
Gain on Building Sale. . . . . . . . . . (29,318) (29,318) (29,318)
Stock option expense . . . . . . . . . . - - 90,701
Provision for income taxes . . . . . . . 400 400 4,235
Depreciation and Amortization. . . . . . 44,078 83,708 147,370
---------------------------------------- ------------ ------------ ---------
EBITDA . . . . . . . . . . . . . . . . . $ 127,015 $ 172,023 $191,673
---------------------------------------- ------------ ------------ ---------
---------------------------------------- ------------ ------------ ---------
PAGE 24
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION FOR THREE-MONTHS ENDED MARCH 31, 2006 -VS.- THREE-MONTHS
ENDED MARCH 31, 2005
Net decrease in cash during the three-months ending March 31, 2006 was
approximately $4,607,000 compared to a cash increase of $344,000 for the same
three-month period in 2005, primarily due to the acquisition of Starsys Research
Corporation and related debt repayment and transaction costs. These items were
partially offset by the sale of our Series D-1 Preferred Stock to a small group
of institutional investors in January 2006. Net cash used in operating
activities totaled approximately $3,264,000 for the three-months ending March
31, 2006, a decrease of approximately $3,500,000 as compared to approximately
$236,000 provided by operating activities during the same three-month period in
2005, primarily due to the increase in accounts receivable which we received
upon the acquisition of Starsys as well as the increase in all other operating
expenses from the acquired company
Net cash used in investing activities totaled approximately $1,391,000 for
the three-months ending March 31, 2006, compared to approximately $43,000 used
in investing activities during the same three-month period in 2005. The
increase in cash used in investing activities is primarily due to the need to
provide working capital for the operations of Starsys, which was insolvent at
the time we acquired it.
Net cash provided by financing activities totaled approximately $47,000 for
the three-months ending March 31, 2006, which is a decrease of approximately
$104,000 from the approximately $151,000 provided by financing activities during
the same three-months in 2005. This is primarily attributable to the sale of
our Series D-1 Preferred Stock in January 2006, which was then used to fund the
merger with Starsys, pay off the secured debt, and pay down payables and other
accruals on Starsys' books at the end of January 2006.
At March 31, 2006, our cash, which included cash reserves and cash
available for investment, was approximately $1,143,000, as compared to
approximately $5,413,000 at March 31, 2005, a decrease of approximately
$4,270,000 mainly due to the use of cash to fund our acquisition of Starsys in
January 2006 and to provide working capital for the combined company in the
first quarter of 2006.
As of March 31, 2006, our backlog of funded and non-funded business was
approximately $37 million, compared to approximately $45 million as of March 31,
2005. With respect to the Missile Defense Agency program, we expect over $8
million in revenue to be generated in 2006. 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.
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 $2,484,000 and $2,075,000 as of March 31, 2006 and 2005,
respectively, consist primarily of the income tax benefits from net operating
loss and capital loss carry forwards, 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 $645,000 in 2006 from
$1,857,000 at December 31, 2005 to $2,502,000 at March 31, 2006. Of this
valuation allowance, $2,259,000, at March 31, 2006 is related to net operation
losses of the acquired business. The tax benefit of these tax loss carry
forwards, if and when realized, will reduce the existing value of goodwill.
At March 31, 2006, the Company had federal and state tax net operating loss
carry forwards of approximately $4,214,000 and $2,316,000, respectively. The
federal and state tax loss carry forwards will expire in 2023 and 2012,
respectively, unless previously utilized.
PAGE 25
The Company also has acquired federal and Colorado net operating losses in
conjunction with the acquisition of Starsys of approximately $5,727,000 and
$9,220,000, respectively. These net operating losses will be subject to an
annual limitation under internal revenue code section 382.
The Company also has federal and California research tax credit carry
forwards of approximately $68,000 and $47,000, respectively, which begin to
expire in 2018.
Pursuant to Internal Revenue Code Section 382 and 383, the Company's use of
its net operating losss and credit carry forwards may be limited as a result of
the cumulative changes in the ownership of more than 50% over a three year
period.
CASH POSITION
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. 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.
CRITICAL ACCOUNTING STANDARDS
Due to the acquisition of Starsys, our revenues transitioned in 2006 from
being primarily cost plus fixed fee contracts, where revenues are recognized as
costs are incurred and services are performed, to fixed-price contracts, where
revenues are recognized using the percentage-of-completion method of contract
accounting based on the ratio of total costs incurred to total estimated costs,.
Losses on contracts are recognized when they become known and reasonably
estimable (see the Notes to SpaceDev's 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
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. We adopted SFAS No. 123 in 1997. Through December
31, 2005, we have elected to measure compensation expense for our stock-based
PAGE 26
employee compensation plans using the intrinsic value method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees and provided pro forma
disclosures as if the fair value based method prescribed in SFAS No. 123 had
been utilized. (See the Note 4 to SpaceDev's 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. Through December 31, 2005, we
had chosen the latter approach.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment (FAS No. 123(R)), which replaces SFAS No. 123 and supersedes APB Opinion
No. 25. SFAS No. 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values. In addition, the adoption of SFAS No. 123R requires
additional accounting related to the income tax effects and additional
disclosure regarding the cash flow effects resulting from share-based payment
arrangements. SFAS No. 123R is effective January 1, 2006 for calendar year
companies. Accordingly, we implemented the revised standard in the first quarter
of 2006. [See Note 4 to our consolidated financial statements for additional
information.]
On December 20, 2005, in response to SFAS No. 123R, our Board of Directors
approved accelerating the vesting of all unvested stock options held by current
employees, including executive officers, and members of the Board of Directors.
The accelerated vesting was effective as of December 20, 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
There were no recent Accounting Pronouncements that affected the Company
during the first quarter of 2006. For past pronouncements, please refer to our
Form 10-KSB filed on March 28, 2006.
RISK FACTORS
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made herein and
presented elsewhere by management from time to time.
RISKS RELATED TO OUR COMPANY
SPACEDEV AND STARSYS HAVE EXPERIENCED LOSSES FROM OPERATIONS IN PRIOR
PERIODS AND HAVE BEEN REQUIRED TO SEEK ADDITIONAL FINANCING TO SUPPORT THEIR
BUSINESSES.
