ASTROTECH CORPORATION

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

05/13/2022 | 10:07am EDT

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 mass spectrometry company that launches, manages, and commercializes scalable companies based on its innovative core technology.

Our efforts are focused on commercializing our platform mass spectrometry technology through our wholly-owned subsidiaries:



  ? Astrotech Technologies, Inc. ("ATI") owns and licenses intellectual property
    related to the Astrotech Mass Spectrometer Technology™ (the "AMS Technology").




  ? 1st Detect Corporation ("1st Detect") is a manufacturer of explosives and
    narcotics trace detectors developed for use at airports, cargo and other
    secured facilities, and borders worldwide. 1st Detect holds an exclusive AMS
    Technology license from ATI for air passenger and cargo security applications.




  ? AgLAB, Inc. ("AgLAB") is developing a series of mass spectrometers for use in
    the hemp and cannabis market with initial focus on optimizing yields in the
    extraction and distillation process. AgLAB holds an exclusive AMS Technology
    license from ATI for agriculture applications.




  ? BreathTech Corporation ("BreathTech") is developing a breath analysis tool to
    screen for volatile organic compound ("VOC") metabolites found in a person's
    breath that could indicate they may have an infection, including COVID-19 or
    pneumonia. BreathTech holds an exclusive AMS Technology license from ATI for
    breath analysis applications.




Our Business Units



Astrotech Technologies, Inc.

ATI owns and licenses the AMS Technology, the platform mass spectrometry technology originally developed by 1st Detect. Long recognized as the gold standard in chemical detection, mass spectrometry has historically been too costly, bulky, and cumbersome. In contrast, the AMS Technology has been designed to be inexpensive, small, and easy to use. Unlike other technologies, the AMS Technology works under ultra-high vacuum, which eliminates competing molecules, yielding higher resolution and fewer false alarms. The intellectual property includes 24 granted patents and two additional patents in process along with extensive trade secrets. With a number of diverse market opportunities for the core technology, ATI is structured to license the intellectual property for different fields of use. ATI currently licenses the AMS Technology to three wholly-owned subsidiaries of Astrotech on an exclusive basis, including to 1st Detect for use in the security and detection market, to AgLAB for use in the agriculture market, and to BreathTech for use in breath analysis.

ATI has contracted with Sanmina Corporation ("Sanmina"), a leading contract manufacturer with a worldwide presence. Sanmina has already helped to reduce the cost of the TRACER 1000™, and we have leveraged their expertise to improve manufacturability and reliability of our systems.




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1st Detect Corporation


1st Detect, a licensee of ATI for the security and detection market, has developed the TRACER 1000, the world's first mass spectrometry ("MS") based explosives trace detector ("ETD") certified by the European Civil Aviation Conference ("ECAC"), designed to replace the ETDs used at airports, cargo and other secured facilities, and borders worldwide. We believe that ETD customers are unsatisfied with the currently deployed ETD technology, which is driven by ion mobility spectrometry ("IMS"). We believe that IMS-based ETDs are fraught with false positives, as they often misidentify personal care products and other common household chemicals as explosives, causing facility shutdowns, unnecessary delays, frustration, and significant wasted security resources. In addition, there are hundreds of different types of explosives, but IMS-based ETDs have a very limited threat detection library reserved only for those several explosives of largest concern. Adding additional compounds to the detection library of an IMS-based ETD fundamentally reduces the instrument's performance, further increasing the likelihood of false alarms. In contrast, adding additional compounds to the TRACER 1000's detection library does not degrade its detection capabilities, as it has a virtually unlimited and easily expandable threat library.

In order to sell the TRACER 1000 to airport and cargo security customers in the European Union and certain other countries, ECAC certification is required. We are currently selling the TRACER 1000 to customers who accept ECAC certification. We have deployed or received orders for the TRACER 1000 in approximately twenty locations in thirteen countries throughout Europe and Asia.

In the United States, we are working with the U.S. Transportation Security Administration ("TSA") towards air cargo certification. On March 27, 2018, we announced that the TRACER 1000 was accepted into TSA's Air Cargo Screening Technology Qualification Test ("ACSQT") and, on April 4, 2018, we announced that the TRACER 1000 was beginning testing with TSA for passenger screening at airports. On November 14, 2019, we announced that the TRACER 1000 had been selected by the TSA's Innovation Task Force to conduct live checkpoint screening at Miami International Airport. With similar protocols as ECAC testing, we have received valuable feedback from all programs. Following ECAC certification and our early traction within the cargo market, testing for cargo security continued with the TSA. With the COVID-19 pandemic, all testing within the TSA was put on hold; however, we resumed cargo testing during the summer of 2020, and we subsequently announced on September 9, 2020 that the TRACER 1000 passed the non-detection testing portion of the TSA's ACSQT. Due to continued delays caused by COVID-19, TSA cargo detection testing is ongoing but proceeding much more slowly than anticipated. As a result, efforts are primarily focused on our other opportunities. TSA cargo detection testing is the final step to be listed on the Air Cargo Screening Technology List ("ACSTL") as an "approved" device. If approved, the TRACER 1000 will be approved for cargo sales in the United States.

