UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended December 31, 2014
OR
For the transition period from to
Commission File Number: 001-34426
Astrotech Corporation
(Exact name of registrant as specified in its charter)
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 þNo ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 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 ¨
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨Noþ
As of February 10, 2015, the number of shares of the registrant’s common stock outstanding was: 20,013,787
ASTROTECH CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
(In thousands, except share data)
See accompanying notes to unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
Condensed Consolidated Statements of Cash Flows
(In thousands)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1) General Information
Description of the Company – 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. We are also evaluating potential investment opportunities where we can leverage our significant operating experience to add considerable value.
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 six months ended December 31, 2014 are not necessarily indicative of the results that may be expected for the year ending June 30, 2015. 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, 2014.
Discontinued Operations– On August 22, 2014, the Company completed the previously announced sale (“Asset Sale”) of substantially all of its assets used in the Company's former Astrotech Space Operations (“ASO”) business unit (the “ASO business”) to Lockheed Martin Corporation (the “Buyer”) for an agreed upon purchase price of $61.0 million, less a working capital adjustment. As of December 31, 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. In connection with the sale of our former ASO business unit, the outstanding debt of ASO was repaid with a portion of the proceeds. The Company has no other debt outstanding as of December 31, 2014. The condensed consolidated financial statements separately report discontinued operations, reflecting the former ASO business, and the results of continuing operations. The condensed consolidated financial statements as of June 30, 2014 and for the three and six month periods ended December 31, 2013 have been reclassified to present the operations of the Company’s former ASO business unit as discontinued operations. Disclosures included herein pertain to the Company’s continuing operations unless noted otherwise (see Note 3 for more information).
Accounting Pronouncements– In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU provides a single comprehensive revenue recognition model for all contracts with customers. The principle for recognizing revenue is clarified as the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU provides a five-step analysis to determine how revenue is recognized. The provisions of the ASU are effective for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of the pending adoption of this ASU on its financial statements as well as which method of adoption the Company will utilize.
In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which changes the criteria for disposals to qualify as discontinued operations and requires new disclosures about disposals of both discontinued operations and certain other disposals that do not meet the new definition. Early adoption of this ASU is permitted and is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014. The Company is currently evaluating the impact of the pending adoption of this ASU on its financial statements but will adopt this standard in fiscal 2016.
Segment Information– With the sale of the ASO business, the Company now operates a single reportable business unit, Spacetech. Since the Company operates in one segment, all financial segment information required by FASB ASC 280 can be found in the condensed consolidated financial statements.
Spacetech is a technology incubator designed to commercialize space-industry technologies. This business unit is currently pursuing two distinct opportunities:
1st Detect
1stDetect 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 has been or will be deployed in the following areas:
Our product portfolio currently consists of the following products:
designed to autonomously monitor processes and report conditions over industry standard factory management system (“FMS”) infrastructure.
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 early 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.
(2) Short-term Investments
The following tables summarize gains and losses related to our short-term investments designated as available-for-sale:
Items denoted with * are less than one thousand.
(3) Discontinued Operations & Gain on the Sale of the ASO Business Unit
On August 22, 2014, the Company completed the previously announced sale of substantially all of its assets used in the Company's former ASO business unit to Lockheed Martin Corporation (the “Buyer”) for an agreed upon sales price of $61.0 million, less a working capital adjustment. As of December 31, 2014, the estimated sales price is $59.3 million, which includes a working capital adjustment of $1.7 million. As of December 31, 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 most likely be settled during the Company’s third quarter, 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. The ASO business consisted 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.
Additionally, as part of the Asset Sale, the Company used a portion of the proceeds to pay off the outstanding balance of its term loan of $5.7 million, which was secured by assets of the ASO business. As such, 100% of interest expense on the debt was allocated to discontinued operations in the amount of $62 thousand and $127 thousand for the six months ended December 31, 2014 and 2013, respectively.