In prior years, both SpaceDev and Starsys have experienced operating losses
and, in some periods, revenues from operations have not been sufficient to fund
their respective operations. On a pro forma basis, the combined company would
have had a net loss from operations of approximately $5.0 million for the year
ended December 31, 2004 and $2.9 million for the year ended December 31, 2005,
assuming the merger had occurred on January 1, 2004. The success of the
combined company's business depends upon our ability to generate revenue from
existing contracts, to execute programs cost-effectively, to attract and
complete successfully additional government and commercial contracts, and
possibly to obtain additional financing. The likelihood of our success must be
PAGE 27
considered in light of the expenses, difficulties and delays frequently
encountered in connection with developing businesses, those historically
encountered by us, and the competitive environment in which we operate.
IF WE ARE UNABLE TO RAISE CAPITAL, WE MAY BE UNABLE TO FUND OPERATING CASH
SHORTFALLS AND FUTURE GROWTH OPPORTUNITIES.
In the past, both SpaceDev and Starsys have relied upon cash from financing
activities to fund part of the cash requirements of their respective businesses.
We may need additional financing to fund our projected operations or expansion
plans. Additional financing may not be available to us on acceptable terms, or
at all. Any financing may cause additional dilution to existing shareholders.
Any debt financing or other issuance of securities senior to common stock likely
will include financial and other covenants that will restrict our operating
flexibility and our ability to pay dividends to common shareholders. SpaceDev
has not paid dividends on its common stock in the past and does not anticipate
paying dividends on its common stock in the foreseeable future.
SOME OF OUR GOVERNMENT CONTRACTS ARE STAGED AND WE CANNOT GUARANTEE THAT
ALL STAGES OF THE CONTRACTS WILL BE AWARDED TO US.
Some of our government contracts are phased contracts in which the customer
may determine to terminate the contract between phases for any reason.
Accordingly, the entire contract amount may not be realized by us. In the event
that subsequent phases of some of our government contracts, including but not
limited to the Missile Defense Agency contract, are not awarded to us, it could
have a material adverse effect on our financial position and results of
operations.
WE PROVIDE OUR PRODUCTS AND SERVICES PRIMARILY THROUGH FIXED-PRICE AND COST
PLUS FIXED FEE CONTRACTS. STARSYS HAS EXPERIENCED SIGNIFICANT LOSSES ON
FIXED-PRICE CONTRACTS. COST OVERRUNS MAY RESULT IN FURTHER LOSSES AND, IF
SIGNIFICANT, COULD IMPAIR OUR LIQUIDITY POSITION.
Under fixed-price contracts, our customers pay us for work performed and
products shipped without adjustment for the costs we incur in the process.
Therefore, we generally bear all or a significant portion of the risk of losses
as a result of increased costs on these contracts. Starsys has experienced
significant cost overruns on development projects under its fixed-price
contracts, resulting in estimated losses on uncompleted contracts of $2.7
million for Starsys' fiscal 2004, and an additional $2.5 million for the twelve
months ended December 31, 2005. As of December 31, 2005, based on a formal
evaluation process, Starsys reserved approximately $1.5 million for potential
risks on these remaining development projects. Fixed-price contracts may
provide for sharing of unexpected costs incurred or savings realized within
specified limits and may provide for adjustments in price depending on actual
contract performance other than costs. We bear the entire risk of cost overruns
in excess of the negotiated maximum amount of unexpected costs to be shared. Any
significant overruns in the future could materially impair our liquidity and
operations.
Under cost plus fixed fee contracts, we are reimbursed for allowable
incurred costs plus a fee, which may be fixed or variable. There is no
guarantee as to the amount of fee we will be awarded under a cost plus fixed fee
contract with a variable fee. The price on a cost plus fixed fee reimbursable
contract is based on allowable costs incurred, but generally is subject to
contract funding limitations. Therefore, we could bear the amount of costs in
excess of the funding limitation specified in the contract, and we may not be
able to recover those cost overruns.
IF WE FAIL TO INTEGRATE OUR OPERATIONS EFFECTIVELY, THE COMBINATION OF
SPACEDEV AND STARSYS WILL NOT REALIZE ALL THE POTENTIAL BENEFITS OF THE MERGER
AND MAY BE COUNTER PRODUCTIVE.
PAGE 28
The integration of SpaceDev and Starsys is ongoing and may be time
consuming and expensive and may disrupt the combined company's operations if it
is not completed in a timely and efficient manner. If this integration effort is
not successful, the combined company's results of operations could be harmed.
In addition, the combined company may not achieve anticipated synergies or other
benefits of the merger. The combined company may encounter difficulties, costs
and delays involved in integrating their operations, including but not limited
to the following:
- failure to successfully manage relationships with customers and other
important relationships;
- failure of customers to accept new services or to continue using the
products and services of the combined company;
- difficulties in successfully integrating the management teams and employees
of the two companies;
- potential incompatibility of business cultures;
- challenges encountered in managing larger, more geographically dispersed
operations;
- the loss of key employees;
- diversion of the attention of management from other ongoing business
concerns;
- potential incompatibilities of processes, technologies and systems; and,
- potential difficulties integrating and harmonizing financial reporting
systems.
If the combined company's operations do not meet the expectations of
existing customers of either company, these customers may reduce the amount of
business or cease doing business with the combined company altogether, which
would harm the results of operations and financial condition of the combined
company.
If the anticipated benefits of the merger are not realized or do not meet
the expectations of financial or industry analysts, the market price of SpaceDev
common stock may decline. This could occur if, among other reasons:
- the integration of the two companies is unsuccessful;
- the combined company does not achieve the expected benefits of the merger
as quickly as anticipated or the costs of or operational difficulties
arising from the merger are greater than anticipated;
- the combined company's financial results after the merger are not
consistent with the expectations of management or financial or industry
analysts;
- the anticipated operating and product synergies of the merger are not
realized; or
- the combined company experiences the loss of significant customers or
employees as a result of the merger.
IF WE FAIL TO INTEGRATE STARSYS, INC., OUR NEW WHOLLY OWNED SUBSIDIARY, OUR
CASH FLOW AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED.