On August 25, 2021, 1st Detect announced that it secured an important landmark purchase order for the TRACER 1000, representing the first units to be deployed at an airport security checkpoint. These systems were delivered to the customer during the second quarter of fiscal year 2022.



AgLAB Inc.


AgLAB, an exclusive licensee of ATI for the agriculture market, has developed the AgLAB-1000™ series of mass spectrometers for use in the hemp and cannabis market with initial focus on optimizing yields in the extraction and distillation process. The AgLAB product line is a derivative of our core AMS Technology. The AMS Technology provides a significant competitive advantage due to its small size, rugged design, quick analysis, and ease of use. AgLAB recently completed several successful field trials to demonstrate that the AgLAB-1000-D2™ can be used in the distillation process to significantly boost the potency and weight yields of THC and CBD oil manufacturing. We plan to launch a family of "process control" instruments, methods, and solutions that we believe could be valuable additions to many nutraceutical extraction and distillation laboratories.




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BreathTech Corporation


BreathTech, an exclusive licensee of ATI for use in breath analysis, is developing the BreathTest-1000™, a breath analysis tool to screen for VOC metabolites found in a person's breath that could indicate they may have an infection, including COVID-19 or pneumonia. While vaccines have been deployed to prevent the transmission of COVID-19, many people remain unvaccinated and new variants continue to pose a significant and evolving threat. New tools to aid in the battle against COVID-19 remain of the utmost importance to help defeat the disease, and BreathTech, in conjunction with Cleveland Clinic, are developing a quick and easy to use device to help prevent the further spread of the disease.

Development of the BreathTest-1000 follows our results in pre-clinical trials for the BreathDetect-1000™, a rapid self-serve breathalyzer that was designed to detect bacterial infections in the respiratory tract, including pneumonia. The pre-clinical trials were conducted in collaboration with UT Health San Antonio in 2017.

On February 2, 2022, BreathTech announced that it has hired Dr. Karim Sirgi, MD, MBA and FCAP as its Chief Science Officer. Dr. Sirgi is a pathologist, board certified in Anatomic, Clinical and Cytopathology, and has over 30 years of practice and leadership experience in private and academic pathology practices. We expect Dr. Sirgi will be key in the research and development and regulatory efforts at BreathTech and will help lead our partnership with Cleveland Clinic in the development of the BreathTest-1000.

Trends and Uncertainties - COVID-19

In March 2020, the World Health Organization declared COVID-19 a global pandemic.

We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on our business is uncertain and difficult to predict, as the disease and the responses that we, other businesses, and governments are taking continue to evolve. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it remains possible that it could cause a prolonged global economic recession. Policymakers around the globe have responded with fiscal policy actions to support the economy as a whole. The magnitude and overall effectiveness of these actions have been somewhat positive, but continuing actions remain uncertain and pose some degree of risk.

To date, we have seen delays with respect to the TSA certification process and parts of our supply chain, particularly the impact of the global semiconductor and electronics shortage, which has now resulted in product pricing inflation. In addition, although passenger demand for air travel has rebounded, the overall recovery of the airline industry and ancillary services remains highly uncertain and is dependent upon, among other things, the number of cases declining around the globe, public health impacts of new COVID-19 variants, the continued administration of vaccines to unvaccinated populations, and the duration of immunity granted by vaccines.

We continue to manage production, to secure alternative supplies, and to take other proactive actions. We believe that we will be able to pass the inflation caused by raw materials shortages and increased shipping costs to our customers by increasing the price of our instruments. If supply chain shortages become more severe or longer term in nature, our business and results of operations could be adversely impacted; however, we do not expect this issue to materially adversely affect our liquidity position. The long-term impact of the COVID-19 pandemic on our business may not be fully reflected until future periods.

We continue to evaluate the current and potential impact of the pandemic on our business, results of operations, and consolidated financial statements. We also continue to actively monitor developments and business conditions that may cause us to take further actions that alter business operations as may be required by applicable authorities or that we determine are in the best interests of our employees, customers, suppliers, and stockholders.



Critical Accounting Policies


The discussion and analysis of our financial condition and results of operations are based upon our condensed 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 disclosures. 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.




