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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Astrotech Corp    ASTC

ASTROTECH CORP

(ASTC)
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ASTROTECH : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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02/12/2019 | 12:43pm EST

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 Delaware corporation organized in 1984, is a science and technology development and commercialization company that launches, manages, and builds scalable companies based on innovative technology in order to maximize shareholder value.

The Company currently operates two reportable business units, 1st Detect Corporation and Astral Images Corporation, and their efforts are focused on the following:

   •  1st Detect Corporation ("1st Detect") is a manufacturer of explosives and
      narcotics trace detectors developed for use at airports, secured facilities,
      and borders worldwide.


   •  Astral Images Corporation ("Astral") is a developer of advanced film
      restoration and enhancement software.




Our Business Units



1st Detect Corporation

1st Detect Corporation has developed a small, laboratory-performance mass spectrometer ("MS") designed to replace the explosives and narcotics trace detectors used at airports, secured facilities, and borders worldwide. We believe that government and airport customers are unsatisfied with the currently deployed Explosives Trace Detector ("ETD") technology, which is driven by an antiquated technology known as Ion Mobility Spectrometry ("IMS"). IMS-based ETDs are fraught with false positives, as they often misidentify common household chemicals as explosives, causing unnecessary passenger delays, significant wasted security resources, and lack of security personnel confidence in ETDs. In addition, IMS-based ETDs have a very limited threat detection library reserved only for those explosives of largest concern. With terrorist threats becoming more numerous, sophisticated, and lethal, security professionals have been looking for better instrumentation to address the evolving threats. MS could provide an alternative solution, but it has historically been reserved for highly trained professionals in high-end laboratories with large budgets. 1st Detect has overcome the significant challenge of making this sophisticated MS technology powerful, yet simple to use, with an easy to understand red light or green light output, at an affordable price. In addition to an increased probability of detection, decreased false alarm rate, and a virtually unlimited threat library that is field-upgradable, we believe that the 1st Detect ETD can increase passenger throughput and save billions of dollars in wasted airport security personnel resources. With more than 30,000 IMS instruments installed in the field, many of which are nearing their end of life or are unable to be updated to the newest standards, 1st Detect is positioned to be a leader in securing worldwide checkpoints.

Either Transportation Security Administration ("TSA") or European Civil Aviation Conference ("ECAC") certification is necessary to sell the TRACER 1000 to the airport market. On June 19, 2018, the Company announced that the TRACER 1000 had entered the ECAC Common Evaluation Process ("CEP") to obtain certification in Europe. On December 12, 2018, the Company announced that the TRACER 1000 passed the ECAC CEP tests for airport checkpoint screening of passengers. On January 9, 2019, the Company subsequently announced that the TRACER 1000 passed the CEP tests for airport cargo screening. Official ECAC Certification is expected in the near-term, at which point, the Company can begin selling the TRACER 1000 to international airports. 1st Detect is the first MS-based ETD to have ever passed either US or European regulatory testing.

In addition, on March 27, 2018, the Company announced that the TRACER 1000 was accepted into TSA's Air Cargo Screening Technology Qualification Test ("ACSQT") and, on April 4, 2018, the Company announced that the TRACER 1000 was beginning testing with TSA for passenger screening at airports. Both programs are currently progressing as expected.

With TSA and ECAC having two of the most rigorous technology review programs for ETDs in the world, certification by either program is a significant endorsement that customers in other vertical markets would consider when procuring ETDs.

There is no assurance that any of the further steps detailed in the milestones mentioned above will be achieved or that our technology will be approved by any of the programs listed.




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Astral Images Corporation

Astral Images is a developer of advanced film restoration and enhancement software. Astral's intelligent algorithms remove dust, scratches, and defects from film while converting the content to a digital format with significantly enhanced resolution. In addition, Astral employs Artificial Intelligence to automatically extend the color gamut and enhance the dynamic range to be viewed in 4K and/or high-dynamic range ("HDR"), collectively known as ultra-high definition ("UHD").

Astrotech Corporation is at a point whereby its resources must be carefully allocated to optimize the primary objective - setting 1st Detect on a path to meaningful sales. Although we believe Astral has developed valuable technology fortified by patents and trade secrets, the potential market has not evolved as quickly as anticipated. Due to funding constraints, the Company's main focus remains on the 1st Detect opportunity. Consequently, headcount and expenditures at Astral are minimized and new development is exclusively focused on strategic initiatives that would facilitate the realization of Astral's value.



Critical Accounting Policies


The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, 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 six months ended December 31, 2018 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 2018 Annual Report on Form 10-K.




