Astrotech Corporation

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)


þ

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2013


OR


o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from                      to                    


Commission File Number: 001-34426


Astrotech Corporation

(Exact name of registrant as specified in this charter)


Washington

 

91-1273737

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)


401 Congress Avenue, Suite 1650

Austin, Texas 78701

(Address of principal executive offices and zip code)


(512) 485-9530

(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o


Indicate by check mark whether the registrant has submitted electronically and posted on it corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company þ

  

 

 

 

(Do not check if a smaller reporting company)

 

 


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o Noþ


As of November 11, 2013, there were 19,486,727 shares of the registrant’s common stock outstanding.






ASTROTECH CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

PART I:   FINANCIAL INFORMATION

3

 

 

ITEM 1.    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

16

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

21

ITEM 4.    CONTROLS AND PROCEDURES

21

 

 

PART II: OTHER INFORMATION

21

 

 

ITEM 1.    LEGAL PROCEEDINGS

21

ITEM 1A. RISK FACTORS

21

ITEM 2.    UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

22

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

22

ITEM 4.    MINE SAFETY DISCLOSURES

22

ITEM 5.    OTHER INFORMATION

23

ITEM 6.    EXHIBITS

23





2




PART I: FINANCIAL INFORMATION


ITEM 1.   Condensed Consolidated Financial Statements



ASTROTECH CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share data)


 

September 30,

2013

 

June 30,

2013

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

$

4,418 

 

$

5,096 

Accounts receivable, net

 

6,407 

 

 

5,317 

Prepaid expenses and other current assets

 

571 

 

 

503 

Total current assets

 

11,396 

 

 

10,916 

Property and equipment, net

 

36,494 

 

 

37,035 

Other assets, net

 

46 

 

 

51 

Total assets

$

47,936 

 

$

48,002 

 

 

 

       

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

$

328 

 

$

2,488 

Accrued liabilities and other

 

2,563 

 

 

2,430 

Deferred revenue

 

1,586 

 

 

1,304 

Term note payable

 

391 

 

 

387 

Total current liabilities

 

4,868 

 

 

6,609 

Deferred revenue

 

814 

 

 

64 

Other liabilities

 

194 

 

 

194 

Term note payable, net of current portion

 

5,556 

 

 

5,655 

Total liabilities

 

11,432 

 

 

12,522 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, no par value, convertible, 2,500,000 authorized shares, no issued and outstanding shares, at September 30, 2013 and June 30, 2013

 

— 

 

 

— 

Common stock, no par value, 75,000,000 shares authorized; 19,781,721 and 19,781,721 shares issued at September 30, 2013 and June 30, 2013

 

183,782 

 

 

183,782 

Treasury stock, 311,660 shares at cost

 

(237)

 

 

(237)

Additional paid-in capital

 

705 

 

 

987 

Accumulated deficit

 

(150,588)

 

 

(151,840)

Noncontrolling interest

 

2,842 

 

 

2,788 

Total stockholders’ equity

 

36,504 

 

 

35,480 

Total liabilities and stockholders’ equity

$

47,936 

 

$

48,002 


See accompanying notes to unaudited condensed consolidated financial statements.




3




ASTROTECH CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share data)


 

Three Months Ended

September 30,

 

 

2013

 

 

2012

 

(unaudited)

Revenue

$

6,689 

 

$

6,128 

Cost of revenue

 

3,086 

 

 

4,907 

Gross profit

 

3,603 

 

 

1,221 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

1,738 

 

 

2,099 

Research and development

 

805 

 

 

642 

Total operating expenses

 

2,543 

 

 

2,741 

Income (loss) from operations

 

1,060 

 

 

(1,520)

Interest and other expense, net

 

(52)

 

 

(38)

Income (loss) before income taxes

 

1,008 

 

 

(1,558)

Income tax expense

 

— 

 

 

— 

Net income (loss)

 

1,008 

 

 

(1,558)

Less: Net loss attributable to noncontrolling interest

 

(245)

 

 

(141)

Net income (loss) attributable to Astrotech Corporation

$

1,253 

 

$

(1,417)

 

 

 

 

 

 

Net income (loss) per share attributable to Astrotech Corporation, basic

$

0.06 

 

$

(0.07)

Weighted average common shares outstanding, basic

 

19,470 

 

 

18,951 

 

 

 

 

 

 

Net income (loss) per share attributable to Astrotech Corporation, diluted

$

0.06 

 

$

(0.07)

Weighted average common shares outstanding, diluted

 

19,578 

 

 

18,951 


See accompanying notes to unaudited condensed consolidated financial statements.



4




ASTROTECH CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)


 

Three Months Ended

September 30,

 

2013

 

2012

 

(unaudited)

Cash flows from operating activities

 

 

 

 

 

Net income (loss)

$

1,008 

 

$

(1,558)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Stock-based compensation

 

16 

 

 

(18)

Depreciation and amortization

 

594 

 

 

507 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(1,090)

 

 

(2,795)

Accounts payable

 

(2,160)

 

 

(1,913)

Deferred revenue

 

1,032 

 

 

186 

Other assets and liabilities

 

65 

 

 

761 

Net cash used in operating activities

 

(535)

 

 

(4,830)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property, equipment and leasehold improvements

 

(48)

 

 

(212)

Net cash used in investing activities

 

(48)

 

 

(212)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Term loan payment

 

(95)

 

 

(92)

Proceeds from common stock issuance

 

— 

 

 

35 

Net cash used in financing activities

 

(95)

 

 

(57)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(678)

 

 

(5,099)

Cash and cash equivalents at beginning of period

 

5,096 

 

 

10,177 

Cash and cash equivalents at end of period

$

4,418 

 

$

5,078 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

$

61 

 

$

64 


See accompanying notes to unaudited condensed consolidated financial statements.




5




ASTROTECH CORPORATION AND SUBSIDIARIES


Notes to Unaudited Condensed Consolidated Financial Statements


(1) Description of the Company and Liquidity


Astrotech Corporation (Nasdaq: ASTC) (“Astrotech,” “the Company,” “we,” “us” or “our”), a State of Washington corporation, is a commercial aerospace company that was formed in 1984 to leverage the environment of space for commercial purposes. For nearly 30 years, the Company has remained a crucial player in space commerce activities. We have supported the launch of 23 shuttle missions and more than 300 spacecraft. We have designed, operated and built space hardware and processing facilities. We currently own, operate and maintain world-class spacecraft processing facilities; prepare and process scientific research from microgravity and develop and manufacture sophisticated chemical sensor equipment.


Our Business Units


Astrotech Space Operations (“ASO”)


ASO provides support to its government and commercial customers as they successfully process complex communication, earth observation and deep space satellites in preparation for their launch on a variety of launch vehicles. Processing activities include satellite ground transportation; pre-launch hardware integration and testing; satellite encapsulation, fueling and launch pad delivery; and communication linked launch control. Our ASO facilities can accommodate up to five meter class satellites, which includes almost all U.S. based satellites. ASO’s service capabilities include designing and building spacecraft processing equipment and facilities. In addition, ASO provides propellant services including designing, building and testing propellant service equipment for fueling spacecraft. ASO accounted for 100% of our consolidated revenues for the three months ended September 30, 2013. Revenue for our ASO business unit is generated primarily from various fixed-priced contracts with launch service providers in both government and commercial markets and from the design, fabrication and use of critical space launch equipment. The services and facilities we provide to our customers support the final assembly, checkout, and countdown functions required to launch a spacecraft. The revenue and cash flows generated by ASO are primarily driven by the number of spacecraft launches and the fabrication of Ground Support Equipment (“GSE”) for the U.S. Government.