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Results of Operations


Three months ended March 31, 2022, compared to three months ended March 31, 2021:




Selected consolidated financial data for the quarters ended March 31, 2022,
and 2021 is as follows:



                                         Three Months Ended March 31,
(In thousands)                             2022                 2021
Revenue                               $           97       $           54
Cost of revenue                                   46                   46
Gross profit                                      51                    8
Gross margin                                      53 %                 15 %
Operating expenses:
Selling, general and administrative            1,476                1,679
Research and development                         722                  669
Total operating expenses                       2,198                2,348
Loss from operations                          (2,147 )             (2,340 )
Other income and (expense), net                   47                  (63 )
Income tax benefit                                 -                    -
Net loss                              $       (2,100 )     $       (2,403 )



Revenue - Total revenue increased by $43 thousand during the third quarter of fiscal 2022, compared to the third quarter of fiscal 2021. In each of the third quarters of fiscal 2022 and 2021, revenue was comprised of sales related to our TRACER 1000 to distributors as well as to DHL (Deutsche Post AG). In the prior year, pandemic-related delays in the delivery of certain microchips used in the production of our TRACER 1000 systems caused a temporary decrease in revenue for the quarter while alternative sourcing methods were implemented. We continue to pursue procurement solutions in today's environment of long-lead times and materials shortages.

Cost of Revenue - Gross profit is comprised of revenue less cost of revenue. In the third quarters of fiscal 2022 and 2021, cost of revenue was comprised of labor, materials, shipping, and warranty reserve related to the sale of TRACER 1000 units. Cost of revenue remained the same during the third quarter of fiscal 2022, compared to the third quarter of fiscal 2021. Gross margin increased by 38% in the third quarter fiscal 2022, compared to the third quarter of fiscal 2021, as we have increased production and benefited from associated volume discounts. Further, we have benefited from implementing specific enhancements to our technology.

Operating Expenses - Operating expenses decreased $150 thousand, or 6.4%, during the third quarter of fiscal 2022, compared to the third quarter of fiscal 2021. Significant changes to operating expenses include the following:



  ? Selling, general and administrative decreased $203 thousand, or 12.1%, during
    the third quarter of fiscal 2022, compared to the third quarter of fiscal
    2021, due to a decrease in payroll-related expenses, partially offset by an
    increase in directors' fees.




  ? Research and development increased $53 thousand, or 7.9%, during the third
    quarter of fiscal 2022, compared to the third quarter of fiscal 2021, largely
    driven by an increase in expenses related to contractors and consultants and
    equipment for development of our BreathTech and AgLAB products.



Income Taxes - Income tax benefit did not change during the third quarter of fiscal 2022, compared to the third quarter of fiscal 2021. The realization of tax benefits depends on the existence of future taxable income. Pursuant to Accounting Standards Codification ("ASC") 740 "Income Taxes", a valuation allowance has been established on all of our deferred tax assets.




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Nine months ended March 31, 2022, compared to nine months ended March 31, 2021:




Selected consolidated financial data for the nine months ended March 31, 2022
and 2021 is as follows:



                                          Nine Months Ended March 31,
(In thousands)                             2022                 2021
Revenue                               $          845       $          324
Cost of revenue                                  662                  287
Gross profit                                     183                   37
Gross margin                                      22 %                 11 %
Operating expenses:
Selling, general and administrative            4,630                3,408
Research and development                       2,013                2,036
Disposal of corporate lease                        -                  544
Total operating expenses                       6,643                5,988
Loss from operations                          (6,460 )             (5,951 )
Other income and (expense), net                  151                 (185 )
Income tax benefit                                 -                    -
Net loss                              $       (6,309 )     $       (6,136 )



Revenue - Total revenue significantly increased by $521 thousand during the fiscal year 2022, compared to fiscal year 2021. In fiscal year 2022, revenue was comprised of sales related to our TRACER 1000 to an airport security checkpoint customer, distributors, and DHL (Deutsche Post AG). In fiscal year 2021, all of our revenue was related to the sales of the TRACER 1000 to DHL (Deutsche Post AG) and distributors.

Cost of Revenue - Gross profit is comprised of revenue less cost of revenue. In the each of the nine months ended March 31, 2022 and 2021, cost of revenue was comprised of labor, materials, shipping, warranty reserve, and overhead allocation related to the sale of TRACER 1000 units. Cost of revenue increased $375 thousand during fiscal year 2022, compared to fiscal year 2021, due to the increase in revenue described above. Gross margin increased by 11% in the fiscal year 2022, compared to the fiscal year 2021, as we have increased production and benefited from associated volume discounts. Further, we have benefited from implementing specific enhancements to our technology.

Operating Expenses - Operating expenses increased $655 thousand, or 10.9% during the nine months ended March 31, 2022, compared to nine months ended March 31, 2021. Significant changes to operating expenses include the following:



  ? Selling, general and administrative increased $1.2 million, or 35.9%, due to
    increases in non-cash equity incentive compensation for employees, legal
    expenses related to our derivative litigation, and directors' fees for our
    lead independent director.




