# ASTROTECH Corp: Form 10-Q for the period ended Sep 30, 2014

- Company: [ASTROTECH Corp](/companies/astc.md) (CIK 1001907)
- Form: 10-Q
- Filed: 2014-11-14
- Accepted by EDGAR: Nov 14, 2014, 19:24 ET
- Period: 2014-09-30
- Accession: 0001571049-14-006393
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1001907/000157104914006393/t1402149_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1001907/000157104914006393/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-07-01 to 2014-09-30 | $320.0k | us-gaap:Revenues |
| Cost of revenue | 3 months, 2014-07-01 to 2014-09-30 | $277.0k | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2014-07-01 to 2014-09-30 | $43.0k | us-gaap:GrossProfit |
| Research and development | 3 months, 2014-07-01 to 2014-09-30 | $692.0k | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2014-07-01 to 2014-09-30 | $2.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2014-07-01 to 2014-09-30 | −$2.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2014-07-01 to 2014-09-30 | −$1.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-07-01 to 2014-09-30 | $23.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-07-01 to 2014-09-30 | $1.16 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted shares (weighted) | 3 months, 2014-07-01 to 2014-09-30 | 19,548,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2014-07-01 to 2014-09-30 | −$3.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2014-07-01 to 2014-09-30 | $46.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2014-09-30 | $45.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-09-30 | $46.7m | us-gaap:AssetsCurrent |
| Total assets | at 2014-09-30 | $54.0m | us-gaap:Assets |
| Current liabilities | at 2014-09-30 | $2.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-09-30 | $2.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2014-09-30 | $51.3m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 24,263 characters.

*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.*

### Business Overview

Astrotech Corporation (Nasdaq: ASTC) (“Astrotech,” “the Company,” “we,” “us” or “our”), a Washington corporation, is a company that was formed in 1984 to leverage the environment of space for commercial purposes. For 30 years, the Company remained a crucial player in space commerce activities which supported the launch of 23 shuttle missions and more than 300 spacecraft. We currently prepare and process scientific research in microgravity and develop and manufacture sophisticated, next generation chemical sensor equipment.

On August 22, 2014, the Company completed the previously announced sale (“Asset Sale”) of substantially all of its assets used to conduct the Company's former Astrotech Space Operations (“ASO”) business unit (“the ASO business”) to Lockheed Martin Corporation for an agreed upon purchase price of $61.0 million, less a working capital adjustment. As of September 30, 2014, the estimated purchase price is $59.3 million, which includes a working capital adjustment of $1.7 million. As of September 30, 2014, the Company has received cash of $52.6 million and has recorded receivables of $0.6 million for the working capital holdback, which is classified in other current assets, and $6.1 million for the indemnity holdback. The working capital holdback will be settled in the next twelve months, once both sides agree on the final net working capital amount as of the date of the transaction. The indemnity holdback is being held in escrow under the terms of an escrow agreement until February 2016 (the 18-month anniversary of the consummation of the transaction). The Company believes it will fully realize the indemnity holdback in February 2016. Our former ASO business consists of (i) ownership, operation and maintenance of spacecraft processing facilities in Titusville, Florida and Vandenberg Air Force Base, California (“VAFB”), (ii) supporting government and commercial customers processing complex communication, earth observation and deep space satellite launches, (iii) designing and building spacecraft processing equipment and facilities and (iv) providing propellant services including designing, building and testing propellant service equipment for fueling spacecraft.

With the sale of the Company’s former ASO business, the Company now operates a single reportable business unit, Spacetech, and its efforts are focused on the following:

- Working with development partners to build industry specific applications using our sensor equipment;
- Enhancing the capabilities of our sensors;
- Commercializing unique space-based technologies;
- Developing next generation vaccines using the unique environment of microgravity.

### Spacetech

Spacetech is a technology incubator designed to commercialize space-industry technologies. Spacetech 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 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 at a lower price point. Our efforts have resulted in a technology that can provide mass spectrometry analytics in real-time for explosive device detection in airports and the battlefield, industrial quality and process control, environmental field applications and laboratory research.

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 requires 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 is a mass spectrometer component that is designed to be integrated into customers’ complementary technology. The OEM-1000 has recently been integrated into a Thermogravimetric Analyzer (“TGA”) manufactured by RIGAKU of Tokyo, Japan, one of the leading instrumentation companies in Asia. The integrated instrument named Thermo iMS2 is the world’s first integrated TGA with MS/MS capabilities and is expected to be well received by the international research and development markets.

