Notes to Unaudited Condensed Consolidated Financial Statements
(1) Description of the Company and Liquidity
Astrotech Corporation (Nasdaq:
ASTC) (“Astrotech,” “the Company,” “we,” “us” or “our”), a State of
Washington corporation, is a commercial aerospace company that was formed in 1984 to leverage the environment of space for commercial
purposes. For nearly 30 years, the Company has remained a crucial player in space commerce activities. We have successfully supported
the launch of 23 shuttle missions and more than 300 spacecraft. We have designed, operated and built space hardware and processing
facilities. We currently own, operate and maintain world-class spacecraft processing facilities; prepare and process scientific
research in microgravity and develop and manufacture sophisticated and cutting edge chemical sensor equipment.
Our Business Units
Astrotech Space Operations
(“ASO”)
ASO provides support to
its government and commercial customers as they successfully process complex communication, earth observation and deep space satellites
in preparation for their launch on a variety of launch vehicles. Processing activities include satellite ground transportation;
pre-launch hardware integration and testing; satellite encapsulation, fueling and launch pad delivery; and communication linked
launch control. Our ASO facilities can accommodate up to five meter class satellites, which includes almost all U.S. based satellites.
ASO’s service capabilities include designing and building spacecraft processing equipment and facilities. In addition, ASO
provides propellant services including designing, building and testing propellant service equipment for fueling spacecraft. ASO
accounted for 97% and 99% of our consolidated revenues for the three and nine months ended March 31, 2014, respectively. Revenue
for our ASO business unit is generated primarily from various fixed-priced contracts with launch service providers in both government
and commercial markets and from the design, fabrication and use of critical space launch equipment. The services and facilities
we provide to our customers support the final assembly, checkout and countdown functions required to launch a spacecraft. The revenue
and cash flows generated by ASO are primarily driven by the number of spacecraft launches.
Spacetech
Our other business unit
is a technology incubator designed to commercialize space-industry technologies. This business unit is currently pursuing two distinct
opportunities:
1
st
Detect —
1
st
Detect develops, manufactures and sells ultra
-
small mass
spectrometers and related equipment. Mass spectrometers, in general, measure the mass and relative abundance of ions in a sample
to create a “mass spectrum”. This resulting mass spectrum is a unique fingerprint for each chemical that can be compared
to a reference library of mass spectra to verify the identity of a sample. Mass spectrometers can identify chemicals with more
accuracy and precision than competing instruments given their extreme sensitivity and specificity and they are a staple of almost
all analytical laboratories. By leveraging technology initiated by an engagement with the National Aeronautics and Space Administration
(“NASA”) to develop a mass spectrometer for the International Space Station (“ISS”), the Company has developed
a series of instruments that are significantly smaller, lighter, faster and less expensive than competing mass spectrometers, and
significantly more sensitive and accurate than other competing chemical detectors. Our efforts have resulted in a technology that
can enable real-time mass spectrometry analytics, something no competitor has been able to accomplish, availing mass spectrometry
to a number of new applications. Examples include real-time explosives detection in airports and the battlefield, product quality
verification, industrial process control, in the field environmental applications and laboratory research.
The Company’s first
commercial product, the MMS-1000
TM
is a small, low power mass spectrometer designed initially for the laboratory market
at a fraction of the cost of competing mass spectrometers. The unique design of this unit enables mass spectrometric quality chemical
analysis in a small (about the size of a shoebox), light and transportable package that operates from less power than a typical
light bulb. This allows high quality chemical analysis to be performed in locations where mass spectrometers have not been used
before without compromising the quality of the analysis. The OEM-1000 is a mass spectrometer component that is designed to be integrated
into an OEM customers’ complementary technology and application. For example, the OEM-1000 has recently been integrated into
a Thermogravimetric Analyzer (“TGA”) manufactured by RIGAKU of Tokyo, Japan. The integrated instrument named Thermo
iMS2 is the world’s first integrated TGA with MS/MS capabilities and is expected to be well received by the international
research and development markets.
