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ASTROTECH CORP \WA\ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 14, 2014

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, and the Risk Factors included in Part II Item 1A of this Report and Part I, Item 1A of our 2013 Annual Report on Form 10-K.

Business Overview

Astrotech Corporation (Nasdaq: ASTC) ("Astrotech," "the Company," "we," "us" or "our"), a 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 efforts are focused on:



Providing world-class facilities and related support services necessary for the preparation of satellites and payloads.



Providing satellite and payload processing and integration services and support.



Designing, fabricating and utilizing equipment and hardware for launch activities.



Supplying propellant and associated services for spacecraft.



Managing launch logistics and support.



Working with development partners to build industry specific applications using our sensor equipment.



Commercializing unique space-based technologies.

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 six months ended December 31, 2013, respectively. Revenue for our ASO business unit is generated primarily from various fixed-priced contracts with launch service providers in both the 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. Other factors that have impacted, and are expected to continue to impact, earnings and cash flows for this business include:



The continuing limited availability of competing facilities at the major domestic launch sites that can offer comparable services, leading to an increase in government and commercial use of our services.



Our ability to design and fabricate spacecraft preparation and processing equipment.



Our ability to control our capital expenditures, which are primarily limited to modifications required to accommodate payload processing for new launch vehicles and upgrading building infrastructure.



Our ability to complete customer specified facility modifications within budgeted costs and time commitments.

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Uncertainty in government funding and support for key space programs.



The impact of competition and industry consolidation and our ability to win new contracts.

Spacetech



Our other business unit is a technology incubator designed to commercialize space-industry technologies. This business unit is currently pursuing two distinct opportunities:

1st Detect - 1st 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 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.

The MMS-1000TM 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. 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, we negotiated a Space Act Agreement with NASA for a minimum of twenty eight additional space flights.

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 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.

Management believes there have been no significant changes during the period ended December 31, 2013 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2013 Annual Report on Form 10-K.

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Results of Operation

Quarter ended December 31, 2013 compared to Quarter ended December 31, 2012:

Selected consolidated financial data for the quarter ended December 31, 2013 and 2012 is as follows (dollars in thousands):

Quarter Ended December 31, 2013 2012 Revenue $ 2,538$ 4,122 Cost of revenue 2,682 3,125 Gross profit (144) 997 Gross margin (6) % 24 % Selling, general and administrative 2,209 1,484 Research and development 350 393 Operating expenses $ 2,559$ 1,877 Interest and other expense, net (65) (46) Income tax expense (6) - Consolidated net loss $ (2,774)$ (926)



Less: Net loss attributable to noncontrolling interest (220) (116) Net loss attributable to Astrotech Corporation

$ (2,554)$ (810)



Revenue - Total revenue decreased $1.6 million, or 38.4% during the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013 primarily due to decreased mission related service revenue as a result of two fewer missions during the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013, as well as decreased non-mission specific project related revenue.

Gross Profit - Gross profit decreased $1.1 million during the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013 primarily due to our decrease in revenue as described above, as well as the discontinuance of costs related to the leaseback of our former Spacehab Payload Processing Facility ("SPPF") that expired in December 2012, further offset by lower cost of revenue on non-mission specific related work.

Operating Expenses - Our operating expenses increased $0.7 million, or 36.3% during the second quarter of fiscal 2014 compared to the same period in the prior fiscal year. Significant changes to operating expenses included the following:



Selling, general and administrative expense increased $0.7 million primarily driven by the immediate vesting of stock options awarded under our 2008 and 2011 stock incentive plans when the Company's stock achieved a closing price of $1.50, a severance payment related to the resignation of our former Chief Financial Officer, and consulting related costs within our corporate and 1st Detect operations.



Research and development expense decreased negligibly and was a result of a reduction in legal costs related to patents, lower material costs, offset by increased depreciation expense due to leasehold improvements at 1st Detect, as well as higher costs associated with additional headcount.

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Six months ended December 31, 2013 compared to six months ended December 31, 2012:

Selected consolidated financial data for the six months ended December 31, 2013 and 2012 is as follows (dollars in thousands):

Six Months Ended December 31, 2013 2012 Revenue $ 9,227$ 10,251 Cost of revenue 5,768 8,032 Gross profit 3,459 2,219 Gross margin 37 % 22 % Selling, general and administrative 3,947 3,583 Research and development 1,156 1,035 Operating expenses $ 5,103$ 4,618 Interest and other expense, net (117) (85) Income tax expense (6) - Consolidated net loss $ (1,767)$ (2,484)



Less: Net loss attributable to noncontrolling interest (466) (257) Net loss attributable to Astrotech Corporation

$ (1,301)$ (2,227)



Revenue - Total revenue decreased $1.0 million, or 10.0% for the six months ended December 31, 2013 compared to the six months ended December 31, 2012 primarily due to lower non-mission specific project related revenue offset by increased mission related service revenue on two additional missions during the six months ended December 31, 2013.

Gross Profit - Gross profit increased $1.2 million, or 55.9% for the six months ended December 31, 2013 compared to the six months ended December 31, 2012 primarily due to our decrease in revenue as described above, as well as the discontinuance of costs related to the leaseback of our former SPPF that expired in December 2012 and lower GSE work.

Operating Expenses - Our operating expenses increased $0.5 million, or 10.5% during the six months ended December 31, 2013 compared to the same period in the prior fiscal year. Significant changes to operating expenses included the following:



Selling, general and administrative expense increased $0.4 million primarily driven by the immediate vesting of stock options awarded under our 2008 and 2011 stock incentive plans when the Company's stock achieved a closing price of $1.50, consulting related costs within our corporate and 1st Detect operations, a severance payment related to the resignation of our former Chief Financial Officer, offset by decreased legal and bonus related costs.



Research and development expense increased $0.1 million as a result of higher costs associated with additional headcount, increased depreciation expense due to leasehold improvements at 1st Detect, increased legal costs related to patents, offset by lower material costs.


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Source: Edgar Glimpses


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