Spacetech


Our other business unit is a technology incubator designed to commercialize space-industry technologies. This business unit is currently pursuing two distinct opportunities:


1st Detect


The Company develops, manufactures and sells ultra-small mass spectrometers and related equipment. Mass spectrometers, in general, measure the mass and relative abundance of ions in a sample to create a “mass spectrum”. This resulting mass spectrum is a unique fingerprint for each chemical that can be compared to a reference library of mass spectra to verify the identity of a sample. Mass spectrometers can identify chemicals with more accuracy and precision than competing instruments given their extreme sensitivity and specificity and they are a staple of almost all analytical laboratories. By leveraging technology initiated by an engagement with the National Aeronautics and Space Administration (“NASA”) to develop a mass spectrometer for the International Space Station (“ISS”), the Company has developed a series of instruments that are significantly smaller, lighter, faster and less expensive than competing mass spectrometers, and significantly more sensitive and accurate than other competing chemical detectors. Our efforts have resulted in a technology that can provide mass spectrometry performance in real-time or in the field.


The MMS-1000TM is a small, low power mass spectrometer designed initially for the laboratory market. The unique design of this unit enables mass spectrometric quality chemical analysis in a small package (about the size of a shoebox) that operates off less power than a typical light bulb. This allows high quality chemical analysis to be performed in locations where mass spectrometers have not been used before, such as directly on the factory floor or in the battlefield, without compromising the quality of the analysis.




6




The OEM-1000 is a mass spectrometer component that was developed for applications where customers need the high quality analysis provided by a mass spectrometer but in a platform that can be integrated into customer specific packages. The OEM-1000 uses the same high performance analyzer as the MMS-1000TM but is provided as an open platform for customers and development partners to integrate with their complementary technologies, with application-specific sample preparation, inlets and software.


Astrogenetix


Astrogenetix is a biotechnology company formed to commercialize products processed in the unique environment of microgravity. Astrogenetix pursued an aggressive space access strategy to take advantage of the Space Shuttle program prior to its retirement in 2011. This strategy gave Astrogenetix unprecedented access to research in microgravity, as the Company flew experiments twelve times over a three year period. Astrogenetix and the team are currently researching a Salmonella vaccine as part of its ongoing commercialization strategy. Concurrently, the team is evaluating a vaccine target for Methicillin-Resistant Staphylococcus Aureus (“MRSA”) based on discoveries made in microgravity. In December 2011, the Company negotiated a Space Act Agreement with NASA for a minimum of twenty eight additional space flights.


Liquidity and Capital Resources


Our future capital requirements will depend on a number of factors, including our success in developing and expanding markets for our products, payments under possible future strategic arrangements, continued progress of our research and development of potential products, the need to acquire licenses to new technology, costs associated with increasing our manufacturing and development facilities, costs associated with strategic acquisitions including integration costs and assumed liabilities, litigation expense, the status of competitive products and potential cost associated with both protecting and defending our intellectual property. Additionally, actions taken as a result of the ongoing internal evaluation of our business could result in expenditures not currently contemplated in our estimates for 2014.  We believe, however, that our existing cash and cash equivalents are sufficient to fund our operating expenses, capital equipment requirements and other expected liquidity requirements for the coming year.  Factors that could affect our capital requirements, in addition to those listed above include continued collections of accounts receivable consistent with our historical experience, uncertainty surrounding mission launch schedules, and our ability to manage product development efforts.


At September 30, 2013, we had cash and cash equivalents of $4.4 million and our working capital was approximately $6.5 million.


The Company’s remaining debt repayments are due as follows (in thousands):


 

 

Fiscal Year

 

Fiscal Year

 

Fiscal Year

 

 

2014

 

2015

 

2016

Term Note

 

$

292

 

$

403

 

$

5,252


Our bank financing facilities contain certain affirmative and negative covenants with which we must comply, including the maintenance by us of a debt service coverage ratio of not less than 1.00 to 1.00, maintaining a tangible net worth of not less than $32.50 million, and maintaining a leverage ratio of not greater than .50 to 1.00.  These financial covenants are applicable to the results of ASO. In the event we are not in compliance with a covenant, the bank may, among other things, accelerate all outstanding borrowings, cease extending credit or foreclose on collateral.  As of September 30, 2013, we were in compliance with our affirmative and negative debt covenants.  However, our financial projections for fiscal year 2014 indicated that we would likely not be in compliance with our debt service coverage ratio and minimum tangible net worth covenants by the third quarter ended March 31, 2014.  As such, on October 11, 2013, we amended the debt agreement with our bank that updated the following with respect to our debt covenants: 1) provided a credit of $0.50 million and $2.25 million for the third and fourth quarter of fiscal year 2014, respectively, to our debt service coverage calculation, 2) reduced our minimum tangible net worth requirement to $32.0 million for the third and fourth fiscal quarter of fiscal year 2014, and 3) required that we maintain a minimum cash balance at the bank of $2.0 million through June 30, 2014 and $0.75 million thereafter.  Under the terms of the amendment, we expect to be compliant with our affirmative and negative covenants through June 30, 2014.  Therefore, we have classified our debt as noncurrent for any principal payments due after September 30, 2014.


In October, 2014 we were notified by a customer that a previously booked payload processing contract would be deferred several weeks. As a result of this deferral, we updated our financial projections for fiscal year 2014 which indicated that it is possible that we may not meet the minimum tangible net worth covenant in the third quarter of 2014.  We will continue to monitor this matter during the remainder of fiscal year 2014 and if necessary pursue a debt amendment with our bank.




7





We believe we have sufficient liquidity and backlog to fund ongoing operations for at least the next fiscal year. We expect to utilize existing cash and proceeds from operations to grow our core business offering in ASO and to support strategies for Spacetech.


(2) Basis of Presentation


The accompanying unaudited condensed consolidated financial statements have been prepared by Astrotech Corporation in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending June 30, 2014. These financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2013.


(3) Noncontrolling Interest


In January 2010, restricted shares of Astrotech subsidiaries, 1st Detect and Astrogenetix, were granted to certain employees, directors and officers, resulting in Astrotech owning less than 100% of the subsidiaries.  The Company applied noncontrolling interest accounting for the period ended September 30, 2013, which requires us to clearly identify the noncontrolling interest in the balance sheets and income statements. We disclose three measures of net income (loss): net income (loss), net income (loss) attributable to noncontrolling interest, and net loss attributable to Astrotech Corporation.  Our operating cash flows in our consolidated statements of cash flows reflect net income (loss); while our basic and diluted net income (loss) per share calculations reflect net income (loss) attributable to Astrotech Corporation.