Astrogenetix —
Astrogenetix is a biotechnology company formed to commercialize products processed in the unique environment of microgravity.
Astrogenetix pursued an aggressive space access strategy to take advantage of the 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. While investment in Astrogenetix has been scaled back considerably until
Astrogenetix’s platform is independently verified, the team is also evaluating a vaccine target for Methicillin-Resistant
Staphylococcus Aureus (“MRSA”) based on discoveries made in microgravity. In December 2011, the Company negotiated
a Space Act Agreement with NASA for a minimum of twenty-eight additional space flights.
Liquidity and Capital Resources
Our future capital requirements
will depend on a number of factors, including our success in developing and expanding markets for our products, payments under
possible future strategic arrangements, continued progress of our research and development of potential products, the need to acquire
licenses to new technology, costs associated with increasing our manufacturing and development facilities, costs associated with
strategic acquisitions including integration costs and assumed liabilities, litigation expense, the status of competitive products
and potential cost associated with both protecting and defending our intellectual property. Additionally, actions taken as a result
of the ongoing internal evaluation of our business could result in expenditures not currently contemplated in our estimates. We
believe, however, that our existing cash and cash equivalents are sufficient to fund our operating expenses, capital equipment
requirements and other expected liquidity requirements for the coming year. Factors that could affect our capital requirements,
in addition to those listed above include continued collections of accounts receivable consistent with our historical experience,
uncertainty surrounding mission launch schedules and our ability to manage product development efforts.
At March 31, 2014,
we had cash and cash equivalents of $4.6 million and our working capital was approximately $(3.9) million.
The Company has outstanding
debt of $5.8 million as of March 31, 2014. Not including the effect of debt covenant violations, the remaining debt
repayments are due as follows (in thousands):
|
|
Fiscal Year
|
|
Fiscal Year
|
|
Fiscal
Year
|
|
|
|
|
2014
(1)
|
|
2015
|
|
2016
|
|
Thereafter
|
Term Note
|
|
$
|
98
|
|
$
|
403
|
|
$
|
418
|
|
$
|
4,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents remaining three months in fiscal year 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
Our bank financing
facilities contain certain affirmative and negative covenants with which we must comply, including the maintenance by us of a
debt service coverage ratio of not less than 1.00 to 1.00, maintaining a tangible net worth of not less than $32.50 million,
and maintaining a leverage ratio of not greater than .50 to 1.00. These financial covenants are applicable to the results of
ASO. In the event we are not in compliance with a covenant, the bank may, among other things, accelerate all outstanding
borrowings, cease extending credit or foreclose on collateral. As of March 31, 2014, we were not in compliance with the debt
service coverage ratio and minimum tangible net worth debt covenants. On May 7, 2014, the Company received a waiver
for the existing defaults for the current quarter.
In October, 2013 we were
notified by a customer that a previously booked payload processing contract would be deferred several weeks. Consequently, our
financial projections for fiscal year 2014 indicated that we would likely not be in compliance with our debt service coverage
ratio and minimum tangible net worth covenants by the third quarter ended March 31, 2014. As such, on October 11, 2013, we amended
the debt agreement with our bank that updated the following with respect to our debt covenants: 1) provided a credit of $0.50
million and $2.25 million for the third and fourth quarter of fiscal year 2014, respectively, to our debt service coverage calculation,
2) reduced our minimum tangible net worth requirement to $32.0 million for the third and fourth fiscal quarter of fiscal year
2014, and 3) required that we maintain a minimum cash balance at the bank of $2.0 million through June 30, 2014 and $0.75 million
thereafter. In November, 2013 we were subsequently notified by the same customer that this mission would be deferred. As a result of this deferral we did not meet our debt service coverage ratio and minimum tangible net worth covenants
in the third quarter of fiscal 2014 and it is probable that we will not be in compliance as of June 30, 2014. As such,
we have reclassified our long-term debt to current. We will continue to monitor this matter during the remainder of fiscal
year 2014, and if necessary, pursue a debt amendment with our bank.
