ASTC 10-Q Quarter ended Dec. 31, 2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 31, 2011

OR

For the transition period from                     to

Commission File Number: 001-34426

Astrotech Corporation

(Exact name of registrant as specified in this charter)

401 Congress Avenue, Suite 1650

Austin, Texas 78701

(Address of principal executive offices and zip code)

(512) 485-9530

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)     Yes ¨ No x

As of January 31, 2012 there were 19,376,800 shares of the registrant’s common stock outstanding.

ASTROTECH CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

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ASTROTECH CORPORATION AND SUBSIDIARIES

(In thousands, except share data)

See accompanying notes to unaudited condensed consolidated financial statements.

3

ASTROTECH CORPORATION AND SUBSIDIARIES

(In thousands, except per share data)

See accompanying notes to unaudited condensed consolidated financial statements.

4

ASTROTECH CORPORATION AND SUBSIDIARIES

(In thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

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ASTROTECH CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(1) Description of the Company and Operating Environment

Astrotech Corporation (Nasdaq: ASTC) (“Astrotech,” “the Company,” “we,” “us” or “our”) is a commercial aerospace company that provides spacecraft payload processing and related services, designs and manufactures space hardware, and commercializes space technologies for use on Earth.

The Company has experience supporting both manned and unmanned missions to space with product and service support including space hardware design and manufacturing, research and logistics expertise, engineering and support services, and payload processing and integration. Through new Spacetech business initiatives such as 1 ^st Detect and Astrogenetix, Astrotech is paving the way in the commercialization of space by translating space-based technology into terrestrial applications.

Our Business Units

Astrotech Space Operations (“ASO”)

ASO is a leading commercial supplier of satellite launch processing services in the United States. ASO provides processing support for government and commercial customers for their complex communication, earth observation and deep space satellites. ASO’s spacecraft processing capabilities are among the elite in the industry, with ideally located facilities that can support the largest five-meter class satellites, encompassing the majority of U.S. based satellite preparation services. ASO has provided launch processing support for government and commercial customers for more than a quarter century, successfully processing more than 290 spacecraft without negatively impacting a customer launch schedule.

Spacetech

Our Spacetech business unit is an incubator intended to develop space-industry technologies into commercial applications to be sold to consumers and industry. Spacetech is currently working on two business initiatives: 1 ^st Detect Corporation and Astrogenetix, Inc. 1 ^st Detect’s business began under a Space Act Agreement with the National Aeronautics and Space Administration (“NASA”) for a chemical detection unit to be used on the International Space Station. 1 ^st Detect engineers are developing a Miniature Chemical Detector, based on ion trap mass spectrometry, that we believe fills a niche by being rapid, lightweight, battery-powered, durable and relatively inexpensive. Astrogenetix is a biotechnology company created to use the unique environment of space to discover and develop novel therapeutic products. A natural extension of the many years of experience preparing, launching, and operating scientific payloads in space, Astrogenetix is in the process of developing products from microgravity discoveries.

The Company’s significant legal entities include Astrotech Space Operations, Inc., 1 ^st Detect Corporation and Astrogenetix, Inc.

(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 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 United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included. Operating results for the six months ended December 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2012. 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, 2011.

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(3) Noncontrolling Interest

In January 2010, restricted shares of Astrotech subsidiaries, 1 ^st 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 December 31, 2011, 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 loss, net loss attributable to noncontrolling interest, and net loss attributable to Astrotech Corporation. Our operating cash flows in our consolidated statements of cash flows reflect net loss, while our basic and diluted net loss per share calculations reflect net loss attributable to Astrotech Corporation.

As of December 31, 2011, 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 computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed on the basis of the weighted average number of shares of common stock 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, convertible debt, and shared-based awards. Reconciliation and the components of basic and diluted net loss per share are as follows (in thousands, except per share data):

Options to purchase 1,147,850 shares of common stock at exercise prices ranging from $0.30 to $24.10 per share outstanding, for the three and six months ended December 31, 2011, were not included in diluted net loss per share, as the impact to net loss per share is anti-dilutive. Options to purchase 396,450 shares of common stock at exercise prices ranging from $0.30 to $34.38 per share outstanding for the three and six months ended December 31, 2010, were not included in diluted net loss per share as the impact to net loss per share is anti-dilutive.