 

(In thousands)

Beginning balance at June 30, 2013

$

2,788 

Net loss attributable to noncontrolling interest

 

(245)

Capital contribution

 

299 

Stock based compensation

 

 Ending balance at September 30, 2013

$

2,842 


As of September 30, 2013, the Company’s share of income and losses is 86% for 1st Detect and 84% for Astrogenetix.


(4) Net Income (Loss) per Share


Basic net income (loss) per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method and the if-converted method. Dilutive potential common shares include outstanding stock options and shared-based awards. Reconciliation and the components of basic and diluted net loss per share are as follows (in thousands, except per share data):


 

Three Months Ended

September 30,

 

2013

 

2012

Numerator:

 

 

 

 

 

Net income (loss) attributable to Astrotech Corporation, basic and diluted

$

1,253 

 

$

(1,417)

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Denominator for basic net income (loss) per share attributable to Astrotech Corporation — weighted average common stock outstanding

 

19,470 

 

 

18,951 

Dilutive common stock equivalents — common stock options and share-based awards

 

108 

 

 

— 

Denominator for diluted net income (loss) per share attributable to Astrotech Corporation — weighted average common stock outstanding and dilutive common stock equivalents

 

19,578 

 

 

18,951 

 

 

 

 

 

 

Basic net income (loss) per share attributable to Astrotech Corporation

$

0.06 

 

$

(0.07)

Diluted net income (loss) per share attributable to Astrotech Corporation

$

0.06 

 

$

(0.07)




8




Options to purchase 539,500 shares of common stock at exercise prices ranging from $1.03 to $24.10 per share outstanding for the three months ended September 30, 2013 were not included in diluted net income per share, as the impact to diluted net income per share is anti-dilutive. Stock options are included in the calculation of diluted EPS based on the treasury-stock method.  Under the treasury-stock method, options will have a dilutive effect only when the average market price of the common stock during the respective period, $0.73 for the three months ended September 30, 2013, exceeds the exercise price of the options.  Options to purchase 1,205,900 shares of common stock at exercise prices ranging from $0.30 to $24.10 per share outstanding for the three months ended September 30, 2012, were not included in diluted net loss per share, as the impact to net loss per share is anti-dilutive.


(5) Revenue Recognition


Astrotech recognizes revenue employing several generally accepted revenue recognition methodologies across its business units. The methodology used is based on contract type and the manner in which products and services are provided.


Revenue generated by Astrotech’s payload processing facilities is recognized ratably over the occupancy period of the satellite while in the Astrotech facilities. The percentage-of-completion method is used for all contracts where incurred costs can be reasonably estimated and successful completion can be reasonably assured at inception. Changes in estimated costs to complete and provisions for contract losses are recognized in the period they become known. Revenue for the sale of commercial products is recognized at shipment.


A Summary of Revenue Recognition Methods


Services/Products Provided

 

Contract Type

 

Method of Revenue Recognition

Payload Processing Facilities

 

Firm Fixed Price — Mission Specific

 

Ratably, over the occupancy period of a satellite

within the facility from arrival through launch

 

 

 

 

 

Construction Contracts

 

Firm Fixed Price

 

Percentage-of-completion based on costs incurred

 

 

 

 

 

Engineering Services

 

Cost Reimbursable

Award/Fixed Fee

 

Reimbursable costs incurred plus award/fixed fee

 

 

 

 

 

Commercial Products

 

Specific Purchase

Order Based

 

At shipment

 

 

 

 

 

Grant

 

Cost Reimbursable

Award

 

As costs are incurred for related research and

development expenses


Under certain contracts, we make expenditures for specific enhancements and/or additions to our facilities where the customer agrees to pay a fixed fee to deliver the enhancement or addition. We account for such agreements as a reduction in the cost of such investments and recognize any excess of amounts collected above the expenditure as revenue.


(6) Debt


In October 2010, we entered into a financing facility with a commercial bank providing a $7.0 million term loan note and a $3.0 million revolving credit facility. The $7.0 million term loan terminates in October 2015, and the $3.0 million revolving credit facility expired in October 2012. The Company had no outstanding balance on the revolving credit facility. The term loan requires monthly payments of principal plus interest at the rate of prime plus 0.25%, but not less than 4.0%. The bank financing facilities are secured by the assets of ASO, including accounts receivable, and require us to comply with designated covenants. The balance of the $7.0 million term loan at September 30, 2013 and 2012 was $5.9 million and $6.3 million, respectively.




9




Our bank financing facilities contain certain affirmative and negative covenants with which we must comply, including the maintenance by us of a debt service coverage ratio of not less than 1.00 to 1.00, maintaining a tangible net worth of not less than $32.50 million, and maintaining a leverage ratio of not greater than .50 to 1.00.  These financial covenants are applicable to the results of ASO. In the event we are not in compliance with a covenant, the bank may, among other things, accelerate all outstanding borrowings, cease extending credit or foreclose on collateral.  As of September 30, 2013, we were in compliance with our affirmative and negative debt covenants.  However, our financial projections for fiscal year 2014 indicated that we would likely not be in compliance with our debt service coverage ratio and minimum tangible net worth covenants by the third quarter ended March 31, 2014.  As such, on October 11, 2013, we amended the debt agreement with our bank that updated the following with respect to our debt covenants: 1) provided a credit of $0.50 million and $2.25 million for the third and fourth quarter of fiscal year 2014, respectively, to our debt service coverage calculation, 2) reduced our minimum tangible net worth requirement to $32.0 million for the third and fourth fiscal quarter of fiscal year 2014, and 3) required that we maintain a minimum cash balance at the bank of $2.0 million through June 30, 2014 and $0.75 million thereafter.


In October, 2014 we were notified by a customer that a previously booked payload processing contract would be deferred several weeks. As a result of this deferral, we updated our financial projections for fiscal year 2014 which indicated that it is possible that we may not meet the minimum tangible net worth covenant in the third quarter of 2014.  We will continue to monitor this matter during the remainder of fiscal year 2014 and if necessary pursue a debt amendment with our bank.


(7) Fair Value Measurement


The accounting standard for fair value measurements defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. The standard is applicable whenever assets and liabilities are measured and included in the financial statements at fair value.


The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:


Level 1—Quoted prices in active markets for identical assets or liabilities.


Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


Level 3—Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.


The following table presents the carrying amounts, estimated fair values and valuation input levels of certain of the Company’s financial instruments as of September 30, 2013 and June 30, 2013 (in thousands):


 

September 30, 2013

 

June 30, 2013

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Valuation

 

Amount

 

Value

 

Amount

 

Value

 

Inputs

Debt

$

5,947

 

$

5,947

 

$

6,042

 

$

6,042

 

Level 2


The carrying value of the Company’s debt at September 30, 2013 approximates fair value based on rates available for similar debt available to comparable companies in the marketplace. The carrying amounts of the Company’s Level 1 securities include cash and cash equivalents.


(8) Business and Credit Risk Concentration


A substantial portion of our revenue has been generated under contracts with the U.S. Government. During the three months ended September 30, 2013 and 2012, approximately 43% and 60%, respectively, of our revenues were generated under U.S. Government contracts. Accounts receivable totaled $6.4 million at September 30, 2013, of which 72% was attributable to the U.S. Government.