We recently acquired Starsys, Inc., as a subsidiary of SpaceDev. Starsys
which was insolvent at the time of the merger and we have begun making
post-acquisition cash investments into Starsys. As stated previously, SpaceDev
and Starsys have experienced losses from operations in prior periods, requiring
that we seek additional financing to support our businesses. Our operating
plans assume revenue and cash growth from SpaceDev and Starsys. If we are
unable to effectively integrate our new subsidiary, or if we are unable to
create positive cash flow within SpaceDev or Starsys, our cash flow and
operating results could be adversely affected.
PAGE 29
A SUBSTANTIAL PORTION OF OUR NET SALES ARE GENERATED FROM GOVERNMENT
CONTRACTS, WHICH MAKES US SUSCEPTIBLE TO THE UNCERTAINTIES INHERENT IN THE
GOVERNMENT BUDGETING PROCESS. IN ADDITION, MANY OF OUR CONTRACTS CAN BE
TERMINATED BY THE CUSTOMER.
Our concentration of government work makes us susceptible to government
budget cuts and policy changes, which may impact the award of new contracts or
future phases of existing contracts. Government budgets (both in general and as
to space and defense projects) are subject to the prevailing political climate,
which is subject to change at any time. Additionally, awarded contracts could
be altered or terminated prior to the time we recognize our projected revenue.
Many contracts are awarded in phases where future phases are not guaranteed to
us. In addition, obtaining contracts and subcontracts from government agencies
is challenging, and contracts often include provisions that are not standard in
private commercial transactions. For example, government contracts may:
- include provisions that allow the government agency to terminate the
contract without penalty under some circumstances;
- be subject to purchasing decisions of agencies that are subject to
political influence;
- contain onerous procurement procedures; and
- be subject to cancellation if government funding becomes unavailable.
Securing government contracts can be a protracted process involving
competitive bidding. In many cases, unsuccessful bidders may challenge contract
awards, which can lead to increased costs, delays and possible loss of the
contract for the winning bidder.
SPACEDEV COMMON SHAREHOLDERS WILL EXPERIENCE DILUTION IF OUR PREFERRED
STOCK IS CONVERTED OR OUR OUTSTANDING WARRANTS AND OPTIONS ARE EXERCISED.
As of May 1, 2006, SpaceDev is obligated to issue 9,776,177 shares of
SpaceDev common stock if all of SpaceDev's outstanding warrants are exercised
and shares of preferred stock converted. In addition, as of May 1, 2006,
SpaceDev has outstanding stock options to purchase an aggregate of 11,012,142
shares of SpaceDev common stock, of which 10,312,142 are currently vested. The
total number of shares, issuable upon the exercise or conversion of currently
vested warrants, options and preferred stock (20,088,319 shares) represents
approximately 70% of SpaceDev's issued and outstanding shares of common stock as
of May 1, 2006.
OUR HISTORIC SPACEDEV BUSINESS' LIMITED OPERATING HISTORY AND LACK OF
EXPERIENCE IN OUR NEW OR PROPOSED LINES OF BUSINESS MAKES IT DIFFICULT TO
PREDICT OUR FUTURE PROSPECTS.
SpaceDev has a limited operating history and, as a result, our historical
financial information is of limited value in projecting our future success in
these markets. We launched our first microsatellite, CHIPSat, in January 2003
and, in June, September and October, 2004, our hybrid rocket technology was
first utilized in connection with SpaceShipOne. We hope to sell an increasing
percentage of SpaceDev's products and services in commercial markets, but
virtually all of SpaceDev's historical work has been from government contracts
and government-related work. We recently announced our intention to enter the
launch services market by providing a microsat bus, integration services, and a
launch vehicle as a package. We will be dependent on the performance of Space
Exploration Technologies, a small company with limited operating history which
has not yet had a successful launch, for our first launch vehicle. Our
microsatellites, nanosatellites and launch services may not achieve market
acceptance, and our future prospects are therefore difficult to evaluate.
WE MAY NOT SUCCESSFULLY OR TIMELY DEVELOP PRODUCTS.
Many of our products and technologies are currently under various stages of
development. Further development and testing of our products and technologies
will be required to prove additional performance capability beyond current
PAGE 30
levels and to confirm commercial viability. Additionally, the final cost of
development cannot be determined until development is complete. Our ongoing and
future product development will depend, in part, on the ability to timely
complete our projects within estimated cost parameters and ultimately deploy the
product in a cost-effective manner. In addition, Starsys has contracted to
execute development programs under fixed price contracts. Under these
contracts, even if our costs begin to exceed the amount to be paid by the
customer under the contract, we are required to complete the contract without
receiving any additional payments from the customer. It is difficult to predict
accurately the total cost of executing these programs. If the costs to complete
these programs significantly exceed the payments from the customers under the
contracts, our results of operations will be harmed.
THE MARKETPLACE FOR OUR TECHNOLOGY AND PRODUCTS IS UNCERTAIN.
The demand for our technology, products and services is uncertain and we
may not obtain a sufficient market share to sustain our business or to increase
profitability. Our business plan assumes that near-term revenues will be
generated largely from government contracts for microsatellites and
electromechanical systems for spacecraft with a long-term commercial market
developing for private manned and unmanned space exploration. Microsatellites
and commercial space exploration are still relatively new concepts, and it is
difficult to predict accurately the ultimate size of the market. In addition, we
are developing new product areas such as large deployable structures, solar
array drives, slip rings and precision scanning assemblies for spacecraft. Many
of our products and services are new and unproven, and the true level of
customer demand is uncertain. Lack of significant market acceptance of our
products and services, delays in such acceptance, or failure of our markets to
develop or grow could negatively affect our business, financial condition, and
results of operations.
OUR OPERATING RESULTS COULD FLUCTUATE ON A QUARTERLY AND ANNUAL BASIS,
WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE OR DECLINE.
Our operating results may fluctuate from quarter-to-quarter and
year-to-year for a variety of reasons, many of which are beyond our control.
Factors that could affect our quarterly and annual operating results include
those listed below as well as others listed in this "Risk Factors" section:
- we may not be awarded all stages of existing or future contracts;
- the timing of new technological advances and product announcements or
introductions by us and our competitors;
- changes in the terms of our arrangements with customers or suppliers;
- our current reliance on a few customers for a significant portion of our
net sales;
- the failure of our key suppliers to perform as expected;
- general or particular political conditions that could affect spending for
the products that we offer;
- delays or failures to satisfy our obligations under our contracts on a
timely basis;
- the failure of our products to successfully launch or operate;
- the uncertain market for our technology and products;
- the availability and cost of raw materials and components for our products;
and
- the potential loss of or inability to hire key personnel.