  ? Research and development decreased $23 thousand, or 1.1% during the nine
    months ended March 31, 2022, compared to the nine months ended March 31, 2021,
    largely driven by less materials purchased for R&D purposes.




  ? Disposal of long-lived assets decreased $544 thousand due to our termination
    of our corporate office lease and the disposal of the leasehold improvement
    assets and right-of-use assets and lease liabilities associated with that
    lease in the prior period.




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Income Taxes - Income tax benefit did not change during the nine months ended March 31, 2022, compared to the nine months ended March 31, 2021. The realization of tax benefits depends on the existence of future taxable income. Pursuant to ASC 740 "Income Taxes", a valuation allowance has been established on all of our deferred tax assets.

Liquidity and Capital Resources

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




                                                       Nine Months Ended March 31,
(In thousands)                                     2022            2021           Change

Change in cash and cash equivalents: Net cash used in operating activities $ (5,164 ) $ (4,855 ) $ (309 ) Net cash used in investing activities

                  (370 )           (24 )          (346 )
Net cash (used in) provided by financing
activities                                           (2,056 )        33,546         (35,602 )

Net change in cash and cash equivalents $ (7,590 ) $ 28,667 $ (36,257 )




Cash and Cash Equivalents


As of March 31, 2022, we held cash and cash equivalents of $28.3 million, and our working capital was approximately $54.5 million. As of June 30, 2021, we had cash and cash equivalents of $35.9 million, and our working capital was approximately $60.9 million. Cash and cash equivalents decreased $7.6 million as of March 31, 2022, compared to June 30, 2021, due to the partial repayment of the related party notes including accrued interest as well as continuing operating expenses.




Operating Activities



Cash used in operating activities increased $309 thousand for the nine months ended March 31, 2022, compared to the nine months ended March 31, 2021, due to an increase in accounts receivable from sales of the TRACER 1000, receipt of an alternative minimum tax credit in the prior period, and a decrease in accounts payable.




Investing Activities



Cash used in investing activities increased $346 thousand for the nine months ended March 31, 2022, compared to the nine months ended March 31, 2021, due to the addition of leasehold improvement assets related to our new R&D facility in Austin as well as the purchase of R&D equipment relating to our BreathTech and AgLAB product development.



Financing Activities


Cash used in financing activities was $2.0 million for the nine months ended March 31, 2022, compared to cash provided by financing activities of $33.5 million for the nine months ended March 31, 2021. This change was due to the partial repayment of the related party notes during the current period, compared to the net proceeds from sale of common stock of $33.5 million in the prior period.




Liquidity



Historically, our primary uses of cash have been to fund research and development, inventory, and selling, general and administrative expenses. During the fiscal year 2021, we successfully completed several public offerings of our common stock, raising net proceeds of approximately $67.6 million. We will continue to evaluate opportunities to further strengthen our liquidity, including selling the Company or a portion thereof, licensing some of our technology, raising additional funds through the capital markets, debt financing, equity financing, merging, or engaging in a strategic partnership. However, our ability to successfully effectuate any such transactions depends on operating and economic conditions, some of which are beyond our control. If additional capital is needed, we may not be able to obtain debt or equity financing on terms favorable to us, or at all. Based on current expectations, we believe we have sufficient liquidity to meet our cash flow needs during this fiscal year 2022 and the immediate future.




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Income Taxes



Provision for Income Tax


Our effective tax rate is 0% for income tax for the nine months ended March 31, 2022, and we expect that our effective tax rate for the full fiscal year 2022 year will be 0%. Based on the weight of available evidence, including net cumulative losses and expected future losses, we have determined that it is more likely than not that our U.S. federal and state deferred tax assets will not be realized and therefore a full valuation allowance has been provided on the U.S. federal and state net deferred tax assets.

In general, if we experience a greater than 50 percentage point aggregate change in ownership over a three-year period (a Section 382 ownership change), utilization of its pre-change net operating loss ("NOL") carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue Code. Generally, U.S. state laws have laws similar to Internal Revenue Code Section 382. The annual limitation generally is determined by multiplying the value of the Company's stock at the time of such ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforward before utilization.

We file U.S. federal and state income tax returns. We are not currently subject to any income tax examinations. Dating back to June 2002, we have net operating loss carryovers, which generally allows all tax years to remain open to income tax examinations for all years for which there are loss carryforwards.



Uncertain Tax Positions


We recognize the financial statement effects of a tax position when it becomes more likely than not, based upon the technical merits, that the position will be sustained upon examination. We currently have approximately $300 thousand of uncertain tax positions as of March 31, 2022, all of which are accounted as contra-deferred tax assets. The Company does not expect any significant changes to its uncertain tax positions in the coming 12 months.



Income Taxes


There is $0 provision for income taxes during each of the three and nine months ended March 31, 2022 and 2021.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2022 or June 30, 2021.

© Edgar Online, source Glimpses

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