The Company maintains funds in bank accounts that may exceed the limit insured by the Federal Deposit Insurance Corporation, or “FDIC.” In October 2008, the FDIC increased its insurance to $250,000 per depositor, and to an unlimited amount for non-interest bearing accounts. The risk of loss attributable to these uninsured balances is mitigated by depositing funds in what we believe to be high credit quality financial institutions. The Company has not experienced any losses in such accounts.



10





(9) Segment Information


Management’s primary financial and operating reviews focus on ASO, the core business unit. All intercompany transactions between business units have been eliminated in consolidation.


Key financial metrics for the three months ended September 30, 2013 and 2012 are as follows (in thousands):


 

 

Three Months Ended

 

Three Months Ended

 

 

September 30, 2013

 

September 30, 2012

 

 

 

 

 

Income (loss)

before

 

 

 

 

Income (loss)

before

Revenue and Income

 

Revenue

 

income taxes

 

Revenue

 

income taxes

ASO

 

$

6,689 

 

$

2,802 

 

$

5,996 

 

$

(538)

Spacetech

 

$

 

$

(1,794)

 

$

132 

 

$

(1,020)

 

 

$

6,689 

 

$

1,008 

 

$

6,128 

 

$

(1,558)


Key financial metrics for the balance sheet are as follows (in thousands):


 

 

September 30, 2013

 

June 30, 2013

Assets

 

Fixed

Assets, net

 

Total Assets

 

Fixed

Assets, net

 

Total Assets

ASO

 

$

35,127 

 

$

45,787 

 

$

35,625 

 

$

46,159 

Spacetech

 

$

1,367 

 

$

2,149 

 

$

1,410 

 

$

1,843 

 

 

$

36,494 

 

$

47,936 

 

$

37,035 

 

$

48,002 


(10) State of Texas Funding


In March 2010, the Texas Emerging Technology Fund awarded 1st Detect $1.8 million for the development and marketing of the Miniature Chemical Detector, a portable mass spectrometer designed to serve the security, healthcare and industrial markets.  In exchange for the award, 1st Detect granted a common stock purchase right and a note payable to the State of Texas.  As of September 30, 2013, 1st Detect has received $1.8 million in disbursements. The proceeds from the award can only be used to fund development of the Miniature Chemical Detector at 1st Detect, not for repaying existing debt or for use in other Company subsidiaries.


The common stock purchase right is exercisable at the first Qualifying Financing Event (“QFE”), which is essentially a change in control or third party equity investment in 1st Detect. The number of shares available to the State of Texas, at the price of par value, is calculated as the total disbursements (numerator) divided by the stock price established in the QFE (denominator). If the first QFE did not occur within 18 months of the agreement’s effective date, which has been extended to June 30, 2014 as a result of extensions granted by the State of Texas, the number of shares available for purchase would equal the total disbursements (numerator) divided by $100 (denominator).  As of September 30, 2013 no QFE has occurred.


The note equals the disbursements to 1st Detect to date, accrues interest at 8% per year and cancels automatically at the earlier of (1) selling substantially all of the assets of 1st Detect, (2) selling more than 50% of common stock of 1st Detect or (3) March 2020. No payments of interest or principal are due on the note unless there is a default, which would occur if 1st Detect moves its operations or headquarters outside of Texas at any time before March 2020. 1st Detect has the option to pay back the principal plus accrued interest by June 30, 2014, but repayment does not cancel the State of Texas’ common stock purchase right.


Management considers the likelihood of voluntarily repaying the note or of a default event as remote due to the fact that the covenants that would necessitate repayment are within the control of the Company. As such, the $1.8 million, which was received in two installments of $0.9 million and $0.9 million prior to the period ended September 30, 2013, was accounted for as a contribution to equity. As of September 30, 2013, no default events have occurred.




11




(11) Equity and Other Long Term Incentive Plans


The 1994 Plan (“1994 Plan”)


Under the terms of the 1994 Plan, the number and price of the stock incentive awards granted to employees is determined by the Board of Directors and such grants vest, in most cases, incrementally over a period of four years and expire no more than ten years after the date of grant. At the time of approval, 395,000 shares of our common stock were reserved for issuance under this plan. As of September 30, 2013, there are no shares available for grant. Based on the Articles of the 1994 stock incentive plan, no awards shall be granted more than ten years after the effective date of the plan unless amended.


The Directors’ Stock Option Plan (“Director’s Plan”)


Options under the Director’s Plan vest after one year and expire seven years from the date of grant. At the time of approval, 50,000 shares of our common stock were reserved for issuance under this plan. As of September 30, 2013, there are 41,500 shares available for future grant.


2008 Stock Incentive Plan (“2008 Plan”)

The 2008 Plan was created to promote growth of the Company by aligning the long-term financial success of the Company with the employees, consultants and directors. At the time of approval, 5,500,000 shares of our common stock were reserved for issuance under this plan. The 2008 Plan, administered by the Compensation Committee of the Board of Directors, provides for granting of incentive awards in the form of stock options, stock appreciation rights (SARs) and restricted stock to employees, directors and consultants of the Company. Stock options awarded will vest upon the Company’s stock achieving a closing price of $1.50 and expire ten years from grant date or upon employee or director termination. Restricted shares awarded will vest 33.33% a year over a three year period and expire upon employee or director termination. There have been no SARs granted from the 2008 Plan. As of September 30, 2013, there are 342,501 shares available for grant under the 2008 Plan.


2011 Stock Incentive Plan (“2011 Plan”)


The 2011 Plan was designed to increase shareholder value by compensating employees over the long term. The plan is to be used to promote long-term financial success and execution of our business strategy. At the time of approval, 1,750,000 shares of our common stock were reserved for issuance under this plan. The 2011 Plan, administered by the Compensation Committee of the Board of Directors, provides for granting of incentive awards in the form of stock options, stock appreciation rights (SARs) and restricted stock to employees, directors and consultants of the Company. Stock options awarded will vest upon the Company’s stock achieving a closing price of $1.50 and expire ten years from the grant date or upon employee or director termination. Additionally, a single 200,000 stock option grant was awarded to a third party consultant intended to provide incentive which is aligned with management and the shareholders. Vesting for these option shares will occur once certain performance conditions have been fulfilled. There have been no SARs or restricted stock granted from the 2011 Plan. As of September 30, 2013, there are 1,056,000 shares available for grant under the 2011 Plan.


At September 30, 2013, 1,440,001 shares of Common Stock were reserved for future grants of stock incentive grants under the Company’s four stock incentive plans.


1st Detect 2011 Stock Incentive Plan


The 2011 Plan was designed to increase shareholder value by compensating employees over the long term. The plan is to be used to promote long-term financial success and execution of our business strategy. At the time of approval, 2,500 shares of 1st Detect stock were reserved for issuance under this plan. The 2011 Plan, administered by the Board of Directors of 1st Detect, provides for granting of incentive awards in the form of stock options to certain directors, officers and employees of 1st Detect. The awards vest upon certain performance conditions being met and expire ten years from the grant date.  The stock options have an exercise price equal to the fair market value of 1st Detect’s common stock on the date of grant as determined by an independent valuation firm. As of September 30, 2013, there are 1,800 shares available for grant under the 2011 Plan.




