ASTROTECH Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the accompanying notes included in Part I, Item 1 of this Report. Business Overview Astrotech Corporation (Nasdaq: ASTC) (“Astrotech,” the “Company,” “we,” “us,” or “our”), a Delaware corporation organized in 1984, is a science and technology development and commercialization company that launches, manages, and builds scalable companies based on innovative technology in order to maximize shareholder value. The Company’s efforts are focused on commercializing its platform mass spectrometry technology through its wholly-owned subsidiaries: • Astrotech Technologies, Inc. (“ATI”) owns and licenses intellectual property related to the Astrotech Mass Spectrometer Technology™ (the “AMS Technology”) . • 1 st Detect Corporation (“1 st Detect”) is a manufacturer of explosives and narcotics trace detectors developed for use at airports, secured facilities, and borders worldwide. 1 st Detect holds an exclusive AMS Technology license from ATI for airport security applications. • AgLAB, Inc. (“AgLAB”) is developing a series of mass spectrometers for use in the agriculture market for process control and the detection of trace amounts of solvents and pesticides. AgLAB holds an exclusive AMS Technology license from ATI for agriculture applications. • BreathTech Corporation (“BreathTech”) is developing a breath analysis tool to screen for volatile organic compound (“VOC”) metabolites found in a person’s breath that could indicate they may have an infection, including COVID-19 or pneumonia. BreathTech holds an exclusive AMS Technology license from ATI for breath analysis applications. Our Business Units Astrotech Technologies, Inc. ATI owns and licenses the AMS Technology, the platform mass spectrometry technology originally developed by 1 st Detect. The intellectual property includes 32 granted patents and two additional patents in process along with extensive trade secrets. With a number of diverse market opportunities for the core technology, ATI is structured to license the intellectual property for different fields of use. ATI currently licenses the AMS Technology to three wholly-owned subsidiaries of Astrotech, including to 1 st Detect for use in the security and detection market, to AgLAB for use in the agriculture market, and to BreathTech for use in breath analysis. 1 st Detect Corporation 1 st Detect, an exclusive licensee of ATI for the security and detection market, has developed the TRACER 1000™, the world’s first mass spectrometer (“MS”) based explosives trace detector (“ETD”) certified by the European Civil Aviation Conference (“ECAC”), designed to replace the ETDs used at airports, cargo facilities, secured facilities, and borders worldwide. We believe that ETD customers are unsatisfied with the currently deployed ETD technology, which is driven by ion mobility spectrometry (“IMS”). We believe that IMS-based ETDs are fraught with false positives, as they often misidentify personal care products and other common household chemicals as explosives, causing unnecessary delays, frustration, and significant wasted security resources. In addition, there are hundreds of different types of explosives, but IMS-based ETDs have a very limited threat detection library reserved only for those several explosives of largest concern. Adding additional compounds to the detection library of an IMS-based ETD fundamentally reduces the instrument’s performance, further increasing the likelihood of false alarms. In contrast, adding additional compounds does not degrade the TRACER 1000’s detection capabilities, as it has a virtually unlimited and easily expandable threat library. With terrorist threats becoming more numerous, sophisticated, and lethal, security professionals have been looking for better instrumentation, and specifically for mass spectrometry, to address the evolving threats, but mass spectrometry has long been too expensive, too cumbersome, and not practical for security applications until the launch of the TRACER 1000. In order to sell the TRACER 1000 to airport and cargo security customers in the European Union, ECAC certification is required. Certain other countries also accept ECAC certification. After receiving ECAC certification for the TRACER 1000 on February 21, 2019, we are now marketing to and taking orders from airports and cargo facilities outside of the U.S. that accept ECAC certification. On June 26, 2019, the Company announced the official launch of the TRACER 1000, and on November 22, 2019, we announced our first commercial sale of TRACER 1000 units to a global shipping and logistics company. 