ASTROTECH CORPORATIO

ASTC
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ASTROTECH : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

09/21/2021 | 09:03am

The following information should be read in conjunction with the Consolidated
Financial Statements and the accompanying Notes included below in Item 8 of this
Annual Report on Form 10-K. This discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward-looking statements.



Business Overview



Astrotech Corporation (Nasdaq: ASTC) ("Astrotech," the "Company," "we," "us," or
"our"), a Delaware corporation organized in 1984, is a mass spectrometry company
that launches, manages, and commercializes scalable companies based on its
innovative core technology through its wholly-owned subsidiaries:






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


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


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


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




Our Business Units




Astrotech Technologies, Inc.



ATI owns and licenses the AMS Technology, the platform mass spectrometry
technology originally developed by 1st Detect. In contrast, the AMS Technology
has been designed to be inexpensive, small, and easy to use. Unlike other
technologies, the AMS Technology works under ultra-high vacuum, which eliminates
competing molecules, yielding higher resolution and fewer false alarms. The
intellectual property includes 28 granted patents and two additional patents in
process along with extensive trade secrets. With a number of diverse market
opportunities for the core technology, ATI is structured to license the
intellectual property for different fields of use. ATI currently licenses the
AMS Technology to three wholly-owned subsidiaries of Astrotech on an exclusive
basis, including to 1st Detect for use in the security and detection market, to
AgLAB for use in the agriculture market, and to BreathTech for use inbreath
analysis.






1st Detect Corporation




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



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. We received ECAC certification for the TRACER 1000 on
February 21, 2019. We are now taking orders from airports and cargo facilities
outside of the U.S. that accept ECAC certification.



In the United States, the Company is working with the U.S Transportation
Security Administration
("TSA") towards air cargo certification. On March 27,
2018
, the Company announced that the TRACER 1000 was accepted into TSA's Air
Cargo Screening Technology Qualification Test ("ACSQT") and, on April 4, 2018,
the Company announced that the TRACER 1000 was beginning testing with TSA for
passenger screening at airports. On November 14, 2019, the Company 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, the Company has 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; however, cargo
testing resumed during the summer of 2020, and the Company 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 is ongoing and
is the next and final step




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to be listed on the Air Cargo Screening Technology List ("ACSTL") as an
"approved" device. If approved, the TRACER 1000 will be approved for cargo sales
in the United States.



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 use in the hemp and cannabis
market with initial focus on optimizing yields in the extraction and
distillation process. The AgLAB product line is a derivative of 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.






BreathTech Corporation




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



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






COVID-19




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



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



To date, we have seen delays with respect to the TSA certification process and
parts of our supply chain as a result of COVID-19. In addition, although
passenger demand for air travel has recently rebounded to a certain extent, the
overall recovery of the airline industry and ancillary services remains highly
uncertain and is dependent upon, among other things, the number of cases
declining around the globe, public health impacts of new COVID-19 variants, the
continued administration of the vaccine to unvaccinated populations, and the
duration of immunity granted by the current vaccine.



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.



Coronavirus Aid, Relief and Economic Security Act (the "CARES Act")



On March 27, 2020, the United States government enacted the CARES Act. The CARES
Act is an emergency economic stimulus package that includes spending and tax
breaks to strengthen the United States economy and fund a nationwide effort to
curtail the effect of COVID-19. While the CARES Act provides sweeping tax
changes in response to the COVID-19




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pandemic, some of the more significant provisions which impacted the Company's
financial statements included removal of certain limitations on utilization of
net operating losses and increasing the ability to deduct interest expense, as
well as amending certain provisions of the previously enacted Tax Cuts and Jobs
Act. The Company also qualified for certain relief measures such as the Paycheck
Protection Program Promissory Note and Agreement (the "PPP Promissory Note"),
alternative minimum tax credit refunds, employee retention credit, and payroll
tax deferral.