12




(12) Income Taxes


The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are more likely than not to be realized. As of September 30, 2013, the Company has established a full valuation allowance against all of its net deferred tax assets.


FASB ASC 740, Income Taxes (FASB ASC 740) addresses the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The Company has an unrecognized tax benefit of $0.1 million for the three months ended September 30, 2013 and 2012.


For the three months ended September 30, 2013 and 2012, the Company’s effective tax rate differed from the federal statutory rate of 35%, primarily due to recording changes to the valuation allowance placed against its net deferred tax assets.


The Company is currently under examination by the Internal Revenue Service for the fiscal years ended June 30, 2008 through 2010. Loss carryovers are generally subject to modification by tax authorities until 3 years after they have been utilized; as such, the Company is subject to examination for the fiscal years ended 2000 through present for federal purposes and fiscal years ended 2006 through present for state purposes.


(13) Purchase of Common Stock


Common stock repurchases under the Company’s securities repurchase program may be made from time to time, in the open market, through block trades or otherwise in accordance with applicable regulations of the Securities and Exchange Commission. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time to time without prior notice. Additionally, the timing of such transactions will depend on other corporate strategies and will be at the discretion of the management of the Company.


As of September 30, 2013, we had repurchased 311,660 shares of common stock at a cost of $0.2 million, which represents an average cost of $0.76 per share, and $1.1 million of Senior Convertible Notes payable.  All of these repurchases were made prior to the period ended September 30, 2013.  As a result, the Company is authorized to repurchase an additional $5.7 million of securities under this program.


(14) Commitments and Contingencies


Legal Proceedings


The Company is subject to various lawsuits and other claims in the normal course of business. In addition, from time to time, the Company receives communications from government or regulatory agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which the Company operates.


The Company establishes reserves for the estimated losses on specific contingent liabilities, for regulatory and legal actions where the Company deems a loss to be probable and the amount of the loss can be reasonably estimated. In other instances, the Company is not able to make a reasonable estimate of liability because of the uncertainties related to the outcome or the amount or range of potential loss.


On January 10, 2013, a lawsuit was filed against Astrotech Corporation by John Porter, the former Senior Vice President, Chief Financial Officer, Treasurer and Secretary of the Company.  In the lawsuit, Mr. Porter alleges various breaches of contract claims in connection with his termination from the Company on August 3, 2012.  Mr. Porter seeks monetary damages of at least $639,808.  The Company is vigorously defending the lawsuit filed by Mr. Porter.


On February 20, 2013, a shareholder derivative lawsuit was filed in the District Court of Travis County, Texas against the current directors and chief executive officer of Astrotech Corporation and against the Company, as nominal defendant. The complaint alleges, among other things, that the directors and chief executive officer breached fiduciary duties to the Company in connection with certain corporate transactions, including loans to subsidiaries and purchases of outstanding shares of the Company’s common stock. The Company intends to vigorously defend the lawsuit.




13




State of Texas Funding


In March 2010, the Texas Emerging Technology Fund awarded 1st Detect $1.8 million for the development and marketing of the Miniature Chemical Detector, a portable mass spectrometer designed to serve the industrial, environmental, security and healthcare markets (See Note 10). As of June 30, 2012, 1st Detect had received $1.8 million in disbursements. The disbursed amount of $1.8 million represents a contingency through March 2020, the date of cancellation. If an event of default should occur, the Company would calculate and expense accrued interest and reclassify principal from equity to notes payable in the consolidated financial statements as amounts due to the State of Texas. Management considers the likelihood of an event of default to be remote. As of September 30, 2013, no default events have occurred.


(15) NASDAQ Listing Qualifications


On November 13, 2012, we received written notification from NASDAQ indicating that the minimum bid price of our common stock had fallen below $1.00 for 30 consecutive trading days and that we were therefore not in compliance with NASDAQ Listing Rule 5550(a)(2).  On October 30, 2013, we received written notification from NASDAQ that for the previous ten business days, from October 16, 2013 to October 29, 2013, the closing bid price of the Company’s common stock had been at $1.00 per share or greater and the Company has regained compliance with Listing Rule 5550(a)(2).


(16) Subsequent Events


On October 11, 2013, we amended the debt agreement with our bank that updated the following with respect to our debt covenants: 1) provided a credit of $0.50 million and $2.25 million for the third and fourth quarter of fiscal year 2014, respectively, to our debt service coverage calculation, 2) reduced our minimum tangible net worth requirement to $32.0 million for the third and fourth fiscal quarter of fiscal year 2014, and 3) required that we maintain a minimum cash balance at the bank of $2.0 million through June 30, 2014 and $0.75 million thereafter.  Under the terms of the amendment, we expect to be compliant with our affirmative and negative covenants through June 30, 2014.


On October 30, 2013, we received written notification from NASDAQ that for the previous ten business days, from October 16, 2013 to October 29, 2013, the closing bid price of the Company’s common stock had been at $1.00 per share or greater and the Company has regained compliance with Listing Rule 5550(a)(2).


Carlisle Kirkpatrick resigned as the Chief Financial Officer, Treasurer and Secretary of the Company effective October 30, 2013.  The Company has entered into a separation and consulting agreement with Mr. Kirkpatrick, the terms of which were disclosed in a Form 8-K on October 30, 2013.


On November 13, 2013, the Board of Directors of the Company elected and appointed Eric Stober, 36, to serve as Chief Financial Officer, Treasurer and Secretary of the Company. Mr. Stober (i) is eligible to receive a cash and stock performance bonus to be determined by the Company’s compensation committee, based on the achievement of performance criteria established by the Company’s compensation committee, and (ii) is entitled to participate in the Company’s eligible customary health, welfare and fringe benefit plans. Mr. Stober joined Astrotech Corporation in August of 2008 as a Senior Staff Financial Analyst.  In the same year, he was promoted to Principal Financial Analyst and from 2012 to the present, Mr. Stober served as Vice President of Corporate Development.  Mr. Stober brings 14 years of experience in private equity, finance and business start-ups.  Prior to joining Astrotech Corporation, he worked at the private equity firm Virtus Financial Group, analyzing prospective middle market private equity investments.  Additionally, Mr. Stober founded or co-founded several companies, including a web advertising company, a small business tax and financial advisory firm, a sports-based media and entertainment company, and a service provider sourcing company.  He has helped numerous companies prepare business plans and raise start-up or growth capital.  Mr. Stober began his professional career working for both The Ayco Company, a Goldman Sachs Company, and Lehman Brothers, where he helped wealthy individuals and families manage their investments, taxes, insurance, estate plans, and compensation and benefits.  Mr. Stober has an MBA from the McCombs School of Business at the University of Texas where he was the President of the MBA Entrepreneur Society.  He also has an undergraduate degree in finance from the University of Illinois where he graduated with honors.