As a result of these factors, period-to-period comparisons of our operating
results may not be meaningful, and you should not rely on them as an indication
of our future performance. In addition, our operating results may fall below the
expectations of public market analysts or investors. In this event, our stock
price could decline significantly.
WE FACE SIGNIFICANT COMPETITION AND MANY OF OUR COMPETITORS HAVE GREATER
RESOURCES THAN WE DO.
PAGE 31
We face significant competition for our government and commercial
contracts. Many of our competitors have greater resources than we do and may be
able to devote greater resources than us to research and development and
marketing. Given the sophistication inherent in our operations, larger
competitors may have a significant advantage and may be able to more efficiently
adapt and implement technological advances. In addition, larger and financially
stronger corporations have advantages over us in obtaining space and defense
contracts due to their superior marketing (lobbying) resources and the
perception that they may be a better choice than smaller companies for
mission-critical projects because of the higher likelihood that they will be
able to continue in business for the necessary future period. Furthermore, it
is possible that other domestic or foreign companies or governments, some with
greater experience in the space industry and many with greater financial
resources than we possess, could seek to produce products or services that
compete with our products or services, including new mechanisms and
electromechanical subsystems using new technology which could render our
products less viable. Some of our foreign competitors currently benefit from,
and others may benefit in the future from, subsidies from or other protective
measures implemented by their home countries.
OUR PRODUCTS AND SERVICES MAY NOT FUNCTION WELL UNDER CERTAIN CONDITIONS.
Most of our products are technologically advanced and tested, but sometimes
are not space qualified for performance under demanding operating conditions.
Our products may not be successfully launched or operated, or perform as
intended. Like most organizations that have launched satellite programs, we have
experienced and in the future will likely experience some product and service
failures, cost overruns, schedule delays, and other problems in connection with
our products. Our products and services are and will continue to be subject to
significant technological change and innovation. Our success will generally
depend on our ability to continue to conceive, design, manufacture and market
new products and services on a cost-effective and timely basis. We anticipate
that we will incur significant expenses in the design and initial manufacture
and marketing of new products and services.
LAUNCH FAILURES OR DELAYS COULD HAVE SERIOUS ADVERSE EFFECTS ON OUR
BUSINESS.
Launch failures or delays of our microsatellites could have serious adverse
effects on our business. Microsatellite launches are subject to significant
risks, the realization of which can cause disabling damage to or total loss of a
microsatellite, as well as damage to our reputation among actual and potential
customers. Delays in the launch could also adversely affect our net sales.
Delays could be caused by a number of factors, including:
- designing, constructing, integrating, or testing the microsatellite,
microsatellite components, or related ground systems;
- delays in receiving the license necessary to operate the microsatellite
systems;
- delays in obtaining the customer's payload;
- delays related to the launch vehicle;
- weather; and,
- other events beyond our control.
Delays and the perception of potential delay could negatively affect our
marketing efforts and limit our ability to obtain new contracts and projects.
OUR U.S. GOVERNMENT CONTRACTS ARE SUBJECT TO AUDITS THAT COULD RESULT IN A
MATERIAL ADVERSE AFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS IF
A MATERIAL ADJUSTMENT IS REQUIRED.
The accuracy and appropriateness of our direct and indirect costs and
expenses under our contracts with the U.S. government are subject to extensive
regulation and audit by the Defense Contract Audit Agency, by other agencies of
PAGE 32
the U.S. government or prime contractors. These entities have the right to
audit our cost estimates and/or allowable cost allocations with respect to
certain contracts. From time to time we may in the future be required to make
adjustments and reimbursements as a result of these audits. Responding to
governmental audits, inquiries or investigations may involve significant expense
and divert management attention. Also, an adverse finding in any such audit,
inquiry or investigation could involve contract termination, suspension, fines,
injunctions or other sanctions.
OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR KEY PERSONNEL. THE JANUARY
2006 IMPLEMENTATION OF FAS 123(R) AND THE RELATED DECEMBER 20, 2005 ACCELERATION
OF VESTING ALL OUTSTANDING STOCK OPTIONS REDUCED THE EFFECTIVENESS OF THE STOCK
OPTIONS AS A RETENTION DEVICE.
Our success will be dependent upon the efforts of key members of our
management and engineering team, including our chairman and chief technology
officer, James W. Benson, our chief executive officer and vice-chairman, Mark N.
Sirangelo, our president and chief financial officer, Richard B. Slansky, our
vice president of engineering, Frank Macklin, our vice president of programs and
new business development, Randall K. Simpson, the managing director of SpaceDev,
Scott Tibbitts, the president of Starsys, Inc., Robert Vacek, and certain other
SpaceDev personnel. The loss of any of these persons, or other key employees,
including personnel with security clearances required for classified work and
highly skilled technicians and engineers, could have a material adverse effect
on us. Our future success is likely to depend substantially on our continued
ability to attract and retain highly qualified personnel. The competition for
such personnel is intense, and our inability to attract and retain such
personnel could have a material adverse effect on us. At this time we do not
maintain key man life insurance on any of our key personnel.
One device we have historically used to enhance our ability to retain and
incent key personnel is the grant of stock options which are subject to vesting.
If the employee leaves us before the vesting period has been completed, the
employee must forfeit a portion of the stock options. In December 2005, in order
to avoid adverse financial reporting effects in future years under FAS 123(R) a
new accounting standard, we eliminated all future vesting requirements on all of
our 8,031,036 stock options then outstanding in the hands of employees,
officers, and directors.
OUR GROWTH MAY NOT BE MANAGEABLE AND OUR BUSINESS COULD SUFFER AS A RESULT.
Even if we are successful in obtaining new business, failure to manage the
growth could adversely affect our operations. We may experience extended periods
of very rapid growth, which could place a significant strain on our management,
operating, financial and other resources. Our future performance will depend in
part on our ability to manage growth effectively. We must develop management
information systems, including operating, financial, and accounting systems,
improve project management systems and processes and expand, train, and manage
our workforce to keep pace with growth. Our inability to manage growth
effectively could negatively affect results of operations and the ability to
meet obligations as they come due.