The sale of our former ASO business, which was previously reported within our former ASO business unit segment, resulted in a pre-tax gain of $25.6 million ($23.7 million after-tax) for the six months ended December 31, 2014. The pre-tax gain on this sale 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. The total pre-tax gain on the sale for the six months ended December 31, 2014, includes the following (in thousands):
The Company and the Buyer entered into a transition services agreement to which the Company and the Buyer agreed to provide the other party with certain services, including, among others, services related to benefits, human resources and payroll administration, cash management, financial statements and compliance, each of a type currently provided by or for the Company or our former ASO business unit prior to the Asset Sale. Pursuant to the transition services agreement, the Company agreed to provide services to the Buyer for a period of up to one year and the Buyer agreed to provide services to the Company for a period of up to six months. Each party has the option to extend the term of the services provided by the other party for a period of one year. The services provided may be terminated by the party receiving such services on an individual basis upon 30 days’ notice to the providing party. The party receiving services shall pay the providing party, as consideration for such services, on a time and materials basis, fees based upon an agreed upon set fringe rate and fee rate and the salary of the employee of the providing party who is providing such services.
While we are a party to the transition services agreement, we have determined that the continuing cash flows generated by this agreement did not constitute significant continuing involvement in the operations of our former ASO business. As such, the net assets, operating results and cash flows related to our former ASO business have been separately reflected as discontinued operations for the three and six months ended December 31, 2014 and 2013.
The following table provides a reconciliation of the major assets and liabilities of our former ASO business to the amounts reported in the previously reported condensed consolidated balance sheet:
The following table provides a reconciliation of the major components of income of our former ASO business to the amounts reported in the consolidated statements of operations:
Revenue generated by our former ASO business unit payload processing facilities was recognized ratably over the occupancy period of the satellite while in those facilities from arrival through launch. Those contracts were firm fixed price
mission specific contracts. The percentage-of-completion method was used for all contracts were incurred costs could be reasonably estimated and successful completion could be reasonably assured at inception. Changes in estimated costs to complete and provisions for contract losses were recognized in the period they become known. Below is a summary of revenue recognition methods under our former ASO business unit:
Ratably, over the occupancy period of a satellite
within the facility from arrival through launch
Cost Reimbursable
Award/Fixed Fee
(4) Receivables – Working Capital and Indemnity Holdback Related to the Asset Sale
On August 22, 2014, the Company completed the Asset Sale. As of December 31, 2014, the estimated purchase price is $59.3 million, which includes a working capital adjustment of $1.7 million. As of December 31, 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 during the Company’s third quarter, once both sides agree on the final net working capital amount as of the date of the Asset Sale. If the final net working capital amount is greater than the estimated net working capital amount, the difference shall be paid to the Company by the Buyer with simple interest thereon from the closing date to the date of payment at a floating rate per annum equal to the Interest Rate and such payment shall include the adjustment holdback amount and interest from the closing date in the manner calculated for the difference. If the final net working capital amount is less than the estimated net working capital amount, the difference shall be paid to the Buyer by the Company with simple interest thereon from the closing date to the date of payment at a floating rate per annum equal to the Interest Rate first, out of the adjustment holdback amount, and if there are insufficient funds in the adjusted holdback amount, directly by the Company. Any such payment shall be made in immediately available funds not later than five business days after the determination of the final net working capital amount by wire transfer to a bank account designated in writing by the party entitled to receive the payment.
The indemnity holdback of $6.1 million is being held in escrow under the terms of an escrow agreement until February 2016 (the 18-month anniversary of the consummation of the Asset Sale). Within three business days after the 18-month anniversary of the closing of the Asset Sale, the then-available indemnity escrow holdback (less any pending Buyer claims), will be released and paid to the Company. The Company is currently not aware of any pending Buyer claims.
(5) 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 from January 2010 through June 2014, which required us to clearly identify the noncontrolling interest in the condensed consolidated balance sheets and condensed consolidated statements of operations. 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 condensed 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.
During June 2014, the Company completed an internal reorganization involving both 1st Detect and Astrogenetix which resulted in the two entities becoming wholly-owned subsidiaries of the Company, and which was effected through the relinquishment by certain employees of equity grants previously issued to them in 1st Detect and Astrogenetix. The noncontrolling interest balance of $1.8 million at June 30, 2014 represented an interest held by the State of Texas Emerging Technology Fund and was settled on August 28, 2014 for $2.3 million (see Note 11 for more information).
(6) Net Income (Loss) per Share
Basic net income per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed based on the weighted average number of common shares outstanding 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 share-based awards. The following table reconciles the numerators and denominators used in the computations of both basic and diluted net income per share (in thousands, except per share data):
Options to purchase 1,018,750 shares of common stock at exercise prices ranging from $0.32 to $2.60 per share outstanding for the three and six months ended December 31, 2014 were not included in diluted net loss per share, as the inclusion of the potential common shares would have had an anti-dilutive effect on the loss from continuing operations.