14




FORWARD-LOOKING STATEMENTS


This Quarterly Report on Form 10-Q contains “forward-looking  statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. Forward-looking statements may include the words “may,” “will,” “plans,” “believes,” “estimates,” “expects,” “intends” and other similar expressions. Such statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in the statements. Such risks and uncertainties include, but are not limited to:


•       The effect of economic conditions in the United States or other space faring nations that could impact our ability to access space and support or gain customers;


•       Our ability to raise sufficient capital to meet our long and short-term liquidity requirements;


•       Our ability to successfully pursue our business plan and execute our strategy;


•       Whether we will fully realize the economic benefits under our NASA and other customer contracts;


•       Technological difficulties and potential legal claims arising from any technological difficulties;


•       Product demand and market acceptance risks, including our ability to develop and sell products and services to be used by governmental or commercial customers;


•       Uncertainty in government funding and support for key space programs;


•       The impact of competition on our ability to win new contracts;


•       Uncertainty in securing reliable and consistent access to space, including the ISS;


•       Delays in the timing of performance of our contracts;


•       Our ability to meet technological development milestones and overcome development challenges; and


•       Risks described in the “Risk Factors” section of this Quarterly Report on Form 10-Q and our 2013 Annual Report on Form 10-K.


Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate, and, therefore, we cannot assure you that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in our forward-looking statements, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Some of these and other risks and uncertainties that could cause actual results to differ materially from such forward-looking statements are more fully described in the Risk Factors included in Part II Item 1A of this Report and Part I, Item 1A of our 2013 Annual Report on 10-K and elsewhere in this Quarterly Report on Form 10-Q or in the documents incorporated by reference herein. Except as may be required by applicable law, we undertake no obligation to publicly update or advise of any change in any forward-looking statement, whether as a result of new information, future events or otherwise. In making these statements, we disclaim any obligation to address or update each factor in future filings with the Securities and Exchange Commission (“SEC”) or communications regarding our business or results, and we do not undertake to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications.  In addition, any of the matters discussed above may have affected our past results and may affect future results, so that our actual results may differ materially from those expressed in this Quarterly Report on Form 10-Q and in prior or subsequent communications.




15




ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the accompanying notes included in Part I, Item 1 of this Report, and the Risk Factors included in Part II Item 1A of this Report and Part I, Item 1A of our 2013 Annual Report on Form 10-K.


Overview


Astrotech Corporation (Nasdaq: ASTC) (“Astrotech,” “the Company,” “we,” “us” or “our”), a Washington corporation, is a commercial aerospace company that was formed in 1984 to leverage the environment of space for commercial purposes. For nearly 30 years, the Company has remained a crucial player in space commerce activities. We have supported the launch of 23 shuttle missions and more than 300 spacecraft. We’ve designed and built space hardware and processing facilities and constructed world-class processing facilities. We currently own, operate and maintain world-class spacecraft processing facilities; prepare and process scientific research from microgravity and develop and manufacture sophisticated chemical sensor equipment.


Our efforts are focused on:


Providing world-class facilities and related support services necessary for the preparation of satellites and payloads.


Providing satellite and payload processing and integration services and support.


Designing, fabricating and utilizing equipment and hardware for launch activities.


Supplying propellant and associated services for spacecraft.


Managing launch logistics and support.


Working with development partners to build industry specific applications using our sensor equipment.


Commercializing unique space-based technologies.


Our Business Units


Astrotech Space Operations (ASO)


ASO provides support to its government and commercial customers as they successfully process complex communication, earth observation and deep space satellites in preparation for their launch on a variety of launch vehicles. Processing activities include satellite ground transportation; pre-launch hardware integration and testing; satellite encapsulation, fueling and launch pad delivery; and communication linked launch control. Our ASO facilities can accommodate up to five meter class satellites, which includes almost all U.S.-based satellites. ASO’s service capabilities include designing and building spacecraft processing equipment and facilities. Additionally, ASO provides propellant services including designing, building and testing propellant service equipment for servicing spacecraft.  ASO accounted for 100% of our consolidated revenues for the three months ended September 30, 2013. Revenue for our ASO business unit is generated primarily from various fixed-priced contracts with launch service providers in both the government and commercial markets and from the design and fabrication of space launch equipment.  The services and facilities we provide to our customers support the final assembly, checkout, and countdown functions associated with preparing and launching spacecraft. The revenue and cash flows generated by ASO are primarily driven by the number of spacecraft launches and the fabrication of GSE for the U.S. Government. Other factors that have impacted, and are expected to continue to impact, earnings and cash flows for this business include:


The continuing limited availability of competing facilities at the major domestic launch sites that can offer comparable services, leading to an increase in government and commercial use of our services.


Our ability to design and fabricate spacecraft preparation and processing equipment.


Our ability to control our capital expenditures, which are primarily limited to modifications required to accommodate payload processing for new launch vehicles and upgrading building infrastructure.


Our ability to complete customer specified facility modifications within budgeted costs and time commitments.



16





Uncertainty in government funding and support for key space programs.


The impact of competition and industry consolidation and our ability to win new contracts.


Spacetech


Our other business unit is a technology incubator designed to commercialize space-industry technologies. This business unit is currently pursuing two distinct opportunities:


1st Detect


1st Detect develops, manufactures and sells ultra-small mass spectrometers and related equipment. Mass spectrometers, in general, measure the mass and relative abundance of ions in a sample to create a “mass spectrum”. This resulting mass spectrum is a unique fingerprint for each chemical that can be compared to a reference library of mass spectra to verify the identity of a sample. Mass spectrometers can identify chemicals with more accuracy and precision than competing instruments given their extreme sensitivity and specificity and they are a staple of almost all analytical laboratories. By leveraging technology initiated by an engagement with NASA to develop a mass spectrometer for the ISS, the Company has developed a series of instruments that are significantly smaller, lighter, faster and less expensive than competing mass spectrometers, and significantly more sensitive and accurate than other competing chemical detectors. Our efforts have resulted in a technology that can provide mass spectrometry performance in real-time or in the field.


The MMS-1000TM is a small, low power mass spectrometer designed initially for the laboratory market. The unique design of this unit enables mass spectrometric quality chemical analysis in a small package (about the size of a shoebox) that operates off less power than a typical light bulb. This allows high quality chemical analysis to be performed in locations where mass spectrometers have not been used before, such as directly on the factory floor or in the battlefield, without compromising the quality of the analysis.


The OEM-1000 s a mass spectrometer component that was developed for applications where customers need the high quality analysis provided by a mass spectrometer but in a platform that can be integrated into customer specific packages. The OEM-1000 uses the same high performance analyzer as the MMS-1000TM but is provided as an open platform for customers and development partners to integrate with their complementary technologies, with application-specific sample preparation, inlets and software.


Astrogenetix


Astrogenetix is a biotechnology company formed to commercialize products processed in the unique environment of microgravity. Astrogenetix pursued an aggressive space access strategy to take advantage of the Space Shuttle program prior to its retirement in 2011. This strategy gave Astrogenetix unprecedented access to research in microgravity, as the Company flew experiments twelve times over a three year period. Astrogenetix and the team are currently researching a Salmonella vaccine as part of its ongoing commercialization strategy. Concurrently, the team is evaluating a vaccine target for MRSA based on discoveries made in microgravity. In December 2011, the Company negotiated a Space Act Agreement with NASA for a minimum of twenty eight additional space flights.


Critical Accounting Policies


The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP for interim financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions are reviewed periodically. Actual results may differ from these estimates under different assumptions or conditions.