WE MAY NOT ADDRESS SUCCESSFULLY THE PROBLEMS ENCOUNTERED IN CONNECTION WITH
POTENTIAL FUTURE ACQUISITIONS.
We expect to consider opportunities to acquire or make investments in other
technologies, products and businesses that could enhance our capabilities,
complement our current products or expand the breadth of our markets or customer
base. We have limited experience in acquiring other businesses and technologies;
the Starsys acquisition was our first major acquisition.
Potential and completed acquisitions and strategic investments involve numerous
risks, including:
- problems assimilating the purchased technologies, products or business
operations;
- problems maintaining uniform standards, procedures, controls and policies;
- unanticipated costs associated with the acquisition;
- diversion of management's attention from our core business;
PAGE 33
- adverse effects on existing business relationships with suppliers and
customers;
- incompatibility of business cultures;
- risks associated with entering new markets in which we have no or limited
prior experience;
- dilution of common stock and shareholder value as well as adverse changes
in stock price.
- potential loss of key employees of acquired businesses; and
- increased legal and accounting costs as a result of the newly adopted rules
and regulations related to the Sarbanes-Oxley Act of 2002.
IF OUR KEY SUPPLIERS FAIL TO PERFORM AS EXPECTED, OUR REPUTATION MAY BE
DAMAGED. WE MAY EXPERIENCE DELAYS, LOSE CUSTOMERS AND EXPERIENCE DECLINES IN
REVENUES, PROFITABILITY, AND CASH FLOW.
We purchase a significant percentage of our product components and
subassemblies from third parties. If our subcontractors fail to perform as
expected or encounter financial difficulties, we may have difficulty replacing
them or identifying qualified replacements in a timely or cost effective manner.
As a result, we may experience performance delays that could result in
additional program costs, contract termination for default or damage to our
customer relationships which may cause our revenues, profitability and cash flow
to decline. In addition, negative publicity from any failure of one of our
products or sub-systems as a result of a supplier failure could damage our
reputation and prevent us from winning new contracts.
OUR LIMITED INSURANCE MAY NOT COVER ALL RISKS INHERENT IN OUR OPERATIONS.
We may find it difficult to insure certain risks involved in our
operations, including our launch vehicle and satellite operations, accidental
damage to high value customer hardware during the manufacturing process and
damages to customer spacecraft caused by our products not working to
specification. Insurance market conditions or factors outside of our control at
the time insurance is purchased could cause premiums to be significantly higher
than current estimates. Additionally, the U.S. Department of State has published
regulations which could significantly affect the ability of brokers and
underwriters to insure certain launches. These factors could cause other terms
to be significantly less favorable than those currently available, may result in
limits on amounts of coverage that we can obtain, or may prevent us from
obtaining insurance at all. Furthermore, proceeds from insurance may not be
sufficient to cover losses.
SEVERAL YEARS OF LOW DEMAND AND OVERCAPACITY IN THE COMMERCIAL SATELLITE
MARKET HAVE RESULTED IN SLOW GROWTH IN DEMAND FOR SPACE PRODUCTS.
The commercial satellite market has experienced pricing pressures due to
excess capacity in the telecommunications industry and weakened demand over the
past several years. Satellite demand, and thus subsystem and component orders,
have also been impacted by the business difficulties encountered by the
commercial satellite services industry. This has resulted in a reduction in the
total market size in the near term. While the market appears to be making a
recovery, growth in the demand for our products may be limited.
OUR COMPETITIVE POSITION WILL BE SERIOUSLY DAMAGED IF WE CANNOT PROTECT
INTELLECTUAL PROPERTY RIGHTS IN OUR TECHNOLOGY.
Our success, in part, depends on our ability to obtain and enforce
intellectual property protection for our technology. We rely on a combination of
patents, trade secrets and contracts to establish and protect our proprietary
rights in our technology. However, we may not be able to prevent
misappropriation of our intellectual property, and the agreements we enter into
may not be enforceable. In addition, effective intellectual property protection
may be unavailable or limited in some foreign countries.
PAGE 34
There is no guarantee any patent will be issued on any patent application
that we have filed or may file. Further, any patent that we may obtain will
expire, and it is possible that it may be challenged, invalidated or
circumvented. If we do not secure and maintain patent protection for our
technology and products, our competitive position will be significantly harmed
because it will be much easier for competitors to sell products similar to ours.
Alternatively, a competitor may independently develop or patent technologies
that design around our patented technology. In addition, it is possible that
any patent that we may obtain may not provide adequate protection and our
competitive position could be significantly harmed.
As we expand our product line or develop new uses for our products, these
products or uses may be outside the scope of our current patent applications,
issued patents, and other intellectual property rights. In addition, if we
develop new products or enhancements to existing products, there is no guarantee
that we will be able to obtain patents to protect them. Even if we do receive
patents for our existing or new products, these patents may not provide
meaningful protection. In some countries outside of the United States, effective
patent protection is not available. Moreover, some countries that do allow
registration of patents do not provide meaningful redress for violations of
patents. As a result, protecting intellectual property in these countries is
difficult and our competitors may successfully sell products in those countries
that have functions and features that infringe on our intellectual property.
We may initiate claims or litigation against third parties in the future
for infringement of our proprietary rights or to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and divert the efforts of our
technical and management personnel. As a result, our operating results could
suffer and our financial condition could be harmed, regardless of the outcome of
the case.
CLAIMS BY OTHER COMPANIES THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY
OR THAT PATENTS ON WHICH WE RELY ARE INVALID COULD ADVERSELY AFFECT OUR
BUSINESS.
From time to time, companies may assert patent, copyright and other
intellectual proprietary rights against our products or products using our
technologies or other technologies used in our industry. These claims may
result in our involvement in litigation. We may not prevail in such litigation
given the complex technical issues and inherent uncertainties in intellectual
property litigation. If any of our products were found to infringe on another
company's intellectual property rights, we could be required to redesign our
products or license such rights and/or pay damages or other compensation to such
other company. If we were unable to redesign our products or license such
intellectual property rights used in our products, we could be prohibited from
making and selling such products.