### 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 NASA space shuttle program prior to its retirement in 2011. This strategy gave Astrogenetix unprecedented access to research in microgravity, as we flew experiments twelve times over a three year period. In collaboration with NASA, NASA has engaged leading vaccine development experts through a premier educational institution to independently evaluate Astrogenetix’s platform with specific direction to aid in the filing of an Investigational New Drug (“IND”) application for Salmonella. Given that NASA is providing much of the necessary funding for this research, additional investment in Astrogenetix has been scaled back considerably as efforts are concentrated on filing this IND. The team is also evaluating a vaccine target for Methicillin-Resistant Staphylococcus Aureus (“MRSA”) based on discoveries made in microgravity. We have negotiated a Space Act Agreement with NASA for a minimum of twenty eight additional space flights following the successful filing of the IND for Salmonella.

### Business Developments

#### Sale of Astrotech Space Operations business (“Asset Sale”)

On August 22, 2014, the Company completed the previously announced sale of substantially all of its assets used to conduct the Company's former ASO business unit to Lockheed Martin Corporation for an agreed upon purchase price of $61.0 million, less a working capital adjustment. As of September 30, 2014, the estimated purchase price is $59.3 million, which includes a working capital adjustment of $1.7 million. As of September 30, 2014, the Company has received cash of $52.6 million and has recorded receivables of $0.6 million for the working capital holdback, which is classified in other current assets, and $6.1 million for the indemnity holdback. The working capital holdback will be settled in the next twelve months, once both sides agree on the final net working capital amount as of the date of the transaction. The indemnity holdback is being held in escrow under the terms of an escrow agreement until February 2016 (the 18-month anniversary of the consummation of the transaction). The Company expects to fully realize the indemnity holdback in February 2016. Our former ASO business consists of (i) ownership, operation and maintenance of spacecraft processing facilities in Titusville, Florida and Vandenberg Air Force Base, California (“VAFB”), (ii) supporting government and commercial customers processing complex communication, earth observation and deep space satellite launches, (iii) designing and building spacecraft processing equipment and facilities and (iv) providing propellant services including designing, building and testing propellant service equipment for fueling spacecraft.

During the first quarter of fiscal 2015, we recorded a pre-tax gain of $25.6 million ($23.7 million, after tax) on the Asset Sale. All of the operations of our former ASO business, which were previously reported within our former ASO business unit segment, have been reclassified as discontinued operations in our unaudited condensed consolidated financial statements for the quarter ended September 30, 2014 and 2013 and as of June 30, 2014. See Note 2 to our unaudited condensed consolidated financial statements for more information regarding the Asset Sale and the use of related proceeds.

#### Payoff of Term Loan

On August 22, 2014, the Company used a portion of the proceeds from the Asset Sale to pay off the outstanding balance of its term loan of $5.7 million. The Company has no outstanding bank debt as of September 30, 2014.

#### Payoff of Texas Emerging Technology Fund Award

On August 28, 2014, the Company used a portion of the proceeds from the Asset Sale to settle its funding from the State of Texas Emerging Technology Fund for $2.3 million.

### 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.

With the sale of our former ASO business unit, several of our critical accounting policies will no longer be applicable in subsequent fiscal years. Management will update its disclosure of our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2015 Annual Report on Form 10-K.

### Results of Operations

**Quarter ended September 30, 2014 compared to Quarter ended September 30, 2013:**

Selected consolidated financial data for the quarter ended September 30, 2014 and 2013 is as follows (dollars in thousands):

|  | Quarter Ended September 30, 2014 | 2013 |
| --- | ---: | ---: |
| **Revenue** | **$320** | **$—** |
| Cost of revenue | 277 | — |
| **Gross profit** | **43** | **—** |
| **Gross margin** | **13%** | **—%** |
| Selling, general and administrative | 1,960 | 1,551 |
| Research and development | 692 | 805 |
| **Operating expenses** | **$2,652** | **$2,356** |
| Interest and other expense, net | (12) | (12) |
| Income tax benefit | (1,325) | (1,173) |
| **Loss from continuing operations** | **$1,272** | **$1,171** |
| **Discontinued operations** |  |  |
| Income from operations of former ASO business | 26,933 | 3,352 |
| Income tax expense | (2,378) | (1,173) |
| **Income from discontinued operations** | **$24,555** | **$2,179** |
| **Net income** | **$23,283** | **$1,008** |
| Less: Net loss attributable to noncontrolling interest | — | (245) |
| **Net income attributable to Astrotech Corporation** | **$23,283** | **$1,253** |

***Revenue –*** Total revenue increased $320 thousand during the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014 due to the first phase of a new subcontract agreement with a third party on the Next Generation Chemical Detector (“NGCD”) program.