Critical Accounting Policies




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






Use of Estimates




The preparation of consolidated financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that directly affect
the amounts reported in the Company's consolidated financial statements and
accompanying notes. Management continuously evaluates its critical accounting
policies and estimates, including those used in evaluating the recoverability of
long-lived assets, recognition of revenue, valuation of inventory, and the
recognition and measurement of loss contingencies, if any.






Revenue Recognition




Astrotech recognizes revenue employing the generally accepted revenue
recognition methodologies described under the provisions of Accounting Standards
Codification ("ASC") Topic 606 "Revenue from Contracts with Customers" ("Topic
606"), which we adopted in fiscal year 2019. The methodology used is based on
contract type and how products and services are provided. The guidelines of
Topic 606 establish a five-step process to govern the recognition and reporting
of revenue from contracts with customers. The five steps are: (i) identify the
contract with a customer, (ii) identify the performance obligations within the
contract, (iii) determine the transaction price, (iv) allocate the transaction
price to the performance obligations within the contract, and (v) recognize
revenue when or as the performance obligations are satisfied.



An additional factor is reasonable assurance of collectability. This
necessitates deferral of all or a portion of revenue recognition until
collection. During the fiscal year ended June 30, 2021, we had two material
revenue sources that comprised substantially all of our $334 thousand in
revenue. During the fiscal year ended June 30, 2020, we recognized revenue from
one material customer for a total of $488 thousand.



We disaggregate revenue by reporting segment to depict the nature of revenue in
a manner consistent with our business operations and to be consistent with other
communications and public filings. Refer to Note 15 to the consolidated
financial statements for additional details of revenues by reporting segment.



Contract Assets and Liabilities. We enter into contracts to sell products and
provide services, and we recognize contract assets and liabilities that arise
from these transactions. We recognize revenue and corresponding accounts
receivable according to Topic 606 and, at times, recognize revenue in advance of
the time when contracts give us the right to invoice a customer. We may also
receive consideration, per the terms of a contract, from customers prior to
transferring goods to the customer. We record customer deposits as deferred
revenue. Additionally, we may receive payments, most typically for service and
warranty contracts, at the onset of the contract and before services have been
performed. In such instances, we record a deferred revenue liability. We
recognize these contract liabilities as sales after all revenue recognition
criteria are met.



Practical Expedients. In cases where we are responsible for shipping after the
customer has obtained control of the goods, we have elected to treat the
shipping activities as fulfillment activities rather than as a separate
performance obligation. Additionally, we have elected to capitalize the cost to
obtain a contract only if the period of amortization would be longer than




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one year. We only give consideration to whether a customer agreement has
a financing component if the period of time between transfer of goods and
services and customer payment is greater than one year.



Product Sales. We recognize revenue from sales of products upon shipment or
delivery when control of the product transfers to the customer, depending on the
terms of each sale, and when collection is probable. In the circumstance where
terms of a product sale include subjective customer acceptance criteria, revenue
is deferred until we have achieved the acceptance criteria unless the customer
acceptance criteria are perfunctory or inconsequential. We generally offer
customers payment terms of less than one year.



Freight. We record shipping and handling fees that we charge to our customers as
revenue and related costs as cost of revenue.



Multiple Performance Obligations. Certain agreements with customers include the
sale of equipment involving multiple elements in cases where obligations in a
contract are distinct and thus require separation into multiple performance
obligations, revenue recognition guidance requires that contract consideration
be allocated to each distinct performance obligation based on its relative
standalone selling price. The value allocated to each performance obligation is
then recognized as revenue when the revenue recognition criteria for each
distinct promise or bundle of promises has been met.



The standalone selling price for each performance obligation is an amount that
depicts the amount of consideration to which the entity expects to be entitled
in exchange for transferring the good or service. When there is only one
performance obligation associated with a contract, the entire amount of
consideration is attributed to that obligation. When a contract contains
multiple performance obligations the standalone selling price is first estimated
using the observable price, which is generally a list price net of applicable
discount or the price used to sell the good or service in similar circumstances.
In circumstances when a selling price is not directly observable, we will
estimate the standalone selling price using information available to us,
including our market assessment and expected cost, plus margin.