(7) Revenue Recognition
Astrotech recognizes revenue employing several generally accepted revenue recognition methodologies. The methodology used is based on contract type and the manner in which products and services are provided.
Revenue is recognized when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when pervasive evidence of an arrangement exists, delivery has occurred or services have been provided, and collectability is reasonably assured.
(8) Debt
In October 2010, our former ASO business entered into a financing facility with a commercial bank providing a $7.0 million term loan 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. The bank financing facilities were secured by the assets of our former ASO business, including accounts receivable, and required us to comply with designated covenants. 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, which is reported in the statement of cash flows as discontinued operations. The Company has no outstanding debt as of December 31, 2014.
(9) 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 Company’s financial instruments as of December 31, 2014 and June 30, 2014 (in thousands):
The value of our available-for-sale short-term investments based on pricing from third party pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value.
(10) Credit Risk Concentration Involving Cash
The Company maintains funds in bank accounts that may exceed the limit insured by the Federal Deposit Insurance Corporation (“FDIC”) of $250,000 per depositor. 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.
(11) 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 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. In exchange for the award, 1st Detect granted a common stock purchase right and a note payable to the State of Texas. The economic substance of the transaction was that the State of Texas had purchased shares of 1st Detect in exchange for the granted award. The note, which was treated economically as purchased shares and reflected in the equity section of the condensed consolidated balance sheet, equaled the disbursements to 1st Detect to date and accrued interest at 8% per year. On August 28, 2014, 1st Detect settled the funding and common stock repurchase right with a payment of $2.3 million. The Company has accounted for the difference between the $2.3 million paid and the $1.8 million received as a deemed dividend in its calculation of earnings per share.
(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 December 31, 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 from continuing operations can be utilized to offset the income otherwise resulting from discontinued operations, it has been recognized as a tax benefit from continuing operations. To the extent that a loss or credit carryover can be utilized to offset the income from discontinued operations, it has been recognized as a tax benefit from discontinued operations.
During the second quarter, the Company identified a reclassification in its intraperiod tax allocations between continuing and discontinued operations reported in the first quarter. During the first quarter, a portion of the valuation allowance benefit was included in continuing operations rather than in discontinued operations. As a result of the reclassification, the continuing operations tax benefit generated in the second quarter has been reduced by $352 thousand, the amount of additional benefit included in continuing operations in the first quarter. The total effective tax rate for continuing operations is approximately 37.0% fiscal year to date. This reclassification had no impact on total tax expense in either first or second quarter.
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 December 31, 2014, the Company expects that it will be able to offset all but $2.2 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 December 31, 2014, the net federal and state tax impact of the disposition gain (net of the losses incurred during the six months ended December 31, 2014, and the tax attribute carryovers from prior years) is $0.5 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 six months ended December 31, 2014 and 2013.
For the six months ended December 31, 2014 and 2013, 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.
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) Commitments and Contingencies
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.
Litigation, Investigations and Audits – We are not party to, nor are our properties the subject of, any material pending legal proceedings, other than as set forth below:
Astrotech was named as a party to a suit filed in the Circuit Court of the Eighteenth Judicial Circuit for Brevard County, Florida. This is an action for foreclosure of certain real estate and for debt. The Company was named as a party because it held an inferior lien against the property at issue and had to be named in the foreclosure action. No monetary relief was requested from Astrotech at the time. During the six months ended December 31, 2014, the Company received a lump sum payment of $50 thousand, less legal fees, along with a release of liability in exchange for a release of its inferior mortgage. In October 2014, the underlying lawsuit was voluntarily dismissed and the case was closed.
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:
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate, 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 our 2014 Annual Report on Form 10-K, 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.
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. We are also evaluating potential investment opportunities where we can leverage our significant operating experience to add considerable value.
