by Douglas Messier
A group of original shareholders in the defunct Firefly Space Systems have accused co-founder and CEO Tom Markusic of fraudulently conspiring with Ukrainian billionaire Maxym Polyakov to force the rocket company into bankruptcy in 2017 and reconstitute it under a nearly identical name without giving them any stake in the new venture.
Markusic “betrayed the trust of his original co-founders and investors and committed fraud to cut them out of his aerospace company. Instead of managing the operations of the Original Firefly, a revolutionary rocket company with endless potential, Markusic schemed with…Maxym Polyakov…to rob Plaintiffs of their investments and form a new company called Firefly Aerospace, Inc. (the ‘New Firefly’),” the plaintiffs said in a lawsuit.
Firefly Space Systems co-founders Michael Blum and P.J. King filed the complaint on Dec. 5 with fellow investors Steven Begleiter, Lauren McCollum, Green Desert NV, Swing Investments BVBA, Bright Success Capital Ltd., and Wunderkind Space Ltd.
The lawsuit accuses Polyakov of aiding and abetting Markusic’s alleged fraud. Their co-defendants include Firefly Aerospace and Polyakov’s investment company, Noosphere Venture Partners, based in Menlo Park, Calif.
In a request for declaratory judgment, the defendants denied that Markusic had committing any wrongdoing or breach of fiduciary duty. After blocking all of Markusic’s efforts to save the original Firefly after it became insolvent in late 2016, the investors are now attempting a money grab, the document alleged.
“Under the leadership of Dr. Markusic and Dr. Polyakov and with the benefit of over $75 million of cash investment by Noosphere, and with two years’ distance from Messrs. King and Blum, New Firefly has become a successful, solvent company with more than 300 employees worldwide and lucrative contracts to design technology for the space technology industry,” the filing stated.
“Nevertheless, after two years of silence and waiting in the weeds, and only now that New Firefly has done well, Defendants are seeking to extort a share in the New Firefly’s success by trying to leverage baseless claims into a windfall,” the document alleged.
Launched in 2014, Firefly Space Systems was developing its Alpha small-satellite booster when a fund-raising round fell through in Fall 2016. The company furloughed its staff in late September of that year as it sought new investors.
Markusic led negotiations with Polyakov, who wanted to become an equity investor in the rocket builder through Noosphere.
After the two sides failed to come to terms, Polyakov began buying up Firefly’s secured debt in February 2017 through one of Noosphere’s fully-owned subsidiary, EOS Launcher.
The investors alleged Markusic improperly assisted the effort. Polyakov subsequently foreclosed on the original Firefly, which then declared bankruptcy.
EOS Launcher changed its name to Firefly Aerospace, which used the old company’s assets to continue rocket development. Markusic became CEO of the reborn Firefly; he also serves on the company’s board with Polyakov.
The original shareholders, who invested $7.9 million into the company, received no equity in the new Firefly despite what the defendants claimed was a good-faith offer to include them.
The investors are seeking punitive damages, pre- and post-judgment interest, an order directing defendants to disgorge all ill-gotten gains, a constructive trust on all proceeds of wrongful actions, and attorneys’ fees and costs.
Striking Out on His Own
According to the legal filings, Markusic approached Blum and King in 2013 about starting up his own rocket company while he was working at Virgin Galactic, where he was leading development of the company’s LauncherOne booster.
With a doctorate in mechanical and aerospace engineering from Princeton University, Markusic is recognized as a leading expert in launch vehicles. He had come to Virgin Galactic after stints with SpaceX, Blue Origin, NASA and the United States Air Force.
Markusic left Virgin Galactic at the end of 2013, joining with Blum and King to co-found Firefly Space Systems in January 2014. Blum and King invested $225,300 and $975,300 in the company, respectively. Markusic served as CEO and as a board member with his co-founders.
The investors’ lawsuit claimed Blum and King subsequently took the lead in attracting equity investment and debt financing totaling approximately $40 million. The investors who are suing contributed $7.9 million of that total for a 41.4 percent share of the company. Markusic owned about 30 percent of Firefly.