Management believes there have been no significant changes during the three months period ended September 30, 2013 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2013 Annual Report on Form 10-K.




17




Results of Operation


Three months ended September 30, 2013 compared to three months ended September 30, 2012:


Selected consolidated financial data for the three months ended September 30, 2013 and 2012 is as follows (dollars in thousands):


 

 

Three Months Ended

September 30,

 

 

 

2013

 

 

2012

 

Revenue

 

$

6,689 

 

 

$

6,128 

 

Cost of revenue

 

 

3,086 

 

 

 

4,907 

 

Gross profit

 

 

3,603 

 

 

 

1,221 

 

Gross margin

 

 

54 

%

 

 

20 

%

Selling, general and administrative

 

 

1,738 

 

 

 

2,099 

 

Research and development

 

 

805 

 

 

 

642 

 

Operating expenses

 

$

2,543 

 

 

$

2,741 

 

Interest and other expense, net

 

 

(52)

 

 

 

(38)

 

Income tax expense

 

 

 

 

 

 

Consolidated net income (loss)

 

$

1,008 

 

 

$

(1,558)

 

Less: Net loss attributable to noncontrolling interest

 

 

(245)

 

 

 

(141)

 

Net income (loss) attributable to Astrotech Corporation

 

$

1,253 

 

 

$

(1,417)

 


Revenue.  Total revenue increased to $6.7 million for the three months ended September 30, 2013 from $6.1 million for the three months ended September 30, 2012. This is primarily due to increased mission related service revenue, as a result of an increased launch schedule, partially offset by a decrease in revenue earned on the fabrication of the GSE for the U. S. government.


Gross Profit.  Gross profit increased to $3.6 million for the three months ended September 30, 2013 from $1.2 million for the three months ended September 30, 2012. This is primarily a result of the increased level of revenues, as discussed above, and an increase in the proportion of revenues earned from projects with greater gross profit margins.  In the three months ended September 30, 2013 revenues were predominantly made up of launch related service projects, primarily from commercial customers, that typically contain much higher profit margins than the U. S. government related fabrication project and other non-mission related projects that made up the majority of revenues for the three months ended September 30, 2012.


Selling, General and Administrative Expense.  Selling, general and administrative decreased to $1.7 million for the three months ended September 30, 2013 from $2.1 million for the three months ended September 30, 2012 due to reduced legal and personnel recruiting expenses.


Research and Development Expense. Research and development expense increased to $0.8 million for the three months ended September 30, 2013 from $0.6 million for the three months ended September 30, 2012, primarily as a result of increased patent related legal expenses and salary expense related to research and development efforts.


Liquidity and Capital Resources


The following is a summary of the change in our cash and cash equivalents (in thousands):


 

Three Months Ended

September 30,

 

2013

 

2012

Net cash used in operating activities

$

(535)

 

$

(4,830)

Net cash used in investing activities

 

(48)

 

 

(212)

Net cash used in financing activities

 

(95)

 

 

(57)

Net change in cash and cash equivalents

$

(678)

 

$

(5,099)




18




Cash and Cash Equivalents


At September 30, 2013, we had cash and cash equivalents of $4.4 million and our working capital was approximately $6.5 million. As of September 30, 2012, we had cash and cash equivalents of $5.1 million and our working capital was approximately $3.6 million. Cash and cash equivalents have decreased by approximately $0.7 million during the three months ended September 30, 2013.


Operating Activities


Cash used in operations was $0.5 million for the three months ended September 30, 2013 compared to cash used in operations of $4.8 million for the three months ended September 30, 2012. This decrease in cash used for operations was primarily attributable to increased earnings and a decrease in accounts receivable growth for 2013 compared to 2012.

 

Investing Activities


Cash used in investing activities was $0.05 million for the three months ended September 30, 2013 compared to $0.2 million for the three months ended September 30, 2012. The reduction of cash used in investing activities was attributable to a reduced level of capital expenditures for the three months ended September 30, 2013 compared to the same period of 2012.


Financing Activities


Cash used in financing activities for the three months ended September 30, 2013 was $0.1 million compared to $0.06 million of cash used in financing activities for the three months ended September 30, 2012. The increase in cash used in financing for the three months ended September 30, 2013 over the same period of 2012, was the result of receiving $0.04 million in proceeds from the issuance of common stock in the 2012 period that did not occur in the 2013 period.


Debt


Credit Facilities


In October 2010, we entered into a financing facility with a commercial bank providing a $7.0 million term loan note and a $3.0 million revolving credit facility. The $7.0 million term loan terminates in October 2015, and the $3.0 million revolving credit facility expired in October 2012. The Company had no outstanding balance on the revolving credit facility. The term loan requires monthly payments of principal plus interest at the rate of prime plus 0.25%, but not less than 4.0%. The bank financing facilities are secured by the assets of ASO, including accounts receivable, and require us to comply with designated covenants. The balance of the $7.0 million term loan at September 30, 2013 and 2012 was $5.9 million and $6.3 million, respectively.


The bank financing facilities contain certain affirmative and negative covenants with which we must comply. As of September 30, 2013, we were in compliance with the debt covenants.


Debt Covenant Compliance


The Company’s remaining debt repayments are due as follows (in thousands):


 

 

Fiscal Year

 

Fiscal Year

 

Fiscal Year

 

 

2014

 

2015

 

2016

Term Note

 

$

292

 

$

403

 

$

5,252





19





Our bank financing facilities contain certain affirmative and negative covenants with which we must comply, including the maintenance by us of a debt service coverage ratio of not less than 1.00 to 1.00, maintaining a tangible net worth of not less than $32.50 million, and a maintaining a leverage ratio of not greater than .50 to 1.00.  These financial covenants are applicable to the results of ASO. In the event we are not in compliance with a covenant, the bank may, among other things, accelerate all outstanding borrowings, cease extending credit or foreclose on collateral.  During fiscal year 2013, we were not in compliance with our debt service coverage ratio and we obtained a waiver from the bank that indefinitely waived this event of default with respect to the periods we were in non-compliance.  As of September 30, 2013, we were in compliance with our affirmative and negative debt covenants.  However, our financial projections for fiscal year 2014 indicated that we would likely not be in compliance with our debt service coverage ratio and minimum tangible net worth covenants by the third quarter ended March 31, 2014.  As such, on October 11, 2013, we amended the debt agreement with our bank that updated the following with respect to our debt covenants: 1) provided a credit of $0.50 million and $2.25 million for the third and fourth quarter of fiscal year 2014, respectively, to our debt service coverage calculation, 2) reduced our minimum tangible net worth requirement to $32.0 million for the third and fourth fiscal quarter of fiscal year 2014, and 3) required that we maintain a minimum cash balance at the bank of $2.0 million through June 30, 2014 and $0.75 million thereafter.  Under the terms of the amendment, we expect to be compliant with our affirmative and negative covenants through June 30, 2014.  Therefore, we have classified our debt as noncurrent for any principal payments due after September 30, 2014.


In October, 2014 we were notified by a customer that a previously booked payload processing contract would be deferred several weeks. As a result of this deferral, we updated our financial projections for fiscal year 2014 which indicated that it is possible that we may not meet the minimum tangible net worth covenant in the third quarter of 2014.  We will continue to monitor this matter during the remainder of fiscal year 2014 and if necessary pursue a debt amendment with our bank.