On August 22, 2014, the Company completed the previously announced sale (“Asset Sale”) of substantially all of its assets used in 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 December 31, 2014, the estimated purchase price is $59.3 million, which includes a working capital adjustment of $1.7 million. As of December 31, 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 during the Company’s third quarter, 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 chemical detection mass spectrometry technology;
• Enhancing and extending the capabilities and fields of use of our mass spectrometry technology;
• Commercializing unique space and defense related technologies; and
• 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:
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 early 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 Asset Sale. As of December 31, 2014, the estimated purchase price is $59.3 million, which includes a working capital adjustment of $1.7 million. As of December 31, 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 most likely be settled in the next quarter, 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 as of June 30, 2014. See Note 3 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 debt as of December 31, 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 Generally Accepted Accounting Principles (“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 December 31, 2014 compared to Quarter ended December 31, 2013:
Selected consolidated financial data for the quarter ended December 31, 2014 and 2013 is as follows (dollars in thousands):
Revenue– Total revenue decreased $78 thousand during the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014. During the second quarter of fiscal 2014 we had revenue associated with a legacy handrail project of $82 thousand. During the second quarter of fiscal 2015 we finished the first phase of the new subcontract agreement with a third party on the Next Generation Chemical Detector (“NGCD”) program.
Gross Profit– Gross profit decreased $82 thousand during the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014 due to our decrease in revenue as described above. Also, we had no cost of revenues during the second quarter of fiscal 2014 compared to $4 thousand of cost of revenues in the second quarter of fiscal 2015.
Operating Expenses– Our operating expenses increased $623 thousand, or 26% during the second quarter of fiscal 2015 compared to the same period in the prior fiscal year. Significant changes to operating expenses included the following:
Income Taxes on Continuing Operations – Our income tax benefit increased $0.2 million due to higher losses on continuing operations during the second 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 December 31, 2013. The loss from discontinued operations decreased $855 thousand during the second quarter of fiscal 2015, compared to the same period in the prior year. Significant changes included the following:
Six months ended December 31, 2014 compared to six months ended December 31, 2013:
Selected consolidated financial data for the six months ended December 31, 2014 and 2013 is as follows (dollars in thousands):
Revenue– Total revenue increased $242 thousand for the six months ended December 31, 2014, compared to the six months ended December 31, 2013 due to the first phase of a new subcontract agreement with a third-party on the NGCD program.
Gross Profit– Gross profit decreased $39 thousand during the six months ended December 31, 2014 compared to the six months ended December 31, 2013 due to no cost of revenues being recorded during the six months ended December 31, 2013.
Operating Expenses– Our operating expenses increased $917 thousand, or 19%, during the six months ended December 31, 2014, compared to the same period in the prior fiscal year. Significant changes to operating expenses included the following:
Income Taxes on Continuing Operations – Our income tax benefit increased $0.3 million due to higher losses on continuing operations during the six months ended December 31, 2014, 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 six months ended December 31, 2013. Income from discontinued operations increased $23.2 million during the six months ended December 31, 2014 compared to the same period in the prior year. Significant changes included the following:
Liquidity and Capital Resources
The following is a summary of the change in our cash and cash equivalents (in thousands):
Cash and Cash Equivalents and Short-Term Investments
As of December 31, 2014, we had cash and cash equivalents and short-term investments of $42.4 million, and our working capital was approximately $41.5 million. As of December 31, 2013, we had cash and cash equivalents and short-term investments of $6.7 million and our working capital was approximately $3.8 million. Cash and cash equivalents and short-term investments increased by approximately $35.7 million as of December 31, 2014, as compared to December 31, 2013 due to proceeds received from the sale of our former ASO business unit.
Operating Activities
Net cash used in operating activities from continuing operations increased to $4.2 million for the six months ended December 31, 2014, compared to $2.4 million for the six months ended December 31, 2013, which was primarily the result of a net income tax liability of $0.6 million associated with both the losses on our current operations and the gain on the sale of our former ASO business unit offset by larger decreases in accrued expenses compared to the same period in the prior fiscal year.
Net cash provided by operating activities from discontinued operations was ($1.6) million for the six months ended December 31, 2014, compared to net cash provided by operating activities from discontinued operations of $3.4 million for the six months ended December 31, 2013. The change was related to the sale of our former ASO business unit prior to the end of the six months ended December 31, 2014.
Investing Activities
Cash used in investing activities from continuing operations for the six months ended December 31, 2014 increased $35.6 million compared to the six months ended December 31, 2013. The proceeds from the sale of the ASO business were used to purchase short-term investments.
Cash provided by investing activities from discontinued operations increased to $52.6 million for the six months ended December 31, 2014, compared to $0.9 million for the six months ended December 31, 2013, which was due to the sale of our former ASO business.