The timetable for fulfilment of each of the distinct performance obligations can
range from completion in a short amount of time and entirely within a single
reporting period to completion over several reporting periods. The timing of
revenue recognition for each performance obligation may be dependent upon
several milestones, including physical delivery of equipment, completion of site
acceptance test, and in the case of after-market consumables and service
deliverables, the passage of time.






Foreign Currency




Our international operations are subject to certain opportunities and risks,
including from foreign currency fluctuations and governmental actions. During
fiscal year 2021, we conducted business in ten countries. We closely monitor our
operations in each country in which we do business and seek to adopt appropriate
strategies that are responsive to changing economic and political environments.
We currently conduct business in the U.S. dollar and the Euro. Weaknesses in one
currency in which we do business are often offset by strengths in the other
currency. Revenues, costs, and expenses are translated at the applicable rate on
the date of the transaction. Translation gains and losses, if any, are
calculated on accounts receivable or accounts payable outstanding at the rate
applicable at the end of the period. We include gains and losses resulting from
foreign currency transactions in income, while we exclude those resulting from
translation of financial statements from income and include them as a component
of accumulated other comprehensive loss when applicable. Transaction gains and
losses, which were included in our consolidated statement of operations,
amounted to a gain of approximately $3 thousand for the fiscal year ended
June 30, 2021 and a loss of approximately $10 thousand for the fiscal year ended
June 30, 2020.






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Warranty Provision




Astrotech offers its customers warranties on the products that it sells. These
warranties typically provide for repairs and maintenance of the products if
problems arise during a specified time period after original shipment.
Concurrent with the sale of products, we record a provision for estimated
warranty expenses with a corresponding increase in cost of goods sold. We
periodically adjust this provision based on historical experience and
anticipated expenses. We charge actual expenses of repairs under warranty,
including parts and labor, to this provision when incurred. The current
obligation for warranty provision is included in accrued expenses and other
liabilities in the consolidated balance sheets, whose activity for each of the
two fiscal years ended June 30, 2021 and 2020 is summarized in the following
table:






(In thousands) Warranty Provision
Balance as of June 30, 2019 $ 3
Warranty claims provided for 22
Settlements made (7 )
Balance as of June 30, 2020 18
Warranty claims provided for 49
Settlements made (51 )
Balance as of June 30, 2021 $ 16




Research and Development




Research and development costs are expensed as incurred. Research and
development costs are used to improve system functionality, streamline and
simplify the user experience, and extend our capabilities into customer-defined,
application-specific opportunities. Research and development expenses for the
fiscal years ended June 30, 2021 and 2020 were $2.7 million and $3.4 million,
respectively. This decrease was primarily attributable to a reduction in
compensation and related expenses.






Net Loss per Common Share




Basic net loss per common share is calculated by dividing net loss by the
weighted average number of common shares outstanding during the period. Diluted
net loss per common share is the same as basic net loss per common share as the
potential dilutive shares are considered to be anti-dilutive (see Note 12 to the
consolidated financial statements).






Cash and Cash Equivalents




We consider short-term investments with original maturities of three months or
less to be cash equivalents. Cash equivalents are comprised primarily of
operating cash accounts, money market investments, and certificates of deposit.






Accounts Receivable




The carrying value of our accounts receivable, net of an allowance for doubtful
accounts, represents their estimated net realizable value. Astrotech estimates
an allowance for doubtful accounts based on type of customer, age of outstanding
receivable, historical collection trends, and existing economic conditions. If
events or changes in circumstances indicate that a specific receivable balance
may be unrealizable, further consideration is given to the collectability of
those balances, and the allowance is adjusted accordingly. Receivable balances
deemed uncollectible are written off against the allowance. We anticipate
collecting all unreserved receivables within one year. As of June 30, 2021 and
2020, there was no allowance for doubtful accounts deemed necessary.






Inventory




We compute inventory cost on a first-in, first-out basis, and inventory is
valued at the lower-of-cost or net realizable value. The valuation of inventory
also requires us to estimate obsolete and excess inventory as well as inventory
that is not of saleable quality.