The investors said the company made rapid progress over the next 2.5 years in developing its Alpha booster, which was designed to launched payloads weighing 1,000 lb (443.6 kg) into low Earth orbit (LEO). Firefly grew to 180 employees and achieved the following milestones:
- developing and testing Alpha’s rocket engine and many of its key systems and components;
- winning launch contracts worth more than $20 million, including a $5.5 million agreement with NASA”s Venture Class Launch Services program;
- obtaining letters of intent from additional customers totaling more than $580 million through 2025;
- delivering $3 million in research and development work funded by the Defense Advanced Research Projects Agency’s (DARPA) Small Business Innovation Research Phase II program; and,
- partnering with Boeing on a successful proposal for DARPA’s for the XS-1 experimental rocket\ plane project.
“While multiple investors had been identified for a larger $50 million Series B round for 2017, the Original Firefly still needed an additional investor to complete Series A funding as of late 2016. Markusic knew of these facts and the necessity of garnering this funding to protect the interests of the Original Firefly,” the investors’ lawsuit stated.
Funding Falls Through
Raising that funding proved to be a bigger challenge than anticipated. A major European investor pulled out over the summer of 2016 after the British people vote to leave the European Union on June 23 disrupted its plans.
In their filing, Markusic and his co-defendants said that Firefly’s financial condition had seriously deteriorated by September.
“…by late Summer of 2016, the company faced significant financial difficulties which persisted through 2017,” the document stated. “It was burdened with significant debt, had no revenues, and was under legal attack by Virgin Galactic, which had brought suit against Old Firefly, Dr. Markusic and Defendants King and Blum, alleging misappropriation of trade secrets and unfair competition.”
The litigation focused on the use of aerospike engine technology for the Alpha rocket that Virgin Galactic claimed Markusic had taken with him when he left the company. The lawsuit was eventually settled with the stipulation that Markusic not pursue aerospike technology, according to court documents.
Firefly suffered another blow in September 2016.
“Moreover, its major equity investor had declined to provide needed additional financial support, and its other stockholders, including the Defendants, proved unwilling to purchase new equity to fill the financing gap caused by this major investor’s decision,” the defendants’ filing stated. “And, as a result of the Virgin Galactic lawsuit and the company’s other financial challenges, Old Firefly was unable to raise additional equity capital from new investors.”
Sources have confirmed to Parabolic Arc that the equity investor was Paul Allen’s Vulcan Aerospace. Vulcan owned Stratolaunch, which was developing an enormous aircraft to place satellites into orbit using air-launched rockets.
Nearly five years after announcing plans for the project, Allen’s venture still lacked a rocket for the airplane to launch. Deals with SpaceX and Orbital Sciences Corporation (now Northrop Grumman) to produce a launch vehicle had each fallen through.
Stratolaunch had been providing funding to Firefly with the goal of using Alpha rockets to launch satellites, a source confirmed. Court filings in this case indicate the financial support included a $3 million loan.
At the time, the change was reflected in a little-noticed change in Firefly’s Venture Class Launch Services launch contract with NASA. Originally, Alpha would have launched a group of CubeSats from a ground-based launch pad. NASA later changed that to air launch on its website.
Although Vulcan seemed committed to supporting Firefly, there were safety concerns at Statolaunch about placing the liquid-fuel Alpha booster aboard the company’s expensive, one-of-a-kind aircraft.
Northrop Grumman uses the Pegasus XL rocket to air launch satellites from a modified L-1011 jetliner. However, Pegasus XL is a solid fuel booster, which is considered to be more stable and less prone to explosions than liquid-fuel rockets.
On Sept. 1, 2016, a SpaceX Falcon 9 rocket suddenly exploded in a fireball while being fueled for a pre-flight engine test at Cape Canaveral in Florida. The booster and its payload were destroyed, and the launch pad was severely damaged.