Other companies or entities also may commence actions seeking to establish
the invalidity of our patents. In the event that one or more of our patents are
challenged, a court may invalidate the patent or determine that the patent is
not enforceable, which could harm our competitive position. If any of our key
patents are invalidated, or if the scope of the claims in any of these patents
is limited by court decision, we could be prevented from licensing the
invalidated or limited portion of such patents. Even if such a patent challenge
is not successful, it could be expensive and time consuming to address, divert
management attention from our business and harm our reputation.
WE ARE SUBJECT TO SUBSTANTIAL REGULATION, SOME OF WHICH PROHIBITS US TO
SELL INTERNATIONALLY. ANY FAILURE TO COMPLY WITH EXISTING REGULATIONS, OR
INCREASED LEVELS OF REGULATION, COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
Our business activities are subject to substantial regulation by various
agencies and departments of the United States government and, in certain
circumstances, the governments of other countries. Several government agencies,
including NASA and the U.S. Air Force, maintain Export Control Offices to ensure
that any disclosure of scientific and technical information complies with the
Export Administration Regulations and the International Traffic in Arms
PAGE 35
Regulations, or "ITAR." Exports of our products, services and technical
information require either Technical Assistance Agreements, manufacturing
license agreements or licenses from the U.S. Department of State depending on
the level of technology being transferred. This includes recently published
regulations restricting the ability of U.S.-based companies to complete offshore
launches, or to export certain satellite components and technical data to any
country outside the United States. The export of information with respect to
ground-based sensors, detectors, high-speed computers, and national security and
missile technology items are controlled by the Department of Commerce. Failure
to comply with the ITAR and/or the Commerce Department regulations may subject
guilty parties to fines of up to $1 million and/or up to 10 years imprisonment
per violation.
In addition, the space industry has specific regulations with which we must
comply. Command and telemetry frequency assignments for space missions are
regulated internationally by the International Telecommunications Union, which
we refer to as the ITU. In the United States, the Federal Communications
Commission, which we refer to as the FCC, and the National Telecommunications
Information Agency, which we refer to as NTIA, regulate command and telemetry
frequency assignments. All launch vehicles that are launched from a launch site
in the United States must pass certain launch range safety regulations that are
administered by the U.S. Air Force. In addition, all commercial space launches
that we would perform require a license from the Department of Transportation.
Satellites that are launched must obtain approvals for command and frequency
assignments. For international approvals, the FCC and NTIA obtain these
approvals from the ITU. These regulations have been in place for a number of
years to cover the large number of non-government commercial space missions that
have been launched and put into orbit in the last 15 to 20 years. Any commercial
deep space mission that we would perform would be subject to these regulations.
We are also subject to laws and regulations regulating the formation,
administration and performance of, and accounting for, U.S. government
contracts. With respect to such contracts, any failure to comply with
applicable laws could result in contract termination, price or fee reductions,
penalties, suspension or debarment from contracting with the U.S. government.
We are also required to obtain permits, licenses, and other authorizations
under federal, state, local and foreign laws and regulations relating to the
environment. Our failure to comply with applicable law or government
regulations, including any of the above-mentioned regulations, could have
serious adverse effects on our business.
SPACEDEV'S STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE, WHICH
COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES OF OUR COMMON
STOCK.
The market prices of securities of technology-based companies like ours
particularly in industries (also like ours) where substantial value is ascribed
to a hope for future increase in the size of the total market, are often highly
volatile. The market price of our common stock has fluctuated significantly in
the past. Our market price may continue to exhibit significant fluctuations in
response to a variety of factors, many of which are beyond our control,
including:
- deviations in our results of operations from estimates;
- changes in estimates of our financial performance;
- changes in our markets, including decreased government spending or the
entry of new competitors;
- our inability to obtain financing necessary to operate our business;
- changes in technology;
- potential loss of key personnel;
- short selling;
- changes in market valuations of similar companies and stock market price;
- the Starsys merger; and
PAGE 36
- volume fluctuations generally, including resales by former Starsys
stockholders or by Laurus.
CHANGES IN STOCK OPTION ACCOUNTING RULES MAY ADVERSELY AFFECT OUR REPORTED
OPERATING RESULTS PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES, OUR STOCK PRICE AND OUR EFFORTS IN RECRUITING ADDITIONAL EMPLOYEES.
Technology companies, in general, and our company in particular, depend
upon and use broad based employee stock option programs to hire, incent and
retain employees in a competitive marketplace. Through fiscal 2005, we did not
recognize compensation expense for stock options issued to employees or
directors, except in limited cases involving modifications of stock options, and
we instead disclosed in the notes to our financial statements information about
what such charges would be if they were expensed. An accounting standard setting
body has adopted a new accounting standard that will require us to record
equity-based compensation expense for stock options and employee stock purchase
plan rights granted to employees based on the fair value of the equity
instrument at the time of grant. We are now recording these expenses beginning
with the first quarter of 2006. The change in accounting rules will lead to a
decrease in reported earnings, if we have earnings, or an increased loss, if we
do not have earnings. This may negatively impact our future stock price. In
addition, this change in accounting rules could impact our ability to utilize
broad based employee stock plans to reward employees and could result in a
competitive disadvantage to us in the employee marketplace.
THE CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK GIVES A FEW INDIVIDUALS
SIGNIFICANT CONTROL OVER IMPORTANT POLICY DECISIONS AND COULD DELAY OR PREVENT
CHANGES IN CONTROL.
As of May 1, 2006, our executive officers and directors together
beneficially owned approximately 50.27% of the issued and outstanding shares of
our common stock. As a result, these persons could have the ability to exert
significant influence over matters concerning us, including the election of
directors, changes in the size and composition of the board of directors, and
mergers and other business combinations involving us. In addition, through
control of the board of directors and voting power, our officers and directors
may be able to control certain decisions, including decisions regarding the
qualification and appointment of officers, dividend policy, access to capital
(including borrowing from third-party lenders and the issuance of additional
equity securities), and the acquisition or disposition of our assets. In
addition, the concentration of voting power in the hands of those individuals
could have the effect of delaying or preventing a change in control of our
company, even if the change in control would benefit our shareholders. A
perception in the investment community of an anti-takeover environment at our
company could cause investors to value our stock lower than in the absence of
such a perception.