Results of Operations



Three months ended December 31, 2018, compared to three months ended December 31, 2017:




Selected consolidated financial data for the quarters ended December 31, 2018,
and 2017 is as follows:



                                                Quarters Ended December 31,
      (In thousands)                             2018                 2017
      Revenue                               $            7       $           41
      Cost of revenue                                    -                   24
      Gross profit                                       7                   17
      Gross margin                                     100 %                 41 %
      Operating expenses:
      Selling, general and administrative            1,286                1,602
      Research and development                         897                1,582
      Total operating expenses                       2,183                3,184
      Loss from operations                          (2,176 )             (3,167 )
      Interest and other income, net                    16                   30
      Income tax benefit                                 -                    -
      Net loss                              $       (2,160 )$       (3,137 )

Revenue - Total revenue decreased $34 thousand during the second quarter of fiscal 2019, compared to the second quarter of fiscal 2018. All of the revenue generated in the second quarter of fiscal 2019 was associated with the Company's now-discontinued agreement with ColorTime, a post-production house specializing in media content creation, restoration, and distribution. The revenue generated in the second quarter of fiscal 2018 was from a software license agreement with a large post-production film company. This agreement was used to correct defects and restore one film.

Gross Profit - Gross profit is comprised of revenue less cost of revenue. During the second quarter of fiscal 2019, cost of revenues decreased $24 thousand as there was no labor associated with the ColorTime revenue. In the second quarter of fiscal 2018, cost of revenue was comprised of labor related to the agreement with a large post-production film company. Gross profit decreased $10 thousand during the same period due to the decrease in revenue as described above.




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Operating Expenses - As a result of management's ongoing commitment to optimize our available resources, operating expenses decreased $1.0 million, or 31%, during the second quarter of fiscal 2019, compared to the second quarter of fiscal 2018. Selling, general and administrative decreased $0.3 million, or 20%, due to decreases in expenses relating to legal, investor relations, lobbying, directors' fees, equity compensation, and headcount. Research and development decreased $0.7 million, or 43%, during the second quarter of fiscal 2019, compared to the second quarter of fiscal 2018, primarily due to decreased headcount and less depreciation expense.

Income Taxes - Income tax benefit did not change during the second quarter of fiscal 2019, compared to the second quarter of fiscal 2018. The realization of tax benefits depends on the existence of future taxable income. Pursuant to Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") "Income Taxes" ("FASB ASC 740"), a valuation allowance has been established to reduce the deferred tax assets to the amounts that are more likely than not to be realized.

Six months ended December 31, 2018, compared to six months ended December 31, 2017:

Selected consolidated financial data for the six months ended December 31, 2018 and 2017 is as follows (in thousands):



                                                     Six Months Ended
                                                       December 31,
             (In thousands)                          2018         2017
             Revenue                               $     40$     41
             Cost of revenue                             11           24
             Gross profit                                29           17
             Gross margin                                73 %         41 %
             Operating expenses:
             Selling, general and administrative      2,430        3,034
             Research and development                 2,000        3,226
             Total operating expenses                 4,430        6,260
             Loss from operations                    (4,401 )     (6,243 )
             Interest and other income, net               3          100
             Income tax benefit                           -            -
             Net loss                              $ (4,398 )$ (6,143 )

Revenue - Total revenue remained consistent during the six months ended December 31, 2018, compared to the six months ended December 31, 2017. All of the revenue generated during the six months ended December 31, 2018 was associated with the Company's now-discontinued agreement with ColorTime, a post-production house specializing in media content creation, restoration, and distribution. The revenue generated during the six months ended December 31, 2017 was from a software license agreement with a large post-production film company. This agreement was used to correct defects and restore one film.

Gross Profit - Gross profit is comprised of revenue less cost of revenue. During the six months ended December 31, 2018, cost of revenue was comprised of labor related to the agreement with ColorTime. During the six months ended December 31, 2018, cost of revenues decreased $13 thousand compared to the six months ended December 31, 2017, and gross profit increased $12 thousand during the same period due to the decrease in cost of revenue as described above.

Operating Expenses - As a result of management's ongoing commitment to optimize our available resources, operating expenses decreased $1.8 million, or 29%, during the six months ended December 31, 2018, compared to the six months ended December 31, 2017. Selling, general and administrative decreased $0.6 million, or 20%, due to decreases in expenses relating to legal, investor relations, lobbying, directors' fees, equity compensation, and headcount. Research and development decreased $1.2 million, or 38%, during the six months ended December 31, 2018, compared to the six months ended December 31, 2017, primarily due to decreased headcount and less depreciation expense.

Income Taxes - Income tax benefit did not change during the six months ended December 31, 2018, compared to the six months ended December 31, 2017. The realization of tax benefits depends on the existence of future taxable income. Pursuant to FASB ASC 740, a valuation allowance has been established to reduce the deferred tax assets to the amounts that are more likely than not to be realized.




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Liquidity and Capital Resources

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



                                                               Six Months Ended
                                                                 December 31,
 (In thousands)                                          2018         2017       change

Change in cash and cash equivalents:

 Net cash used in operating activities                 $ (4,230 )$ (5,849 )$ 1,619
 Net cash provided by investing activities                3,597        4,301        (704 )
 Net cash provided by (used in) financing activities      2,927           (3 )     2,930
 Net change in cash and cash equivalents               $  2,294$ (1,551 )$ 3,845




Cash and Cash Equivalents


As of December 31, 2018, we held cash and cash equivalents of $2.8 million, and our working capital was approximately $2.1 million. As of June 30, 2018, we had cash and cash equivalents of $0.6 million, and our working capital was approximately $3.3 million. Cash and cash equivalents increased by approximately $2.3 million as of December 31, 2018, as compared to June 30, 2018, due to a private placement of equity securities and the sale and/or maturities of our available-for-sale securities, partially offset by funding our normal operating activities and research and development initiatives.