Later that month, Vulcan ended its investment in Firefly and abandoned plans to launch Alpha boosters from Stratolaunch’s airplane, the source said. Chuck Beames, who had favored the rocket, left his position as Vulcan’s president as a result.
On Oct. 6, Stratolaunch announced an agreement to purchase three Pegasus XL rockets for use on its aircraft. Pegasus would be an interim step as the company developed other boosters to launch larger payloads.
By then, the damage to Firefly had already been done. The company furloughed all of its staff at the end of September as it continued to search for other investors.
A Possible Lifeline
In Fall 2016, Polyakov approached Markusic about investing in Firefly. The investors’ lawsuit said the Firefly CEO was somewhat apprehensive given the Ukrainian billionaire’s background. The document alleged:
On information and belief, Polyakov owned and operated a ring of offshore adult dating and entertainment websites, which frequently changed names under various holding companies. On information and belief, according to the Financial Times and Daily Business Group, Polyakov sold many of these websites to himself after board members of his previous company, “Cupid,” deemed them too explicit.
On information and belief, Cupid sold these brands after accusations that its websites contained fake dating profiles manufactured and manned by the company to dupe users into purchasing subscriptions. On information and belief, following these accusations, Cupid’s revenues fell significantly, and the company was swiftly stripped of its assets during the process of a purported reverse takeover.
Polyakov, who had moved to Silicon Valley, was also interested in investing in the aerospace, space and defense industries in his home country and abroad. Ukraine had inherited part of the Soviet Union’s industrial capacity in these areas after it became an independent country in 1991.
Two months after Firefly furloughed its employees, Polyakov proposed an investment deal through Noosphere. The defendants said the offer was a lifeline for company that had nearly $20 million in debt, worthless shares, and no serious prospects for other investment.
” ….on November 29, 2016, Noosphere proposed a convertible note financing that would have provided Old Firefly with significant needed capital, but which could have resulted in a significant reduction in the existing stockholders’ ownership interest if Noosphere exercised a conversion feature that was part of the proposed financing structure,” the defendants said in their legal filing.
“However, Noosphere’s proposal allowed for Old Firefly’s existing stockholders, including the Defendants, to participate in the note financing. Consequently, the Defendants could have invested in the financing, and provided Old Firefly with needed financial support, while protecting their positions as investors,” the filing added.
The shareholders rejected the proposal as an unacceptable low-ball offer.
“The financing would have resulted in existing shareholders retaining only 10 % of any new company (which Markusic dubbed ‘newCo’) without any dilution protections. These terms substantially undervalued the investments that Plaintiffs had made in the Original Firefly. Further, the proposal hinged on senior secured creditors, like Space Florida, to subordinate their notes to Noosphere,” the investors’ lawsuit stated.
“When Plaintiffs raised these concerns with Markusic, he urged them not to accept the low-ball offer. Markusic explained that his substantial experience in the aerospace industry made him instrumental to Firefly’s continued success,” the suit claimed.
‘He represented that he would use this as leverage to get Plaintiffs a stronger deal while he continued to work on investment options. According to Markusic, they were a team, and he would not abandon them,” the document added. “In reality, Markusic was satiating Plaintiffs while he finalized Defendants’ plan to drive the Original Firefly out of business.”
Markuskic denied the claims. Negotiations continued, but the two sides could not reach a deal on equity investment.
A Shift in Focus
In January 2017, Polyakov shifted his focus toward acquiring Firefly’s outstanding debt. In their filing, the defendants claimed the move came only after all other efforts had come to naught, and the best option given the distressed nature of the company.
The investors said they found the strategy dangerous and confusing.
“To Plaintiffs, the proposed debt acquisition was extremely risky and confusing. Plaintiffs believed that debt acquisition by a new third party was in direct conflict with the Original Firefly’s best interests,” their lawsuit stated.
“King, on behalf of the Original Firefly shareholders, warned Markusic that assisting Polyakov in any way rather than working to negotiate his inclusion as an equity investor was a conflict of interest for the Original Firefly’s CEO and would risk substantial harm to the Original Firefly’s shareholders,” the document added.