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Property and Equipment, net




Property and equipment are stated at cost, net of depreciation and amortization.
All furniture, fixtures, and equipment are depreciated using the straight-line
method over the estimated useful lives of the respective assets, which is
generally five years. Purchased software is typically depreciated over three
years. Leasehold improvements are amortized over the shorter of the useful life
of the improvement or the term of the lease. Repairs and maintenance are
expensed when incurred.



Impairment of Long-Lived Assets



We continuously evaluate our long-lived assets for impairment to assess whether
the carrying amount of an asset may not be recoverable. Our evaluation is based
on an assessment of potential indicators of impairment, such as an adverse
change in the business climate that could affect the value of an asset, current
or forecasted operating or cash flow losses that demonstrate continuing losses
associated with the use of an asset, and a current expectation that, more likely
than not, an asset will be disposed of before the end of its previously
estimated useful life. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Recoverability of long-lived assets is dependent
on a number of conditions, including uncertainty about future events and demand
for our services. Due to the termination of our corporate office lease in August
2021
, we recorded an impairment of long-lived assets of $173 thousand for the
fiscal year ended June 30, 2021, which is included in disposal of corporate
lease in the accompanying consolidated statements of operations and
comprehensive loss. There was no impairment of long-lived assets recognized
during the fiscal year ended June 30, 2020.



Fair Value of Financial Instruments



Astrotech's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, and accrued
liabilities. Our management believes the carrying amounts of these assets and
liabilities approximates their fair value. For more information about our
accounting policies surrounding fair value investments, see Note 6 to the
consolidated financial statements.



Available-for-Sale Investments



Investments that are designated as available-for-sale are reported at fair
value, with unrealized gains and losses recorded in accumulated other
comprehensive loss. We determine the cost of investments sold based on a
first-in, first-out cost basis at the individual security level. We also
consider specific adverse conditions related to the financial health of, and the
business outlook for, the investee, which may include industry and sector
performance, changes in technology, operational and financing cash flow factors,
and changes in the investee's credit rating. We record other than temporary
impairments on marketable equity securities and marketable equity method
investments in gains (losses) on equity investments, net of previously recorded
gains (losses). For more information on investments, see Note 3 to the
consolidated financial statements.






Operating Leases




We adopted Accounting Standards Update No. 2016-02, "Leases (Topic 842)" (ASU
2016-02) effective July 1, 2019. ASU 2016-02 requires that we determine, at the
inception of an arrangement, whether the arrangement is or contains a lease,
based on the unique facts and circumstances present. Operating lease assets
represent our right to use an underlying asset for the lease term
and operating lease liabilities represent our obligation to make lease payments
arising from the lease. Right-of-use ("ROU") assets
and operating lease liabilities are recognized at the commencement date of the
lease based upon the present value of lease payments over the lease term. When
determining the lease term, we include options to extend or terminate the lease
when it is reasonably certain, at inception, that we will exercise that option.
The interest rate implicit in lease contracts is typically not readily
determinable; accordingly, we use our incremental borrowing rate, which is the
rate that would be incurred to borrow on a collateralized basis over a similar
term an amount equal to the lease payments in a similar economic environment,
based upon the information available at the commencement date. The lease
payments used to determine our operating lease assets may include lease
incentives, stated rent increases and escalation clauses linked to rates of
inflation, when determinable, and are recognized in determining our ROU assets.
Our operating leases are reflected in the operating lease, right-of-use asset;
lease liabilities, current; and lease liabilities, non-current in our
consolidated balance sheets.






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Lease expense for minimum lease payments is recognized on a straight-line basis
over the lease term. As a result of our adoption of ASU 2016-02, we no longer
recognize deferred rent on the consolidated balance sheet. Short-term leases,
defined as leases that have a lease term of 12 months or less at the
commencement date, are excluded from this treatment and are recognized on a
straight-line basis over the term of the lease. Variable lease payments are
amounts owed by us to a lessor that are not fixed, such as reimbursement for
common area maintenance costs for our facility lease, and are expensed when
incurred.