WE HAVE NOT PAID DIVIDENDS ON OUR COMMON STOCK IN THE PAST AND DO NOT
ANTICIPATE PAYING DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
We have not paid common stock dividends since our inception and do not
anticipate paying dividends in the foreseeable future. Our current business plan
provides for the reinvestment of earnings in an effort to complete development
of our technologies and products, with the goal of increasing sales and
long-term profitability and value. In addition, the revolving credit facility
with Laurus Master Fund Ltd. and the terms of our preferred stock currently
restrict, and any other credit or borrowing arrangements that we may enter into
may in the future restrict or limit, our ability to pay common stock dividends
to our shareholders.
OUR EXPANSION INTO OTHER NEW LINES OF BUSINESS MAY DIVERT MANAGEMENT'S
ATTENTION FROM OUR EXISTING OPERATIONS AND PROVE TO BE TOO COSTLY.
Our current business plan contemplates the migration of SpaceDev's
technology from projects into products for microsatellites and hybrid rocket
motors over the next several years. In the meantime, we are investigating other
PAGE 37
applications of our technology and other markets for our technologies and
prospective products. Our expansion into new lines of business may be difficult
for us to manage because they may involve different disciplines and require
different expertise than our core business. Consequently, this expansion may
divert management's time and attention away from our core business, and we may
need to incur significant expenses in order to develop the expertise, and
reputation we desire. Any revenues generated by new lines of business may not
be significant enough to offset the expenditures required to enter such
business, or provide the anticipated return on investment.
WE ARE SUBJECT TO NEW CORPORATE GOVERNANCE AND INTERNAL CONTROL REPORTING
REQUIREMENTS, AND OUR COSTS RELATED TO COMPLIANCE WITH, OR OUR FAILURE TO COMPLY
WITH EXISTING AND FUTURE REQUIREMENTS COULD ADVERSELY AFFECT OUR BUSINESS.
We face new corporate governance requirements under the Sarbanes-Oxley Act
of 2002, as well as new rules and regulations subsequently adopted by the SEC,
the Public Company Accounting Oversight Board and any stock exchange on which
our stock may be listed in the future. These laws, rules and regulations, which
are already known to be burdensome and costly, continue to evolve and may become
increasingly stringent in the future. In particular, we will be required to
include management and independent registered public accounting firm reports on
internal controls as part of our annual report for the year ended December 31,
2007 pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of
evaluating our control structure and processes to help ensure that we will be
able to comply with Section 404 of the Sarbanes-Oxley Act. We cannot assure you
that we will be able to fully comply with these laws, rules and regulations that
address corporate governance, internal control reporting and similar matters.
Failure to comply with these laws, rules and regulations could materially
adversely affect our reputation, financial condition and the value of our
securities.
THE TERMS OF SPACEDEV'S OUTSTANDING SHARES OF PREFERRED STOCK, AND ANY
SHARES OF PREFERRED STOCK ISSUED IN THE FUTURE, MAY REDUCE THE VALUE OF YOUR
COMMON STOCK.
SpaceDev is authorized to issue up to 10,000,000 shares of preferred stock
in one or more series. SpaceDev currently has outstanding 248,460 shares of its
Series C Convertible Preferred Stock and 5,150 shares of its Series D-1
Preferred Stock. Our board of directors may determine the terms of future
preferred stock offerings without further action by our shareholders. If we
issue additional preferred stock, it could affect your rights or reduce the
value of your common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with
or sell our assets to a third party. These terms may include voting rights,
preferences as to dividends and liquidation, conversion and redemption rights,
and sinking fund provisions. SpaceDev's Series C Preferred Stock and Series D-1
Preferred Stock rank senior to the common stock with respect to dividends and
liquidation and have other important preferred rights.
BECAUSE SPACEDEV COMMON STOCK IS SUBJECT TO THE SEC'S PENNY STOCK RULES,
BROKER-DEALERS MAY EXPERIENCE DIFFICULTY IN COMPLETING CUSTOMER TRANSACTIONS AND
TRADING ACTIVITY IN SPACEDEV SECURITIES MAY BE ADVERSELY AFFECTED.
Transactions in SpaceDev common stock are currently subject to the "penny
stock" rules promulgated under the Securities Exchange Act of 1934. Under these
rules, broker-dealers who recommend SpaceDev securities to persons other than
institutional accredited investors must:
- make a special written suitability determination for the purchaser;
- receive the purchaser's written agreement to a transaction prior to sale;
- provide the purchaser with risk disclosure documents which identify certain
risks associated with investing in "penny stocks" and which describe the
market for these "penny stocks" as well as a purchaser's legal remedies;
and
PAGE 38
- obtain a signed and dated acknowledgment from the purchaser demonstrating
that the purchaser has actually received the required risk disclosure
document before a transaction in a "penny stock" can be completed.
As a result of these rules, broker-dealers may find it difficult to
effectuate customer transactions and trading activity in SpaceDev securities may
be adversely affected. As a result, the market price of SpaceDev securities may
be depressed, and you may find it more difficult to sell our securities.
ITEM 3. CONTROLS AND PROCEDURES
Mark N. Sirangelo, our chief executive officer, and Richard B. Slansky, our
chief financial officer, after evaluating the effectiveness of our disclosure
controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e))
have concluded that, as of March 31, 2006, our disclosure controls and
procedures are effective.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Previously disclosed.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 30, 2006, at a special meeting of our shareholders, our
shareholders approved each of the following proposals, as described in the joint
proxy statement/prospectus included as a part of the Amendment No. 1 to our
Registration Statement on Form S-4 (File No. 333-130244) filed with the SEC on
December 28, 2005:
Proposal No. 1 - To adopt and approve the Agreement and Plan of Merger and
Reorganization dated as of October 24, 2005, as amended, with Starsys Research
Corporation, Monoceros Acquisition Corp., our wholly-owned subsidiary, and
certain other parties, and to approve the merger contemplated thereby and the
issuance and reservation for issuance of shares of our common stock to Starsys
shareholders pursuant to the merger agreement. Of the 24,410,196 shares of our
outstanding common stock, 15,720,249 shares (or 64.4%) voted in person or by
proxy on this proposal, with over 99.4% of those shares voted in favor of the
proposal. The following table provides a breakdown of the actual vote tally.