We believe we have sufficient
liquidity and backlog to fund ongoing operations. We expect to utilize existing cash and proceeds from operations to grow our
core business offering in ASO and to support strategies for Spacetech. However, in the event that the bank accelerates payments
on borrowings due to a debt covenant violation, we would have to secure new funding in order to pay off the debt.
(2) Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements have been prepared by Astrotech Corporation in accordance with United States generally
accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair
presentation have been included. Operating results for the nine months ended March 31, 2014 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2014. These financial statements should be read in conjunction with the
financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2013.
(3) Noncontrolling Interest
In January 2010, restricted
shares of Astrotech subsidiaries, 1st Detect and Astrogenetix, were granted to certain employees, directors and officers, resulting
in Astrotech owning less than 100% of the subsidiaries. The Company applied noncontrolling interest accounting for the period ended
March 31, 2014, which requires us to clearly identify the noncontrolling interest in the balance sheets and income statements.
We disclose three measures of net income (loss): net income (loss), net income (loss) attributable to noncontrolling interest,
and net income (loss) attributable to Astrotech Corporation. Our operating cash flows in our consolidated statements of cash flows
reflect net income (loss); while our basic and diluted net income (loss) per share calculations reflect net income (loss) attributable
to Astrotech Corporation.
A rollforward of noncontrolling
interest for the nine months ended March 31, 2014 is as follows:
|
(In thousands)
|
Beginning balance at June 30, 2013
|
$
|
2,788
|
|
Net loss attributable to noncontrolling interest
|
|
(681
|
)
|
Capital contribution
|
|
789
|
|
Stock based compensation
|
|
1
|
|
Ending balance at March 31, 2014
|
$
|
2,897
|
|
As of March 31, 2014, the
Company’s share of income and losses is 86% for 1
st
Detect and 84% for Astrogenetix.
(4) Net Loss per Share
Basic net loss per share
is based on the weighted average number of common shares outstanding during each period. Diluted net loss per share is 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 shared-based awards. The following table reconciles the numerators and denominators used in the computations of both
basic and diluted net loss per share (in thousands, except per share data):
|
Three Months Ended
March 31,
|
Nine Months Ended
March 31,
|
|
2014
|
2013
|
2014
|
2013
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Astrotech Corporation, basic and diluted
|
$
|
(2,837
|
)
|
$
|
(113
|
)
|
$
|
(4,140
|
)
|
$
|
(2,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net loss per share attributable to Astrotech Corporation — weighted average common stock outstanding
|
|
19,486
|
|
|
19,463
|
|
|
19,479
|
|
|
19,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common stock equivalents — common stock options and share-based awards
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net loss per share attributable to Astrotech Corporation — weighted average common stock outstanding and dilutive common stock equivalents
|
|
19,486
|
|
|
19,463
|
|
|
19,479
|
|
|
19,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share attributable to Astrotech Corporation
|
$
|
(0.15
|
)
|
$
|
(0.01
|
)
|
$
|
(0.21
|
)
|
$
|
(0.12
|
)
|
Diluted net loss per share attributable to Astrotech Corporation
|
$
|
(0.15
|
)
|
$
|
(0.01
|
)
|
$
|
(0.21
|
)
|
$
|
(0.12
|
)
|
Options to purchase 1,119,150
shares of common stock at exercise prices ranging from $0.32 to $24.10 per share outstanding for the three and nine month periods
ended March 31, 2014 and were not included in diluted net loss per share, as the impact to net loss per share is anti-dilutive.
Options to purchase 1,147,850 shares of common stock at exercise prices ranging from $0.30 to $24.10 per share outstanding from
the three and nine months ended March 31, 2013 were not included in diluted net loss per share, as the impact to net loss per share
is anti-dilutive.
(5) Revenue Recognition
Astrotech recognizes revenue
employing several generally accepted revenue recognition methodologies across its business units. The methodology used is based
on contract type and the manner in which products and services are provided.
Revenue generated by Astrotech’s
payload processing facilities is recognized ratably over the occupancy period of the satellite while in the Astrotech facilities.