Financing leases, formerly referred to as capitalized leases, are treated
similarly to operating leases except that the asset subject to the lease is
included in the appropriate fixed asset category, rather than recorded as a
right-of-use asset, and depreciated over its estimated useful life, or lease
term, if shorter. For more information on Leases, see Note 4 to the consolidated
financial statements.






Stock-Based Compensation




We account for stock-based awards to employees based on the fair value of the
award on the grant date. The fair value of stock options is estimated using the
expected dividend yields of our stock, the expected volatility of the stock, the
expected length of time the options remain outstanding, and the risk-free
interest rates. Changes in one or more of these factors may significantly affect
the estimated fair value of the stock options. We recognize forfeitures as they
occur. The fair value of awards that are likely to meet goals, if any, are
recorded as an expense over the vesting period. For more information on
share-based compensation, see Note 9 to the consolidated financial statements.






Income Taxes




We account for income taxes under the liability method, whereby deferred tax
asset or liability account balances are determined based on the difference
between the financial statement and the tax bases of assets and liabilities
using current tax laws and rates in effect for the year in which the differences
are expected to affect taxable income. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes
the enactment date. A valuation allowance is established when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.






Preferred Stock




We have issued Series D convertible preferred stock. Series D Preferred Shares
are convertible to common stock on a one-to-one basis. The Preferred D are not
callable by the Company. The holders of the preferred stock are entitled to
receive, and we shall pay, dividends on shares equal to and in the same form as
dividends actually paid on shares of the common stock when, and if, such
dividends are paid on shares of common stock. No other dividends are paid on the
preferred shares. Preferred shares have no voting rights. Upon liquidation,
dissolution, or winding-up of the Company, whether voluntary or involuntary, the
preferred shares have preference over common stock. The holder of Series D
Preferred Shares has the option to convert said shares to common stock at the
holder's discretion.



The holders of the preferred stock have agreed with the Company that they will
not convert the preferred stock until such time as the 2021 Certificate
Amendment is accepted for filing with the state of Delaware.






Treasury Stock




The Company records treasury stock at the cost to acquire it and includes
treasury stock as a component of stockholders' equity. During fiscal year 2021,
we sold all treasury stock held by the Company.






Accounting Pronouncements




In December 2019, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") 2019-12, "Simplifying the Accounting for
Income Taxes" ("ASU 2019-12"), which removes certain exceptions related to the
approach for intra-period tax allocation, the methodology for calculating income
taxes in an interim period, and the recognition of deferred tax liabilities for
outside basis differences. ASU 2019-12 also amends other aspects of the guidance
to help simplify and promote consistent application of GAAP. ASU No. 2019-12 is
effective for fiscal years beginning after December 15, 2020 (for Astrotech, the
fiscal year ending June 30, 2022), and interim periods within those fiscal
years. ASU 2019-12 is not expected to have a material impact on our financial
statements.






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In May 2021, the FASB issued ASU 2021-04, "Earnings Per Share (Topic 260),
Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock
Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own
Equity (Subtopic 815-40)" ("ASU 2021-04"), which provides authoritative guidance
for the accounting for modifications or exchanges of freestanding
equity-classified written call options (for example, warrants) that remain
equity classified after modification or exchange. ASU 2021-04 provides that for
an entity that presents earnings per share in accordance with Topic 260, the
effects of a modification or an exchange of a freestanding equity-classified
written call option that is recognized as a dividend should be an adjustment to
net income (or net loss) in the basic earnings per share calculation. The
amended guidance becomes mandatorily effective for all entities for fiscal years
beginning after December 15, 2021, including interim periods within those fiscal
years, and should be applied prospectively to modifications or exchanges
occurring on or after the effective date. While we do not expect the adoption of
ASU 2021-04 to materially impact our consolidated financial statements and
related disclosures because we do not currently anticipate modifications to our
outstanding equity-classified written call options, the impact on our
consolidated financial statements and disclosures will depend on the facts and
circumstances of any specific future transactions.



Results of Operations for the Years Ended June 30, 2021 and 2020






Selected financial data for the fiscal years ended June 30, 2021 and 2020 of our
operations are as follows:



Years Ended June 30,
(In thousands) 2021 2020 Variance
Revenue $ 334 $ 488 $ (154 )
Cost of revenue 298 449 151
Gross profit 36 39 (3 )
Gross margin percentage 11 % 8 % 3 %
Operating expenses
Selling, general and administrative 4,741 4,716 (25 )
Research and development 2,692 3,437 745
Disposal of corporate lease 513 - (513 )
Total operating expenses 7,946 8,153 207
Interest and other (expense), net (235 ) (197 ) (38 )
Gain from extinguishment of debt - PPP loan 542 - 542
Income tax benefit - - -
Net loss (7,603 ) (8,311 ) 708
Net unrealized losses, net of zero tax expense (23 ) - (23 )
Total comprehensive loss $ (7,626 ) $ (8,311 ) $ 685





Revenue - Total revenue decreased by $154 thousand, or 32%, to $334 thousand for
the fiscal year ended June 30, 2021, compared to $488 thousand for the fiscal
year ended June 30, 2020. Substantially all of the fiscal year 2021 and 2020
revenue was from the sales of our TRACER 1000 units to DHL (Deutsche Post AG).
The decrease in revenue was caused by pandemic-related delays in the delivery of
certain microchips used in the production of our TRACER 1000 systems. Even
though production has resumed, we continue to see impacts to the supply chain
from the microchip shortages.



Cost of Revenue and Gross Profit - Cost of revenue is comprised of labor,
materials, shipping, warranty reserve, and overhead allocation. Gross profit is
comprised of revenue less cost of revenue. Cost of revenue decreased $151
thousand
, or 34%, for the fiscal year ended June 30, 2021, compared to the year
ended June 30, 2020. Gross profit decreased $3 thousand and gross margin
increased 3% during the fiscal year ended June 30, 2021, compared to the year
ended June 30, 2020. We expect that gross margin will continue to improve as we
increase production and benefit from associated volume discounts, and as we
further refine our technology.



Operating Expenses - Our operating expenses decreased $207 thousand, or 3%,
during the fiscal year ended June 30, 2021, compared to the fiscal year ended
June 30, 2020. Significant changes to operating expenses include the following:






• Selling, General and Administrative Expenses - Our selling, general and
administrative expenses were consistent for the year ended June 30, 2021,
compared to the year ended June 30, 2020. The increase in legal expenses
related to our ongoing derivative litigation was partially offset by 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.


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• Research and Development Expenses - Research and development expenses
decreased $745 thousand, or 22%, for the year ended June 30, 2021, compared
to the year ended June 30, 2020. This decrease is mainly due to a decrease
in headcount as we continue to shift our focus from research and development
and toward commercialization of our products.


• Disposal of long-lived assets increased $513 thousand due to the 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 over the
remainder of the lease was estimated to be approximately $870 thousand.





Interest and other (expense), net - Interest expense for the year ended June 30,
2021
was $235 thousand, compared to interest expense of $197 thousand for the
year ended June 30, 2020. This change was driven by interest expense on a term
note to the Company by our CEO executed in February 2020.



Gain from extinguishment of PPP loan - Gain from extinguishment of PPP loan was
$542 thousand for the year ended June 30, 2021 due to receiving full forgiveness
of our PPP Promissory Note from the Small Business Admission ("SBA") in April
2021
.



Income Taxes - Our income tax benefit did not change for the year ended June 30,
2021
, compared to the year ended June 30, 2020.



FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY






Consolidated Balance Sheet




Total assets for the year ended June 30, 2021 were $65.6 million compared to
total assets of $5.9 million as of the end of fiscal year 2020. The following
table sets forth the significant components of the consolidated balance sheet as
of June 30, 2021, compared with June 30, 2020:






Years Ended June 30,
(In thousands) 2021 2020 Variance
Assets:
Current assets $ 65,110 $ 4,672 $ 60,438
Property and equipment, net 263 99 164
Assets held for disposal, net - 237 (237 )
Operating leases, right-of-use asset, net 249 851 (602 )
Other assets, net 11 71 $ (60 )
Total $ 65,633 $ 5,930 $ 59,703
Liabilities and stockholders' equity:
Current liabilities $ 4,211 $ 4,350 $ (139 )
Lease liabilities, non-current 215 623 (408 )
Term note payable, net of current portion - 332 (332 )
Stockholders' equity 61,207 625 60,582
Total $ 65,633 $ 5,930 $ 59,703





Current assets - Current assets increased $60.4 million as of June 30, 2021,
compared to June 30, 2020, as a result of cash raised through a series of equity
offerings. Current assets also increased due to purchases of inventory needed to
build our TRACER 1000 systems.



Property and equipment, net - Property and equipment increased $164 thousand as
of June 30, 2021, compared to June 30, 2020 due to leasehold improvement assets
and equipment purchases associated with our new research and development
facility in Austin.



Assets held for disposal, net - Assets held for disposal decreased $237 thousand
during fiscal year 2021 as these were fixed assets that were disposed of in
relation to the termination of our corporate office lease in Austin.






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Operating leases, right-of-use asset - Operating leases, right-of-use asset
decreased $602 thousand in fiscal year 2021 due to the termination of our lease
in Austin and the expiration of our lease in Webster.



Current liabilities - Current liabilities decreased $139 thousand as of June 30,
2021
, compared to June 30, 2020, as increases in accounts payable and accrued
expenses were offset by decreases in term note payable related to our PPP
Promissory Note forgiveness and lease liabilities related to the termination of
our office leases in Austin and Webster.



Other long-term liabilities - Other long-term liabilities decreased $740
thousand
for the year ended June 30, 2021, compared to June 30, 2020 due to the
same decreases in term note payable and lease liabilities stated above.



Liquidity and Capital Resources



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






Years Ended June 30,
(In thousands) 2021 2020 Variance
Change in cash and cash equivalents:
Net cash used in operating activities $ (7,410 ) $ (6,931 ) $ (479 )
Net cash used in investing activities (27,585 ) - (27,585 )
Net cash provided by financing activities 67,582 8,692 58,890
Net change in cash and cash equivalents $ 32,587 $ 1,761 $ 30,826




Cash and Cash Equivalents




At June 30, 2021, we held cash and cash equivalents of $35.9 million and our net
working capital was approximately $60.9 million. At June 30, 2020, we held cash
and cash equivalents of $3.3 million and our net working capital was
approximately $0.3 million. Cash and cash equivalents increased by approximately
$32.6 million during the year ended June 30, 2021 due to the series of equity
offerings as mentioned above.






Operating Activities




Net cash used in operating activities was $7.4 million for the year ended
June 30, 2021, compared to cash used in operating activities of $6.9 million for
the year ended June 30, 2020. The increase in cash used in operating activities
was primarily due to an increase in inventory as we purchased raw materials to
ramp up production with our contract manufacturer Sanmina, partially to fulfill
outstanding purchase orders for our TRACER 1000.






Investing Activities




Net cash used in investing activities for the year ended June 30, 2021 increased
$27.6 million, compared to the year ended June 30, 2020. The increase in cash
used in investing activities was due to purchasing short-term available-for-sale
investments in the fourth quarter of fiscal year 2021.






Financing Activities




Cash provided by financing activities was $67.6 million for the year ended
June 30, 2021, compared to cash provided by financing activities of $8.7
million
for the year ended June 30, 2020. The increase in cash provided by
financing activities was the result of the sale of common stock through equity
offerings.






Debt




As of June 30, 2021, the Company held debt through term notes payable totaling
$2.5 million. Our PPP Promissory Note of $542 thousand was forgiven by the SBA
in April 2021.







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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. During the
fiscal year 2021, we successfully completed several public offerings of our
common stock, raising net proceeds of approximately $67.6 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.



Off-Balance Sheet Arrangements



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

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