***Gross Profit –*** Gross profit increased $43 thousand during the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014 due to our increase in revenue as described above.

***Operating Expenses –*** Our operating expenses increased $296 thousand, or 12.6%, during the first quarter of fiscal 2015 compared to the same period in the prior fiscal year. Significant changes to operating expenses included the following:

- Selling, general and administrative expense increased by $409 thousand primarily driven by transaction-related costs within our Corporate operations, as well as higher employee-related costs due to additional headcount within our 1st Detect business unit.
- Research and development expense decreased by $113 thousand primarily driven by a shift of direct material and labor costs to cost of revenue and lower subcontractor costs due to higher employee headcount, offset by higher R&D material costs, new software licensing, and increased utilities expense.

***Income Taxes on Continuing Operations –*** Our income tax benefit increased $152 thousand due to lower losses on continuing operations during the first quarter of fiscal 2015 compared to the same period in the prior fiscal year.

***Discontinued Operations –*** Discontinued operations includes the reclassification of operations of the Company’s former ASO business unit for the three months ended September 30, 2013. Income from discontinued operations increased $22.4 million during the first quarter of fiscal 2015 compared to the same period in the prior year. Significant changes included the following:

- Gain on the Asset Sale of $25.6 million ($23.7 million after-tax) which reflects the excess of the sum of the cash proceeds received over the net book value of the net assets of the Company’s former ASO business unit.
- Operating income from discontinued operations decreased by $2.0 million as our former ASO business unit’s operating results were only included through August 21, 2014 in the three months ended September 30, 2014, compared to a full quarter in the three months ended September 30, 2013.
- Income tax expense increased $1.2 million primarily driven by taxes of $1.9 million on the gain of the Asset Sale, offset by a decrease in operating income tax expense of $0.6 million related to the shorter period of operations during the first quarter of fiscal 2015 compared to the same period in the prior fiscal year.

### Liquidity and Capital Resources

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

| Cash flows from continuing operations: | Three Months Ended September 30, 2014 | 2013 | change |
| --- | ---: | ---: | ---: |
| Net cash used in operating activities | $(1,749) | $(1,249) | $(500) |
| Net cash used in investing activities | (46) | (41) | (5) |
| Net cash used in financing activities | (2,331) | — | (2,331) |
| Net cash used in continuing operations | (4,126) | (1,290) | (2,836) |
| Cash flows from discontinued operations: |  |  |  |
| Net cash provided by (used in) operating activities | (1,370) | 208 | (1,578) |
| Net cash provided by investing activities | 52,591 | 499 | 52,092 |
| Net cash used in financing activities | (5,655) | (95) | (5,560) |
| Net cash provided by discontinued operations | 45,566 | 612 | 44,954 |
| **Net change in cash and cash equivalents** | **$41,440** | **$(678)** | **$42,118** |

### Cash and Cash Equivalents

At September 30, 2014, we had cash and cash equivalents of $45.3 million and our working capital was approximately $44.1 million. At September 30, 2013, we had cash and cash equivalents of $4.4 million and our working capital was approximately $3.6 million. Net change in cash and cash equivalents increased by approximately $42.1 million during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 due to the sale of our former ASO business.

### Operating Activities

Net cash used in operating activities from continuing operations increased to $1.7 million for the three months ended September 30, 2014 compared to $1.2 million for the three months ended September 30, 2013, which was primarily the result of a net income tax liability of $1.1 million associated with both the losses on our current operations and the gain on the sale of our former ASO business unit as the ASO business unit’s operating results were only included through August 21, 2014 in the three months ended September 30, 2014, offset by larger decreases in accrued expenses compared to the same period in the prior fiscal year.