19 In the United States, we are working with the Transportation Security Administration (“TSA”) towards Air Cargo certification. On March 27, 2018, we announced that the TRACER 1000 was accepted into TSA’s Air Cargo Screening Technology Qualification Test (“ACSQT”) and, on April 4, 2018, we announced that the TRACER 1000 was beginning testing with TSA for passenger screening at airports. On November 14, 2019, we announced that the TRACER 1000 had been selected by the TSA’s Innovation Task Force to conduct live checkpoint screening at Miami International Airport. With similar protocols as ECAC testing, we have received valuable feedback from all programs. Following ECAC certification and the Company's early traction within the cargo market, testing for cargo security continued with the TSA. With the COVID-19 pandemic, all testing within the TSA was put on hold; h owever, cargo non-detection testing resumed this summer, and we subsequently announced on September 9, 2020 that the TRACER 1000 passed the non-detection testing portion of the TSA’s ACSQT. TSA cargo detection testing resumed this fall and continues to move forward. This is the next and final step to be listed on the Air Cargo Screening Technology List (“ACSTL”) as an “approved” device and, if approved, thereby approved for cargo sales in the United States. Given the deterioration in air traffic caused by the pandemic, TSA certification testing for passenger checkpoint security has been put on indefinite hold. Finally, on October 28, 2020, the Company announced that it had surpassed $1.0 million in purchase orders for the TRACER 1000 and an additional $1.0 million in future service and support commitments, also announcing DHL (Deutsche Post AG) as its largest flagship customer. AgLAB Inc. AgLAB, an exclusive licensee of ATI for the agriculture market, has developed the AgLAB-1000™ series of mass spectrometers for process control and in the detection of trace levels of solvents and pesticides. The AgLAB product line is a derivative of the Company’s core AMS Technology. The AMS Technology provides a significant competitive advantage due to its small size, rugged design, quick analysis, ease of use, and affordability. These attributes are valuable for agriculture applications in both processing facilities and in the field. BreathTech Corporation BreathTech, an exclusive licensee of ATI for breath analysis, is developing the BreathTest-1000 ™ , a breath analysis tool to screen for VOC metabolites found in a person’s breath that could indicate they may have an infection, including COVID-19 or pneumonia. Development of the BreathTest-1000 follows the Company’s positive results in pre-clinical trials for the BreathDetect-1000™, a rapid self-serve breathalyzer that detects bacterial infections in the respiratory tract, including pneumonia. The pre-clinical trials were conducted in collaboration with UT Health San Antonio in 2017. On October 20, 2020, we announced a joint development agreement with the Cleveland Clinic Foundation to explore leveraging the BreathTest-1000 to rapidly screen for COVID-19 or related indicators. The goal of the agreement is to develop a non-invasive device that will use breath samples to identify COVID-19 strains, with the potential to provide a low-cost, self-service screening option that could be deployed on a large-scale. Trends and Uncertainties - COVID-19 In March 2020, the World Health Organization declared COVID-19 a global pandemic. We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on our business is uncertain and difficult to predict, as the responses that we, other businesses, and governments are taking continue to evolve. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a prolonged global economic recession. Policymakers around the globe have responded with fiscal policy actions to support the economy as a whole. The magnitude and overall effectiveness of these actions remain uncertain. To date, we have seen delays with respect to the TSA certification process and parts of our supply chain as a result of COVID-19. In addition, with a reduction in air travel caused by the pandemic, we are seeing a reduction in near-term demand for ETDs at checkpoints. It is possible that the continued spread of COVID-19 could cause further disruption in our supply chain; cause delay, or limit the ability of customers to perform, including in making timely payments to the Company; cause further delay in regulatory certification testing of our instruments; impact investment performance; and cause other unpredictable events. The extent to which the COVID-19 pandemic may in the future materially impact our financial condition, liquidity, or results of operations is uncertain. 20 Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions are reviewed periodically. Actual results may differ from these estimates under different assumptions or conditions. Results of Operations Three months ended December 31, 2020, compared to three months ended December 31, 2019 : Selected consolidated financial data for the quarters ended December 31, 2020, and 2019 is as follows: Three Months Ended December 31, (In thousands) 2020 2019 Revenue $ 130 $ 205 Cost of revenue 128 196 Gross profit 2 9 Gross margin 2 % 4 % Operating expenses: Selling, general and administrative 803 1,110 Research and development 758 939 Total operating expenses 1,561 2,049 Loss from operations (1,559 ) (2,040 ) Interest and other expense, net (63 ) (43 ) Income tax benefit — — Net loss $ (1,622 ) $ (2,083 ) Revenue – Total revenue decreased $75 thousand during the second quarter of fiscal 2021, compared to the second quarter of fiscal 2020. The decrease was due to the timing of orders. All of the revenue generated in the second quarters of fiscal 2021 and 2020 was from the sales of our TRACER 1000 . Cost of Revenue – Gross profit is comprised of revenue less cost of revenue. In the second quarters of fiscal 2021 and 2020, cost of revenue was comprised of labor, materials, shipping, warranty reserve, and overhead related to the sale of TRACER 1000 units. Gross margin was in the single digits as we have low volume production and certain costs related to refining our product for the cargo environment. Gross margin should improve as we increase production and benefit from associated volume discounts, and as we further enhance our technology for the cargo environment. Gross margin remained consistent in the second quarter fiscal 2021, compared to the second quarter of fiscal 2020. Operating Expenses – Operating expenses decreased $488 thousand, or 24%, during the second quarter of fiscal 2021 , compared to the second quarter of fiscal 2020. Significant changes to operating expenses include the following: • Selling, general and administrative decreased $307 thousand, or 28%, due to a decrease in office rent and related expenses associated with the former corporate office. In addition, due to COVID-19, our expenses related to travel and conferences also declined. Finally, we also had a decline in compensation and related expenses due to a reduction in headcount. • Research and development decreased $181 thousand, or 19%, during the second quarter of fiscal 2021 , compared to the second quarter of fiscal 2020. This decrease is mainly due to decreases in compensation and related expenses as well as less materials purchased for R&D purposes as development of the core AMS Technology is largely complete. Income Taxes – Income tax benefit did not change during the second quarter of fiscal 2021, compared to the second quarter of fiscal 2020. The realization of tax benefits depends on the existence of future taxable income. Pursuant to ASC 740 “Income Taxes”, a valuation allowance has been established on all of the Company’s deferred tax assets. 21 Six months ended December 31, 2020, compared to six months ended December 31, 2019 : Selected consolidated financial data for the six months ended December 31, 2020, and 2019 is as follows: Six Months Ended December 31, (In thousands) 2020 2019 Revenue $ 270 $ 206 Cost of revenue 241 196 Gross profit 29 10 Gross margin 11 % 5 % Operating expenses: Selling, general and administrative 1,729 2,312 Research and development 1,367 1,794 Disposal of corporate lease 544 — Total operating expenses 3,640 4,106 Loss from operations (3,611 ) (4,096 ) Interest and other income, net (122 ) (55 ) Income tax benefit — — Net loss $ (3,733 ) $ (4,151 ) Revenue – Total revenue increased $64 thousand during the six months ended December 31, 2020, compared to the six months ended December 31, 2019. All of the material revenue generated during each of the six months ended December 31, 2020 and 2019 was from the sales of our TRACER 1000 units. Cost of Revenue – Gross profit is comprised of revenue less cost of revenue. During each of the six months ended December 31, 2020 and 2019, cost of revenue was comprised of labor, materials, overhead, warranty reserve, and shipping related to the above sales. Gross margin increased to 11% during the six months ended December 31, 2020, compared to the six months ended December 31, 2019, as the margin in the prior period was driven by the FIFO inventory methodology where much of the inventory used to build the TRACER 1000 had R&D volume pricing. Operating Expenses – Operating expenses decreased $466 thousand, or 11%, during the six months ended December 31, 2020, compared to the six months ended December 31, 2019. Significant changes to operating expenses include the following: • Selling, general and administrative decreased $583 thousand, or 25%, due to decreases in office rent and related expenses associated with the former corporate office. In addition, due to COVID-19, our expenses related to travel and conferences also declined. Finally, we also had a decrease in compensation and related expenses due to a reduction in headcount. • Research and development decreased $427 thousand, or 24%, mainly due to decreases in compensation and related expenses as well as less materials purchased for R&D purposes as development of the core AMS Technology is largely complete. • Disposal of long-lived assets increased $544 thousand due to our termination of our corporate office lease and the disposal of the leasehold improvement assets and right-of-use assets and lease liabilities associated with that lease. As a result of this termination, our net cash savings will be approximately $870 thousand over the next three years. Income Taxes – Income tax benefit did not change during the six months ended December 31, 2020, compared to the six months ended December 31, 2019. The realization of tax benefits depends on the existence of future taxable income. Pursuant to ASC 740 “Income Taxes”, a valuation allowance has been established on all of the Company’s deferred tax assets. 