The percentage-of-completion method is used for all contracts where incurred costs can be reasonably estimated and successful completion
can be reasonably assured at inception. Changes in estimated costs to complete and provisions for contract losses are recognized
in the period they become known. Revenue for the sale of commercial products is recognized at shipment.
A Summary of Revenue Recognition Methods
Services/Products
Provided
|
|
Contract
Type
|
|
Method
of Revenue Recognition
|
Payload Processing Facilities
|
|
Firm Fixed Price — Mission Specific
|
|
Ratably, over the occupancy period of a satellite
within the facility from arrival through launch
|
|
|
|
|
|
Construction Contracts
|
|
Firm Fixed Price
|
|
Percentage-of-completion based on costs incurred
|
|
|
|
|
|
Engineering Services
|
|
Cost Reimbursable
Award/Fixed Fee
|
|
Reimbursable costs incurred plus award/fixed fee
|
|
|
|
|
|
Commercial Products
|
|
Specific Purchase
Order Based
|
|
At shipment
|
|
|
|
|
|
Grant
|
|
Cost Reimbursable
Award
|
|
As costs are incurred for related research and
development expenses
|
Under certain contracts,
we make expenditures for specific enhancements and/or additions to our facilities where the customer agrees to pay a fixed fee
to deliver the enhancement or addition. We account for such agreements as a reduction in the cost of such investments and recognize
any excess of amounts collected above the expenditure as revenue.
(6) Debt
Credit Facilities
In October 2010, we entered
into a financing facility with a commercial bank providing a $7.0 million term loan note and a $3.0 million revolving credit facility.
The $7.0 million term loan terminates in October 2015, and the $3.0 million revolving credit facility expired in October 2012.
The Company had no outstanding balance on the revolving credit facility. The term loan requires monthly payments of principal plus
interest at the rate of prime plus 0.25%, but not less than 4.0%. The bank financing facilities are secured by the assets of ASO,
including accounts receivable, and require us to comply with designated covenants. The balance of the $7.0 million term loan at
March 31, 2014 and 2013 was $5.8 million and $6.1 million, respectively.
Our bank financing facilities
contain certain affirmative and negative covenants with which we must comply, including the maintenance by us of a debt service
coverage ratio of not less than 1.00 to 1.00, maintaining a tangible net worth of not less than $32.50 million, and maintaining
a leverage ratio of not greater than .50 to 1.00. These financial covenants are applicable to the results of ASO. In the event
we are not in compliance with a covenant, the bank may, among other things, accelerate all outstanding borrowings, cease extending
credit or foreclose on collateral. As of March 31, 2014, we were not in compliance with the debt service coverage ratio and minimum
tangible net worth debt covenants. However, on May 7, 2014, the Company received a waiver for the existing defaults.
In October, 2013 we were
notified by a customer that a previously booked payload processing contract would be deferred several weeks. Consequently, our
financial projections for fiscal year 2014 indicated that we would likely not be in compliance with our debt service coverage
ratio and minimum tangible net worth covenants by the third quarter ended March 31, 2014. As such, on October 11, 2013, we amended
the debt agreement with our bank that updated the following with respect to our debt covenants: 1) provided a credit of $0.50
million and $2.25 million for the third and fourth quarter of fiscal year 2014, respectively, to our debt service coverage calculation,
2) reduced our minimum tangible net worth requirement to $32.0 million for the third and fourth fiscal quarter of fiscal year
2014, and 3) required that we maintain a minimum cash balance at the bank of $2.0 million through June 30, 2014 and $0.75 million
thereafter. In November, 2013 we were subsequently notified by the same customer that this mission would be deferred. As a result of this deferral we did not meet our debt service coverage ratio and minimum tangible net worth covenants
in the third quarter of fiscal 2014 and it is probable that we will not be in compliance as of June 30, 2014. As such,
we have reclassified our long-term debt to current. We will continue to monitor this matter during the remainder of fiscal
year 2014, and if necessary, pursue a debt amendment with our bank.
(7) Fair Value Measurements
The accounting standard
for fair value measurements defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and
expands disclosures about fair value measurements. The standard is applicable whenever assets and liabilities are measured and
included in the financial statements at fair value.
The fair value hierarchy
established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:
Level 1 — Quoted prices in active markets for
identical assets or liabilities.
Level 2 — Inputs other
than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable
inputs that are supported by little or no market activity and are significant to the fair value of the assets or
liabilities.
The following table presents
the carrying amounts, estimated fair values and valuation input levels of certain of the Company’s financial instruments
as of March 31, 2014 and June 30, 2013 (in thousands):
|
March
31, 2014
|
|
June
30, 2013
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Valuation
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Inputs
|
Debt
|
$
|
5,753
|
|
$
|
5,753
|
|
$
|
6,042
|
|
$
|
6,042
|
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying value of the
Company’s debt at March 31, 2014 approximates fair value based on rates available for similar debt available to comparable
companies in the marketplace. The carrying amounts of the Company’s Level 1 securities include cash and cash equivalents.
(8) Business and Credit Risk Concentration
A substantial portion
of our revenue has been generated under contracts with the U.S. Government. During the nine months ended March 31, 2014 and 2013,
approximately 53% and 64%, respectively, of our revenues were generated under U.S. Government contracts. Accounts receivable (net
of allowance) totaled $2.1 million at March 31, 2014, of which 29% was attributable to the U.S. Government.
The Company maintains funds
in bank accounts that may exceed the limit insured by the Federal Deposit Insurance Corporation, or “FDIC.” In October
2008, the FDIC increased its insurance to $250,000 per depositor, and to an unlimited amount for non-interest bearing accounts.
The risk of loss attributable to these uninsured balances is mitigated by depositing funds in what we believe to be high credit
quality financial institutions. The Company has not experienced any losses in such accounts.
(9) Segment Information
We currently have two reportable
business units: ASO and Spacetech.
ASO is our core business
unit with operating facilities located in Titusville, Florida and Vandenberg AFB, California. ASO provides support to its government
and commercial customers as they successfully process complex communication, earth observation and deep space satellites in preparation
for their launch on a variety of launch vehicles.
Our
Spacetech business unit is a technology incubator designed to commercialize space-industry technologies. This business unit is
currently pursuing two distinct opportunities: 1
st
Detect and Astrogenetix. Our 1
st
Detect platform develops,
manufactures and sells ultra
-
small mass spectrometers and related equipment. Our Astrogenetix
platform is a biotechnology company formed to commercialize products processed in the unique environment of microgravity.
Management’s primary
financial and operating reviews focus on ASO, the core business unit. All intercompany transactions between business units have
been eliminated in consolidation.
Key financial metrics for the three and
nine months ended March 31, 2014 are as follows (in thousands):
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
March
31, 2014
|
|
March
31, 2013
|
|
|
|
|
|
Loss before
|
|
|
|
Loss before
|
|
Revenue and Income
|
|
Revenue
|
|
income
taxes
|
|
Revenue
|
|
income
taxes
|
|
ASO
|
|
$
|
1,508
|
|
$
|
(1,521
|
)
|
$
|
4,565
|
|
$
|
655
|
|
Spacetech
|
|
$
|
48
|
|
$
|
(1,530
|
)
|
$
|
—
|
|
$
|
(893
|
)
|
|
|
$
|
1,556
|
|
$
|
(3,051
|
)
|
$
|
4,565
|
|
$
|
(238
|
)
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
|
March
31, 2014
|
|
March
31, 2013
|
|
|
|
|
|
Loss before
|
|
|
|
Loss before
|
|
Revenue and Income
|
|
Revenue
|
|
income
taxes
|
|
Revenue
|
|
income
taxes
|
|
ASO
|
|
$
|
10,653
|
|
$
|
49
|
|
$
|
14,682
|
|
$
|
14
|
|
Spacetech
|
|
$
|
130
|
|
$
|
(4,861
|
)
|
$
|
133
|
|
$
|
(2,736
|
)
|
|
|