Financing Activities
Cash used in financing activities from continuing operations increased $2.6 million for the six months ended December 31, 2014, compared to the six months ended December 31, 2013. The increase was due to the payoff of funding from the State of Texas Emerging Technology Fund for $2.3 million. There was also $0.4 million used for shares bought back during this period.
Cash used in financing activities from discontinued operations increased to $5.7 million for the six months ended December 31, 2014, compared to $0.2 million for the six months ended December 31, 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
As of December 31, 2014, we had cash and cash equivalents and short-term investments of $42.4 million and our working capital was approximately $41.5 million, which excludes an indemnity cash holdback receivable of $6.1 million being held in escrow as part of the sale of our ASO business. The indemnity cash holdback may be received no later than February 2016 subject to certain conditions in the asset purchase agreement entered into in connection with the Asset Sale.
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 and 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, we completed the Asset Sale. As of December 31, 2014, the estimated purchase price is $59.3 million, which includes a working capital adjustment of $1.7 million. As of December 31, 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 third quarter, 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 our 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
We account 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, 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.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2014.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
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, as amended (“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 December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party from time to time to certain claims, litigation, audits and investigations. Potential liabilities associated with these types of proceedings could have a material impact on our financial position, results of operations or cash flows.
Astrotech was named as a party to a suit filed in the Circuit Court of the Eighteenth Judicial Circuit for Brevard County, Florida. This was an action for foreclosure of certain real estate and for debt. The Company was named as a party because it held an inferior lien against the property at issue and had to be named in the foreclosure action. No monetary relief was requested from Astrotech at the time. During the six months ended December 31, 2014, the Company received a lump sum payment of $50 thousand, less legal fees, along with a release of liability in exchange for a release of its inferior mortgage. In October 2014, the underlying lawsuit was voluntarily dismissed and the case was closed.
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In November 2014, we discovered that we had inadvertently failed to file a Registration Statement on Form S-8 (the “Form S-8”) with the SEC relating to our 2011 Stock Incentive Plan (the “Plan”). On October 6, 2014, 50 thousand shares of our common stock (the “Shares”) were issued under the Plan to a former officer of the Company pursuant to the exercise of vested options that were granted on August 21, 2012 for an aggregate exercise price of $60 thousand. As a result of the failure to file the Form S-8, the Shares were unregistered at the time of issuance. On December 3, 2014, we filed a Form S-8 with the SEC to register any further issuances under the Plan. Nonetheless, we may be subject to civil and other penalties by regulatory authorities as a result of the failure to register, and the previously outstanding unregistered Shares may be subject to rescission rights. We have implemented monitoring and reporting procedures to ensure that in the future we timely meet our registration obligations with respect to our employee incentive plans.
We have treated the previously unregistered Shares issued under the Plan as outstanding for financial reporting purposes. Consequently, the previously unregistered transaction does not represent any additional dilution. We believe that at all relevant times the participant in the Plan was provided with the same information he would have received had the Form S-8 been filed.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers (amounts in thousands of dollars, except share data and per share amounts).
On December 16, 2014, we announced a share repurchase program pursuant to which our Board of Directors authorized the repurchase of up to $5 million of our outstanding shares. As of December 31, 2014, we had repurchased approximately $148 thousand worth of Astrotech Corporation stock.
The following table provides information with respect to purchases under our share repurchase program during the second quarter of 2015.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURE
ITEM 5. OTHER INFORMATION
On July 2, 2014, our Board approved Amended and Restated By-laws of the Company (the “Amended and Restated By-laws”), which became effective immediately. Pursuant to the Amended and Restated By-laws, the prior by-laws of the Company were amended to align the scope of the director and officer indemnification provisions set forth in Article 9 of the Amended and Restated By-laws more closely with Washington law. In addition, changes were made in the Amended and Restated By-laws to reflect, among other things, the current corporate governance structure of the Company, including the existence of a Chief Executive Officer and Senior Vice Presidents. The foregoing description of the Amended and Restated By-laws does not purport to be complete, and is qualified in its entirety by reference to the Amended and Restated By-laws of the Company, a copy of which is attached as Exhibit 3.1 hereto and is incorporated herein by reference.
In connection with the Amended and Restated By-laws, we have entered into indemnification agreements with each of our directors and executive officers, which provides for contractual indemnification and expense reimbursement to directors and executive officers, subject to the limitations described in the agreement. A form of the indemnification agreement is attached as Exhibit 10.1 hereto and is incorporated herein by reference.
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
(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.
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.