22 Liquidity and Capital Resources The following is a summary of the change in our cash and cash equivalents: Six Months Ended December 31, (In thousands) 2020 2019 Change Change in cash and cash equivalents: Net cash used in operating activities $ (2,498 ) $ (3,356 ) $ 858 Net cash used in investing activities (16 ) — (16 ) Net cash provided by financing activities 21,828 2,772 19,056 Net change in cash and cash equivalents $ 19,314 $ (584 ) $ 19,898 Cash and Cash Equivalents As of December 31, 2020, we held cash and cash equivalents and restricted cash of $22.7 million, and our working capital was approximately $18.8 million. As of June 30, 2020, we had cash and cash equivalents of $3.3 million, and our working capital was approximately $0.3 million. Cash and cash equivalents increased $19.3 million as of December 31, 2020, compared to June 30, 2020, due to public offerings of common stock with net proceeds of approximately $21.8 million, partially offset by funding our normal operating activities and research and development initiatives. Operating Activities Cash used in operating activities decreased $0.9 million for the six months ended December 31, 2020, compared to the six months ended December 31, 2019, primarily due to a reduction in our expenses as well as a decrease in accounts receivable from receiving the remaining alternative minimum tax (“AMT”) credit. Investing Activities Cash used in investing activities increased $16 thousand for the six months ended December 31, 2020, compared to the six months ended December 31, 2019, due to purchases of equipment. Financing Activities Cash provided by financing activities increased $19.1 million for the six months ended December 31, 2020, compared to the six months ended December 31, 2019, due to the net proceeds from sale of common stock of $21.8 million in the current period, compared to a note payable from a related party as well as the sale of shares of common stock through an “at the market offering” program in the prior period . Liquidity Our annual report on Form 10-K for the fiscal year ended June 30, 2020 indicated substantial doubt as to our ability to continue as a going concern. On October 23, 2020, we completed a public offering of our common stock, raising gross proceeds of $18.0 million, and on October 30, 2020, we also completed a registered direct offering of our common stock, raising gross proceeds of $6.2 million. We believe this solves our liquidity issue, and we no longer have substantial doubt about our ability to continue as a going concern. We will continue to evaluate opportunities to further strengthen our liquidity, including selling the Company or a portion thereof, licensing some of our technology, raising additional funds through the capital markets, debt financing, equity financing, merging, or engaging in a strategic partnership. 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, 2020, the Company established a valuation allowance against all of its net deferred tax assets. For the three months ended December 31, 2020 and 2019, the Company incurred pre-tax losses in the amount of $1.6 million and $2.1 million, respectively. For the six months ended December 31, 2020 and 2019, the Company incurred pre-tax losses in the amount of $3.7 million and $4.2 million, respectively. The total effective tax rate was approximately 0% for the each of the three and six months ended December 31, 2020 and 2019. For each of the six months ended December 31, 2020 and 2019, the Company’s effective tax rate differed from the federal statutory rate of 21%, primarily due to the valuation allowance placed against its net deferred tax assets. The CARES Act was signed into law on March 27, 2020. The CARES Act provided certain tax relief measures including the acceleration of the AMT credit previously paid. The CARES Act allows for the acceleration of the refundable AMT credit up to 23 100 % of the AMT credit. In response to the impact of the CARES Act, the Company received the remaining AMT credit of $ 429 thousand for AMT previously paid during the three months ended September 30, 2020. FASB ASC 740, “Income Taxes” addresses the accounting for uncertainty in income tax recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The Company had no unrecognized tax benefit for the three and six months ended December 31, 2020 or 2019. Loss carryovers are generally subject to modification by tax authorities until three years after they have been utilized; as such, the Company is subject to examination for the fiscal years ended 2001 through present for federal purposes and fiscal years ended 2006 through present for state purposes. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of December 31, 2020, or June 30, 2020. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable to smaller reporting companies.