$
|
10,783
|
|
$
|
(4,812
|
)
|
$
|
14,815
|
|
$
|
(2,722
|
)
|
|
|
|
|
|
|
March
31, 2014
|
|
June
30, 2013
|
|
Assets
|
|
Fixed
Assets,
net
|
|
Total
Assets
|
|
Fixed
Assets,
net
|
|
Total
Assets
|
|
ASO
|
|
$
|
34,290
|
|
$
|
40,705
|
|
$
|
35,625
|
|
$
|
46,159
|
|
Spacetech
|
|
$
|
1,300
|
|
$
|
2,158
|
|
$
|
1,410
|
|
$
|
1,843
|
|
|
|
$
|
35,590
|
|
$
|
42,863
|
|
$
|
37,035
|
|
$
|
48,002
|
|
(10) State of Texas Funding
In March 2010, the Texas
Emerging Technology Fund awarded 1
st
Detect $1.8 million for the development and marketing of the Miniature Chemical
Detector, a portable mass spectrometer designed to serve the security, healthcare, environmental and industrial markets. In exchange
for the award, 1
st
Detect granted a stock purchase right and a note payable to the State of Texas. As of March 31, 2014,
1
st
Detect has received $1.8 million in disbursements. The proceeds from the award can only be used to fund development
of the Miniature Chemical Detector at 1
st
Detect, not for repaying existing debt or for use in other Company subsidiaries.
The stock purchase right
is exercisable at the first Qualifying Financing Event (“QFE”), which is generally a change in control or third party
equity investment in 1
st
Detect. The number of shares of stock (common stock or the class or series issued in the financing)
of 1
st
Detect available for purchase by the State of Texas, at the price $0.001 per share (par value), is calculated
as the total disbursements of $1.8 million (numerator) divided by 80% of the stock price established in the QFE (denominator).
If a QFE has not occurred before June 30, 2014, the number of shares of common stock of 1
st
Detect available for purchase
would equal the total disbursements of $1.8 million (numerator) divided by $100 (denominator). As of March 31, 2014 no QFE has
occurred.
The principal value of
the note is equal to the total disbursements to 1
st
Detect to date of $1.8 million, accrues interest at 8% per year
and cancels automatically at the earlier of (1) selling substantially all of the assets of 1
st
Detect, (2) selling more
than 50% of common stock of 1
st
Detect, or (3) March 2020. No payments of interest or principal are due on the note
unless there is a default, which would occur if 1
st
Detect moves its operations or headquarters outside of Texas at
any time before March 2020. 1
st
Detect has the option to pay back the principal plus accrued interest by June 30, 2014,
but repayment does not cancel the State of Texas’ stock purchase right.
Management considers the
likelihood of voluntarily repaying the note or of a default event as remote due to the fact that the covenants that would necessitate
repayment are within the control of the Company. As such, the $1.8 million, which was received in two installments of $0.9 million
and $0.9 million prior to the period ended March 31, 2014, was accounted for as a contribution to equity. As of March 31, 2014,
no default events have occurred.
(11) Equity and Other Long Term Incentive Plans
The 1994 Plan (“1994
Plan”)
Under the terms of the
1994 Plan, the number and price of the stock incentive awards granted to employees is determined by the Board of Directors and
such grants vest, in most cases, incrementally over a period of four years and expire no more than ten years after the date of
grant. At the time of approval, 395,000 shares of our common stock were reserved for issuance under this plan. As of March 31,
2014, there are no shares available for grant. Based on the Articles of the 1994 stock incentive plan, no awards shall be granted
more than ten years after the effective date of the plan unless amended.
The Directors’ Stock
Option Plan (“Director’s Plan”)
Options under the Director’s
Plan vest after one year and expire seven years from the date of grant. At the time of approval, 50,000 shares of our common stock
were reserved for issuance under this plan. As of March 31, 2014, there are 44,000 shares available for future grant.