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(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 spacecraft 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

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.

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 expires in October 2012. 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 revolving credit facility allows multiple advances not to exceed $3.0 million, based on eligible accounts receivable, and incurs 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 December 31, 2011 was $6.6 million and there was no outstanding balance on the revolving credit facility at December 31, 2011.

The Company was in compliance with all covenants as of December 31, 2011.

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(7) Fair Value Measurement

The accounting standard for fair value measurements defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. The standard is applicable whenever assets and liabilities are measured and included in the financial statements at fair value.

The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that 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 December 31, 2011 and June 30, 2011 (in thousands):

The carrying value of the Company’s debt at December 31, 2011 approximates fair value based on rates available for similar debt available to comparable companies in the marketplace. The carrying amounts of cash and cash equivalents, accounts receivable, notes receivable and accounts payable approximate their fair market value due to the relatively short duration of these instruments. Cash and cash equivalents are Level 1 securities.

(8) Asset Impairments

In the six months ended December 31, 2011, the Company evaluated the future use of two historical SPACEHAB modules. Due to the retirement of the space shuttle program in the United States and the lack of alternative uses which could potentially generate cash flow, the Company recorded a non-cash impairment of $0.2 million for the two SPACEHAB modules as the full aggregate carrying amount was deemed no longer recoverable.

(9) Business and Credit Risk Concentration

A substantial portion of our revenue has been generated under contracts with the U.S. Government. During the six months ended December 31, 2011 and 2010, approximately 63% and 64%, respectively, of our revenues were generated under U.S. Government contracts. Accounts receivable totaled $4.2 million at December 31, 2011, of which 69% 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.

(10) Segment Information

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.

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Key financial metrics for the six months ended December 31, 2011 are as follows (in thousands):

(11) 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 and industrial markets. In exchange for the award, 1 ^st Detect granted a common stock purchase right and a note payable to the State of Texas. As of December 31, 2011, 1 ^st Detect has received both $0.9 million disbursements totaling the full amount of the award. 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 common stock purchase right is exercisable at the first “Qualifying Financing Event”, which is essentially a change in control or third party equity investment in 1 ^st Detect. The number of shares available to the State of Texas, at the price of par value, is calculated as the total disbursements (numerator) divided by the stock price established in the Qualifying Financing Event (denominator). If the first Qualifying Financing Event does not occur within 18 months of the agreement’s effective date, the number of shares available for purchase will equal the total disbursements (numerator) divided by $100 (denominator). At management’s request, the deadline for calculating the equity conversion factor was extended by the State of Texas for an additional six months to March 31, 2012.

The note equals the disbursements to 1 ^st Detect to date, 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.

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 two $0.9 million installments were accounted for as a contribution to equity in the period ended December 31, 2011. As of December 31, 2011, no default events have occurred.

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(12) Equity and Other Long Term Incentive Plans

Equity Grants

In August 2009 and September 2009, the Compensation Committee of the Board of Directors granted directors, named executive officers and employees 1,995,559 and 410,000, respectively, of restricted shares. The shares were issued from the 2008 Stock Incentive Plan, vest 33.33% a year over a three-year period and expire upon employee termination.

In September 2011, the Compensation Committee of the Board of Directors granted directors, named executive officers and employees 579,000 stock options designed to increase shareholder value by compensating employees over the long term. The options were issued from the 2008 and 2011 Stock Incentive Plans, vest upon the Company’s stock achieving a closing price of $1.50 and expire 10 years from grant date.

In July 2011, the Compensation Committee of the Board of Directors granted a third party consultant 200,000 stock options intended to provide incentive which is aligned with management and the shareholders. The options were issued out of the 2011 Stock Incentive Plan, vest upon certain performance conditions and expire 7 years from grant date. Management considers the likelihood of the performance conditions being met as remote, and therefore no expense was recorded for the six months ended December 31, 2011.

As of December 31, 2011, 26,152 shares of common stock were reserved for future grants under the 2008 Stock Incentive Plan and 1,386,000 shares of common stock reserved for future grant under the 2011 Stock Incentive Plan. In the six months ended December 31, 2011 and 2010, we recognized compensation expense of $0.4 million and $0.4 million, respectively, for restricted stock and stock options outstanding.