Operating Activities


Cash used in operating activities decreased $1.6 million for the six months ended December 31, 2018, compared to the six months ended December 31, 2017, primarily caused by a reduction in our expenses.

Investing Activities

Cash provided by investing activities decreased $0.7 million for the six months ended December 31, 2018, compared to the six months ended December 31, 2017, due to fewer maturities and sales of our available-for-sale investments.



Financing Activities


Cash provided by financing activities was $2.9 million for the six months ended December 31, 2018 compared to cash used in financing activities of $3 thousand for the six months ended December 31, 2017. This change was due to a private placement of equity securities on October 9, 2018.



Liquidity


As of December 31, 2018, we had cash and cash equivalents of $2.8 million, and our working capital was approximately $2.1 million. For the fiscal year 2018, the Company reported a net loss of $13.3 million and net cash used in operating activities of $10.8 million. For the six months ended December 31, 2018, the Company reported a net loss of $4.4 million and net cash used in operating activities of $4.2 million. These factors raise substantial doubt about the Company's ability to continue as a going concern.

The Company remains resolute in identifying the optimal solution to its liquidity issue. The Company is currently evaluating several potential sources for additional liquidity. These include, but are not limited to, selling the Company or a portion thereof, debt financing, equity financing, merging, or engaging in a strategic partnership. On July 3, 2018, management filed Form S-3 to raise funds through the capital markets. On October 9, 2018, the Company entered into a Securities Purchase Agreement (the "Agreement") with Thomas B. Pickens III, the Chief Executive Officer and Chairman of the Board of Directors of the Company, and a long-term accredited investor in the Company (the "Investor"). Pursuant to the Agreement, the Company agreed to sell an aggregate of 866,950 shares of its series B convertible preferred stock, par value $0.001 per share (the "Preferred Shares") to Mr. Pickens and 409,645 of its shares of common stock, par value $0.001 per share (the "Common Shares") to the Investor, at a price per share of $2.35 and for aggregate gross proceeds of approximately $3.0 million. The purchase price of $2.35 per share was equal to the closing price on The NASDAQ Capital Market on October 8, 2018. The Preferred Shares converted into an aggregate of 866,950 shares of common stock on December 7, 2018 upon receipt of shareholder approval in accordance with NASDAQ Listing Rule 5635(b).

The Company is currently evaluating potential offerings of any combination of common stock, preferred stock, debt securities, warrants to purchase common stock, preferred stock or debt securities, or any combination of the foregoing, either individually


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or as units comprised of one or more of the other securities. However, additional funding may not be available when needed or on terms acceptable to us. If we are unable to generate funding within a reasonable timeframe, we may have to delay, reduce or terminate our research and development programs, limit strategic opportunities, or curtail our business activities. Astrotech's consolidated financial statements as of December 31, 2018 do not include any adjustments that might result from the outcome of this uncertainty.



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 December 31, 2018 and June 30, 2018, the Company established a full valuation allowance against all of its net deferred tax assets.

For the three months ended December 31, 2018 and 2017, the Company incurred pre-tax losses in the amount of $2.2 million and $3.1 million, respectively. For the six months ended December 31, 2018 and 2017, the Company incurred pre-tax losses in the amount of $4.4 million and $6.1 million, respectively. The total effective tax rate was approximately 0% for each of the three and six months ended December 31, 2018 and 2017.

For each of the six months ended December 31, 2018 and 2017, the Company's effective tax rate differed from the federal statutory rate of 21% and 28% respectively, primarily due to the valuation allowance placed against its net deferred tax assets.

The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. In the second quarter of fiscal 2018, the Company revised its estimated annual effective rate to reflect a change in its federal statutory rate from 35% to 21%. The rate change was effective on January 1, 2018; therefore, the Company's blended statutory tax rate for the fiscal year ended June 30, 2018 was 28%. At December 31, 2018, the Company has not completed its accounting for all of the tax effects of enactment of the Act; however, a reasonable estimate has been made. Note that the Company currently has net operating loss carryovers. A valuation allowance has been recorded to fully reserve for net operating loss carryovers, other carryovers, and book/tax differences on the balance sheet.

FASB ASC 740, "Income Taxes" addresses the accounting for uncertainty in income tax 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 had no unrecognized tax benefit for the three and six months ended December 31, 2018 and 2017.

Loss carryovers are generally subject to modification by tax authorities until three 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. The reason for this extended examination period is due to the utilization of the loss carryovers generated by the sale of our Astrotech Space Operations business unit in fiscal year 2015.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2018, and June 30, 2018.

© Edgar Online, source Glimpses

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