The shareholders claimed that while Markusic reassured them, he secretly schemed with Polyakov to identify Firefly’s debt so the Ukrainian billionaire could acquire it, foreclose on the company, and cut the original investors loose.
The investors alleged the plan was finalized during a “first class” trip Markusic took to Ukraine in late January 2017. The visit, which included “extravagant meals, alcohol, and spa visits,” was made under false pretenses.
“Markusic told Plaintiffs that the purpose of the trip was to determine firsthand what capabilities Polyakov’s companies had and to solicit further strategic investments from Polyakov that would purportedly benefit the Original Firefly,” the lawsuit stated.
Markusic said he was acting in the best interest of the company and its creditors, who by that time were taking action to get their investments back. Markusic denied having any conflict of interest in his dealings with Polyakov and Noosphere.
By late February, Markusic was also acting in his capacity as the lone remaining member of Firefly’s board of directors. King had resigned at the end of December 2016; Blum quit two months later, the defendants said.
Acquiring the Debt
On Jan. 27, 2017, Polyakov founded EOS Launcher as a subsidiary of Noosphere. Over the next month, the new company would purchase $5.5 million of Firefly’s secured debt. The purchases included:
FITA LCC: $1,556,000 loan (Feb. 10)
Space Florida: $1 million loan (Feb. 14)
Vulcan Aerospace: $3,007,000 loan (Feb. 27 )
The Space Florida loan turned out to the crucial acquisition. Fearing foreclosure, the investors voted against signing over the note until after Firefly secured an equity investment deal with Polyakov.
“Although Noosphere already owned the FITA note, Firefly was capable of paying off the balance of this note through selective assets sales without inducing a strict foreclosure. However, if Noosphere were to gain an additional $1 million in secured debt from Space Florida and foreclose, the Original Firefly would be forced into auction,” the shareholders’ lawsuit stated.
The investors alleged that despite reassuring the shareholders he would abide by the vote, Markusic had already unilaterally assigned the permit the assignment of the note to Polyakov’s company.
In their filing, Markusic and his co-defendants said that Firefly shareholders had no right to block the acquisition of the Space Florida loan.
“The Space Florida Note did contain a provision giving Old Firefly the power to block an assignment of the note, but this power was limited to ensuring that the assignment would not violate applicable securities law,” the filing stated.
“And the transfer of the Space Florida Note from Space Florida to Noosphere was exempt from any requirement under federal or applicable state securities law that the note be registered or qualified. Consequently, Old Firefly’s consent right was not triggered,” the document added.
In their filing, Markusic and his co-defendants accused Blum and King of “scheming” to obtain an equity interest in the new Firefly through maneuvers that would have allowed them to improperly “jump the queue” ahead of Firefly creditors, who had legal priority over shareholders.
“Nevertheless, Noosphere, in the interest of minimizing roadblocks to New Firefly’s exercise of its rights and remedies as the holder of Old Firefly’s secured debt, offered Old Firefly’s stockholders warrants in New Firefly. The stockholders, including Defendants, ultimately rejected this opportunity,” the filing stated.
The End of Old Firefly
With the Feb. 27 acquisition of Firefly’s $3 million loan from Vulcan Aerospace, Polyakov began foreclosure procedures. On March 16, EOS Launcher prevailed at an auction of personal property that Firefly had pledged as security for the FITA debt.
“The sham auction was organized and led by EOS (Defendants’ newly created company which would later become the New Firefly). The auction was not widely publicized and imposed aggressive financial terms that disincentivized potential buyers from participating,” the investors’ lawsuit alleged.
In April, Firefly Space Systems filed for bankruptcy with debts of more than $26 million and assets of $27.6 million.
EOS Launcher changed its name to Firefly Aerospace. Markusic would become CEO of the company; Polyakov serves him on the company’s Board of Directors.
On July 4, Firefly Aerospace prevailed at an auction of the original Firefly’s remaining assets.