Net cash used in operating activities from discontinued operations was $1.4 million for the three months ended September 30, 2014 compared to net cash provided by operating activities from discontinued operations of $0.2 million for the three months ended September 30, 2013. The change was related to the sale of our former ASO business unit prior to the end of our fiscal quarter.

### Investing Activities

Cash used in investing activities from continuing operations for the three months ended September 30, 2014 did not change significantly compared to the three months ended September 30, 2013.

Cash provided by investing activities from discontinued operations increased to $52.6 million for the three months ended September 30, 2014 compared to $0.5 million for the three months ended September 30, 2013, which was due to the sale of our former ASO business.

### Financing Activities

Cash used in financing activities from continuing operations increased $2.3 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The increase was due to the payoff of funding from the State of Texas Emerging Technology Fund for $2.3 million.

Cash used in financing activities from discontinued operations increased to $5.7 million for the three months ended September 30, 2014 compared to $0.1 million for the three months ended September 30, 2013. This increase was related to the payoff of our term loan that was secured by the assets of our former ASO business unit.

### Debt

### Credit Facilities

In October 2010, our former ASO business 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 was to terminate in October 2015, and the $3.0 million revolving credit facility expired in October 2012. On August 22, 2014, the Company used a portion of the proceeds from the sale of its former ASO business to pay off the outstanding balance of its term loan of $5.7 million.

### Liquidity

At September 30, 2014, we had cash and cash equivalents of $45.3 million and our working capital was approximately $44.1 million.

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. In addition, actions taken as a result of the ongoing internal evaluation of our business could result in expenditures not currently contemplated in our estimates for 2015. 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 and our ability to manage product development efforts.

On August 22, 2014, the Company completed the sale of substantially all of its assets used to conduct the Company's Astrotech Space Operations business unit to Lockheed Martin Corporation for an agreed upon purchase price of $61.0 million, less a working capital adjustment. As of September 30, 2014, the estimated purchase price is $59.3 million, which includes a working capital adjustment of $1.7 million. As of September 30, 2014, the Company has received cash of $52.6 million and has recorded receivables of $0.6 million for the working capital holdback and $6.1 million for the indemnity holdback. The working capital holdback will be settled in the next twelve months, once both sides agree on the final net working capital amount as of the date of the transaction. The indemnity holdback is being held in escrow under the terms of an escrow agreement until February 2016 (the 18-month anniversary of the consummation of the transaction). A portion of the proceeds from the sale were used to pay off the term loan of $5.7 million and to settle the Company’s funding from the State of Texas Emerging Technology Fund for $2.3 million. The remaining funds will fund current operations and support strategies for our remaining business unit, Spacetech.

We believe we have sufficient liquidity to continue to fund our operating expenses, capital requirements and other expected liquidity requirements over the next fiscal year.

### 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, 2014, the Company has established a full valuation allowance against all of its net deferred tax assets to the extent they will not be utilized to offset the gain and income from discontinued operations.

To the extent that a loss or credit carryover can be utilized to offset the gain and income from discontinued operations, it has been recognized as a tax benefit to be applied against the current tax otherwise resulting from discontinued operations.

To the extent that a taxable loss from the current year can be utilized to offset the tax otherwise resulting from discontinued operations, it has been recognized as a tax benefit from continuing operations.

The disposition of the ASO business resulted in the recognition of a taxable gain of approximately $27.0 million. The Company will utilize losses generated during its current fiscal year ending June 30, 2015, as well as loss carryovers and credits that are unrestricted by IRC Section 382 (which limits the utilization of loss carryovers). As of September 30, 2014, the Company expects that it will be able to offset all but $2.8 million of the gain. Any additional losses incurred during the current fiscal year ending June 30, 2015 will reduce the taxable gain and the taxes associated with that gain. The Company is currently unable to reasonably estimate the impact of any additional losses that may occur during the remainder of its fiscal year ending June 30, 2015. As of September 30, 2014, it is expected that the net federal and state tax impact of the disposition gain (net of the losses incurred during the three months ended September 30, 2014, and the tax attribute carryovers from prior years) is $1.1 million.

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, 2014 and 2013.

### Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of September 30, 2014.

## Controls and procedures

As filed, 1,612 characters.

### (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, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed Nov 14, 2014.
Source: SEC EDGAR, the filing index for accession 0001571049-14-006393. Last ingested by Listed: Oct 24, 2026, 15:01 ET. No prices; not investment advice.