Related Party Transactions

Director Compensation

In August 2009, the Board of Directors granted 525,000 restricted shares valued at $0.6 million to directors from the 2008 Stock Incentive Plan. The restricted shares vest 33.33% a year for three years and expire upon termination. Compensation expense of $0.1 million was recorded in the six months ended December 31, 2011 for these awards.

In September 2011, the Board of Directors granted 150,000 stock options valued at $0.1 million to directors from the 2011 Stock Incentive Plan. The stock options vest upon the Company’s stock achieving a closing price of $1.50 and expire 10 years from grant date. Compensation expense of $0.1 million was recorded in the six months ended December 31, 2011.

Executive Compensation

1 ^st Detect

In January 2010, an independent committee of the Board of Directors of 1 ^st Detect approved a grant of 1,180 restricted stock shares and 1,820 stock purchase warrants to certain officers, directors and employees of 1st Detect pursuant to restricted stock agreements and stock purchase warrants between 1st Detect and each such individual . The awards will vest as follows, subject to earlier vesting upon the grantee’s death or disability or in the event of a change of control of the Company: 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date. The restricted stock agreements and stock purchase warrants provide for forfeiture of unvested stock if the recipient is terminated or voluntarily ceases to perform services for 1 ^st Detect, immediate vesting upon a change of control, and restrictions on and requirements as to transfer. The stock purchase warrants 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.

The number of shares and warrants underlying each award to a named executive officer is as follows: Thomas B. Pickens III: 300 shares, 680 warrants; John Porter: 200 shares, 180 warrants. In the six months ended December 31, 2011 and 2010, we recognized compensation expense of $0.1 million and $0.1 million, respectively, for restricted stock and warrants outstanding.

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In September 2011, the Board of Directors of 1 ^st Detect approved a grant of 965 stock options to certain officers, directors and employees of 1 ^st Detect. The awards vest upon certain performance conditions being met and expire 10 years from 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.

The number of options underlying each award to a named executive officer is as follows: Thomas B. Pickens III: 200 stock options; John Porter: 150 stock options. In the six months ended December 31, 2011, the Company recognized compensation expense of $0.1 million.

Assuming a business event occurred, without taking into account any dilution resulting from the State of Texas funding, which resulted in the vesting of all restricted stock, stock purchase warrants and stock options, then Thomas B. Pickens III would hold 10.9%, John Porter would hold 4.9% and the Company would hold 64.5% of the outstanding shares of 1 ^st Detect.

The restricted stock issuances resulted in noncontrolling interest, as described in Note 3.

Astrogenetix

In January 2010, an independent committee of the Board of Directors of Astrogenetix approved a grant of 1,550 restricted stock shares, of which 375 have been subsequently cancelled. There were 2,050 stock purchase warrants that were also granted to certain officers, directors and employees of Astrogenetix, of which 50 have been subsequently cancelled, pursuant to restricted stock agreements and stock purchase warrants between Astrogenetix and each such individual. The awards will vest as follows, subject to earlier vesting upon the grantee’s death or disability or in the event of a change of control of the Company: 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date. The restricted stock agreements and stock purchase warrants provide for forfeiture of unvested stock if the recipient is terminated or voluntarily ceases to perform services for Astrogenetix, immediate vesting upon a change of control, and restrictions on and requirements as to transfer. The stock purchase warrants have an exercise price equal to the fair market value of Astrogenetix’s common stock on the date of grant as determined by an independent valuation firm.

The number of shares and warrants underlying each award to a named executive officer is as follows: Thomas B. Pickens III: 500 shares, 1,000 warrants; John Porter: 400 shares, 800 warrants. In the three months ended December 31, 2011 and 2010, we recognized compensation expense of $0.1 million and $0.1 million, respectively, for restricted stock and warrants outstanding.

Assuming a business event occurred which resulted in the vesting of all restricted stock and stock purchase warrants, then Thomas B. Pickens III would hold 16.3%, John Porter would hold 13.1% and the Company would hold 65.4% of the outstanding shares of Astrogenetix.