2008 Stock Incentive Plan
(“2008 Plan”)
The 2008 Plan was created
to promote growth of the Company by aligning the long-term financial success of the Company with the employees, consultants and
directors. At the time of approval, 5,500,000 shares of our common stock were reserved for issuance under this plan. The 2008 Plan,
administered by the Compensation Committee of the Board of Directors, provides for granting of incentive awards in the form of
stock options, stock appreciation rights (SARs) and restricted stock to employees, directors and consultants of the Company. Stock
options awarded under this plan to date vested upon the Company’s stock achieving a closing price of $1.50 and expire ten
years from grant date or upon employee or director termination. Restricted shares awarded under this plan to date vest 33.33% a
year over a three year period and expire upon employee or director termination. There have been no SARs granted from the 2008 Plan.
As of March 31, 2014, there are 362,501 shares available for grant under the 2008 Plan.
2011 Stock Incentive Plan (“2011
Plan”)
The 2011 Plan was designed
to increase shareholder value by compensating employees over the long term. The plan is to be used to promote long-term financial
success and execution of our business strategy. At the time of approval, 1,750,000 shares of our common stock were reserved for
issuance under this plan. The 2011 Plan, administered by the Compensation Committee of the Board of Directors, provides for granting
of incentive awards in the form of stock options, stock appreciation rights (SARs) and restricted stock to employees, directors
and consultants of the Company. Stock options awarded under this plan to date vested upon the Company’s stock achieving a
closing price of $1.50 and expire ten years from the grant date or upon employee or director termination. Additionally, a single
200,000 stock option grant was awarded to a third party consultant intended to provide incentive which is aligned with management
and the shareholders. Vesting for these option shares will occur once certain performance conditions have been fulfilled. There
have been no SARs or restricted stock granted from the 2011 Plan. As of March 31, 2014, there are 1,066,000 shares available for
grant under the 2011 Plan.
At March 31, 2014, 1,472,501
shares of Common Stock were reserved for future grants of stock incentive grants under the Company’s four stock incentive
plans.
1
st
Detect 2011
Stock Incentive Plan (“1
st
Detect Plan”)
The 1
st
Detect Plan was designed to increase shareholder value by compensating employees over the long term. The plan is to be used
to promote long-term financial success and execution of our business strategy. At the time of approval, 2,500 shares of 1
st
Detect stock were reserved for issuance under this plan. The 1
st
Detect Plan, administered by the Board
of Directors of 1
st
Detect, provides for granting of incentive awards in the form of stock options to certain directors,
officers and employees of 1
st
Detect. The awards vest upon certain performance conditions being met and expire ten
years from the grant date. The stock options have an exercise price equal to the fair market value of 1
st
Detect’s
common stock on the date of grant as determined by an independent valuation firm. As of March 31, 2014, there are 1,800 shares
available for grant under the 1
st
Detect Plan.
(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 March 31, 2014, the
Company has established a full valuation allowance against all of its net deferred tax assets.
FASB ASC 740,
Income
Taxes
(FASB ASC 740) addresses the accounting for uncertainty in income taxes recognized in an entity’s financial statements
and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected
to be taken on a tax return. The Company has an unrecognized tax benefit of $0.1 million for the nine months ended March 31, 2014
and 2013.
For the three and nine
months ended March 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.
The Company’s examination
by the Internal Revenue Service (“IRS”) for its fiscal years ended June 30, 2008 through 2010, has been closed with
no tax due or refund.
(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:
On January 10, 2013, a
lawsuit was filed against Astrotech Corporation by John Porter, the former Senior Vice President, Chief Financial Officer, Treasurer
and Secretary of the Company. In the lawsuit, Mr. Porter alleged various breaches of contract claims in connection with his termination
from the Company on August 3, 2012. On April 28, 2014, the Company reached a settlement of all claims asserted by Mr. Porter in
this lawsuit. The Company has accrued a liability for this settlement as of March 31, 2014.
On February 20, 2013, a
shareholder derivative lawsuit was filed in the District Court of Travis County, Texas against the current directors and chief
executive officer of Astrotech Corporation and against the Company, as nominal defendant. The complaint alleged, among other things,
that the directors and chief executive officer breached fiduciary duties to the Company in connection with certain corporate transactions,
including loans to subsidiaries and purchases of outstanding shares of the Company’s common stock. On February 25, 2014 the
Texas Court of Appeals dismissed this lawsuit.
Astrotech has been 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 is named as a party because it holds an inferior lien against
the property at issue and must be named in the foreclosure action. No monetary relief has been requested against Astrotech.
Contingent obligation
related to State of Texas Funding
In March 2010, the
Texas Emerging Technology Fund awarded 1
st
Detect $1.8 million for the development and marketing of the Miniature
Chemical Detector, a portable mass spectrometer designed to serve the security, healthcare, environmental and industrial markets
(See Note 10). As of June 30, 2012, 1
st
Detect had received $1.8 million in disbursements. The disbursed amount
of $1.8 million represents a contingency through March 2020, the date of cancellation. If an event of default should
occur, the Company would calculate and expense accrued interest and reclassify principal from equity to notes payable in the consolidated
financial statements as amounts due to the State of Texas. Management considers the likelihood of an event of default to be remote.
As of March 31, 2014, no default events have occurred.
Contingent obligation
related to our five-meter high-bay at VAFB in California
In September 2009, we completed
construction of a 23,000 square foot payload processing facility at VAFB in California which enhanced our capability to process
five-meter class satellite payloads. Additionally, in December 2009, we completed construction of a 5,600 square foot office building
used by customers for administrative and operational support of teams processing satellites in the new five-meter payload facility.
ASO presently leases the 60-acre site located on VAFB in California, where we own four buildings totaling over 50,000 square feet
of space. The Company has extended the original land lease, which expired in September 2013. The new lease expires in September
2018, with provisions to extend the lease at the request of the lessee and the concurrence of the lessor. Upon final expiration
of the land lease, all improvements on the property revert, at the lessor’s option, to the lessor at no cost or we will be
required to return the land to the original condition at our cost. We currently have not accrued anything for this potential obligation
because we view the likelihood of this happening as remote.
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:
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The effect of economic conditions in the United States or other space
faring nations that could impact our ability to access space and support or gain customers;
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Our ability to raise sufficient capital to meet our long and short-term
liquidity requirements;
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Our ability to successfully pursue our business plan and execute our
strategy;
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Whether we will fully realize the economic benefits under our NASA
and other customer contracts;
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Technological difficulties and potential legal claims arising from
any technological difficulties;
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Product demand and market acceptance risks, including our ability
to develop and sell products and services to be used by governmental or commercial customers;
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Uncertainty in government funding and support for key space programs;
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The impact of competition on our ability to win new contracts;
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Uncertainty in securing reliable and consistent access to space, including
the International Space Station;
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Delays in the timing of performance of our contracts;
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Our ability to meet technological development milestones and overcome
development challenges; and
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Risks described in the “Risk Factors” section of this
Quarterly Report on Form 10-Q and our 2013 Annual Report on Form 10-K.
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Although we believe that the assumptions underlying
our forward-looking statements are reasonable, any of the assumptions could be inaccurate, and, therefore, we cannot assure you
that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant
uncertainties inherent in our forward-looking statements, the inclusion of such information should not be regarded as a representation
by us or any other person that our objectives and plans will be achieved. Some of these and other risks and uncertainties that
could cause actual results to differ materially from such forward-looking statements are more fully described in the Risk Factors
included in Part II Item 1A of this Report and Part I, Item 1A of our 2013 Annual Report on 10-K and elsewhere in this Quarterly
Report on Form 10-Q or in the documents incorporated by reference herein. Except as may be required by applicable law, we undertake
no obligation to publicly update or advise of any change in any forward-looking statement, whether as a result of new information,
future events or otherwise. In making these statements, we disclaim any obligation to address or update each factor in future filings
with the Securities and Exchange Commission (“SEC”) or communications regarding our business or results, and we do
not undertake to address how any of these factors may have caused changes to discussions or information contained in previous filings
or communications. In addition, any of the matters discussed above may have affected our past results and may affect future results,
so that our actual results may differ materially from those expressed in this Quarterly Report on Form 10-Q and in prior or subsequent
communications.