Liquidity


Our future capital requirements will depend on a number of factors, including our success in developing and expanding markets for our products, payments under possible future strategic arrangements, continued progress of our research and development of potential products, the need to acquire licenses to new technology, costs associated with increasing our manufacturing and development facilities, costs associated with strategic acquisitions including integration costs and assumed liabilities, litigation expense, the status of competitive products and potential cost associated with both protecting and defending our intellectual property. Additionally, actions taken as a result of the ongoing internal evaluation of our business could result in expenditures not currently contemplated in our estimates for 2014.  We believe, however, that our existing cash and cash equivalents are sufficient to fund our operating expenses, capital equipment requirements and other expected liquidity requirements for the coming year.  Factors that could affect our capital requirements, in addition to those listed above include continued collections of accounts receivable consistent with our historical experience, uncertainty surrounding mission launch schedules, and our ability to manage product development efforts.


We believe we have sufficient liquidity and backlog to fund ongoing operations for at least the next fiscal year. We expect to utilize existing cash and proceeds from operations to grow our core business offering in ASO and to support strategies for Spacetech.


Income Taxes


The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are more likely than not to be realized. As of September 30, 2013, the Company has established a full valuation allowance against all of its net deferred tax assets.


FASB ASC 740, Income Taxes (FASB ASC 740) addresses the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The Company has an unrecognized tax benefit of $0.1 million for the three months ended September 30, 2013 and 2012.


For the three months ended September 30, 2013 and 2012, the Company’s effective tax rate differed from the federal statutory rate of 35%, primarily due to recording changes to the valuation allowance placed against its net deferred tax assets.





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The Company is currently under examination by the Internal Revenue Service for the fiscal years ended June 30, 2008 through 2010. Loss carryovers are generally subject to modification by tax authorities until 3 years after they have been utilized; as such, the Company is subject to examination for the fiscal years ended 2000 through present for federal purposes and fiscal years ended 2006 through present for state purposes.


Off-Balance Sheet Arrangements


We do not have any significant off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


ITEM 3.  QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


We have no material changes to the disclosure made on this matter in our 2013 Annual Report on Form 10-K.


ITEM 4.  CONTROLS AND PROCEDURES


(a) Evaluation of Disclosure Controls and Procedures


We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (Exchange Act), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report. Based on the evaluation and criteria of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.


(b) Changes in Internal Control over Financial Reporting


There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II:  OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS


On January 10, 2013, a lawsuit was filed against Astrotech Corporation by John Porter, the former Senior Vice President, Chief Financial Officer, Treasurer and Secretary of the Company.  In the lawsuit, Mr. Porter alleges various breaches of contract claims in connection with his termination from the Company on August 3, 2012.  Mr. Porter seeks monetary damages of at least $639,808.  The Company is vigorously defending the lawsuit filed by Mr. Porter.


On February 20, 2013, a shareholder derivative lawsuit was filed in the District Court of Travis County, Texas against the current directors and chief executive officer of Astrotech Corporation and against the Company, as nominal defendant. The complaint alleges, among other things, that the directors and chief executive officer breached fiduciary duties to the Company in connection with certain corporate transactions, including loans to subsidiaries and purchases of outstanding shares of the Company’s common stock. The Company intends to vigorously defend the lawsuit.


ITEM 1A. RISK FACTORS


Other than the substitution of the first following risk factor for the final risk factor in our 2013 Annual Report on Form 10-K and the addition of the second following risk factor, there have been no material changes in the risk factors described in our 2013 Annual Report on Form 10-K.




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If our common stock ceases to be listed for trading on the NASDAQ Capital Market it may harm our stock price and make it more difficult to sell shares.


On November 13, 2012, we received written notification from NASDAQ indicating that the minimum bid price of our common stock had fallen below $1.00 for 30 consecutive trading days and that we were therefore not in compliance with NASDAQ Listing Rule 5550(a)(2). On October 30, 2013, we received written notification from NASDAQ that for the previous ten business days, from October 16, 2013 to October 29, 2013, the closing bid price of the Company’s common stock had been at $1.00 per share or greater and the Company has regained compliance with Listing Rule 5550(a)(2). However, we cannot provide any assurance that we will be able to maintain future compliance with this requirement. Any delisting of our common stock from the NASDAQ Capital Market could adversely affect our ability to attract new investors, decrease the liquidity of our outstanding shares of common stock, reduce our flexibility to raise additional capital, reduce the price at which our common stock trades and increase the transaction costs inherent in trading such shares with overall negative effects for our shareholders. In addition, delisting of our common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock, and might deter certain institutions and persons from investing in our securities at all. For these reasons and others, delisting could adversely affect our business, financial condition and results of operations.


Our cash and cash equivalents may not be sufficient to fund our operating expenses, capital equipment requirements and other expected liquidity requirements.


Our future capital requirements will depend on a number of factors, including our success in developing and expanding markets for our products, payments under possible future strategic arrangements, continued progress of our research and development of potential products, the need to acquire licenses to new technology, costs associated with increasing our manufacturing and development facilities, costs associated with strategic acquisitions including integration costs and assumed liabilities, litigation expense, the status of competitive products and potential cost associated with both protecting and defending our intellectual property. Additionally, actions taken as a result of the ongoing internal evaluation of our business could result in expenditures that are not currently contemplated. Factors that could affect our capital requirements, in addition to those listed above include continued collections of accounts receivable consistent with our historical experience, uncertainly surrounding mission launch schedules, and our ability to manage product development efforts.


ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


During the quarter ended September 30, 2013, we did not issue any unregistered securities or repurchase any of our securities.


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES


Not applicable.


ITEM 4.  MINE SAFETY DISCLOSURE


Not applicable.




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ITEM 5.  OTHER INFORMATION


On November 13, 2012, we received written notification from NASDAQ indicating that the minimum bid price of our common stock had fallen below $1.00 for 30 consecutive trading days and that we were therefore not in compliance with NASDAQ Listing Rule 5550(a)(2). On October 30, 2013, we received written notification from NASDAQ that for the previous ten business days, from October 16, 2013 to October 29, 2013, the closing bid price of the Company’s common stock had been at $1.00 per share or greater and the Company has regained compliance with Listing Rule 5550(a)(2).


ITEM 6.  EXHIBITS


The following exhibits are filed herewith:


Exhibit No.

 

Description

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

 

 

32

 

Certification pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934.

 

 

 

101

 

The following financial information from the Company’s Quarterly Report on Form 10-Q, for the period ended September 30, 2013, formatted in eXtensible Business Reporting Language: (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations, (iii) Unaudited Condensed Consolidated Statements of Cash Flows, (v) Notes to Unaudited Condensed Consolidated Financial Statements.(1)


(1)  Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.




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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.



 

 

Astrotech Corporation

 

 

 

 

 

Date: November 14, 2013

 

/s/ Thomas B. Pickens III  

 

 

 

Thomas B. Pickens III 

 

 

 

Chief Executive Officer 

 



 

 

/s/ Eric Stober

 

 

 

Eric Stober

 

 

 

Chief Financial Officer

 




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