-------------------------------------------------------------------------------
ISSUE FOR AGAINST ABSTAIN
Adopt Plan of Merger Total 15,631,682 69,630 18,937
-------------------------------------------------------------------------------
Proposal No. 2 - To approve amendments to our 2004 Equity Incentive Plan:
(1) to increase the number of authorized shares under the plan by 3,000,000
shares of our common stock; (2) to add per person annual share award limits; and
(3) to clarify the limitation on the number of shares which may be issued as
incentive stock options. Of the 24,410,196 shares of our outstanding common
stock, 15,720,249 shares (or 64.4%) voted in person or by proxy on this
PAGE 39
proposal, with over 94.9% of those shares voted in favor of the proposal. The
following table provides a breakdown of the actual vote tally.
-------------------------------------------------------------------------------
ISSUE FOR AGAINST ABSTAIN
Amendment to 2004 Equity
Incentive Plan Total 14,914,286 776,376 29,587
-------------------------------------------------------------------------------
Proposal No. 3 - To approve an amendment to our articles of incorporation
to increase the number of authorized shares of common stock by 50,000,000
shares, to a total of 100,000,000 shares. Of the 24,410,196 shares of our
outstanding common stock, 15,720,252 shares (or 64.4%) voted in person or by
proxy on this proposal, with over 97.4% of those shares voted in favor of the
proposal. The following table provides a breakdown of the actual vote tally.
-------------------------------------------------------------------------------
ISSUE FOR AGAINST ABSTAIN
Amendment to Articles of
Incorporation 100,000,000 shares Total 15,317,174 353,348 49,727
-------------------------------------------------------------------------------
Proposal No. 4 - To give to our board of directors discretionary authority
to sell more than 20% of our common stock (or securities convertible into or
exercisable for common stock) in one or more private financings. Of the
24,410,196 shares of our outstanding common stock, 15,720,252 shares (or 64.4%)
voted in person or by proxy on this proposal, with over 97.2% of those shares
voted in favor of the proposal. The following table provides a breakdown of
the actual vote tally.
-------------------------------------------------------------------------------
ISSUE FOR AGAINST ABSTAIN
Board authority to sell 20% in
private financing Total 15,285,260 384,897 50,095
-------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit Description Filed Incorporated Form Date Filed Exhibit
No. . . Herewith by with SEC No.
Reference
------- -------------------------------------- -------- ------------ ----------- --------------- --------
2.3 . . Amendment No. 2 to the Agreement X 8-K Feb. 6, 2006 2.3
and Plan of Merger and
Reorganization dated January 31,
2006 (Starsys)
------- -------------------------------------- -------- ------------ ----------- --------------- --------
2.4 . . Escrow Agreement dated January 31, X 8-K Feb. 6, 2006 2.4
2006 (Starsys)
------- -------------------------------------- -------- ------------ ----------- --------------- --------
3.4 Articles of Amendment to Articles of X 10-KSB Mar. 28, 2006
Incorporation dated February 1,
2006
------- -------------------------------------- -------- ------------ ----------- --------------- --------
3.7 . . Certificate of Designations of Series X 8-K Jan. 17, 2006 3.1
D-1 Preferred Stock
------- -------------------------------------- -------- ------------ ----------- --------------- --------
3.8 . . Certificate of Designations of Series X 8-K Jan. 17, 2006 3.2
D-2 Preferred Stock
------- -------------------------------------- -------- ------------ ----------- --------------- --------
PAGE 40
------- -------------------------------------- -------- ------------ ----------- --------------- --------
10.1. . Securities Purchase Agreement dated X 8-K Jan. 17, 2006 99.1
January 11, 2006 (Laurus)
------- -------------------------------------- -------- ------------ ----------- --------------- --------
10.2. . Registration Rights Agreement dated X 8-K Jan. 17, 2006 99.2
January 17, 2006 (Laurus)
------- -------------------------------------- -------- ------------ ----------- --------------- --------
10.3. . Form of Preferred Stock Warrant X 8-K Jan. 17, 2006 99.3
(Laurus)
------- -------------------------------------- -------- ------------ ----------- --------------- --------
10.4. . Form of Common Stock Warrant X 8-K Jan. 17, 2006 99.4
(Laurus)
------- -------------------------------------- -------- ------------ ----------- --------------- --------
10.5. . Executive Employment Agreement X 8-K Feb. 6, 2006 99.1
with Scott Tibbitts dated January 31,
------- -------------------------------------- -------- ------------ ----------- --------------- --------
10.6. . Executive Employment Agreement X 8-K Feb. 6, 2006 99.2
with Robert Vacek dated January 31,
2006
------- -------------------------------------- -------- ------------ ----------- --------------- --------
10.7. . Non-Competition Agreement with X 8-K Feb. 6, 2006 99.3
Scott Tibbitts dated January 31, 2006
------- -------------------------------------- -------- ------------ ----------- --------------- --------
10.8. . Form of Standstill and Lock-up X 8-K Feb. 6, 2006 99.4
Agreement
------- -------------------------------------- -------- ------------ ----------- --------------- --------
10.9. . Amendment No. 2 to the SpaceDev X 8-K Feb. 6, 2006 99.5
2004 Equity Incentive Plan
------- -------------------------------------- -------- ------------ ----------- --------------- --------
21.1. . List of Subsidiaries X 10-KSB Mar. 28, 2006 21.1
------- -------------------------------------- -------- ------------ ----------- --------------- --------
31.1. . Rule 13a-14(a) certification of Chief X
Executive Officer
------- -------------------------------------- -------- ------------ ----------- --------------- --------
31.2. . Rule 13a-14(a) certification of Chief X
Financial Officer
------- -------------------------------------- -------- ------------ ----------- --------------- --------
32.1. . Section 1350/Rule 13a-14(b) X
certifications
------- -------------------------------------- -------- ------------ ----------- --------------- --------
------- -------------------------------------- -------- ------------ ----------- --------------- --------
PAGE 41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPACEDEV, INC.
Dated: May 15, 2006 /s/Mark N. Sirangelo
----------------------
Mark N. Sirangelo
Chief Executive Officer
Dated: May 15, 2006 /s/ Richard B. Slansky
-------------------------
Richard B. Slansky
President and Chief Financial Officer
PAGE 41