The restricted stock issuances resulted in noncontrolling interest, as described in Note 3.

Stock Options

In the three months ended September 30, 2011, 779,000 stock options were granted to employees, directors and consultants. At December 31, 2011 and 2010, there were $0.3 million and $0.1 million, respectively, of total unrecognized compensation costs related to non-vested stock options, which is expected to be recognized over a weighted average period of 8.1 years. In the three months ended December 31, 2011 and 2010, we recognized compensation expense of $0.1 million and $0.1 million, respectively, for stock options outstanding.

The Company’s stock options activity for the three months ended December 31, 2011 was as follows:

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In the six months ended December 31, 2011, we recognized compensation expense of $0.1 million for stock options outstanding. In the six months ended December 31, 2010, no compensation expense was recognized for stock options outstanding.

The Company’s stock options activity for the six months ended December 31, 2011 was as follows:

Restricted Stock

At December 31, 2011 and 2010, there were $0.5 million and $1.3 million respectively, of unrecognized compensation costs related to restricted stock, which is expected to be recognized over a weighted average period of 0.7 years. In the three months ended December 31, 2011 and 2010, we recognized compensation expense of $0.2 million and $0.2 million, respectively, for restricted stock outstanding.

The Company’s restricted stock activity for the three months ended December 31, 2011 was as follows:

In the six months ended December 31, 2011 and 2010, we recognized compensation expense of $0.4 million and $0.5 million, respectively, for restricted stock outstanding.

The Company’s restricted stock activity for the six months ended December 31, 2011 was as follows:

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Stock Options and Warrants for 1 ^st Detect

At December 31, 2011 and 2010, there was $0.1 million and $0.1 million respectively, of unrecognized compensation costs related to warrants and options, which is expected to be recognized over a weighted average period of 5.1 years. In the three months ended December 31, 2011 and 2010, we recognized compensation expense of $0.1 million and $0.1 million, respectively, for stock options and warrants outstanding.

1 ^st Detect stock options and warrants activity for the three months ended December 31, 2011 was as follows:

In the six months ended December 31, 2011 and 2010, we recognized compensation expense of $0.1 million and $0.1 million, respectively, for stock options and warrants outstanding.

1 ^st Detect stock options and warrants activity for the six months ended December 31, 2011 was as follows:

Restricted Stock for 1 ^st Detect

At December 31, 2011 and 2010, there were $0.1 million and $0.1 million respectively, of unrecognized compensation costs related to restricted stock, which is expected to be recognized over a weighted average period of 0.1 years. In the three months ended December 31, 2011 and 2010, we recognized compensation expense of $0.1 million and $0.1 million, respectively, for restricted stock outstanding.

1 ^st Detect restricted stock activity for the three months ended December 31, 2011 was as follows:

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In the six months ended December 31, 2011 and 2010, we recognized compensation expense of $0.1 million and $0.1 million, respectively, for restricted stock outstanding.

1 ^st Detect restricted stock activity for the six months ended December 31, 2011 was as follows:

Warrants for Astrogenetix

At December 31, 2011 and 2010, there was $0.1 million and $0.1 million respectively, of unrecognized compensation costs related to warrants, which is expected to be recognized over a weighted average period of 0.1 years. In the three months ended December 31, 2011 and 2010, we recognized compensation expense of $0.1 million and $0.1 million, respectively, for warrants outstanding.

Astrogenetix warrant activity for the three months ended December 31, 2011 was as follows:

In the six months ended December 31, 2011 and 2010, we recognized compensation expense of $0.1 million and $0.1 million, respectively, for warrants outstanding.

Astrogenetix warrant activity for the six months ended December 31, 2011 was as follows:

Restricted Stock for Astrogenetix

At December 31, 2011 and 2010, there was $0.1 million and $0.1 million respectively, of unrecognized compensation costs related to restricted stock, which is expected to be recognized over a weighted average period of 0.1 years. In the three months ended December 31, 2011 and 2010, we recognized compensation expense of $0.1 million and $0.1 million, respectively, for restricted stock outstanding.

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Astrogenetix restricted stock activity for the three months ended December 31, 2011 was as follows: