UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10‑K
| X |x Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended October 31, 2017
OR
| _ |¨ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from ___ to ___
Commission file number 0-7642
PASSUR AEROSPACE, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York | 11-2208938 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
One Landmark Square, Suite | 06901 |
(Address of Principal Executive Office) | (Zip Code) |
Registrant’s telephone number, including area code: 203-622-4086
Securities registered pursuant toSectionto
Section 12(b) of the Act: None
Securities registered pursuant toSectionto
Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] ¨No [X]x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.Yes [ ] ¨No [X]x
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] xNo [ ]¨
Indicate by check mark whether the Registrant has submitted electronically, and posted on its corporate Website, 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] xNo [ ]¨
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant'sRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. [ ]¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of "large“large accelerated filer,"” accelerated filer," "smaller” “smaller reporting company,"” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
Accelerated filer | |||
Non-accelerated filer | (Do not check if a smaller reporting company) | Smaller reporting company | |
Emerging growth company |
If emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes [ ] ¨No [X]x
The aggregate market value of the voting shares of the Registrant held by non-affiliates as of April 30, 2017,2020, was $12,234,165.
The number of shares of common stock, $0.01 par value, outstanding as of December 31, 2017,2020, was 7,696,091.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant'sRegistrant’s Definitive Proxy Statement for the 20182021 Annual Meeting of Stockholders of the Company (the “2021 Proxy Statement”), to be filed with the Securities and Exchange Commission (the “SEC”) within 120 days of October 31, 2017,2020, are incorporated by reference into Part III of this Form 10-K.
Forward Looking Statements
The consolidated financial information provided in this Annual Report on Form 10-K (including, without limitation, "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations",Operations,” and "Liquidity“Liquidity and Capital Resources",Resources,” below) contains "forward-looking statements"“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the Company's (defined below) future plans, objectives, and expected performance. The words "believe," "may," "will," "could," "should," "would," "anticipate," "estimate," "expect," "project," "intend," "objective," "seek," "strive," "might," "likely“believe,” “may,” “will,” “could,” “should,” “would,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “objective,” “seek,” “strive,” “might,” “likely result," "build," "grow," "plan," "goal," "expand," "position,"” “build,” “grow,” “plan,” “goal,” “expand,” “position,” or similar words, or the negatives of these words, or similar terminology, identify forward-looking statements. These statements are based on assumptions that the Company believes are reasonable but are subject to a wide range of risks and uncertainties, and a number of factors could cause the Company's actual results to differ materially from those expressed in the forward-looking statements referred to above. These factors include, without limitation, the risks and uncertainties discussed under "Risk Factors"“Risk Factors” and "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations,"” the uncertainties related to the ability of the Company to sell its existing product and professional service lines, as well as in new products and professional services (due to potential competitive pressure from other companies or other products), as well as the potential for terrorist attacks, changes in fuel costs, airline bankruptcies and consolidations, economic conditions, and other risks detailed in the Company's periodic report filings with the Securities and Exchange Commission ("SEC").SEC. Other uncertainties which could impact the Company include, without limitation, uncertainties with respect to future changes in governmental regulation and the impact that such changes in regulation will have on the Company'sCompany’s business. Additional uncertainties include, without limitation, uncertainties relating to: (1) the Company's ability to find and maintain the personnel necessary to sell, manufacture, and service its products; (2) its ability to adequately protect its intellectual property; and (3) its ability to secure future financing. Readers are cautioned not to place undue reliance on these forward-looking statements, which relate only to events as of the date on which the statements are made and which reflect management'smanagement’s analysis, judgments, belief, or expectation only as of such date. The Company undertakes no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Readers are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-Q and 8-K.
Item 1. Business
PASSUR® Aerospace, Inc. ("PASSUR"(“PASSUR” or the "Company"“Company”), a New York corporation founded in 1967, is a leading business intelligence company, providing predictive analytics and decision support technology for the aviation industry primarily to improve the operational performance and cash flow of airlines, airports, fixed based operators (FBOs) and the airports where they operate.air navigation service providers (ANSPs). The Company is recognized as a leader in airlineproviding a cloud-based platform, ARiVA™, that manages and airport operational efficiency and business aviation marketing and operational solutions. optimizes operations for our customers.
PASSUR is a pioneer in the successful use of big data, with an aviation intelligence platform and suite of web-baseddelivers digital solutions that address the aviation industry's most intractable and costly challenges, including, but not limitedare essential to the underutilization of airspace and airport capacity, delays, cancellations, and diversions. Several independent studies have estimated the annual direct costs of such inefficiencies in the United States at over $8 billion annually, and worldwide direct costs at over $30 billion annually. The Company's technology platform is supported by its Aviation Intelligence Center of Excellence, a team of subject matter experts with extensive experience in airline, airport, and businessglobal aviation operations, finance,meeting the needs of global air traffic management, systems automation, and data visualization, with specific expertise intravel as well as supporting the operational and business needs, requirements, objectives, and constraintsrecovery of the aviation industry.
PASSUR providescontinues to be a pioneer applying artificial intelligence powered by machine learning to aviation data, aggregationaddressing the industry’s most costly challenges, including the management and consolidation, information, decision support, predictive analytics, collaborative solutions,optimization of airspace, airport assets, aircraft, and professional services. To enable this unique offering, PASSUR owns and operates the largest commercial passive radar network in the world that updatesday of flight tracks every 1 to 4.6 seconds, powering a proprietary database that is accessible in real-time and delivers timely, accurate information and solutions via PASSUR's industry-leading algorithms and business logic included in its products.
PASSUR Core Capabilities
ARiVA™ is powered by PASSUR help to ensure flight completion, across the flight life cycle, from gate to gate, and result in reductions in overall costs and carbon emissions, while maximizing revenue opportunities, as well as improving operational efficiency and enhancing the passenger experience.
Fused Global Data: Flight data from multipleterrestrial and satellite ADS-B sources, including its independent network of over 180 surveillance sensorsairline schedules, flight plans and the PASSUR surface surveillance network installed throughout North America creating coast to coast coverage, as well as locations in Europe and Asia; multiple airports; government data; customer data; andevent data from third party partners. PASSUR's sensors receive aircraftANSPs, airports, and drone signals in Mode A, C, S,carriers, are fused with airport and Automatic Dependent Surveillance-Broadcast ("ADS-B"), providing position, altitude, beacon code, and tail number, among other information. PASSUR receives signals from aircraft that, when combined with our historical database of aircraft and airport behavior, including information recorded by our network over the last 10 years, allows the Companyweather data to know more about what has happened historically, and what is happening in real-time. In addition, the historical database allows the Company to predict how aircraft, the airspace, and airports are going to perform, and more importantly, how the aircraft, the airspace, and airport should perform.
Predictive Analytics: Predictive technology (xETA™) powered and delivered by state-of-the-art machine learning algorithms using live and historical flight data from its customer's systems,terrestrial and satellite ADS-B sources, airline schedules, flight plans, ANSPs, weather and airports.
Workflow Optimization: Customizable user interface and collaboration components, configurable by event type and user role (airport, airline, ANSP, FBO), optimally manage cross functional workflows and air traffic flow management (ATFM), such as airline internal flightdeparture sequencing and irregular operations data,(IROPs) management.
ARiVA™ increases safety and Airport Operational Databases.
The Company’s revenues are generated by Exception
The Company currently owns 2427 issued patents and has an additional 189 patent applications pending with the United States Patent Office. The issued patents expire in various years through 2033.
ARiVA™ Platform Capabilities:
ARiVATEMPO
Dynamic gate-to-gate global flight tracking.
Supported solutions and capabilities include:
·ICAO GADSS-compliant flight tracking
·Operational-quality surface surveillance
·Interactive map with multiple optional overlays: Aeris weather; flight routes and fixes (filed/flown), actual flight track, surface vehicles, gate and taxiway labels, and more
·Advanced filtering of flights and flight data attributes
·User-configurable display options and the ability to create library of saved layouts
·Global search capabilities
·Real-time or replay availability
ARiVAAWARE
Continuous forecasts and alerts to achieve the most efficient execution of the daily operation.
Supported solutions and capabilities include:
·Estimated flight arrival times: ON (runway touchdown), IN (gate arrival), predicted taxi times and runways
·Airport / airspace demand and capacity forecasts
·Forecast of holding activity: ETA to hold fix, hold release, and new arrival time; and diversion prevention / optimal diversion for airports
·Prediction of early and late flights
·Notification of gate conflicts up to 60 mins before arrival time
·Notification of on-time save opportunities (A14/D0)
·Tarmac delays: taxiing flights in danger of exceeding the U.S. Department of Transportation (DOT) 3/4 hour rule
ARiVAWORKFLOW
Integrated communication and collaboration on shared workflow platform, including Air Traffic Flow Management (ATFM) and Collaborative Decision Making (CDM/ACDM) to maximize use of existing assets and capacity.
Supported solutions and capabilities include:
·Large scale Regional Diversion Management (diversions and recovery)
·Airport communicator for dissemination of airport status to all stakeholders
·Movement area sequencing
·Departure management / Departure metering
·Gate and tow management
·Expedited taxi management / single engine taxi opportunities
·Runway availability: eligible flights/sector demand
·De-ice management
ARiVAINTEL
Data, reporting, and analytical tools that enable insights into operational performance to drive continuous improvement.
Supported solutions and capabilities include:
·Operational performance reports: on-time, block, taxi, and airport/airspace throughput
·Tow and ramp sequence reports
·Surface wait-for-park reports (gate holds)
·Gate pushback latency reports
·Airborne holding and diversion analysis
·Operational day replay
·Customized user-defined reports
ARIVABIZAV
A complete set of tools to help forecast and manage the operation.
Supported solutions and capabilities include:
·Rich historical data to assist in forecasting current and new customers (e.g., fuel planning / fees)
·Relationship management – know your best customers – supports customer loyalty and pricing programs
·Predictive and real-time data for FBO flight support and CSR needs
ARIVALFM
Landing Fee Management ensures all landing fees and related charges are being fully and accurately captured and billed.
Supported solutions and capabilities include:
·A fully automated process designed to be more efficient than airline self reporting, reduces errors, work effort and time
·Reduces the need for post-audit true-ups and increases predictability of fees
·Ensures timely capture of all revenue with PASSURconfidence
·Reduces airport workload and supports faster revenue collection through standardized and automated billing
ARiVASTRATEGY (Professional Services Consulting)
1. Integrated Traffic Management modulesOperations Strategy and capabilities.Planning - Designing the best operational foundation to execute from.
Supported solutions and capabilities include:
·Integrate commercial strategies and operational priorities into a balanced design (revenue, cost, reliability, customer)
·Provide insights on the relationship and tradeoffs of strategic investments (i.e., block / ground time, manpower, and maintenance) and tactical costs (i.e., misconnects, bags, overtime, and cancellations) for future designs
·Prepare for future events with IROP planning, including scenario development, and pre-canned plans to build upon, and predictive forecasting
2. Operational Efficiency and Resiliency Planning – Managing and executing on the best foundation.
Supported solutions and capabilities include:
·Optimize and maintain the integrity of the operational / schedule plan until day-of operation and provide operations control with a complete schedule to execute against
·Identify and improve constraints in the operation on a daily basis and incorporate learnings into your operational / schedule foundation
·Access a complete set of sustainability processes and tools to maximize fuel savings and CO2 reductions
·Gain understanding of the current airport throughput and airspace situation for future opportunities
The Company believes its business opportunities come from the following industry conditions and potential demand drivers:
7
·Extreme economic pressure to support operations during COVID 19, which requires minimization of the cost per available seat mile (CASM) ·Loss or release of knowledgeable operating resources/staff create a demand for automation of both normal and irregular operations ·Long term change in economic focus on operating costs drives the implementation of automation and digitization and a change in the Build vs. Buy vs. Subscribe paradigm now supporting subscription business ·A requirement to consolidate operations increases efficiency driven by collaborative platforms between aviation constituencies and stakeholders ·A global gate to gate understanding of flight operations with predictive “look ahead” capabilities facilitates proactive management of operations
| |
Focus on health and safety related to COVID 19 Requirements foradvance alerting of conditions that can create risks to public health due to unplanned or irregularly created operational conditions (such as congestion) that violate continuously evolving health regulations. Emphasis on infrastructure spending. New commitments to large-scale aviation programs, including an upgraded technologies and services similar to those provided by PASSUR’s ARiVA™ platform. Lower tolerance for severe disruptions. Changes in public policy in the form of expensive fines levied on airlines reflect this change of attitude. Consumers want better information relating to aviation and fewer delays. Limiting carbon emissions becoming a greater focus. Airlines are increasingly sensitive |
Surveillance and Data Standards
·ADS-B has become the global standard for aircraft and vehicle position surveillance. PASSUR has established partnerships with multiple global, terrestrial and satellite ADS-B surveillance vendors, and has integrated those data feeds into ARiVA™.
·System Wide Information Management (SWIM) data standards have been adopted as a global standard for air traffic flow management (ATFM) data exchange. ARiVA™ is one of the major consumers of SWIM data, which is used by others, or used for unauthorized purposes.
Distribution Method
The Company's directCompany’s sales force sellsis directly responsible for the sale of PASSUR solutions.
Competition
The Company’s ARiVA platform fuses global aircraft surveillance, airport and airspace data to provide airline, airport and ANSPs with situational awareness (flight tracking), predictive analytics, collaborative decision making (CDM) and workflow optimization solutions. ARiVA is a global, data driven, software as service platform which can be configured and implemented faster than competitive systems, with minimal capital investment, with costs proportional to the volume of operations. ARiVA’s core design integrating airline, airport and ANSP data, combined with its products, as do authorized distributors or integrators who sell PASSUR's products as part of their total solution, e.g. for live flight status updates or fee collection.
There are however, other forms of surveillance, flight tracking, surveillance,collaboration/communication and aviation business intelligence products. Dependingproducts on the market. Based on the various end useuses of the Company'sCompany’s products, primary competitors include Sabre, Saab,Saab-Sensis, The Weather Company/IBM, Harris Corporation, Amadeus, Thales, IDS, Metron, FlightAware, and Harris Corporation. MostMosaic ATM. Many of these companies have larger sales forces and greater financial resources than the Company.
Source of Materials
The Company obtains itscomputer and network components from distributors and manufacturers throughout the United States. The Company has multiple sources from which to obtain athe majority of its components.
Dependence on Certain Customers
The Company’s principal business is to provide predictive analytics and decision support technology for the aviation industry to primarily improve the operational performance and cash flow of its customers. The Company believes it operates in one operating segment. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Three customers accounted for 52%36%, or $7,165,000,$4,176,000, of total revenues in fiscal year 2017. One2020. Of these three customers, one customer accounted for 22%13%, or $2,988,000,$1,538,000. This customer was given concessions of approximately $513,000 during the fourth quarter of 2020, as a result of the COVID 19 pandemic. It is unclear at this time whether or not the customer will renew its contract with the Company. A second customer accounted for 19%12%, or $2,637,000,$1,440,000, and a third customer accounted for 11%10%, or $1,540,000$1,198,000, of total revenues in fiscal year 2017. Three2020. Both of these customers terminated their contracts with the Company during the year. The same three customers accounted for 45%55%, or $6,698,000,$8,296,000, of total revenues in fiscal year 2016.2019. One customer accounted for 17%,24% or $2,555,000,$3,599,000, a second customer accounted for 17%,20% or $2,460,000,$2,985,000, and a third customer accounted for 11%, or $1,683,000$1,713,000, of total revenues in fiscal year 2016. 2019.
As of October 31, 2017,2020, the Company had four customers each of which accounted for 10% or more of the accounts receivable balance. One customer accounted for 38%, or $597,000, and three customers accounted for 10% each, with balances ranging from $151,000 to $159,000. As of October 31, 2019, the Company had three customers each of which accounted for 10% or more of the accounts receivable balance. OneThe customer with the largest 2020 accounts receivable balance also accounted for 21%19%, or $309,000,$224,000 of the 2019 balance, a second customer accounted for 16%14%, or $242,000,$173,000, and a third customer accounted for 15%,13% or $218,000. As of October 31, 2016, the Company$158,000. Credit losses historically have been immaterial. However, one major customer included above for fiscal 2020, had three customers each of which accounted for 10% or more of the accounts receivable balance. One customer accounted for 30%, or $330,000, and a second customer accounted for 21%, or $226,000 and a third customer accounted for 14%, or $157,000. There is one customer with a significant past due accounts receivable balance, which is not one of the major customers described above, which the Company has fully reserved as of the fiscal year ended October 31, 2017.
9Governmental Regulations
The Company is subject to governmental regulations on the use and Development
In provision of its services, the Company utilizes data from government and development efforts include activities associated with the enhancement, maintenance,commercial data sources. In particular, FAA SWIM and improvementEUROCONTROL Business-to-Business (B2B) data services are heavily used. Many of the Company's existing hardware, software, and information products. These expenses amounted to $783,000 and $826,000 in fiscal years 2017 and 2016, respectively.
Environmental Costs
The Company is not aware of any environmental issues that would have a material adverse effect on future capital expenditures or current and future business operations.
Employees
The Company employed 6245 employees (including 3 employees currently on furlough), of which 5641 were full-time, including fourthree officers, as of October 31, 2017.2020. None of its employees is subject to any collective bargaining agreements.
Available Information
Stockholders may obtain copies of our filings with the SEC, free of charge from the website maintained by the SEC at www.sec.gov or from our website at www.passur.com. Further, a copy of this Annual Report on Form 10-K is located at the SEC's Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our filings will be available on our website as soon as reasonably practicable after we electronically file such materials with the SEC. However, the information from our website is not incorporated by reference into this report.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company'sCompany’s headquarters are located at One Landmark Square, Suite 1900,1905, Stamford, Connecticut. Effective June 26, 2009, the Company entered into a five-year lease for 4,000 square feet of office space. This lease was modified during fiscal year 2010, extending the term of the original lease through January 31, 2018, and adding 1,300 square feet of office space resulting in a total average annual rental rate of $235,000 andfor a total of 5,300 square feet. On November 20, 2017, the Company modified this lease agreement, extending the term to June 30, 2023, at an average annual rental rate of $220,000.
The Company's primary software development facility is located at 5750 Major Blvd, Suite 530, Orlando, Florida. Effective May 1, 2016, the Company expanded its offices and entered into a five-year lease for 3,445 square feet of office space at an average annual rental rate of $67,000.
During 2020, the Company reached settlement agreements with landlords to terminate existing leases and vacate its facilities in Bohemia, New York, Vienna, Virginia and Irving, Texas. Activities previously performed at these locations have been consolidated into the Company’s remaining facilities. The Company has a sales officetermination of these lease agreements will result in Bloomington, Minnesota and McLean, Virginia. The Company entered into a new five-year lease in December 2017 for a regional office in Irving, Texas, at an average annual rental rateoverall facility cost savings of $60,000.
The Company believes these rates are competitive and are at or below market rates. The Company'sCompany’s headquarters and software development and manufacturing facilities are suitable for its requirements.
Item 3. Legal Proceedings
The Company is not aware of any material, existing or pending legal proceedings to which the Company or its Subsidiarysubsidiary is a party or to which any of its properties are subject.
On or about May 17, 2019, Barnett Electric Inc. filed a lawsuit against the Company in Los Angeles Superior Court seeking to recover fees in the amount of $150,000, plus interest and attorneys’ fees, for certain services and equipment allegedly provided to PASSUR. In response, the Company denied the allegations of any liability and asserted counterclaims alleging that Barnett is liable to PASSUR for Barnett’s alleged failures to perform and interference with PASSUR’s business. On or about July 7, 2020, the parties entered into a settlement agreement, pursuant to which the Company has agreed to pay Barnett a compromise sum, which is payable in monthly installments over a 24-month period beginning on January 1, 2021. The settlement amount is not material to the Company’s financial condition. The settlement agreement contains broad mutual releases of claims.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
(a) Market Information
The Company's Common Stock, par value $0.01 per share (the "Common Stock"“Common Stock”), is tradedcurrently quoted on the over-the-counter bulletin board.
The following table sets forth the reported high and low sales prices for the Company'sCompany’s common stock for each quarterly period during the Company's last two fiscal years, as reported by the National Quotation Bureau, Inc.:
Period | Prices* | |||||||
| Fiscal year ended October 31, 2017 | High | Low | ||||||
| First quarter | $ | 4.00 | $ | 2.75 | ||||
| Second quarter | $ | 5.50 | $ | 3.75 | ||||
| Third quarter | $ | 4.41 | $ | 2.90 | ||||
| Fourth quarter | $ | 3.05 | $ | 2.40 | ||||
| Fiscal year ended October 31, 2016 | ||||||||
| First quarter | $ | 3.45 | $ | 2.25 | ||||
| Second quarter | $ | 2.95 | $ | 2.17 | ||||
| Third quarter | $ | 3.92 | $ | 2.33 | ||||
| Fourth quarter | $ | 4.00 | $ | 2.75 | ||||
Period | Prices* | |||
Fiscal year ended October 31, 2020 | High | Low | ||
First quarter | $1.40 | $1.05 | ||
Second quarter | $1.10 | $0.59 | ||
Third quarter | $0.95 | $0.25 | ||
Fourth quarter | $0.50 | $0.25 | ||
Fiscal year ended October 31, 2019 | ||||
First quarter | $1.46 | $1.10 | ||
Second quarter | $1.66 | $1.08 | ||
Third quarter | $1.70 | $1.10 | ||
Fourth quarter | $1.50 | $1.10 | ||
*The quotations represent prices on the over-the-counter bulletin boardmarket between dealers in securities and do not include retail markup, markdown, or commission. Further, the quotations do not necessarily represent actual transactions.
(b) Holders
The number of registered equity security holders of record as of DecemberOctober 31, 20172020 was 172,148, as shown in the records of the Company'sCompany’s transfer agent.
(c) Dividends
The Company has never paid cash dividends on its shares. The Company does not anticipate paying cash dividends in the foreseeable future.
(d) Securities Authorized for Issuance under Equity Compensation Plans
Information with respect to securities authorized for issuance under the Company'sCompany’s equity compensation plans as of October 31, 2017,2020, is as follows:
Plan category | Number of securities to be issued upon exercise of outstanding stock options, warrants, and rights (a) | Weighted average exercise price of outstanding stock options, warrants, and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
| Equity compensation plans approved by security holders | 1,594,000 | $ | 3.52 | 1,448,000 | ||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| Total | 1,594,000 | $ | 3.52 | 1,448,000 | ||||||||
Plan category | Number of securities | Weighted average | Number of securities | |||
Equity compensation plans approved by security holders | 1,690,000 | $2.77 | 4,337,500 | |||
Equity compensation plans not approved by security holders | - | - | - | |||
Total | 1,690,000 | $2.77 | 4,337,500 |
Item 6. Selected Financial Data
Not Required.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
General
The Company'sCompany’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures of contingent assets and liabilities based upon accounting policies management has implemented. The Company has identified the policies and estimates below as critical to its business operations and the understanding of its results of operations. The impact and any associated risks related to these policies on the Company'sCompany’s business operations are discussed throughout Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, where such policies affect its reported financial results. The actual impact of these factors may differ under different assumptions or conditions.
Impact of the COVID-19 Pandemic
During the year ended October 31, 2020, the aviation and travel industries, which are served by the Company and its products, were severely affected by the COVID-19 outbreak. Travel restrictions and other measures imposed by most jurisdictions resulted in a precipitous decline in demand for air travel, and our customers in the aviation and travel industries have drastically reduced their capacity and operations in 2020, as compared to 2019, which in turn has resulted in a significant reduction of demand for our products and services. As a result, the Company has faced increased economic pressures and experienced a significant loss of revenue during the year ended October 31, 2020, which the Company anticipates will continue into fiscal year 2021. The severity of the downturn depends on many factors, the outcomes of which are uncertain or unknown at this time, such as, among other things, the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or to mitigate its impact, the discovery and public distribution of treatments and vaccines for the disease (including its variants), the length of time before the public feels safe to travel, and the economic stimulus programs available to affected industries and consumers. All of these variables will impact how quickly the industry can recover and may affect the revenue and earnings levels of the Company.
The CARES Act was enacted in March 2020 and provides economic support for, among others, businesses in the airline industry. The Company has been granted government funds totaling $3.0 million pursuant to the Payroll Support Program for Air Carriers and Contractors under the CARES Act. Pursuant to the Payroll Support Program Agreement entered into by the Company with the U.S. Department of the Treasury, the Company is required to, among other things, refrain from conducting involuntary employee layoffs or furloughs, reducing employee rates of pay or benefits through September 30, 2020, and paying dividends or engaging in share repurchases through September 30, 2021. The Company is also required to limit certain executive compensation through March 24, 2022, maintain certain internal controls and records relating to the CARES Act funds and comply with certain reporting requirements. The Company believes that it has operated in compliance with all the provisions and requirements under the CARES Act during the year ended October 31, 2020 and fully intends to continue to comply with all such provisions and requirements. Consequently, the Company has accounted for the advanced funds as grants not requiring repayment and recognized such amounts in income as qualifying salaries, wages and benefits have been incurred. During fiscal 2020, the Company reduced its compensation expense by $1,130,000, as a portion of the CARES Act grant proceeds received by the Company was used to fund eligible payroll costs. If the Company does not comply with the provisions of the CARES Act and the Payroll Support Program Agreement, the Company may be required to repay the government funds and also be subject to other remedies.
Additionally, provisions under the CARES Act allow the Company to defer payment of the employer’s share of social security taxes incurred from March of 2020 through December 31, 2020. Under the terms of the legislation, 50% of the deferred payroll taxes would be due and payable by December 31, 2021, and the remaining 50% would be due and payable by December 31, 2022. The amount of payroll taxes subject to deferred payment is approximately $111,000.
The Company has taken several actions beginning in April 2020 and prior to receiving CARES Act funds, to mitigate the effects of the COVID-19 pandemic on its business, as outlined below:
·Eliminated or furloughed approximately one-third of then-existing positions;
·Instituted a temporary pay reduction plan affecting essentially all of the then-remaining employees;
·Suspended the use of outside consultants;
·Decommissioned the PASSUR Network to reduce data feed and telecom costs; and
·Reduced and/or eliminated other operating expenses that were not critical to the short-term outlook of the Company.
The effects of the actions above were reflected in lower costs of revenues, research and development and administrative costs in fiscal 2020, compared to fiscal 2019, and the Company anticipates that such cost savings will continue into fiscal 2021. However, if the recovery of the air transportation industry accelerates and revenue levels quickly return to pre-COVID-19 levels, these levels of cost savings may not be practicable or sustainable to support the operations necessary for the increased level of revenue.
Overview
PASSUR is a global leader in digital operational excellence. The Company’s trusted platform, combined with professional services, help customers reduce operational complexity and lower operating expenses.
Operational efficiency is more important now than ever to eliminate sources of waste, variability, and inflexibility in operations. The Company addresses these significant industry problems by using our technology platform, combined with professional services, to provide solutions that predict, prioritize, prevent and help the industry recover from unexpected disruptions. These disruptions have long been seen as the cost of doing business in the industry and are even more pronounced today and create greater uncertainty to the industry. The Company provides data aggregationactionable intelligence to enable the industry to manage their operations more efficiently and consolidation, information, decision support, predictive analytics, collaborativeincrease profits.
The Company provides its solutions to airlines and professional services. To enable this unique offering, PASSUR® owns and operates the largest commercial passive radar networkairports in the world that updates flight tracks every 1 to 4.6 seconds, powering a proprietary database that is accessible in real-time and delivers timely, accurate information and solutions via PASSUR's industry-leading algorithms and business logic included in its products.
Our core business addresses some of the aviation industry'sindustry’s most intractable and costly challenges, including, but not limited to, underutilization of airspace and airport capacity, delays, cancellations, and diversions, among others.diversions. Several independent studies have estimated the annual direct costs of such inefficiencies to airlines in the United States at over $8 billion annually and worldwide direct cost at over $30 billion annually.
Solutions offered by PASSUR help to ensure flight completion. They cover the entire flight life cycle, from gate to gate, and result in reductions in overall costs and carbon emissions, while maximizing revenue opportunities, improving operational efficiency, and enhancing the passenger experience.
The Company'sCompany’s revenues are generated by selling: (1) subscription-based real-time decision and solutions information solutions; and (2) professional services.
The Company'sCompany’s major achievements during fiscal year 20172020 are summarized below:
PASSUR’s resilience was notable in several majorthe pandemic-tinted year of 2020. Superior delivery, product strength and commercial flexibility each contributed to a high level of client retention and new client development. The Company believes that the firm is well positioned to participate in the industry renaissance in 2021. Even in such trying economic times, this was an exceptional year in the development of the ARiVA Platform and PASSUR capabilities. In 2020 PASSUR:
·Pivoted from hardware driven solutions (MLATs, PASSUR radars) to data driven decision support solutions;
·Transitioned from deploying PASSUR-only solutions to integrated value-add solutions;
·Secured global terrestrial aircraft surveillance data partnership with Flight Radar 24;
·Secured global satellite aircraft surveillance data partnership with Aireon;
·Secured global satellite aircraft surveillance data partnership with OAG; and
·Developed seven new products under our solutions platform (ARiVA) to deliver a global unified operations monitoring, decision support platform.
Other Key 2020 Developments
Significant expansion of the ARiVA platform’s capabilities and user community.
The ARiVA platform enables customers to better predict, prevent, and manage disruptions in the air and on the ground, providing relevant and actionable predictive intelligence and workflow tooling. A single, common operating platform, ARiVA is designed for availability to all internal stakeholders, while also supporting collaboration between airlines, airports, air navigation service providers (ANSPs), and others. The result is a common vehicle for aviation stakeholders to drive greater efficiencies through information exchange and shared workflow.
The evolution of ARiVA in 2020 reflects the continued development of a suite of defined products reflecting different levels of market areas are shown below.
ARiVA TEMPO | Dynamic gate-to-gate global flight tracking. |
ARiVA AWARE | Continuous forecasts and |
ARiVA WORKFLOW | Integrated communication and collaboration on shared workflow platform, including Air Traffic Flow Management |
ARiVA INTEL | Data, reporting, and analytical tools that enable insights into operational performance to drive continuous improvement. |
ARiVA BIZAV |
A | |
ARiVA LFM | Landing Fee Management ensures all landing fees and related charges are being fully and accurately captured and billed. |
ARiVA STRATEGY | Integrated Operations Strategy and Planning - Designing the best operational foundation to |
Growth in airports and business aviation
PASSUR was successful in retaining all key airport customers in 2020 while adding several new airports to the PASSUR network. These results were achieved in the midst of unparalleled financial challenges driven by the COVID-19 pandemic. The ARiVA platform, and PASSUR’s ability to tailor commercial and technical solutions to reflect clients’ unique circumstances, were primary drivers.
Additionally, the business aviation market showed signs of a faster recovery than commercial aviation, which yielded a number of new customer agreements with GEFixed Base Operators (FBOs) of various sizes. This trend is expected to continue in FY21.
Implementation of ARiVA WORKFLOW at Aeromexico
ARiVA WORKFLOW is one of the ARiVA products launched in 2020, with Aeromexico as the launch customer. Aeromexico deployed several core ARiVA WORKFLOW capabilities to optimize the flow of traffic on the airfield, in order to ensure reduced fuel burn, schedule fidelity, and optimal passenger experience. All PASSUR solutions being implemented at Aeromexico were migrated in 2020 to the ARiVA platform, sunsetting all PASSUR legacy programs in use at the airline.
Launch of PASSUR Partnership Program
PASSUR’s partnership program was launched with the overriding objective of adding value for our customers by forming alliances with other companies and organizations that can enhance or accelerate the capabilities and benefits we deliver. We look for partnerships that add value to our core technology stack, solutions architecture and delivery, market responsiveness, and commercial innovation.
Partnership with Aireon
PASSUR and Aireon concluded an agreement that will integrate Aireon’s global, gate-to-gate, space-based ADS-B dataset, into PASSUR’s ARiVA platform. This integration will be the first to feature Aireon’s air traffic service (ATS) surveillance-quality data feed and include high-fidelity, low latency airport surface surveillance and global International Civil Aviation Digital SolutionsOrganization Global Aeronautical Distress Safety System (ICAO GADSS) compliant flight tracking on PASSUR’s ARiVA platform – making ARiVA the first platform to offer global, space-based, operational-quality surface surveillance and collaborative airfield management solutions to any airline, airport, or business aviation service provider in the world. The partnership will also power PASSUR’s predictive arrival times (ETA) and constraint forecasting services, in order to deliver advanced disruption management capabilities.
FlightRadar24
ARiVA is powered by FlightRadar24 (FR24) Commercial Services, the world’s largest independent terrestrial ADS-B receiver network. FR24 data is fused in ARiVA with multiple live data sources including Aireon space-based ADS-B; surface radar; airline schedules and flight plans and event data from ANSPs and airlines; airport status data; and weather data – to create a single truth about the flight track, the airport, and the airspace. Integration of FR24 surveillance into ARiVA enables PASSUR to offer the most comprehensive global flight tracking, predictive services, disruption forecasting and management, and BI reporting.
OAG
ARiVA is powered by OAG’s live Flight Status data. This information is fused with data from terrestrial and satellite ADS-B sources; flight plans; event data from ANSPs, airports, and carriers; and airport weather data, to build the most authoritative flight, airport, and airspace data objects in the world.
Expansion of IATA Operations Coordination Platform for Digital Transformation
In April 2020, PASSUR announced an agreement to develop a global portal to assist the airline industry in managing the severe disruption caused by COVID-19. The ITOP Global Contingency Portal (GCP) provides real-time sharing of critical aviation operational information around the world.
ITOP GCP is modeled on the existing IATA Tactical Operations Portal (ITOP) solution, developed and maintained by PASSUR for IATA North America operations support desk, co-located at the FAA Air Traffic Command and System Control Center (ATCSCC). ITOP GCP is a collaborative information and advisory service used to notify aviation stakeholders globally about critical updates, news, directives, and developments related to COVID-19.
In July 2020, PASSUR concluded an agreement to implement an enhanced ITOP-GCP where data and events related to disruptions globally will be managed by IATA stakeholders using the ARiVA platform – Americas, Asia Pacific (North Asia, South Asia, ASEAN, SW Pacific), Europe, Middle East, and Africa. ITOP Global will be a single platform for collaborative coordination of global contingencies, providing IATA members and affiliated stakeholders with the tools needed to: manage contingencies for any region in the world based on ICAO standards for contingency event management; collaborate in real time with aviation stakeholders in secure channels; and receive IATA real time operations support for all global regions, tailored to users’ specific needs and geographical areas of focus.
The Company'sCompany’s business plan is to continue to focus on increasing subscription-based revenues from its suite of software applications and to develop new applications and professional services designed to address the needs of the aviation industry and the U.S. government. The Company'sCompany helps customers alleviate constraints without the cost of expensive infrastructure upgrades and gets them fully operational within months, to capture more revenue during peak travel periods. The Company’s goal is to help solve problems faced by its customers basedand increase profits, by focusing on:
·Improving visibility across departments;
·Improving the quality of planning data; and
·Automating data driven decision support for capacity and demand to meet the spikes in revenue opportunity.
PASSUR Network
Certain of PASSUR’s services have traditionally relied on our proprietary network of sensors for aircraft surveillance - the following product development objectives:
19Revenues
Management concentrates its efforts on the sale of business intelligence, predictive analytics, and decision support product applications, utilizing data primarily derived from external sources and, to a lesser extent, the PASSUR Network.Network (which is currently in the process of being decommissioned, as described above). Such efforts include the continued development of existing products, new product offerings and to a lesser extent, professional services.
The Company is a supplier and partner to the air transportation industry. Many of the Company’s customers have been severely impacted by the COVID-19 outbreak and the rapid decline in air travel. As a result, the Company experienced downturns in its revenues for fiscal year 2020.
Although the Company’s revenue is primarily subscription based, during fiscal 2020, several customers requested, and the Company agreed to, the suspension of certain services to those customers, or the provision of services free of charge during a specific period of time. Additionally, one customer requested extended terms of payment, which request the Company also accepted. The Company believes that these decisions were in the best interests of the Company as a partner to the aviation industry and will benefit the Company in the longer term. The Company continues to believe that its products and professional service engagements are critical to the efficient operation of the air transportation market.
In fiscal year 2017,2020, total revenues decreased $1,021,000,$3.5 million, or 7%23%, to $13,871,000,$11,529,000, as compared with $14,892,000to $15,046,000 in fiscal year 2016.2019. The decrease in total revenues was primarily due (i)to a declinedecrease in our subscription revenue of $538,000,$3.8 million or 4%27%, a declinewhich was partially offset by an increase in our consulting and other revenue of $423,000, or 73%, and a decline$283,000 to $593,000, as compared to fiscal year 2019.
The decrease in maintenancesubscription revenue of $60,000, or 35% as compared with the prior year.
As previously disclosed, partially offset bythe Company engaged in ongoing discussions with two of its customers about the possible renewal of certain existing contracts which had expired at various times from January 31, 2020 through May 31, 2020, but certain parts of these contracts had been renewed on a short-term interim basis. These contracts were not renewed in full or in part, which resulted in the loss of potential revenue generated from these contracts of approximately $4,197,000 for fiscal 2020, as compared to the full fiscal year of revenue recognized in fiscal year 20172019. Additionally, the Company agreed with one of its customers to a temporary suspension of billings during the period from new contracts recorded in fiscal year 2016, netAugust 1, 2020 through October 31, 2020 as a result of the partial year'sCOVID-19 pandemic. This reduced the Company’s fourth quarter revenue recorded in fiscal year 2016 ofby approximately $600,000, plus revenue from new contracts recognized in fiscal year 2017 of approximately $300,000.$513,000.
The declineincrease in consulting and license feeother revenue of $423,000$283,000 to $160,000$593,000 for the year ended October 31, 20172020, as compared to $583,000$310,000 for the same period in 2016 is2019, was due to the completion of a one-time consulting assignment.
The Company continues to enhance its wide selection of products by developing and deploying new software applications and solutions to better address customers'customers’ needs, deliveredall of which are easily deliverable through web-based applications or as stand-alone professional services.
Cost of Revenues
Costs associated with subscription and maintenance revenues consist primarily of direct labor, depreciationamortization of PASSUR and Surface Multilateration ("SMLAT") Network Systems, amortization ofpreviously capitalized software development costs, communication costs, data feeds, travel and entertainment, and consulting fees. Also, included inPreviously, cost of revenues arein each reporting period was impacted by capitalized costs associated with software development and data center projects, costs associated with upgrades to PASSUR and SMLAT Systems necessary to make such systems compatible with new software applications (all referred to as “Capitalized Assets”), depreciation of PASSUR and SMLAT Systems as well as the ordinary repair and maintenance of existing PASSUR and SMLAT Systems. Additionally, cost of revenues in each previous reporting period iswas impacted by: (1)by the number of PASSUR and SMLAT System units added to the PASSUR Network, which includeincluded the production, shipment, and installation of these assets (largely installed by unaffiliated outside contractors), which arehad previously been capitalized to the PASSUR Network;Network. The labor and (2) capitalized costs associated with software development and data center projects. Both of these are referred to as "Capitalized Assets", and are depreciated and/or amortized over their respective useful lives and charged to cost of revenues. The Company does not break down its costs by product.
As a result of the industry changes in response to the COVID-19 pandemic (described in “Impact of the COVID-19 Pandemic,” above), the corresponding review conducted by the Company and the resultant write-offs taken during fiscal 2020, the Company anticipates that its level of capitalized software development costs, including related amortization of such costs, will decrease in the future.
Cost of revenues decreased $2,181,000, or 26%, to $6,187,000 for PASSUR or 5 yearsthe year ended October 31, 2020, as compared to $8,368,000 in fiscal year 2019. During fiscal year 2020, cost of revenues decreased as a result of decreases in personnel costs as well as reductions in depreciation and amortization expense and consulting costs, which were offset in part by a decrease in capitalized software development costs as a result of the Company not incurring any capitalized software costs subsequent to January 31, 2020. In response to the uncertainty surrounding the prospects of airlines and airports and the travel industry for SMLAT systems.
Costs of revenues was 46%54% of revenue in fiscal year 20172020 and 42%56% in fiscal year 2016.
20
The Company'sCompany’s research and development efforts include activities associated with new product development, as well as the enhancement and improvement of the Company's existing hardware, software, and information products.
Research and development expenses decreased $43,000,$218,000, or 5%39%, to $338,000 for thefiscal year ended October 31, 2017,2020, as compared to the same period$556,000 for fiscal year 2019. The decrease in 2016,research and development was primarily dueattributable to a decrease in personnel related costs as compared withto the prior year.
The Company anticipates that it will continue to invest in research and developmentits software portfolio to develop, maintain, and support existing and newly developed applications for its customers. There were no customer-sponsored research and development activities during fiscal years 2017 or 2016.2020 and 2019. Research and development expenses are funded by current operations.
Selling, General, and Administrative
Selling, general, and administrative expenses increased $1,540,000,decreased $2,787,000, or 24%30%, to $6,467,000 for the year ended October 31, 2017,2020, as compared to $9,254,000 in the same period in 2019. The decrease was primarily due to decreases in personnel related costs, professional and other consulting expenses, marketing and travel costs. These decreases were the result of the Company’s concerted efforts to streamline its operations in line with the reduced level of revenue due to the impact of the COVID-19 pandemic (as described above). For the year ended October 31, 2020, the Company was able to use proceeds from the PSP grant of the CARES Act to offset its compensation expense by $641,000. Also, as part of the review of its operating costs described above, the Company exited three leased facilities (during June and July 2020) and terminated the related lease agreements and reduced the leased square footage at another location, reducing rent
expenses by approximately $62,000 as compared to fiscal 2019. Annualized rent savings related to these undertakings represent approximately $311,000.
Impairment Charges
Certain of PASSUR’s services have traditionally relied on our proprietary network of sensors for aircraft surveillance. During the second quarter of 2020, in light of the FAA's mandate for ADS-B equipage on aircrafts operating in most U.S. airspace, effective January 2020, and parallel adoption of ADS-B requirements in much of the world, the Company performed a comprehensive review of its data feeds, specifically those associated with the PASSUR Network units and external ADS-B data feeds to determine if these external data feeds provide sufficient redundant data as to that generated from the existing PASSUR installations. The Company determined that such services could be powered by a combination of FAA data plus commercial ADS-B aggregator feeds and other date feeds available to the Company, which would provide a more cost-effective solution and allow the Company to focus more on value-added analytics and less on sensor technology. In this regard, the Company reviewed and decommissioned approximately half of the PASSUR Network system assets during the second quarter of fiscal 2020. It is the Company’s intention to decommission all remaining PASSUR Network system assets during fiscal 2021. As a result, the Company wrote off net assets applicable to the PASSUR Network systems of approximately $3,565,000, and lease assets applicable to these PASSUR locations of approximately $175,000 during the second quarter of fiscal 2020, which amounts were included in the impairment charge for the year ended October 31, 2020. The write-off amount included PASSUR System and SMLAT System assets as well as inventory of finished and spare parts.
As a result of the FAA mandate and the corresponding review conducted by the Company, which resulted in the commencement of the decommissioning of the PASSUR Network, the Company anticipates that the costs of maintaining and operating these systems, including depreciation and data feed costs, will decrease materially in the future.
Additionally, during the second quarter of 2020, given the impact of the current COVID-19 environment on customers, there was a sufficient amount of uncertainty surrounding the ability of customers to continue to perform their contracts with the Company and the Company’s ability to generate revenue from such contracts. In order to determine whether or not an impairment had occurred, we looked at existing contracted revenue, adjusted for future uncertainties, and compared those amounts with the net carrying value of the related software development asset. Where the revenue amount was less than the net carrying value of the software development asset, we noted an impairment. As a result of this exercise, the Company wrote off previously capitalized software development costs totaling approximately $6,134,000 during the second quarter of fiscal 2020 due to impairment, given the impact of the current COVID-19 environment on the aviation industry and its customers, which amount was included in the impairment charge for the year ended October 31, 2020.
During fiscal year 2020, the Company did not capitalize any software development costs for any periods subsequent to January 31, 2020. As a result of the industry changes in response to the COVID-19 pandemic, the corresponding review conducted by the Company during the second quarter of 2020 and the resultant write-offs, the Company anticipates that its level of capitalized software development, along with related amortization of such costs, will decrease materially in the future.
The total amount of these charges and write-offs are included as an impairment charge for the year ended October 31, 2020 in the amount of $9,874,000.
Loss from Operations
Loss from operations for the year ended October 31, 2020 (inclusive of the impact of the impairment charges recorded during the second quarter of 2020) was $11,338,000, an increase of $8,206,000, or 262%, as compared to fiscal 2019. Excluding the impact of the impairment charges of $9,874,000, the loss from operations was $1,463,000, an improvement of $1,668,000, or 53%, from a loss of $3,132,000 for the year ended October 31, 2019. The decrease in the loss from operations (excluding the impairment charges) was primarily due to a decrease in operating expenses of $5,185,000 or 29%, as compared to fiscal year 2019, which was partially offset by a decrease in revenue of $3,517,000, or 23%. For the two quarters ended July 31, 2020 and October 31, 2020, the Company had positive income from operations. All of the previous six fiscal quarters had losses from Operations.
Interest Expense – Related Party
Interest expense – related party for the year ended October 31, 2020 increased $191,000, or 27%, as compared to the same period in 2016. The increase is primarily2019, due to (i) an increase in personnel related costs for new hires of $985,000 related to sales and marketing, (ii) an increase is stock-based compensation expense of $184,000, as a result of the increase in headcount, and (iii) an increase in bad debt reserve of $173,000 related to accounts receivable outstanding for which collections are uncertain.
Loss Before Income from Operations
Loss before income taxes for the year ended October 31, 2017,2020 (including the effect of the impairment charges of $9,874,000 recorded during the second quarter of 2020), increased $8,419,000, or 219%, to $12,267,000, as compared to the same period in 2016. The decrease was primarily due to (i) an increase in operating expensesloss before income taxes of $1,706,000 or 13% and (ii) a decrease in revenues of $1,021,000, or 7%. Overall,$3,848,000 for the increase in operating expenses was primarily due to a major investment in hiring new development, sales and marketing and management professionals needed to achieve our future strategic product enhancements and revenue growth objectives.
Income Taxes
The Company'sCompany’s income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect the Company'sCompany’s best estimate of current and future taxes to be paid. The Company'sCompany’s provision for income taxes in each fiscal year consists of federal and state taxes. The effective tax rate for
For the fiscal year 2017 was (125.8%)ended October 31, 2020, the Company recorded an income tax provision of $37,000 on a pre-tax loss of $(1,559,000) as compared to 55.4%$12,267,000 (which includes the impact of the impairment charges of $9,874,000), resulting in fiscal year 2016 on pre-tax income of $1,161,000. Thea 0.3% effective tax rate. The difference between the effective rate differs fromand the FederalU.S. federal statutory rate of 34%21% primarily related to pre-tax losses for which no tax benefit has been provided as the Company recording a full valuation allowance againstconcluded that its deferred tax assets as such amounts were no longernot realizable on a more-likely-than-not basis.
For the fiscal year ended October 31, 2019, the Company recorded an income tax benefit of $10,000 on a pre-tax loss of $3,848,000, resulting in a (0.3%) effective tax rate. The difference between the effective rate and the U.S. federal statutory rate of 21% primarily related to pre-tax losses for which no tax benefit has been provided as the Company concluded that its deferred tax assets were not realizable on a more-likely-than-not basis.
Net (Loss)/Income
The Company had a net loss of $3,520,000,$12,304,000, or $0.46$1.60 per diluted share, for the year ended October 31, 2017,2020 (inclusive of the impact of the impairment charges of $9,874,000 recorded during the second quarter of 2020), as compared to a net incomeloss of $518,000,$3,837,000, or $0.07$0.50 per diluted share, for fiscal year 2019. Note that the same periodCompany’s income from operations for the quarter ended July 31, 2020, was positive for the first time in 2016.
Impact of Inflation
In the opinion of management, inflation has not had a material effect on the operations of the Company including selling prices, capital expenditures, and operating expenses.
21
The Company'sCompany’s current liabilities (excluding deferred revenue and certain CARES Act grant proceeds), exceeded current assets excluding deferred revenue by $371,000$738,000 as of October 31, 2017.2020. The note payable to a related party, G.S. Beckwith Gilbert, the Company'sCompany’s significant shareholder and Non-Executive Chairman was $3,800,000 at October 31, 2017,of the Board, with a maturity of November 1, 2018. The Company's stockholders' equity2021, was $8,453,000$10,692,000 at October 31, 2017.2020, which amount included additional loans made by Mr. Gilbert in fiscal 2020 of $1,435,000, bringing the principal balance owed to $9,585,000, plus capitalized accrued and unpaid interest of $1,107,000. The capitalized interest included $200,000 incurred during the fourth quarter of fiscal 2019 and all the fiscal 2020 interest of $907,000. The Company’s stockholders’ equity had a deficit of $11,358,000 at October 31, 2020. The Company had a net loss of $3,520,000$12,304,000 for the year ended October 31, 2017.
As of October 31, 2019, the total amount owed by the Company under a promissory note issued by the Company to Mr. Gilbert on January 28, 2019 (the “Fifth Gilbert Note”) was $8,335,000, consisting of a principal of $8,135,000 and interest of $200,000 accrued during the fourth quarter of fiscal year 2019. The maturity date under the Fifth Gilbert Note was November 1, 2020, and the annual interest rate was 9 ¾%, with annual interest payments required to be made on October 31st of each year. The note payable was secured by the Company’s assets.
On January 27, 2020, the Company and Mr. Gilbert entered into a FourthSixth Debt Extension Agreement, with G.S. Beckwith Gilbert, the Company's Chairman and significant stockholder, effective February 9, 2018,as of January 27, 2020, pursuant to which the Company cancelled the Fifth Gilbert Note and issued Mr. Gilbert agreeda new promissory note (the “Sixth Gilbert Note”) in the amount of $9,071,000, consisting of a principal of $8,670,000 (which included the principal previously outstanding under the Fifth Gilbert Note and an additional amount of $535,000 loaned to modify certainthe Company by Mr. Gilbert during the period from October 31, 2019 and January 27, 2020) and unpaid interest of $401,000 accrued under the Fifth Gilbert Note through January 27, 2020. Under the terms and conditions of the existing debt agreement with Mr.Sixth Gilbert (the "Existing Gilbert Note"). The maturity date of the Existing Gilbert Note, was due on November 1, 2018, and the total amount of principal and interest due and owing as of February 12, 2018, was $4,734,000. Pursuant to the Fourth Debt Extension Agreement, the Company issued a new note to Mr. Gilbert in the principal amount of $4,725,000 (the "Fourth Replacement Note") in exchange for the Existing Gilbert Note and the Company agreed to pay the unpaid interest of $401,000 accrued interest under the ExistingFifth Gilbert Note as of February 9, 2018,and included in an amount equal to $7,000,the Sixth Gilbert Note, (as described above) at the time and on the terms set forth in the ExistingSixth Gilbert Note. Under the terms of the Fourth ReplacementSixth Gilbert Note, the maturity date of the loan was extended to November 1, 2019,2021, and the annual interest rate remained at 6%. Interest9 ¾%, with annual interest payments under the Fourth Replacement Note shallrequired to be made annually on October 31st of each year. The note payable was secured by the Company’s assets.
During the fiscal year ended October 31, 2020, the Company did not pay any interest on the Sixth Gilbert Note. As of October 31, 2020, the aggregate amount owed by the Company to Mr. Gilbert was $10,692,000, consisting of a principal of $9,585,000 (which included the principal of $8,670,000 outstanding under the Sixth Gilbert Note and an additional amount of $915,000 loaned to the Company by Mr. Gilbert during the period from January 27, 2020 to October 31, 2020) and unpaid interest of $1,107,000 (which included unpaid interest of $401,000 accrued under the Fifth Gilbert Note that was included in the Sixth Gilbert Note and unpaid interest of $706,000 accrued under the Sixth Gilbert Note through October 31, 2020). In December 2020, the Company made a payment in the amount of $177,000 in respect of interest accrued under the Sixth Gilbert Note during the 2021 fiscal year.
On January 29, 2021, the Company and Mr. Gilbert entered into a Seventh Debt Extension Agreement, effective January 29, 2021, pursuant to which the Company cancelled the Sixth Gilbert Note and issued Mr. Gilbert a new promissory note (the “Seventh Gilbert Note”) in the amount of $10,692,000, consisting of a principal of $9,585,000 and unpaid interest of $1,107,000 accrued under the Sixth Gilbert Note through October 31, 2020. Under the terms of the Seventh Gilbert Note, the Company agreed to pay the unpaid interest of $1,107,000 accrued under the Sixth Gilbert Note and included in the Seventh Gilbert Note (as described above) at the time and on the terms set forth in the Seventh Gilbert Note. Under the terms of the Seventh Gilbert Note, the maturity date of the loan was extended to November 1, 2022, and the annual interest rate remained at 9 ¾%, with annual interest payments required to be made on October 31st of each year (although any accrued interest can be paid before such time without penalty). The note payable is secured by the Company'sCompany’s assets. The Company has paid all interest incurred on the Fourth Replacement Note through October 31, 2017, totaling $171,000. Subsequent to October 31, 2017, the Company paid all interest incurred on the note payable, through January 31, 2018 in the amount of $66,000. During fiscal year 2017, Mr. Gilbert loaned the Company an additional $1,100,000, and subsequent to October 31, 2017, Mr. Gilbert loaned the Company an additional $925,000. As of February 12, 2018, the principal amount of the loan outstanding to Mr. Gilbert was $4,725,000
Management is addressing the Company'sCompany’s working capital deficiency by aggressively marketing the Company's PASSUR Network Systems informationCompany’s capabilities in its existing product and professional service lines, as well as in new products and professional services, which are continually being developed and deployed. Management believes that the continued development of its existing suite of software products and professional services, which address the wide array of needs of the aviation industry, will continue to lead to increased growth in the Company'sCompany’s customer-base and subscription-based revenues.
If the Company'sCompany’s business plan does not generate sufficient cash flows from operations to meet the Company'sCompany’s operating cash requirements, the Company will attempt to obtain external financing on commercially reasonable terms. However, the Company has received a commitment from G.S. BeckwithMr. Gilbert, dated February 12, 2018,January 29, 2021, that if the Company, at any time, is unable to meet its obligations through February 12, 2019, G.S. BeckwithJanuary 30, 2022, Mr. Gilbert will provide the necessary continuing financial support to the Company in order for the Company to meet such obligations. Such commitment for financial support may be in the form of additional advances or loans to the Company, in addition to the deferral of principal and/or interest payments due on the existing loans, if deemed necessary.
The note payable is secured byCARES Act was enacted in March 2020 and provided economic support for, among others, businesses in the Company's assets.
Net cash providedused by operating activities was $2,334,000($1,363,000) for the year ended October 31, 2017, and2020, as compared to cash provided by operating activities of $735,000 for the year ended October 31, 2019. Net cash used by operating activities in the current fiscal year consisted of net loss of $3,520,000,($3,560,000), after adjusting for the effect of the impairment charge of $9,874,000 and the federal stimulus credits utilized of $1,130,000, depreciation and amortization of $2,968,000,$2,123,000 and stock-based compensation expense of $578,000,$467,000, decreases in deferred revenue of ($1,838,000), and the provision for deferred taxesan increase in accrued interest related party of $1,942,000,$907,000, with the balance of $538,000 consisting of an increasechanges in other operating assets and liabilities.liabilities, particularly a decrease in accounts receivable of $376,000. The decrease in cash from operations in fiscal 2020 as compared with 2019 was the result of lower levels of revenue experienced by the Company as a result of the loss of several major airline customers during the year. Net cash used in investing activities was $4,683,000$496,000 for the year ended October 31, 2017,2020, which was expended for primarily for capitalized software development costs additionsin the first quarter of fiscal 2020. The decrease in capitalized software development costs in fiscal 2020 as compared with 2019 was the result of the Company’s decision to focus on maintenance and support of existing products, as a result of the PASSUR Network, and additional computer equipment for our Bohemia, New York, and Orlando, Florida data centers.change in business conditions experienced in the industry, particularly as a result of the COVID-19 pandemic. Net cash provided by financing activities was $1,100,000$4,461,000 for year ended October 31, 2017,2020, and consisted of proceeds from note payable – related party. Netparty of $1,435,000, grant proceeds received under the Payroll Support Program of the CARES Act of $3,003,000, and proceeds from the exercise of stock options of $23,000. The increase in cash provided by operatingfrom financing activities decreased by $2,261,000 for the year ended October 31, 2017in fiscal 2020 as compared towith 2019 was the same periodresult of the receipt of $3,003,000 in 2016, primarily due to net loss for fiscal year 2017.
The Company actively monitors the costs associated with supporting the business, and continually seeks to identify and reduce any unnecessary costs as part of its cost reduction initiatives, while strategically reinvesting back into the business as part of its long-term plans. As described above, during fiscal 2020, the Company took aggressive steps to reduce its cost structure, including, but not limited to, reductions in force, furloughs and salary reduction plans. The Company will continue to monitor costs in relation to its revenue and will take further actions as necessary consistent with the requirements of the CARES Act financing. The Company believes that it has the ability to reduce operating costs further if, at any time, such adjustments would be necessary to align the Company’s financial condition, liquidity, and capital resources with the uncertain outlook of the COVID-19 pandemic. However, if the recovery of the air transportation industry accelerates and revenue levels quickly return to pre-COVID-19 levels, the levels of cost savings already taken or which may be taken by the Company may not be practical or sustainable to support the operations necessary for the increased level of revenue. Additionally, the aviation market has been impacted by budgetary constraints, airline bankruptcies and consolidations, current economic conditions, the continued war on terrorism, and fluctuations in fuel costs. The aviation market is extensively regulated by government agencies, particularly the FAA and the National Transportation Safety Board, and management anticipates that new regulations relating to air travel may continue to be issued. Substantially all of the Company'sCompany’s revenues are derived from airlines, airports, and organizationscustomers that serve, or are served by, the aviation industry. Any new regulations or changes in the economic situation of the aviation industry could have an impact on the future operations of the Company, either positively or negatively.
Despite the continuing downturn in the air transportation industry due to the COVID-19 pandemic, interest by potential customers in the Company’s information and decision support software products obtained from PASSUR Network Systems and its professional services remains strong. As a result, the Company believes that future revenues will increase on an annualized basis. However, there are no guarantees that such annualized future revenue increases will occur. If revenues do not increase and the Company'sCompany’s cost-structure is not adjusted accordingly, losses may occur. The extent of such profits or losses will be dependent on sales volume achieved and the Company'sCompany’s ability to optimize its cost structures.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
General
The Company'sCompany’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"(“GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities, based upon accounting policies management has implemented. The Company has identified the policies and estimates below as critical to its business operations and the understanding of its results of operations. The impact and any associated risks related to these policies on the Company'sCompany’s business operations are discussed throughout Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, where such policies affect its reported financial results. The actual impact of these factors may differ under different assumptions or conditions. The Company'sCompany’s accounting policies that require management to apply significant judgment and estimates include:
Revenue Recognition
The Company recognizesderives revenue in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605-15, "Revenue Recognition in Financial Statements" ("ASC 605-15"), which requires that four basic criteria must be met before revenues can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.
The Company determines revenue recognition through the following steps:
·Identification of the contract, or contracts, with a customer;
·Identification of the performance obligations in the contract;
·Determination of transaction price;
·Allocation of transaction price to performance obligations in the contract; and
·Recognition of revenue when, or as, the Company satisfies a performance obligation.
A.Nature of performance obligations
Subscription services revenue
Subscription services revenue is comprised of cloud-based subscription fees that provide the customer the right to access the Company’s software and receive support and updates, if any, for a period of time. The Company has determined such access represents a stand-ready service provided continually throughout the contract term. As such, control and satisfaction of this stand-ready performance obligation is deemed to occur over time. The Company’s subscription contracts include a fixed amount of consideration that is recognized ratably over the non-cancelable contract term, beginning on the date that access is made available to the customer. The passage of such executed agreements and/or customer's receipt of such data or services. In accordance with ASC 605-15,time is deemed to be the Company recognizes revenue when persuasive evidence of an arrangement exists which is evidenced by a signed agreement, the service has been deployed, as applicable, to its hosted servers, the fee is fixed or determinable, and collectionmost faithful depiction of the resulting receivable is reasonably assured. The Company records revenues pursuant to individual contracts on a month-by-month basis,transfer of control of the services as outlinedthe customer simultaneously receives and consumes the benefit provided by the applicable agreement. In many cases, the Company may invoice respective customersCompany’s performance. Subscription contracts are generally one to three years in advance of the specified period,length, billed either monthly, quarterly or annually, typically in advance, which coincides with the terms of the agreement. In such cases,The Company’s subscription contracts do not have a significant financing component and customer invoices are typically due within 30 days. There is no significant variable consideration related to these arrangements. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether transfer of control to customers has occurred.
Professional services revenue
Professional services primarily consist of value assessments and customer training services. Payment for professional services is generally a fixed fee or a fee based on time and materials. The obligation to provide professional services is generally satisfied over time, with the customer simultaneously receiving and consuming the benefits as the Company will defer at the close of each month and/or reporting period, any subscription revenues invoiced for which services have yet to be rendered, in accordance with ASC 605-15. Revenues generated bysatisfies its performance obligations. For professional services, revenue is recognized by measuring progress toward the complete satisfaction of the Company’s obligation. Progress for services that are contracted for a fixed price is generally measured based on hours incurred as a portion of total estimated hours, and as a practical expedient, progress for services that are contracted for time and materials is generally based on the amount the Company has the right to invoice. Professional services contracts are generally one year or less in length, billed either in advance, upon pre-defined milestones or as services are rendered, which coincides with the terms of the agreement. The Company’s professional service contracts do not have a significant financing component and customer invoices are typically due within 30 days.
Material rights
Contracts with customers may include material rights which are also performance obligations. Material rights primarily arise when the contract gives the customer the right to renew subscription services at a discounted price in the future. This may occur from time to time when the Company’s contracts provide an implicit discount as the customer pays a nonrefundable up-front fee in connection with the initial services contract that it does not have to pay again in order to renew the service. These non-refundable up-front fees are not related to any promised service that the customer benefits from other than providing access to the subscription service. Revenue allocated to material rights is recognized when services are provided.
Contracts with Multiple Performance Obligations
Some of products and services which are included in a particular arrangement. As such, the units of accounting are based on each individual element sold, and revenueCompany’s contracts with customers contain multiple distinct performance obligations. For these contracts, the transaction price is allocated to each element basedthe separate performance obligations on selling price. Selling price is determined using vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or best estimate ofa relative standalone selling price ("BESP")basis. The standalone selling price reflects the price the Company would charge for a specific service if neither VSOE or TPE is available. BESP must be determinedit was sold separately in a manner that is consistent with that usedsimilar circumstances and to similar customers. The Company maximizes the use of directly observable transactions to determine the price to sell the specific elements on a standalone basis. BESP is established considering multiple factors including, but not limited to, pricing practices with different classes of customers, geographies and other factors contemplated in negotiating the arrangement with the customer. The Company uses either VSOE or BESP.
Other policies and judgments
The commissions that the Company pays for obtaining a contract with a customer to receiveare conditional on future service provided by the employee. Therefore, since these costs are not incremental solely based on obtaining a one-time fee for rights including, but not limited to, the rights to use certain data at an agreed upon location(s) for a specific use and/or for an unlimited number of users, covering installation costs associated with the deployment of additions tocontract, the Company owned PASSUR Network, and/or set-up fees associated with new deployments of the Company software solutions. These fees are recognized as revenue ratably over the term of the agreement or relationship period of such arrangement, whichever is longer, but typically five years.
Capitalized Software Development Costs
As discussed further in Note (1) Description of Business and Significant Accounting Policies, to the Company'sCompany’s consolidated financial statements, the Company capitalizes costs related to the development of internal use software in accordance with authoritative guidance issued by the FASB on internal-use software, ASC 350-40, "Internal-Use“Internal-Use Software."” The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes the costs incurred during the application development stage. CostsFor periods through October 31, 2020, costs incurred relating to upgrades and enhancements to the software arewere capitalized if it ishad been determined that these upgrades or enhancements add additional functionality to the software. Costs incurred to improvemaintain and support products after they becomebecame available arewere charged to expense as incurred.
During the second quarter of 2020, due to the financial and economic hardships being experienced by airlines, airports and air transportation support vendors in the current COVID-19 environment, there was a sufficient amount of uncertainty surrounding the ability of our customers to continue to perform their contracts with the Company. In order to determine whether or not an impairment had occurred, the Company looked at existing contracted revenue, adjusted for future uncertainties, and compared those amounts with the net carrying value of the related capitalized development cost asset. Where the contribution margin was less than the net carrying value of the asset, we determined that an impairment had occurred. As a result of this exercise, the Company wrote-off assets totaling $6,134,000 during the second quarter of fiscal 2020, based on the assumption that the carrying value of the software capitalization was representative of 100% of the committed contract values then remaining, given the impact of the current COVID-19 environment on the aviation industry and its customers.
As a result of the industry changes in response to the COVID-19 pandemic, the corresponding review conducted by the Company described above and the resultant write-offs taken, the Company anticipates that its level of capitalized software development costs, including related amortization of such costs, will decrease in the future.
As of October 31, 2017,2020, and 2016,2019, the Company had $8,893,000$1,223,000 and $7,600,000,$8,319,000, respectively, of software development costs, net of amortization. The Company has a formal program to determine when additional functionality of a product is established and assumptions are used that reflect the Company'sCompany’s best estimates. Software development costs are reported at the lower of amortized cost or net realizable value. Net realizable value is computed as the estimated gross future revenue from each software solution less the amount of estimated future costs of completing and disposing of that product. Software costs are included in "Capitalized“Capitalized software development costs, net"net” on the Company'sCompany’s balance sheet and are depreciated using the straight-line method over theiran estimated useful life generally fiveof three years.
Impairment of Long-Lived Assets
As discussed further in Note (1) Description of Business and Significant Accounting Policies, to the Company'sCompany’s consolidated financial statements, the Company follows the provisions of FASB ASC 360-10, "Impairment“Impairment and Disposal of Long-Lived Assets."” The Company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. Impairment is recognized to the extent the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value. Assets to be disposed of are carried at the lower of their carrying value or fair value, less costs to sell. The Company evaluates the periods of amortization continually in determining whether later events and circumstances warrant revised estimates of useful lives. If estimates are changed, the unamortized costs will be allocated to the increased or decreased number of remaining periods in the revised life.
All of the Company'sCompany’s capitalized assets are recorded at cost (which may also include salaries incurred during production and/or development) and depreciated and/or amortized over the asset'sasset’s estimated useful life for financial statement purposes. The estimated useful life represents the projected period of time that the asset will be productively employed by the Company and is determined by management based on many factors, including historical experience with similar assets, technological life cycles, and industry standards for similar assets. Circumstances and events relating to these assets are monitored to ensure that changes in asset lives or impairments (see "Impairment of Long-Lived Assets" above) are identified and prospective depreciation or impairment expense is adjusted accordingly.
At each reporting period, management evaluates the carrying values of the Company'sCompany’s assets. The evaluation considers the undiscounted cash flows generated from current contractual revenue sources and the anticipated forecast revenue derived from each asset. The Company then evaluates these revenues on an overall basis to determine if any impairment issues exist. The Company did not have any increases in inventory reserves, impairment charges or write-offs during fiscal year 2019.
Depreciation and Amortization
As of October 31, 2017, based upon management's evaluation of2020, the above asset groups, no impairment of these asset groups exist. If these forecasts are not met, the Company may have to record impairment charges not previously recorded.
Depreciation and amortization are provided on the straight-line basis over the estimated useful lives of the assets, as follows:
PASSUR Network | 5 to 7 years |
Capitalized software development costs | 3 years |
Property and equipment | 3 to 10 years |
The PASSUR Network iswas comprised of PASSUR and SMLAT Systems, which includeincluded the direct production, shipping, and installation costs incurred for each PASSUR and SMLAT System, which arewere recorded at cost, net of accumulated depreciation. Depreciation iswas charged to cost of revenues and is calculatedwas recorded using the straight-line method over the estimated useful life of the asset, which iswas estimated at five years for SMLAT Systems and seven years for PASSUR Systems. PASSUR and SMLAT Systems which arewere not installed, raw materials, work-in-process, and finished goods components arewere carried at cost and not depreciated until installed.
Total depreciation and amortization expense was $2,968,000$2,123,000 for the year ended October 31, 2017.2020. This consisted of $1,234,000$652,000 of depreciation expense related to the PASSUR Network and Property and equipment, $1,451,000 of amortization expense related to Capitalized software development costs, and $20,000 related to one-time fee amortization. For the year ended October 31, 2019, total
depreciation and amortization expense was $3,628,000. This consisted of $1,232,000 of depreciation expense related to the PASSUR Network and Property and equipment and $1,734,000$2,396,000 of amortization expense related to Capitalized software development costs. For the year ended October 31, 2016, total depreciation and amortization expense was $2,891,000. This consisted of $1,330,000 of depreciation expense related to PASSUR Network and Property and equipment and $1,561,000 of amortization expense related to Capitalized software development costs.
Stock-Based Compensation
As discussed further in Note (10) (9) Stock-Based Compensation to the Company'sCompany’s consolidated financial statements, the Company accounts for share-based awards in accordance with the authoritative guidance issued by the FASB on stock compensation, FASB ASC 718, "Compensation-Stock“Compensation-Stock Compensation,"” which requires measurement of compensation cost for all stock-based awards at fair value on date of grant, and recognition of stock-based compensation expense over the service period for awards expected to vest. The fair value of stock options wasis determined using the Black-Scholes valuation model to compute the estimated fair value of share-based compensation expense. The Black-Scholes valuation model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. The assumptions used in computing the fair value of share-based compensation expense reflect the Company'sCompany’s best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of the Company'sCompany’s control. Additionally, the Company estimates forfeiture rates based primarily upon historical experience, adjustedaccounts for forfeitures when appropriate for known events or expected trends.they occur. Stock-based compensation expense was $578,000$467,000 and $401,000$613,000 for the year ended October 31, 20172020 and 2016,2019, respectively, and was primarily included in selling, general, and administrative expenses.
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At October 31, 2017,2020, the Company had available a federal net operating loss carry-forward of $7,474,000$25,377,000 for U.S. federal income tax purposes, whichpurposes. Approximately $12,780,000 of U.S. federal net operating loss carryforwards will expire in various tax years from fiscal year 20232022 through fiscal year 2037. 2038. These net operating losses are available to offset 100% of future taxable income. The remaining $12,597,000 of U.S. federal net operating loss may be carried forward indefinitely but are only available to offset 80% of future taxable income.
The Company evaluates whether a valuation allowance related to deferred tax assets is required each reporting period. A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized. Based on the weight ofAfter weighting all available positive and negative evidence, including cumulative losses in recent years, the Company believescontinues to conclude that itsthe more likely than not threshold for the realization of deferred tax assets willhas not be realized on a more-likely-than-not basis.
The Company follows ASC 740, "Income“Income Taxes,"” where tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in tax returns that do not meet these recognition and measurement standards. At October 31, 2017,2020, the Company did not have any uncertain tax positions. As permitted by ASC 740-10, the Company'sCompany’s accounting policy is to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in its income tax provision.
On December 22, 2017,March 27, 2020, the Tax CutsCoronavirus Aid, Relief and Jobs ActsEconomic Security Act ("CARES Act") was enacted into law.to provide economic relief to those impacted by the COVID-19 pandemic. The new tax legislation represents a fundamental and dramatic shift in US taxation.
Recent Accounting Pronouncements Adopted
In February 2016, the FASB issued ASU 2016-02, which amends the ASC and creates Topic 842, Leases (“Topic 842”). Topic 842 requires lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous GAAP on the balance sheet. On November 1, 2019, the Company adopted Topic 842. As a result of the adoption of Topic 842, the Company recognized operating lease right-of-use (“ROU”) assets and liabilities as well as reassess the realizabilityof the Company's deferred tax$1,497,000 and $1,620,000, respectively. The Company does not have any finance lease ROU assets and liabilities. After consideringThere was no change to our consolidated statements of operations or cash flows, as a result of the adoption. During the year ended October 31, 2020, the Company recorded an impairment charge of $175,000 in connection with the leases related to its PASSUR Network System assets locations.
On November 1, 2018, the Company adopted the revenue recognition requirements of Topic 606 using the modified retrospective transition method which resulted in an adjustment to retained earnings for the cumulative effect of applying the standard to all contracts not completed as of the adoption date. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Revenue recognition remained substantially unchanged following adoption of Topic 606 and therefore the adoption of Topic 606 did not have a material impact on revenues. The primary impact of adopting Topic 606 relates to the accounting for nonrefundable up-front fees. The Company recognized revenue during the fiscal year ended October 31, 2019, of $15,046,000 under Topic 606, which was not materially different from what would have been recognized under Topic 605. The Company recorded an addition to
opening accumulated deficit and a reduction to deferred revenue of approximately $66,000, respectively, as of November 1, 2018 due to the impact of the current year loss, including the Company's increased expenses and weighting all available positive and negative evidence, the Company concluded that it was more likely than not that the net deferred tax asset would not be realized and a full valuation allowance was recorded. The SEC staff has issued Staff Accounting Bulletin No.118 which will allow the recording of provisional amounts during a measurement period used when accounting for business combinations. The Company will continue to assess the impact of the recently enacted tax law on our business and our consolidated financial statements and will reflect the provisional impact of the tax law change in the fourth quarter of fiscal 2018.
In May 2017, the FASB issued Accounting Standards Update ("ASU") NoASU 2017-09, "Compensation—“Compensation—Stock Compensation: Topic 718" —Compensation (Topic 718): Scope of Modification Accounting ("Accounting” (“ASU 2017-09"2017-09”), to clarify when to account for a change in the terms or conditions of a share-based payment award as a modification. Under the new standard, modification is required only if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. ASU 2017-09 will be effective for the Company beginning November 1, 2018, and will be applied prospectively.
Accounting Pronouncements Issued but not yet Adopted
In FebruaryDecember 2019, the FASB issued ASU 2019-12, “Income Taxes Topic 740-Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application of Topic 740. This guidance is effective for fiscal years beginning after December 15, 2020, including interim periods therein, and early adoption is permitted. Adoption of Topic 740 is not expected to have a material effect on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-02,2016-13, “Current Expected Credit Losses” (ASU 2016-13), which amendsintroduces an impairment model based on expected, rather than incurred, losses. Additionally, it requires expanded disclosures regarding (a) credit risk inherent in a portfolio and how management monitors the ASCportfolio’s credit quality; (b) management’s estimate of expected credit losses; and, creates Topic 842, Leases ("Topic 842"). Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous GAAP on(c) changes in estimates of expected credit losses that have taken place during the balance sheet. This guidanceperiod. ASU 2016-13 is effective for annual periodsfiscal years beginning after December 15, 2018, which for the Company will be the annual period ending October 31, 2020, and early adoption is permitted. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
Item 8. Financial Statements and Supplementary Data
See Part IV, Item 15(a)(1) of this Annual Report on Form 10-K for the Company'sCompany’s annual financial statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management carried out an evaluation, under the supervision, and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"“Exchange Act”).The Company'sCompany’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission'sCommission’s rules.
The Company believes that a control system, no matter how well designed and operated, can provide only reasonable assurance, not absolute assurance, that the objectives of the control system are met.met. Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, the Company's Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were effective at a reasonable assurance level as of October 31, 2017.
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The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company's internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting in accordance with GAAP. Management evaluates the effectiveness of the Company's internal control over financial reporting using the criteria set forth in the Integrated Framework (2013) issued by the 1992 Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Integrated Framework.Commission. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management has concluded that, as of October 31, 2017 , due to the identification of material weaknesses in the Company's2020, its internal control over financial reporting as further described below, the Company's disclosure controls and procedures were notwas effective to providein providing reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company'sCompany’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) withinduring the fourth fiscal quarter ended October 31, 2017,2020, that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance of the Registrant
The following table sets forth the names and ages of the Company's directors, as well as the year each individual became a director, and the position(s) with the Company, if any, held by each individual.
Name | Age | Director since | Director Position and Officers with the Company |
| G.S. Beckwith Gilbert | 75 | 1997 | Executive Chairman of the Board, Chairman of the Executive Committee, and Director |
| Paul L. Graziani | 60 | 1997 | Chairman of the Audit Committee and Director |
| James T. Barry | 56 | 2000 | President, Chief Executive Officer, and Director |
| Kurt J. Ekert | 47 | 2009 | Chairman of the Compensation Committee and Director |
| Richard L. Haver | 72 | 2010 | Director |
| Robert M. Stafford | 75 | 2013 | Director |
| Ronald V. Rose | 66 | 2014 | Chairman of the Technology Committee and Director |
| Michael P. Schumaecker | 73 | 2017 | Director |
Name | Age | Officer since | Officer Position and Officers with the Company |
| G.S. Beckwith Gilbert | 75 | 1997 | Executive Chairman of the Board, Chairman of the Executive Committee, and Director |
| James T. Barry | 56 | 1998 | President, Chief Executive Officer, and Director |
| Louis J. Petrucelly | 43 | 2016 | Chief Financial Officer, Treasurer, and Secretary |
| Timothy P. Campbell | 55 | 2017 | Chief Operating Officer |
Item 11. Executive Compensation
The Company hereby incorporates by reference intoinformation required to be furnished pursuant to this Item the information containedwill be set forth under the heading "Executive Compensation"caption “Compensation Discussion and Analysis Compensation Philosophy and Objectives of Our Executive Compensation Program” in the 20182021 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The Company hereby incorporates by reference intoinformation required to be furnished pursuant to this Item the information containedwill be set forth under the heading "Securitycaptions “Security Ownership of Management” and “Security Ownership of Certain Beneficial Owners and Management"Owners” in the 20182021 Proxy Statement.
For information regarding securities authorized for issuance under the Company'sCompany’s equity compensation plans, see Part II, Item 5(d), of this Annual Report on Form 10-K, above.
Item 13. Certain Relationships and Related Transactions
The information required to be furnished pursuant to this Item will be set forth under the captions “Certain Relationships and Related Persons
Item 14. Principal Accounting Fees and Services
The Company hereby incorporates by reference into this Item the information contained under the heading "Principal Accounting Fees“Audit and Services"Audit Related Fees” and “Audit Committee’s Pre-Approval Policies and Procedures” in the 20182021 Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) | List of Documents Filed as a Part of This Annual Report on Form 10-K: | Page |
(1)Index to Consolidated Financial Statements | |
F-1 | |
Consolidated Balance Sheets as of October 31, | F-2 |
Consolidated Statements of Operations for the years ended October 31, | F-3 |
Consolidated Statements of | F-4 |
| 2019 | F-5 |
F-6 | |
(2)Index to Financial Statement Schedule: N/A |
Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange CommissionSEC are not required under the related instructions or are inapplicable, and therefore have been omitted.
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The following exhibits are required to be filed with this Annual Report on Form 10-K by Item 15(a)(3).
Exhibits
3.1 | The |
3.2 | The |
| . | |
Commitment of G.S. Beckwith Gilbert, dated January 27, 2020, is incorporated by reference from Exhibit 10.30 to our Annual Report on Form 10-K filed on January 27, 2020. |
Commitment of G.S. Beckwith Gilbert, dated January 29, 2021. | |
21 | List of Subsidiaries is incorporated by reference |
101.ins** | XBRL Instance |
101.xsd** | XBRL Schema |
101.cal** | XBRL Calculation |
101.def** | XBRL Definition |
101.lab** | XBRL Label |
101.pre** | XBRL Presentation |
____________________
*Filed herewith.
**Furnished herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
PASSUR AEROSPACE, INC.
Dated: | By: | /s/ |
Brian G. Cook | ||
President and Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
Dated: January 29, 2021 | /s/ Brian G. Cook |
Brian G. Cook | |
President and Chief Executive Officer and Director | |
(Principal Executive Officer) |
Dated: January 29, 2021 | /s/ Sean Doherty |
Sean Doherty | |
Executive Vice President of Finance and Administration | |
(Principal Financial and Accounting Officer) |
SIGNATURES (continued)
Dated: | /s/ G.S. Beckwith Gilbert |
G.S. Beckwith Gilbert | |
Non-Executive Chairman of the Board and Director | |
Dated: | /s/ Brian G. Cook |
Brian G. Cook | |
President, Chief Executive Officer and Director | |
Dated: January 29, 2021 | /s/ Kurt J. Ekert |
Kurt J. Ekert | |
Director | |
Dated: January 29, 2021 | /s/ Paul L. Graziani |
Paul L. Graziani | |
Director | |
Dated: | |
/s/ Richard L. Haver | |
Richard L. Haver | |
Director | |
Dated: | /s/ Ronald V. Rose |
Ronald V. Rose | |
Director | |
Dated: January 29, 2021 | /s/ Michael P. Schumaecker |
Michael P. Schumaecker | |
Director | |
Dated: January 29, 2021 | /s/ Robert M. Stafford |
Robert M. Stafford | |
Director | |
Dated: | |
/s/ Michael | |
Michael | |
Director |
Shareholders and Board of Directors and Stockholders
PASSUR Aerospace, Inc. and Subsidiary
Stamford, CT
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of PASSUR Aerospace, Inc. and Subsidiary (the “Company”) as of October 31, 20172020 and 2016 and2019, the related consolidated statements of operations, stockholders'stockholders’ equity, and cash flows for the two years then ended. in the period ended October 31, 2020 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended October 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of a Matter- Covid-19
As discussedmore fully described in Note 21 to the accompanying consolidated financial statements, the Company has restated its consolidated financial statements forbeen adversely impacted by the year ended October 31, 2016 andoutbreak of the novel coronavirus (COVID 19), which was declared a global pandemic by the World Health Organization in March 2020.
/s/ BDO USA, LLP
We have served as of October 31, 2015.
Melville, New York
January 29, 2021
Consolidated Balance Sheets
October 31, 20172020 and 2016
| 2017 | 2016 | |||||||
| (Restated) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 275,146 | $ | 1,523,655 | ||||
| Accounts receivable, net | 1,308,091 | 1,073,498 | ||||||
| Deferred tax assets, current | - | 418,889 | ||||||
| Prepaid expenses and other current assets | 303,045 | 217,410 | ||||||
| Total current assets | 1,886,282 | 3,233,452 | ||||||
| PASSUR Network, net | 6,004,367 | 5,198,421 | ||||||
| Capitalized software development costs, net | 8,893,414 | 7,600,038 | ||||||
| Property and equipment, net | 852,147 | 1,187,158 | ||||||
| Deferred tax assets, non-current | - | 1,522,967 | ||||||
| Other assets | 169,635 | 208,755 | ||||||
| Total assets | $ | 17,805,845 | $ | 18,950,791 | ||||
| Liabilities and stockholders' equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 984,369 | $ | 356,387 | ||||
| Accrued expenses and other current liabilities | 1,273,170 | 936,272 | ||||||
| Deferred revenue, current portion | 2,824,885 | 3,140,292 | ||||||
| Total current liabilities | 5,082,424 | 4,432,951 | ||||||
| Deferred revenue, long term portion | 470,831 | 423,346 | ||||||
| Note payable - related party | 3,800,000 | 2,700,000 | ||||||
| Total liabilities | 9,353,255 | 7,556,297 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity: | ||||||||
| Preferred shares - authorized 5,000,000 shares, par value $0.01 per share; none issued or outstanding | - | - | ||||||
| Common shares - authorized 20,000,000 and 10,000,000 shares, respectively, par value $0.01 per share; issued 8,480,526 and 8,465,526 at October 31, 2017 and 2016, respectively | 84,804 | 84,654 | ||||||
| Additional paid-in capital | 16,699,337 | 16,082,865 | ||||||
| Accumulated deficit | (6,397,873 | ) | (2,877,597 | ) | ||||
| 10,386,268 | 13,289,922 | |||||||
| Treasury stock, at cost, 784,435 and 775,327 shares at October 31, 2017 and 2016, respectively | (1,933,678 | ) | (1,895,428 | ) | ||||
| Total stockholders' equity | 8,452,590 | 11,394,494 | ||||||
| Total liabilities and stockholders' equity | $ | 17,805,845 | $ | 18,950,791 | ||||
|
| 2020 |
| 2019 |
Assets |
|
|
|
|
Current assets: |
|
|
|
|
Cash |
| $2,748,066 |
| $145,151 |
Accounts receivable, net |
| 662,081 |
| 1,141,282 |
Prepaid expenses and other current assets |
| 162,843 |
| 249,118 |
Total current assets |
| 3,572,990 |
| 1,535,551 |
PASSUR Network, net |
| - |
| 3,948,542 |
Capitalized software development costs, net |
| 1,223,399 |
| 8,319,134 |
Property and equipment, net |
| 257,561 |
| 552,150 |
Operating lease right-of-use assets |
| 232,721 |
| - |
Other assets |
| 53,031 |
| 91,883 |
Total assets |
| $5,339,702 |
| $14,447,260 |
Liabilities and stockholders' equity |
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable |
| $1,486,808 |
| $1,531,112 |
Accrued liabilities - Stimulus funding |
| 1,933,955 |
| - |
Accrued expenses and other current liabilities |
| 721,058 |
| 789,370 |
Operating lease liabilities, current portion |
| 168,923 |
| - |
Deferred revenue, current portion |
| 1,173,573 |
| 2,863,273 |
Total current liabilities |
| 5,484,317 |
| 5,183,755 |
Deferred revenue, long term portion |
| 249,727 |
| 377,760 |
Note payable - related party |
| 10,691,625 |
| 8,350,058 |
Operating lease liabilities, non-current |
| 271,946 |
|
|
Other liabilities |
| - |
| 79,958 |
Total liabilities |
| 16,697,615 |
| 13,991,531 |
Commitments and contingencies |
|
|
|
|
Stockholders' equity: |
|
|
|
|
Preferred shares - authorized 5,000,000 shares, par value $0.01 per share; |
| - |
| - |
Common shares - authorized 20,000,000 shares, respectively, par value $0.01 |
| 84,964 |
| 84,804 |
Additional paid-in capital |
| 18,448,202 |
| 17,958,165 |
Accumulated deficit |
| (27,957,401) |
| (15,653,562) |
|
| (9,424,235) |
| 2,389,407 |
Treasury stock, at cost, 784,435 shares at October 31, 2020 and 2019, respectively |
| (1,933,678) |
| (1,933,678) |
Total stockholders' equity |
| (11,357,913) |
| 455,729 |
Total liabilities and stockholders' equity |
| $5,339,702 |
| $14,447,260 |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Operations
Years Ended October 31, 20172020 and 2016
| 2017 | 2016 | |||||||
| (Restated) | ||||||||
| Revenues | $ | 13,871,495 | $ | 14,892,495 | ||||
| Cost of expenses: | ||||||||
| Cost of revenues | 6,449,931 | 6,240,949 | ||||||
| Research and development expenses | 783,014 | 826,227 | ||||||
| Selling, general, and administrative expenses | 8,021,182 | 6,481,260 | ||||||
| 15,254,127 | 13,548,436 | |||||||
| (Loss)/Income from operations | $ | (1,382,632 | ) | $ | 1,344,059 | |||
| Interest expense - related party | 170,917 | 183,333 | ||||||
| Other (Loss)/Income | (5,221 | ) | - | |||||
| (Loss)/Income before income taxes | (1,558,770 | ) | 1,160,726 | |||||
| Provision for income taxes | 1,961,506 | 643,023 | ||||||
| Net (loss)/income | $ | (3,520,276 | ) | $ | 517,703 | |||
| Net (loss)/income per common share - basic | $ | (0.46 | ) | $ | 0.07 | |||
| Net (loss)/income per common share - diluted | $ | (0.46 | ) | $ | 0.07 | |||
| Weighted average number of common shares outstanding - basic | 7,693,831 | 7,679,696 | ||||||
| Weighted average number of common shares outstanding - diluted | 7,693,831 | 7,730,566 | ||||||
|
| 2020 |
| 2019 |
|
|
|
|
|
Revenues |
| $11,528,813 |
| $15,046,149 |
|
|
|
|
|
Cost of expenses: |
|
|
|
|
Cost of revenues |
| 6,187,442 |
| 8,368,025 |
Research and development expenses |
| 338,001 |
| 556,261 |
Selling, general, and administrative expenses |
| 6,466,682 |
| 9,253,583 |
Impairment charges |
| 9,874,281 |
| - |
|
| 22,866,406 |
| 18,177,869 |
|
|
|
|
|
Loss from operations |
| $(11,337,593) |
| $(3,131,720) |
|
|
|
|
|
Interest expense - related party |
| 906,567 |
| 715,933 |
Other loss |
| 22,761 |
| - |
Loss before income taxes |
| (12,266,921) |
| (3,847,653) |
|
|
|
|
|
Provision/(Benefit) for income taxes |
| 36,918 |
| (10,320) |
Net loss |
| $(12,303,839) |
| $(3,837,333) |
|
|
|
|
|
Net loss per common share - basic |
| $(1.60) |
| $(0.50) |
Net loss per common share - diluted |
| $(1.60) |
| $(0.50) |
|
|
|
|
|
Weighted average number of common shares outstanding - basic |
| 7,710,561 |
| 7,696,091 |
Weighted average number of common shares outstanding - diluted |
| 7,710,561 |
| 7,696,091 |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Stockholders'Stockholders’ Equity
Years Ended October 31, 20172020 and 2016
| Additional | Total | |||||||||||||||||||||||
| Common Stock | Paid-In | Accum. | Treasury | Stockholders | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Equity | |||||||||||||||||||
Balance at November 1, 2015 - Restated | 7,653,199 | $ | 84,284 | $ | 15,663,796 | $ | (3,395,300 | ) | $ | (1,895,428 | ) | $ | 10,457,352 | |||||||||||
| Exercise of common stock options | 37,000 | 370 | 17,850 | 18,220 | ||||||||||||||||||||
| Stock-based compensation expense | 401,219 | 401,219 | ||||||||||||||||||||||
| Net income | 517,703 | 517,703 | ||||||||||||||||||||||
Balance at October 31, 2016 - Restated | 7,690,199 | $ | 84,654 | $ | 16,082,865 | $ | (2,877,597 | ) | $ | (1,895,428 | ) | $ | 11,394,494 | |||||||||||
| Exercise of common stock options | 15,000 | 150 | 38,100 | 38,250 | ||||||||||||||||||||
| Purchase of treasury stock | (9,108 | ) | (38,250 | ) | (38,250 | ) | ||||||||||||||||||
| Stock-based compensation expense | 578,372 | 578,372 | ||||||||||||||||||||||
| Net loss | (3,520,276 | ) | (3,520,276 | ) | ||||||||||||||||||||
| Balance at October 31, 2017 | 7,696,091 | $ | 84,804 | $ | 16,699,337 | $ | (6,397,873 | ) | $ | (1,933,678 | ) | $ | 8,452,590 | |||||||||||
Additional | Total | |||||||||||
Common Stock | Paid-In | Accum. | Treasury | Stockholders | ||||||||
Shares | Amount | Capital | Deficit | Stock | Equity | |||||||
Balance at November 1, 2018 | 8,480,526 | $84,804 | $17,345,450 | $(11,882,259) | $(1,933,678) | $3,614,317 | ||||||
Stock-based compensation expense | 612,715 | 612,715 | ||||||||||
Net loss | (3,837,333) | (3,837,333) | ||||||||||
Effect of new accounting standard | 66,030 | 66,030 | ||||||||||
Balance at October 31, 2019 | 8,480,526 | $84,804 | $17,958,165 | $(15,653,562) | $(1,933,678) | $455,729 | ||||||
Stock-based compensation expense | 466,997 | 466,997 | ||||||||||
Exercise of stock options | 16,000 | 160 | 23,040 | 23,200 | ||||||||
Net loss | (12,303,839) | (12,303,839) | ||||||||||
Balance at October 31, 2020 | 8,496,526 | $84,964 | $18,448,202 | $(27,957,401) | $(1,933,678) | $(11,357,913) | ||||||
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Years Ended October 31, 20172020 and 2016
| 2017 | 2016 | |||||||
| (Restated) | ||||||||
| Cash flows from operating activities | ||||||||
| Net (loss)/income | $ | (3,520,276 | ) | $ | 517,703 | |||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 2,967,557 | 2,890,541 | ||||||
| Provision for deferred taxes | 1,941,856 | 593,605 | ||||||
| Provision for doubtful accounts | 179,415 | 5,982 | ||||||
| Stock-based compensation | 578,372 | 401,219 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (414,008 | ) | 155,506 | |||||
| Prepaid expenses and other current assets | (134,497 | ) | (120,260 | ) | ||||
| Other assets | 39,120 | 31,106 | ||||||
| Accounts payable | 627,982 | (524,432 | ) | |||||
| 336,898 | (41,628 | ) | ||||||
| Deferred revenue | (267,922 | ) | 686,058 | |||||
| Total adjustments | 5,854,773 | 4,077,697 | ||||||
| Net cash provided by operating activities | 2,334,497 | 4,595,400 | ||||||
| Cash flows from investing activities | ||||||||
| PASSUR Network | (1,400,624 | ) | (622,098 | ) | ||||
| Software development costs | (3,027,394 | ) | (2,263,198 | ) | ||||
| Property and equipment | (254,988 | ) | (330,177 | ) | ||||
| Net cash used in investing activities | (4,683,006 | ) | (3,215,473 | ) | ||||
| Cash flows from financing activities | ||||||||
| Purchase of treasury stock | - | - | ||||||
| Payment of notes payable-related party | - | (800,000 | ) | |||||
| Proceeds from notes payable - related party | 1,100,000 | - | ||||||
| Proceeds from exercise of stock options | - | 18,220 | ||||||
| Net cash provided by/(used in) financing activities | 1,100,000 | (781,780 | ) | |||||
| (Decrease)/increase in cash | (1,248,509 | ) | 598,147 | |||||
| Cash - beginning of period | 1,523,655 | 925,508 | ||||||
| Cash - end of period | $ | 275,146 | $ | 1,523,655 | ||||
| Supplemental cash flow information | ||||||||
| Cash paid during the period for: | ||||||||
| Interest - related party | $ | 171,000 | $ | 183,000 | ||||
| Income taxes | $ | 89,000 | $ | 62,000 | ||||
| Non-cash financing activities - purchase of treasury stock | $ | 38,250 | $ | - | ||||
| Non-cash financing activities - proceeds from exercise of stock options | $ | 38,250 | $ | - | ||||
|
| 2020 |
| 2019 |
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
Net loss |
| $(12,303,839) |
| $(3,837,333) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
Depreciation and amortization |
| 2,122,920 |
| 3,627,604 |
Provision for doubtful accounts |
| 103,534 |
| 6,000 |
Federal Stimulus credits utilized |
| (1,130,232) |
| - |
Loss on disposal of assets |
| 22,761 |
| - |
Other |
| 9,258 |
| (33,315) |
Stock-based compensation |
| 466,997 |
| 612,715 |
Operating lease assets and liabilities, net |
| 33,461 |
| - |
Impairment charges |
| 9,874,281 |
| - |
Changes in operating assets and liabilities: |
|
|
|
|
Accounts receivable |
| 375,667 |
| 39,382 |
Prepaid expenses and other current assets |
| 86,275 |
| (92,217) |
Other assets |
| (41,106) |
| 20,668 |
Accounts payable |
| (44,304) |
| 541,154 |
Accrued expenses and other current liabilities |
| (7,320) |
| (399,972) |
Accrued interest - related party |
| 906,567 |
| 200,058 |
Deferred revenue |
| (1,837,611) |
| 49,769 |
Total adjustments |
| 10,941,148 |
| 4,571,846 |
Net cash (used in)/provided by operating activities |
| (1,362,691) |
| 734,513 |
|
|
|
|
|
Cash flows used in investing activities |
|
|
|
|
PASSUR Network |
| - |
| (15,354) |
Software development costs |
| (488,774) |
| (2,573,395) |
Property and equipment |
| (7,015) |
| (201,469) |
Net cash used in investing activities |
| (495,789) |
| (2,790,218) |
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
Proceeds from notes payable - related party |
| 1,435,000 |
| 2,100,000 |
Proceeds under Federal Stimulus grant program |
| 3,003,195 |
| - |
Proceeds from exercise of stock options |
| 23,200 |
| - |
Net cash provided by financing activities |
| 4,461,395 |
| 2,100,000 |
|
|
|
|
|
Increase in cash |
| 2,602,915 |
| 44,295 |
|
|
|
|
|
Cash - beginning of period |
| 145,151 |
| 100,856 |
Cash - end of period |
| $2,748,066 |
| $145,151 |
|
|
|
|
|
Supplemental cash flow information |
|
|
|
|
Cash paid during the period for: |
|
|
|
|
Interest - related party |
| $- |
| $515,875 |
Income taxes |
| $7,275 |
| $(21,779) |
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
October 31, 2017
1. Description of Business and Significant Accounting Policies
Nature of Business
PASSUR Aerospace, Inc. ("PASSUR"(“PASSUR” or the "Company"“Company”), a New York corporation founded in 1967, is a business intelligence company, providing predictive analytics and decision support technology for the aviation industry'sindustry primarily to improve the operational performance and cash flow of airlines and the airports where they operate. PASSUR uses big data, within the aviation intelligence platform and a suite of web-based solutions that address the aviation industry'sindustry’s intractable and costly challenges, including, but not limited to, the underutilization of airspace and airport capacity, delays, cancellations, and diversions. The Company'sCompany’s technology platform is supported by its Aviation Intelligence Center of Excellence, a team of subject matter experts with
PASSUR’s mission is to improve global air traffic efficiencies by connecting the world'sworld’s aviation professionals onto a single aviation intelligence platform, making PASSUR an element in addressing the aviation industry'sindustry’s system-wide inefficiencies. We are an aviation intelligence company that makes air travel more predictable, gate-to-gate, by using predictive analytics generated from our own big data – to mitigate constraints for airlines, airports and their customers.
PASSUR’s information solutions are used by airlines and airports in the largest five North American airlines, more than 60 airport customers, including 21 of the top 30 North American airports (with PASSUR solutions also used at the remaining nine airports by one or more airline customers), hundreds of corporate aviation customers,United States as well as in Canada and the U.S. government.
PASSUR’s commercial solutions give aviation operators the ability to optimize performance in today'stoday’s air traffic management system, while also achieving Next Generation Air Transportation System ("NextGen"(“NextGen”) and Single European Sky ATM Research objectives.
PASSUR integrates data from multiple sources, includingsources. Certain of PASSUR’s services have traditionally relied on its independentproprietary network of over 180 surveillance sensors installed throughout North America creating coastfor aircraft surveillance. During the second quarter of fiscal year 2020, in light of the FAA's mandate for ADS-B equipage on aircrafts operating in most U.S. airspace, effective January 2020, and parallel adoption of ADS-B requirements in much of the world, the Company performed a comprehensive review of its data feeds, specifically those associated with the PASSUR Network units, and external ADS-B data feeds to coast coverage,determine if these external data feeds provide sufficient redundant data as to that generated from the existing PASSUR installations. The Company determined that such services could be powered by a combination of FAA data plus commercial ADS-B aggregator feeds and other data feeds available to the Company, which would provide a more cost-effective solution and allow the Company to focus more on value-added analytics, and less on sensor technology. In this regard, the Company reviewed and decommissioned approximately half of its PASSUR Network system assets during the second quarter of fiscal year 2020. As a result, the Company wrote off net assets applicable to the PASSUR Network systems of approximately $3,565,000, and lease assets applicable to these PASSUR locations of approximately $175,000 during the second quarter of fiscal 2020, which amounts are included in the impairment charge for the year ended October 31, 2020. The write-off amount includes PASSUR System and SMLAT System assets as well as locations in Europeinventory of finished and Asia; government data; customer data; and data from third party partners. PASSUR's sensors receive aircraft and drone signals in Mode A, C, S, and Automatic Dependent Surveillance-Broadcast ("ADS-B"), providing position, altitude, beacon code, and tail number, among other information.spare parts. It is the Company’s intention to decommission all remaining PASSUR receives signals from aircraft that, when combined with its historical database of aircraft and airport behavior, including information recorded by its network over the last 10 years, allows the Company to know more about what has happened historically and what is happening in real-time. In addition, the historical database allows the Company to predict how aircraft, the airspace, and airports are going to perform, and more importantly, how the aircraft, the airspace, and airports should perform.Network system assets during fiscal 2021.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Liquidity
The Company’s current liabilities (excluding deferred revenue and certain CARES Act grant proceeds, described in “Impact of the COVID-19 Pandemic”, below) exceeded current assets, by $738,000 as of October 31, 2020. The note payable to a related party, G.S. Beckwith Gilbert, the Company’s significant shareholder and Non-Executive Chairman of the Board, with a maturity of November 1, 2021, was $10,692,000 at October 31, 2020, which amount included additional loans made by Mr. Gilbert in fiscal 2020 of $1,435,000, bringing the principal balance owed to $9,585,000, plus capitalized accrued and unpaid interest of $1,107,000. The capitalized interest included $200,000 incurred during the fourth quarter of fiscal 2019 and all the fiscal 2020 interest of $907,000. The Company’s stockholders’ equity was a deficit of $11,358,000 at October 31, 2020. The Company had a net loss of $12,304,000 for the year ended October 31, 2020 (inclusive of certain impairment charges of $9,874,000, described under “PASSUR Network” and “Capitalized Software Development Costs”, below).
As described in more detail in Note 6, “Notes Payable,” below, as of October 31, 2019 and October 31, 2020, the total amount of principal and accrued interest owed by the Company under the promissory note issued by the Company to Mr. Gilbert was $8,335,000 and $10,692,000, respectively. On January 29, 2021, the Company and Mr. Gilbert entered into a Seventh Debt Extension Agreement, effective January 29, 2021, pursuant to which the Company cancelled the Sixth Gilbert Note and issued Mr. Gilbert a new promissory note (the “Seventh Gilbert Note”) in the amount of $10,692,000, consisting of a principal of $9,585,000 and unpaid interest of $1,107,000 accrued under the Sixth Gilbert Note through October 31, 2020. Under the terms of the Seventh Gilbert Note, the Company agreed to pay the unpaid interest of $1,107,000 accrued under the Sixth Gilbert Note and included in the Seventh Gilbert Note (as described above) at the time and on the terms set forth in the Seventh Gilbert Note. Under the terms of the Seventh Gilbert Note, the maturity date of the loan is November 1, 2022, and the annual interest rate is 9 ¾%, with annual interest payments required to be made on October 31st of each year (although any accrued interest can be paid before such time without penalty). The note payable is secured by the Company’s assets.
In December 2020, the Company made a payment of accrued interest in the amount of $177,000 for November 2020 and December 2020. Interest incurred in 2021 and 2022 will be paid monthly, and any unpaid and accrued interest is due October 31 in each year.
The CARES Act was enacted in March 2020 and provides economic support for, among others, businesses in the airline industry. In July 2020, the Company entered into an agreement with the U.S. Department of the Treasury to receive an aggregate of $3,003,000 in emergency relief through the CARES Act Payroll Support Program, which amounts were received in installments through September 2020. Pursuant to the Payroll Support Program Agreement, the relief payments must be used exclusively for the continuation of payment of certain employee wages, salaries and benefits. The relief payments are conditioned on the Company’s agreement to, among other things, refrain from conducting involuntary employee layoffs or furloughs through September 30, 2020. Other conditions include prohibitions on share repurchases and dividends through September 30, 2021, and certain limitations on executive compensation. The relief payments were comprised of $3,003,000 in direct grants, received in three installments from July 2020 through September 1, 2020.
If the Company’s business plan does not generate sufficient cash flows from operations to meet the Company’s operating cash requirements, the Company will attempt to obtain external financing on commercially reasonable terms. However, the Company has received a commitment from Mr. Gilbert, dated January 29, 2021, that if the Company, at any time, is unable to meet its obligations through January 30, 2022, Mr. Gilbert will provide the necessary continuing financial support to the Company in order for the Company to meet such obligations. Such commitment for financial support may be in the form of additional advances or loans to the Company, in addition to the deferral of principal and/or interest payments due on the existing loans, if deemed necessary.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Basis of Presentation
The consolidated financial statements include the accounts of PASSUR Aerospace, Inc. and its wholly-owned Subsidiary.subsidiary. All
significant inter-company transactions and balances have been eliminated in consolidation.
Revenue Recognition Policy
The Company recognizes revenue in accordance with the Financial Accounting Standards Board ("FASB"(“FASB”) Accounting Standards CodificationUpdate (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” ("ASC"Topic 606") 605-15, "Revenue Recognition in Financial Statements" ("ASC 605-15"), which requires that four basic criteria must be met before revenues. The Company accounts for a customer contract when both parties have approved the contract and are committed to perform their respective obligations, each party’s rights can be recognized: (1) persuasive evidenceidentified, payment terms can be identified, the contract has commercial substance, and it is probable the Company will collect substantially all of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the feeconsideration to which it is fixed or determinable; and (4) collectability is reasonably assured.
The Company's revenues are generated by selling: (1)Company derives revenue primarily from subscription-based, real-time decision and solution information and (2) professional services.
The Company determines revenue recognition through the following steps:
·Identification of the contract, or contracts, with a customer;
·Identification of the performance obligations in the contract;
·Determination of transaction price;
·Allocation of transaction price to performance obligations in the contract; and
·Recognition of revenue when, or as, the Company satisfies a performance obligation.
A.Nature of performance obligations
Subscription services revenue
Subscription services revenue is comprised of cloud-based subscription fees that provide the customer the right to access the Company’s software and receive support and updates, if any, for a period of time. The Company has determined such access represents a stand-ready service provided continually throughout the contract term. As such, control and satisfaction of this stand-ready performance obligation is deemed to occur over time. The Company’s subscription contracts include a fixed amount of consideration that is recognized ratably over the non-cancelable contract term, beginning on the date that access is made available to the customer. The passage of such executed agreements and/ortime is deemed to be the customer's receipt of such data or services. In accordance with ASC 605-15, the Company recognizes revenue when persuasive evidence of an arrangement exists which is evidenced by a signed agreement, the service has been deployed, as applicable, to its hosted servers, the fee is fixed and determinable, and collectionmost faithful depiction of the resulting receivable is reasonably assured. The Company records revenues pursuant to individual contracts on a month-by-month basis,transfer of control of the services as outlinedthe customer simultaneously receives and consumes the benefit provided by the applicable agreement. In many cases, the Company may invoice respective customersCompany’s performance. Subscription contracts are generally one to three years in advance of the specified period,length, billed either monthly, quarterly or annually, typically in advance, which coincides with the terms of the agreement. In such cases,The Company’s subscription contracts do not have a significant financing component and customer invoices are typically due within 30 days. There is no significant variable consideration related to these arrangements. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether transfer of control to customers has occurred.
Professional services revenue
Professional services primarily consist of value assessments and customer training services. Payment for professional services is generally a fixed fee or a fee based on time and materials. The obligation to provide professional services is generally satisfied over time, with the customer simultaneously receiving and consuming the benefits as the Company will defer at the close of each month and/or reporting period, any subscription revenues invoiced for which services have yet to be rendered, in accordance with ASC 605-15. Revenues generated by professional services are recognized when services are provided.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
performance obligations. For professional services, revenue is recognized by measuring progress toward the complete satisfaction of the Company’s obligation. Progress for services that are contracted for a fixed price is generally measured based on hours incurred as a portion of total estimated hours, and as a practical expedient, progress for services that are contracted for time and materials is generally based on the amount the Company has the right to invoice. Professional services contracts are generally one year or less in length, billed either in advance, upon pre-defined milestones or as services are rendered, which coincides with the terms of the agreement. The Company’s professional service contracts do not have a significant financing component and customer invoices are typically due within 30 days.
Material rights
Contracts with customers may include material rights which are also performance obligations. Material rights primarily arise when the contract gives the customer the right to renew subscription services at a discounted price in the future. This may occur from time to time when the Company’s contracts provide an implicit discount as the customer pays a nonrefundable up-front fee in connection with the initial services contract that it does not have to pay again in order to renew the service. These non-refundable up-front fees are not related to any promised service that the customer benefits from other than providing access to the subscription service. Revenue allocated to material rights is recognized when the customer exercises the right over the estimated renewal period of five years or when the right expires. If exercised by the customer, the amount previously deferred for the material right is included in the transaction price of the renewal contract and allocated to the services included in that contract. If expired, revenue is recognized as subscription services revenue in the period the right expired. If the up-front fees do not provide the customer with a material right, then the amount is included in the transaction price of the initial services contract and allocated to the performance obligations in that contract.
Contracts with Multiple Performance Obligations
Some of the Company’s contracts with customers contain multiple distinct performance obligations. For these contracts, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The standalone selling price reflects the price the Company would charge for a specific service if it was sold separately in similar circumstances and to similar customers. The Company maximizes the use of directly observable transactions to determine the standalone selling prices for its performance obligations. For subscription services, the Company separately determines the standalone selling prices by type of solution and customer demographics. For professional services, the Company separately determines standalone selling price by type of services.
Other policies and judgments
The commissions that the Company pays for obtaining a contract with a customer are conditional on future service provided by the employee. Therefore, since these costs are not incremental solely based on obtaining a contract, the Company does not defer any commission costs.
B.Disaggregation
The disaggregation of revenue by customer and type of performance obligation is as follows:
Revenue by type of customer: | Year Ended | Year Ended | ||
Airlines | $5,589,000 | $9,349,000 | ||
Airports | 5,501,000 | 5,608,000 | ||
Other | 439,000 | 89,000 | ||
Total Revenue | $11,529,000 | $15,046,000 |
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Year Ended | Year Ended | |||
Revenue by type of performance obligation: | October 31, 2020 | October 31, 2019 | ||
Subscription services | $10,936,000 | $14,736,000 | ||
Professional services | 593,000 | 310,000 | ||
Total Revenue | $11,529,000 | $15,046,000 |
C.Contract Balances
The opening and closing balances of the Company's accounts receivable, unbilled receivables, and deferred revenues are as follows:
Accounts | Unbilled | Deferred | ||||
Balance at November 1, 2019 | $1,041,000 | $100,000 | $3,241,000 | |||
Balance at October 31, 2020 | $609,000 | $53,000 | $1,423,000 |
The difference in the opening and closing balances of the Company’s unbilled receivable and deferred revenue primarily results from the timing difference between the Company’s performance and the customer’s payment, along with lower levels of renewals in the current year compared with the prior year.
Deferred revenue includes amounts billed to customers for which the revenue recognition criteria has not yet been met. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the Company’s
subscription services and, to a lesser extent, professional services. Deferred revenue is recognized as the Company satisfies
its performance obligations. The Company generally invoices its customers in monthly, quarterly or annual installments for subscription services. Accordingly, the deferred revenue balance does not generally represent the total contract value of annual or multi-year, non-cancelable subscription arrangements. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent. The amount of revenue recognized during the fiscal year ended October 31, 2020 that was included in the deferred revenue balance at November 1, 2019 was $2,984,000.
Unbilled accounts receivable relates to the delivery of subscription and professional services for which the related billings will occur in a future period.
D.Transaction Price Allocated to the Remaining Performance Obligation
The following table discloses the aggregate amount of the transaction price allocated to the remaining performance obligations as of the end of the reporting period, and when the Company expects to recognize the revenue.
12 months or | Greater than | |||
Subscription services | $2,401,000 | $416,000 | ||
Professional services | $335,000 | $- | ||
Material rights | $98,000 | $195,000 |
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
*Approximately 94% of subscription services and 79% of material rights are expected to be recognized between 12 and 36 months.
The table above includes amounts billed and not yet recognized as revenue as well as, unrecognized future committed billings in customer contracts and excludes future billing amounts for which the customer has a termination for convenience right in their agreement.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company'sCompany’s significant estimates include those related to revenue recognition, stock-based compensation, software development costs, the PASSUR Network and income taxes. Actual results could differ from those estimates.
Subsequent Events
Management has evaluated subsequent events after the balance sheet date, through the date of issuance of the financial statements, for appropriate accounting and disclosure.
Effective as of November 13, 2020, Louis J. Petrucelly resigned his positions as Senior Vice President, Chief Financial Officer of the Company. In connection with his resignation, PASSUR and Mr. Petrucelly have entered into a separation agreement, dated as of November 25, 2020, pursuant to which, among other things, the Company will pay Mr. Petrucelly eight (8) weeks of separation pay, at his base compensation rate in effect immediately prior to his resignation.
On December 18, 2020, the Board of Directors of the Company (the “Board of Directors”) approved the appointment of Sean Doherty as Executive Vice President of Finance and Administration of the Company. In connection with such appointment, the Company and Mr. Doherty have entered into an employment agreement, effective December 14, 2020, pursuant to which Mr. Doherty will receive an annual salary of CAD $260,000 and also be eligible to receive a grant of options to purchase 100,000 shares of common stock of the Company under its 2019 Stock Incentive Plan (the “Plan”), which have a vesting period of five years and an exercise price equal to the closing of PASSUR’s common stock on his first full day of employment with the Company.
On January 29, 2021, the Company and Mr. Gilbert entered into a Seventh Debt Extension Agreement, effective January 29, 2021, pursuant to which the Company cancelled the Sixth Gilbert Note and issued Mr. Gilbert a new promissory note (the “Seventh Gilbert Note”) in the amount of $10,692,000.
Accounts Receivable,
The Company records accounts receivables for agreements where amounts due from customers are contractually required and are non-refundable. The carrying amount of accounts receivables is reduced by a valuation allowance that reflects the Company'sCompany’s best estimate of the amounts that will not be collected. Net accounts receivable is comprised of the monthly, quarterly, or annual committed amounts due from customers pursuant to the terms of each respective customer'scustomer’s agreement. Account receivable balances include amounts attributable to deferred revenues.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
included $53,000 of unbilled receivables associated with contractually committed services provided to existing customers during the twelve months ended October 31, 2020, which will be invoiced subsequent to October 31, 2020. As of October 31, 2019, the Company’s accounts receivable balance included $100,000 of unbilled receivables associated with contractually committed services provided to existing customers.
The Company has a history of successfully collecting all amounts due from its customers under the original terms of its subscription agreements without making concessions. However, during fiscal year 2020, several customers requested, and the Company agreed to, the suspension of certain services to those customers, or the provision of services free of charge during a specified period of time. Additionally, one customer requested extended terms of payment, which the Company also accepted. The Company believes that these decisions were in the best interests of the Company as a partner to the aviation industry and will benefit the Company in the longer term. The Company continues to believe that its products and professional service engagements are critical to the efficient operation of the air transportation market.
The provision for doubtful accounts was $184,000$948,000 and $26,000$165,000 as of October 31, 2017,2020 and 2016,2019, respectively. In addition to reviewing delinquent accounts receivable, the Company considers many factors in estimating its reserve, including historical data, experience, customer types, credit worthiness, and economic trends. The Company monitors its outstanding accounts receivable balances and believes the provision is adequate.
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of the related assets. Amortization of leasehold improvements is calculated on a straight-line basis over the estimated useful life of the improvements or the term of the lease, including renewal options expected to be exercised, whichever is shorter.
PASSUR Network
The PASSUR Network iswas comprised of PASSUR and SMLAT Systems, which includeincluded the direct production, shipping, and installation costs incurred for each PASSUR and SMLAT System, which arewere recorded at cost, net of accumulated depreciation. Depreciation iswas charged to cost of revenues and iswas recorded using the straight-line method over the estimated useful life of the asset, which iswas estimated at five years for SMLAT Systems and seven years for PASSUR Systems. PASSUR and SMLAT Systems which arewere not installed, raw materials, work-in-process, and finished goods components arewere carried at cost and not depreciated until installed.
During the second quarter of fiscal year 2020, in light of the FAA's mandate for ADS-B equipage on aircrafts operating in most U.S. airspace, effective January 2020, and parallel adoption of ADS-B requirements in much of the world, the Company performed a comprehensive review of its data feeds, specifically those associated with the PASSUR Network units, and external ADS-B data feeds to determine if these external data feeds provide sufficient redundant data as to that generated from the existing PASSUR installations. The Company determined that such services could be powered by a combination of FAA data plus commercial ADS-B aggregator feeds and other data feeds available to the Company, which would provide a more cost-effective solution and allow us to focus more on value-added analytics, and less on sensor technology. In this regard, the Company reviewed and decommissioned approximately half of its PASSUR Network system assets during the second quarter of the fiscal year ended October 31, 2020. It is the Company’s intention to decommission all remaining PASSUR Network system assets during fiscal 2021. As a result, the Company wrote off the carrying value applicable to the PASSUR Network systems of approximately $3,565,000, and lease assets applicable to these PASSUR locations of approximately $175,000 during the second quarter of fiscal 2020, which amounts were included as an impairment charge for the year ended October 31, 2020. The write-off amount includes PASSUR System and SMLAT System assets as well as inventory of finished and spare parts.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Capitalized Software Development Costs
The Company follows the provisions of ASC 350-40, "Internal“Internal Use Software" ("Software” (“ASC 350-40"350-40”). ASC 350-40 provides guidance for determining whether computer software is internal-use software, and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public.use. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes the costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the software are capitalized if it is determined that these upgrades or enhancements add additional functionality to the software. Costs incurred to improvemaintain and support existing products after they become available are charged to expense as incurred. The Company records amortization of the software on a straight-line basis over the estimated useful life of three years within “Cost of Revenues”.
During the second quarter of 2020, due to the financial and economic hardships being experienced by the Company’s customers and air transportation support vendors in the current COVID-19 environment, there was a sufficient amount of uncertainty surrounding the ability of our customers to either renew and/or maintain their current levels of committed contracts with the Company. As a result, during the second quarter of fiscal year 2020, the Company conducted a review of its customer contracts to determine whether an impairment had occurred. In order to determine whether or not an impairment had occurred, we looked at existing contracted revenue, adjusted for future uncertainties, and compared those amounts with the net carrying value of the related software development asset. Where the contracted revenue amount was less than the net carrying value of the software typically over five years within "Costdevelopment asset, we noted an impairment. As a result, the Company wrote off previously capitalized software development costs totaling approximately $6,134,000 due to impairment, given the impact of Revenues".
The total amount of these charges and write-offs of the PASSUR Network and capitalized software development costs are included as an impairment charge for the year ended October 31, 2020 totaling $9,874,000.
Long-Lived Assets
The Company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. Impairment is recognized to the extent the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value. Assets to be disposed of are carried at the lower of their carrying value or fair value, less costs to sell. The Company evaluates the periods of amortization continually in determining whether later
events and circumstances warrant revised estimates of useful lives. If estimates are changed, the unamortized costs will be allocated to the increased or decreased number of remaining periods in the asset’s revised life. As of October 31, 2017, and 2016 based upon management's evaluation of the above asset groups, there is no impairment of these asset groups.
Cost of Revenues
Costs associated with subscription and maintenance revenues consist primarily of direct labor, depreciationamortization of PASSUR and SMLAT Network Systems, amortization ofpreviously capitalized software development costs, communication costs, data feeds, travel and entertainment, and consulting fees. Also, includedPreviously, cost of revenues in Cost of Revenues areeach reporting period was impacted by capitalized costs associated with software development
and data center projects, and costs associated with upgrades to PASSUR and SMLAT Systems necessary to make such systems compatible with new software applications (all referred to as “Capitalized Assets”), depreciation of PASSUR and SMLAT Network Systems as well as the ordinary repair and maintenance of existing PASSUR and SMLAT Systems. Additionally, cost of revenues in each previous reporting period iswas impacted by: (1)by the number of PASSUR and SMLAT SystemsSystem units added to the PASSUR Network, which includesincluded the cost of production, shipment, and installation of these assets (largely installed by unaffiliated outside contractors), which arehad previously been capitalized to the PASSUR Network;Network. The labor and (2) newfringe benefit costs of the Company employees involved in creating Capitalized Assets were capitalized, costs associated withrather than expensed, and amortized over three years, as determined by their projected useful life. The Company did not capitalize any software development projects. Bothcosts as well as network and data center costs for any periods subsequent to January 31, 2020. Given business conditions in the
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Description of these are referredBusiness and Significant Accounting Policies (continued)
aviation industry surrounding the unprecedented COVID-19 pandemic, the Company’s software efforts were concentrated in the areas of maintenance of existing products.
As a result of the industry changes in response to as "Capitalized Assets"the COVID-19 pandemic (described in “Impact of the COVID-19 Pandemic”, below), the corresponding review conducted by the Company during the second quarter of fiscal 2020 and are depreciated and/or amortized over their respective useful lives and charged to costthe resultant write-offs taken during fiscal 2020, the Company anticipates that its level of revenues.
Income Taxes
The Company follows the liability method of accounting for income taxes. Deferred income taxes are recorded to reflect the temporary differences in the tax bases of the assets or liabilities and their reported amounts in the financial statements. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company'sCompany’s financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount currently estimated to be realized. After considering the impact of the current year loss, including the Company's increased expenses and weighting all available positive and negative evidence including cumulative losses in recent years, the Company concludedcontinues to conclude that it was notthe more likely than not thatthreshold for the netrealization of deferred tax asset would be realized.
The Company follows ASC 740, "Income“Income Taxes," ("” (“ASC 740"740”) where tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in tax returns that do not meet these recognition and measurement standards. At October 31, 2017,2020, the Company did not have any uncertain tax positions. As permitted by ASC 740-10, the Company'sCompany’s accounting policy is to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in its income tax provision.
Research and Development Costs
Research and development costs are expensed as incurred.
Net IncomeLoss per Share Information
Basic net incomeloss per share is computed based on the weighted average number of shares outstanding. Diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the effect of common shares issuable upon exercise of stock options, using the treasury stock method in periods in which they have a dilutive effect. Shares used to calculate net incomeloss per share for fiscal years 20172020 and 20162019 are as follows:
|
| 2020 |
| 2019 |
Basic Weighted average shares outstanding |
| 7,710,561 |
| 7,696,091 |
Effect of dilutive stock options |
| - |
| - |
Diluted weighted average shares outstanding |
| 7,710,561 |
| 7,696,091 |
|
|
|
|
|
Weighted average shares which are not included |
| 1,690,000 |
| 1,847,000 |
| 2017 | 2016 | |||||||
| Basic Weighted average shares outstanding | 7,693,831 | 7,679,696 | ||||||
| Effect of dilutive stock options | - | 50,870 | ||||||
Diluted weighted average shares outstanding | 7,693,831 | 7,730,566 | ||||||
| Weighted average shares which are not included in the calculation of diluted net income per share because their impact is anti-dilutive. These shares consist of stock options. | 1,594,000 | 1,182,000 | ||||||
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Weighted average options to purchase 1,594,0001,690,000 and 1,182,0001,847,000 shares of common stock at prices ranging from $1.40$0.28 to $5.48$4.50 per share that were outstanding during fiscal years 20172020 and 20162019, were excluded from each respective year'syear’s computation of diluted earnings per share. In each of these years, such options'options’ exercise prices exceeded the average market price of our common stock, thereby causing the effect of such options to be anti-dilutive.
Deferred Revenue
Deferred revenue includes amounts attributable to advances received or billings related to customer agreements, which are contractually required and are non-refundable, and may be prepaid either annually, quarterly, or monthly. Deferred revenues from such customer agreements are recognized as revenue ratably over the period that coincides with the respective agreement. The Company recognizes initial set-up fee revenues and associated costs on a straight-line basis over the estimated life of the customer relationship period, typically five years.
Fair Value of Financial Instruments
The recorded amounts of the Company'sCompany’s cash, receivables, and accounts payable, and accrued liabilitiespayables approximate their fair values principally because of the short-term nature of these items. The fair value of related party debt is not practicable to determine due primarily to the fact that the Company'sCompany’s related party debt is held by its Chairman and significant shareholder and Non-Executive Chairman of the Board, and the Company does not have any third-party debt with which to compare.
Additionally, on a recurring basis, the Company uses fair value measures when analyzing asset impairments. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present, and the review indicates that the assets will not be fully recoverable based on the undiscounted estimated future cash flows expected to result from the use of the asset, their carrying values are reduced to estimated fair value.
Stock-Based Compensation
The Company follows FASB ASC 718, "Compensation-Stock Compensation",“Compensation-Stock Compensation,” which requires measurement of compensation cost for all stock-based awards at fair value on date of grant, and recognition of stock-based compensation expense over the service period for awards expected to vest. The fair value of stock options wasis determined using the Black-Scholes valuation model. Such fair value is recognized as an expense over the service period, net of forfeitures. Stock-based compensation expense was $578,000$467,000 and $401,000$613,000 for the year ended October 31, 20172020 and 2016,2019, respectively, and was primarily included in selling, general, and administrative expenses.
Comprehensive Income
The Company'sCompany’s comprehensive incomeloss is equivalent to that of the Company'sCompany’s total net incomeloss for fiscal years 20172020 and 2016.
Impact of the COVID-19 Pandemic
In December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China. The World Health Organization (“WHO”) declared COVID-19 a “pandemic” on March 11, 2020, and the U.S. government declared a national state of emergency on March 13, 2020. The U.S. government has implemented enhanced screenings, quarantine requirements and other travel restrictions in connection with the COVID-19 outbreak. U.S. state governments have instituted similar measures, such as “shelter-in-place” requirements and declared states of emergency. In addition, the U.S. government has strongly recommended “social distancing” measures, including avoiding gathering in groups of more than 10 people and avoiding discretionary travel.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Government restrictions and consumer fears relating to the COVID-19 pandemic have impacted flight schedules and given rise to a general reluctance of consumers to fly at this time, resulted in unprecedented cancellations of flights, and substantially reduced demand for future flights for the foreseeable future. The severe reduction in air travel continued throughout 2020 and negatively impacted the Company’s revenues for fiscal 2020 and is also anticipated to impact fiscal 2021 revenue.
The CARES Act was enacted in March 2020 and provides economic support for, among others, businesses in the airline industry. The Company has been granted government funds totaling $3.0 million pursuant to the Payroll Support Program for Air Carriers and Contractors under the CARES Act. Pursuant to the Payroll Support Program Agreement entered into by the Company with the U.S. Department of the Treasury, the Company is required to, among other things, refrain from conducting involuntary employee layoffs or furloughs, reducing employee rates of pay or benefits through September 30, 2020, and paying dividends or engaging in share repurchases through September 30, 2021. The Company is also required to limit certain executive compensation through March 24, 2022, maintain certain internal controls and records relating to the CARES Act funds and comply with certain reporting requirements. The Company believes that it has operated in compliance with all the provisions and requirements under the CARES Act during the fiscal year ended October 31, 2020, and fully intends to continue to comply with all such provisions and requirements. Consequently, the Company has accounted for the advanced funds as grants not requiring repayment and recognized such amounts in income as qualifying salaries, wages and benefits have been incurred. During fiscal 2020, the Company reduced its compensation expense by $1,130,000, as a portion of the CARES Act grant proceeds received by the Company was used to fund eligible payroll costs. If the Company does not comply with the provisions of the CARES Act and the Payroll Support Program Agreement, the Company may be required to repay the government funds and also be subject to other remedies.
Additionally, provisions under the CARES Act allow the Company to defer payment of the employer’s share of social security taxes incurred from March of 2020 through December 31, 2020. Under the terms of the legislation, 50% of the deferred payroll taxes would be due and payable by December 31, 2021, and the remaining 50% would be due and payable by December 31, 2022. The amount of payroll taxes subject to deferred payment is approximately $111,000.
During the second quarter of fiscal year 2020, in response to the uncertainty surrounding the prospects of airlines and airports and the travel industry as a result of the global COVID-19 pandemic and the declines in revenue that the Company began to experience during the same period, partly as a result of the pandemic, the Company reviewed its operating costs to more closely align those costs with its outlook for the foreseeable future. Beginning in April 2020 and prior to receiving CARES Act funds, the Company took several actions to mitigate the effects of the COVID-19 pandemic on its business, as outlined below:
·Eliminated or furloughed approximately one-third of then-existing positions;
·Instituted a temporary pay reduction plan affecting essentially all of the then-remaining employees;
·Suspended the use of outside consultants;
·Rationalized the PASSUR Network to reduce data feed and telecom costs; and
·Reduced and/or eliminated other operating expenses that were not critical to the short-term outlook of the Company.
The effects of the actions above were reflected in lower costs of revenues, research and development and administrative costs in the fiscal year ended October 31, 2020, as compared to the same period in 2019, and the Company anticipates that such cost savings will continue into fiscal 2021. However, if the recovery of the air transportation industry accelerates and revenue levels quickly return to pre-COVID-19 levels, these levels of cost savings may not be practicable or sustainable to support the operations necessary for the increased level of revenue.
Recent Accounting Pronouncements Adopted
In February 2016, the FASB issued but not yet adopted
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
previous GAAP on the balance sheet. On November 1, 2019, the Company adopted Topic 842. As a result of the adoption of Topic 842, the Company recognized operating lease right-of-use (“ROU”) assets and liabilities of $1,497,000 and $1,620,000, respectively. The Company did not have any finance lease ROU assets and liabilities. There was no change to our consolidated statements of operations or cash flows, as a result of the adoption.
On November 1, 2018, the Company adopted the revenue recognition requirements of Topic 606 using the modified retrospective transition method which resulted in an adjustment to retained earnings for the cumulative effect of applying the standard to all contracts not completed as of the adoption date. The Company recorded an addition to opening accumulated deficit and a reduction to deferred revenue of approximately $66,000, respectively, as of November 1, 2018 due to the impact of adopting Topic 606. The primary impact of adopting Topic 606 relates to the accounting for nonrefundable up-front fees.
In May 2017, the FASB issued Accounting Standards Update ("ASU") NoASU 2017-09, "Compensation—“Compensation—Stock Compensation: Topic 718" —Compensation (Topic 718): Scope of Modification Accounting ("Accounting” (“ASU 2017-09"2017-09”), to clarify when to account for a change in the terms or conditions of a share-based payment award as a modification. Under the new standard, modification is required only if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. ASU 2017-09 will be effective for the Company beginning November 1, 2018, and will be applied prospectively.
Accounting Pronouncements Issued but not yet Adopted
In December 2019, the FASB issued ASU 2019-12, “Income Taxes Topic 740-Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and Subsidiary
In FebruaryJune 2016, the FASB issued ASU 2016-02,2016-13, “Current Expected Credit Losses” (ASU 2016-13), which amendsintroduces an impairment model based on expected, rather than incurred, losses. Additionally, it requires expanded disclosures regarding (a) credit risk inherent in a portfolio and how management monitors the ASCportfolio’s credit quality; (b) management’s estimate of expected credit losses; and creates Topic 842, Leases ("Topic 842"). Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous GAAP on(c) changes in estimates of expected credit losses that have taken place during the balance sheet. This guidanceperiod. ASU 2016-13 is effective for annual periodsfiscal years beginning after December 15, 2018, which for the Company will be the annual period ending October 31, 2020, and early adoption is permitted. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.
2. Restatement of Previously Issued Consolidated Financial Statement (continued)
| October 31, 2015 | ||||||||||||||||
| Select Balance Sheet Accounts | As Reported | Adjustments | As Restated | Reference | ||||||||||||
| PASSUR Network, net | $ | 5,902,751 | $ | (554,088 | ) | $ | 5,348,663 | 2 | ||||||||
| Capitalized software development costs, net | $ | 7,684,603 | $ | (786,894 | ) | $ | 6,897,709 | 1 | ||||||||
| Deferred tax asset, non-current | $ | 1,658,557 | $ | 325,234 | $ | 1,983,791 | 1-3 | |||||||||
| Total stockholders' equity | $ | 11,473,100 | $ | (1,015,748 | ) | $ | 10,457,352 | 1-3 | ||||||||
| October 31, 2016 | ||||||||||||||||||||
| Select Balance Sheet Accounts | As Reported | Period Adjustments | Prior Period Adjustments | As Restated | Reference | |||||||||||||||
| PASSUR Network, net | $ | 5,739,753 | $ | 12,756 | $ | (554,088 | ) | $ | 5,198,421 | 2 | ||||||||||
| Capitalized software development costs, net | $ | 8,263,533 | $ | 123,399 | $ | (786,894 | ) | $ | 7,600,038 | 1 | ||||||||||
| Deferred tax asset, non-current | $ | 1,250,833 | $ | (53,100 | ) | $ | 325,234 | $ | 1,522,967 | 1-2 | ||||||||||
| Total stockholders' equity | $ | 12,327,187 | $ | 83,055 | $ | (1,015,748 | ) | $ | 11,394,494 | 1-2 | ||||||||||
| October 31, 2016 | ||||||||||||||||
| Select Statement of Operations Accounts | As Reported | Adjustments | As Restated | Reference | ||||||||||||
| Cost of revenues | $ | 6,377,104 | $ | (136,155 | ) | $ | 6,240,949 | 1-2 | ||||||||
| Income from operations | $ | 1,207,904 | $ | 136,155 | $ | 1,344,059 | 1-2 | |||||||||
| Income tax expense | $ | 589,923 | $ | 53,100 | $ | 643,023 | 1-2 | |||||||||
| Net income | $ | 434,648 | $ | 83,055 | $ | 517,703 | 1-2 | |||||||||
| Net income per common share - basic | $ | 0.06 | $ | 0.01 | $ | 0.07 | ||||||||||
| Net income per common share - diluted | $ | 0.06 | $ | 0.01 | $ | 0.07 | ||||||||||
| October 31, 2016 | ||||||||||||||||
| Select Statement of Cash Flows Accounts | As Reported | Adjustments | As Restated | Reference | ||||||||||||
| Net income | $ | 434,648 | $ | 83,055 | $ | 517,703 | 1-2 | |||||||||
| Depreciation and amortization | $ | 3,341,349 | $ | (450,808 | ) | $ | 2,890,541 | 1-2 | ||||||||
| Provision for deferred taxes | $ | 540,505 | $ | 53,100 | $ | 593,605 | ||||||||||
| Net cash provided by operating activities | $ | 4,910,053 | $ | (314,653 | ) | $ | 4,595,400 | 1-2 | ||||||||
| PASSUR Network | $ | (776,138 | ) | $ | 154,040 | $ | (622,098 | ) | 2 | |||||||
| Capitalized software development | $ | (2,423,811 | ) | $ | 160,613 | $ | (2,263,198 | ) | 1 | |||||||
| Net cash used in investing activities | $ | (3,530,126 | ) | $ | 314,653 | $ | (3,215,473 | ) | 1-2 | |||||||
| Three months ended January 31, 2017 | ||||||||||||||||||||
| Select Balance Sheet Accounts | As Reported | Period Adjustments | Prior Period Adjustments | As Restated | Reference | |||||||||||||||
| PASSUR Network, net | $ | 5,686,154 | $ | (18,833 | ) | $ | (541,332 | ) | $ | 5,125,989 | 2 | |||||||||
| Capitalized software development costs, net | $ | 8,419,097 | $ | 27,068 | $ | (663,495 | ) | $ | 7,782,670 | 1 | ||||||||||
| Deferred tax asset, non-current | $ | 1,165,039 | $ | - | $ | 272,134 | $ | 1,437,173 | ||||||||||||
| Total stockholders' equity | $ | 12,212,596 | $ | 8,235 | $ | (932,693 | ) | $ | 11,288,138 | 1-2 | ||||||||||
| Six months ended April 30, 2017 | ||||||||||||||||||||
| Select Balance Sheet Accounts | As Reported | Period Adjustments | Prior Period Adjustments | As Restated | Reference | |||||||||||||||
| PASSUR Network, net | $ | 5,918,106 | $ | (55,970 | ) | $ | (560,165 | ) | $ | 5,301,971 | 2 | |||||||||
| Capitalized software development costs, net | $ | 8,616,778 | $ | 22,783 | $ | (636,427 | ) | $ | 8,003,134 | 1 | ||||||||||
| Deferred tax asset, non-current | $ | 1,358,400 | $ | - | $ | 272,134 | $ | 1,630,534 | ||||||||||||
| Total stockholders' equity | $ | 12,287,185 | $ | (33,187 | ) | $ | (924,458 | ) | $ | 11,329,540 | 1-2 | |||||||||
| Nine months ended July 31, 2017 | ||||||||||||||||||||
| Select Balance Sheet Accounts | As Reported | Period Adjustments | Prior Period Adjustments | As Restated | Reference | |||||||||||||||
| PASSUR Network, net | $ | 6,169,478 | $ | (35,256 | ) | $ | (616,135 | ) | $ | 5,518,087 | 2 | |||||||||
| Capitalized software development costs, net | $ | 8,957,601 | $ | 16,449 | $ | (613,644 | ) | $ | 8,360,406 | 1 | ||||||||||
| Deferred tax asset, non-current | $ | 1,271,900 | $ | - | $ | 272,134 | $ | 1,544,034 | ||||||||||||
| Total stockholders' equity | $ | 11,861,213 | $ | (18,807 | ) | $ | (957,645 | ) | $ | 10,884,761 | 1-2 | |||||||||
| Three months ended January 31, 2017 | ||||||||||||||||
| Select Statement of Operations Accounts | As Reported | Adjustments | As Restated | Reference | ||||||||||||
| Cost of revenues | $ | 1,690,009 | $ | (8,235 | ) | $ | 1,681,774 | 1-2 | ||||||||
| (Loss)/Income from operations | $ | (120,467 | ) | $ | 8,235 | $ | (112,232 | ) | 1-2 | |||||||
| (Benefit) provision for income taxes | $ | 94,684 | $ | (197,749 | ) | $ | (103,065 | ) | 3 | |||||||
| Net (loss)/income | $ | (256,551 | ) | $ | 205,984 | $ | (50,567 | ) | ||||||||
| Net (loss)/income per common share - basic | $ | (0.03 | ) | $ | 0.02 | $ | (0.01 | ) | ||||||||
| Net (loss)/income per common share - diluted | $ | (0.03 | ) | $ | 0.02 | $ | (0.01 | ) | ||||||||
| Three months ended April 30, 2017 | ||||||||||||||||
| Select Statement of Operations Accounts | As Reported | Adjustments | As Restated | Reference | ||||||||||||
| Cost of revenues | $ | 1,534,126 | $ | 33,187 | $ | 1,567,313 | 1-2 | |||||||||
| (Loss)/Income from operations | $ | (185,166 | ) | $ | (33,187 | ) | $ | (218,353 | ) | 1-2 | ||||||
| (Benefit) provision for income taxes | $ | (192,325 | ) | $ | - | $ | (192,325 | ) | ||||||||
| Net (loss)/income | $ | (38,112 | ) | $ | (33,187 | ) | $ | (71,299 | ) | |||||||
| Net (loss)/income per common share - basic | $ | 0.00 | $ | (0.01 | ) | $ | (0.01 | ) | ||||||||
| Net (loss)/income per common share - diluted | $ | 0.00 | $ | (0.01 | ) | $ | (0.01 | ) | ||||||||
| Three months ended July 31, 2017 | ||||||||||||||||
| Select Statement of Operations Accounts | As Reported | Adjustments | As Restated | Reference | ||||||||||||
| Cost of revenues | $ | 1,489,703 | $ | 18,807 | $ | 1,508,510 | 1-2 | |||||||||
| (Loss)/Income from operations | $ | (451,460 | ) | $ | (18,807 | ) | $ | (470,267 | ) | 1-2 | ||||||
| (Benefit) provision for income taxes | $ | 86,500 | $ | - | $ | 86,500 | ||||||||||
| Net (loss)/income | $ | (579,360 | ) | $ | (18,807 | ) | $ | (598,167 | ) | |||||||
| Net (loss)/income per common share - basic | $ | (0.08 | ) | $ | - | $ | (0.08 | ) | ||||||||
| Net (loss)/income per common share - diluted | $ | (0.08 | ) | $ | - | $ | (0.08 | ) | ||||||||
| Three months ended January 31, 2017 | ||||||||||||||||
| Select Statement of Cash Flows Accounts | As Reported | Adjustments | As Restated | Reference | ||||||||||||
| Net (loss)/income | $ | (256,551 | ) | $ | 205,984 | $ | (50,567 | ) | 1-3 | |||||||
| Depreciation and amortization | $ | 857,174 | $ | (111,256 | ) | $ | 745,918 | 1-2 | ||||||||
| Provision for deferred taxes | $ | 85,794 | $ | (197,749 | ) | $ | (111,955 | ) | 3 | |||||||
| Net cash (used in)/ provided by operating activities | $ | (124,381 | ) | $ | (103,021 | ) | $ | (227,402 | ) | 1-3 | ||||||
| PASSUR Network | $ | (162,795 | ) | $ | 62,658 | $ | (100,137 | ) | 2 | |||||||
| Capitalized software development | $ | (647,432 | ) | $ | 40,362 | $ | (607,070 | ) | 1 | |||||||
| Net cash used in investing activities | $ | (896,046 | ) | $ | 103,021 | $ | (793,025 | ) | 1-2 | |||||||
| Six months ended April 30, 2017 | ||||||||||||||||
| Select Statement of Cash Flows Accounts | As Reported | Adjustments | As Restated | Reference | ||||||||||||
| Net (loss)/income | $ | (294,663 | ) | $ | 172,797 | $ | (121,866 | ) | 1-3 | |||||||
| Depreciation and amortization | $ | 1,702,760 | $ | (222,512 | ) | $ | 1,480,248 | 1-2 | ||||||||
| Provision for deferred taxes | $ | (107,567 | ) | $ | (197,749 | ) | $ | (305,316 | ) | 3 | ||||||
| Net cash (used in)/ provided by operating activities | $ | 2,339,774 | $ | (247,464 | ) | $ | 2,092,310 | 1-3 | ||||||||
| PASSUR Network | $ | (596,533 | ) | $ | 162,453 | $ | (434,080 | ) | 2 | |||||||
| Capitalized software development | $ | (1,327,848 | ) | $ | 85,009 | $ | (1,242,839 | ) | 1 | |||||||
| Net cash used in investing activities | $ | (2,021,324 | ) | $ | 247,464 | $ | (1,773,860 | ) | 1-2 | |||||||
| Nine months ended July 31, 2017 | ||||||||||||||||
| Select Statement of Cash Flows Accounts | As Reported | Adjustments | As Restated | Reference | ||||||||||||
| Net (loss)/income | $ | (874,024 | ) | $ | 153,990 | $ | (720,034 | ) | 1-3 | |||||||
| Depreciation and amortization | $ | 2,519,500 | $ | (349,331 | ) | $ | 2,170,169 | 1-2 | ||||||||
| Provision for deferred taxes | $ | (21,067 | ) | $ | (197,749 | ) | $ | (218,816 | ) | 3 | ||||||
| Net cash (used in)/ provided by operating activities | $ | 2,711,495 | $ | (393,090 | ) | $ | 2,318,405 | 1-3 | ||||||||
| PASSUR Network | $ | (1,023,608 | ) | $ | 261,238 | $ | (762,370 | ) | 2 | |||||||
| Capitalized software development | $ | (2,144,555 | ) | $ | 131,850 | $ | (2,012,705 | ) | 1 | |||||||
| Net cash used in investing activities | $ | (3,421,958 | ) | $ | 393,090 | $ | (3,028,868 | ) | 1-2 | |||||||
Property and equipment consist of the following as of October 31, 20172020 and 2016:
|
| Estimated useful lives |
| 2020 |
| 2019 |
|
|
|
|
|
|
|
Leasehold improvements |
| 3-5 years |
| $4,000 |
| $216,000 |
Equipment |
| 5-10 years |
| 4,789,000 |
| 6,413,000 |
Furniture and fixtures |
| 5-10 years |
| 29,000 |
| 593,000 |
|
|
|
| 4,822,000 |
| 7,222,000 |
Less: accumulated depreciation |
|
|
| 4,564,000 |
| 6,670,000 |
Total |
|
|
| $258,000 |
| $552,000 |
| Estimated useful lives | 2017 | 2016 | |||||||
| Leasehold improvements | 3-5 years | $ | 216,000 | $ | 216,000 | ||||
| Equipment | 5-10 years | 5,960,000 | 5,727,000 | ||||||
| Furniture and fixtures | 5-10 years | 585,000 | 563,000 | ||||||
| 6,761,000 | 6,506,000 | ||||||||
| Less accumulated depreciation | 5,909,000 | 5,319,000 | |||||||
| Total | $ | 852,000 | $ | 1,187,000 | |||||
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Property and Equipment, net (continued)
The Company recorded depreciation expense on the assets included in property and equipment of $590,000$279,000 and $496,000$322,000 for the year ended October 31, 20172020 and 2016,2019, respectively.
3. PASSUR Network,
PASSUR Network consists of the following as of October 31, 20172020 and 2016:
| 2017 | 2016 | |||||||
| (As Restated) | ||||||||
| PASSUR Network, beginning balance | $ | 18,387,000 | $ | 17,765,000 | ||||
| Additions | 1,401,000 | 622,000 | ||||||
| Total capitalized PASSUR Network costs | 19,788,000 | 18,387,000 | ||||||
| Less accumulated depreciation | 13,784,000 | 13,189,000 | ||||||
| PASSUR Network, ending balance, net | $ | 6,004,000 | $ | 5,198,000 | ||||
|
| 2020 |
| 2019 |
PASSUR Network, beginning balance |
| $18,902,000 |
| $19,242,000 |
Additions |
| - |
| 15,000 |
Disposals |
| (11,000) |
| (355,000) |
Impairment charges taken |
| (3,565,000) |
| - |
Total capitalized PASSUR Network costs |
| 15,326,000 |
| 18,902,000 |
Less accumulated depreciation |
| 15,326,000 |
| 14,953,000 |
PASSUR Network, ending balance, net |
| $- |
| $3,949,000 |
The Company capitalized $1,197,000$0 and $489,000,$61,000, of PASSUR Network costs, for the year ended October 31, 20172020 and 2016, respectively. These amounts exclude $204,000 and $133,000 of parts purchased, related to the PASSUR Network, for the year ended October 31, 2017 and 2016,2019, respectively. Depreciation expense related to the Company-owned PASSUR Network was $595,000$374,000 and $773,000$868,000 for the periodyears ended October 31, 20172020 and 2016,2019, respectively. Depreciation iswas charged to cost of revenues and is calculated using the straight-line method over the estimated useful life of the asset, which iswas estimated at seven and five years for PASSUR and SMLAT systems, respectively.
The net carrying balance of the PASSUR Network as of October 31, 20172020 and October 31, 2016,2019 was $6,004,000$0 and $5,198,000,$3,949,000, respectively. Included in the net carrying balance as of October 31, 2017,2019, were parts and finished goods for PASSUR and SMLAT Systems totaling $1,636,000$1,298,000 and $642,000,$533,000, respectively, which havewere not yet been installed. As of October 31, 2016, $1,815,000 and $911,000 of parts and finished goods for PASSUR and SMLAT systems, respectively, were included in the net carrying balance of the PASSUR Network. PASSUR and SMLAT Systems which arewere not installed arewere carried at cost and not depreciated until installed.
The Company wrote off the carrying value applicable to the PASSUR Network systems of approximately $3,565,000, and lease assets where depreciation has commenced is estimatedapplicable to approximate $673,000, $659,000, $626,000, $412,000, and $255,000,these PASSUR locations of approximately $175,000 during the second quarter of fiscal 2020, which amounts were included as an impairment charge for the fiscal yearsyear ended October 31, 2018,2020. The write-off amount includes PASSUR System and SMLAT System assets as well as inventory of finished and spare parts.
During the year ended October 31, 2019, 2020, 2021 and 2022, respectively.the Company disposed of four PASSUR Network assets, with a net book value of zero. The Company did not dispose of or record any impairments related to any of the PASSUR Network assets in fiscal years 2017 or 2016.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. Capitalized Software Development Costs
PASSUR Software Development costs consist of the following as of October 31, 20172020 and 2016:
| 2017 | 2016 | |||||||
| (As Restated) | ||||||||
Software development costs, beginning balance | $ | 16,890,000 | $ | 14,627,000 | ||||
Additions | 3,027,000 | 2,263,000 | ||||||
Total capitalized software development costs | 19,917,000 | 16,890,000 | ||||||
Less accumulated amortization | 11,024,000 | 9,290,000 | ||||||
Software development costs, ending balance, net | $ | 8,893,000 | $ | 7,600,000 | ||||
|
| 2020 |
| 2019 |
Software development costs, beginning balance |
| $23,732,000 |
| $21,159,000 |
Additions |
| 489,000 |
| 2,573,000 |
Impairment charge |
| (6,134,000) |
| - |
Total capitalized software development costs |
| 18,087,000 |
| 23,732,000 |
Less accumulated amortization |
| 16,864,000 |
| 15,413,000 |
Software development costs, ending balance, net |
| $1,223,000 |
| $8,319,000 |
The Company'sCompany’s capitalization of software development projects was $3,027,000$489,000 and $2,263,000$2,573,000 for the year ended October 31, 20172020 and 2016,2019, respectively. Amortization expense related to capitalized software development projects was $1,734,000$1,451,000 and $1,561,000$2,396,000 for the year ended October 31, 20172020 and 2016,2019, respectively.
As of October 31, 2017, amortization expense for capitalized software development costs where amortization has commenced is estimated to approximate $1,893,000, $1,480,000, $1,368,000, $906,000, and $359,000, for the fiscal years ended October 31, 2018, 2019, 2020, 2021 and 2022, respectively. As of October 31, 2017, the Company had $2,727,000$973,000 of capitalized software development costs relating to projects currently still in development, therefore, are not yet subject to amortization. During the year ended October 31, 2020, the Company revised the amortization period for capitalized software development costs to 36 months, to more closely align with the estimated remaining useful life of these assets.
During the second quarter of 2020, due to the financial and economic hardships being experienced by airlines, airports and air transportation support vendors in the current COVID-19 environment, there was a sufficient amount of uncertainty surrounding the ability of our customers to continue to perform their contracts with the Company. In order to determine whether or not an impairment had occurred, the Company looked at existing contracted revenue, adjusted for future uncertainties, and compared those amounts with the net carrying value of the related capitalized development cost asset. Where the revenue amount was less than the net carrying value of the asset, we determined that an impairment had occurred. As a result of this exercise, during the second quarter of fiscal 2020, the Company wrote-off assets totaling $6,134,000, based on the assumption that the carrying value of the software capitalization should not exceed 100% of the committed contract values remaining.
As a result of the industry changes in response to the COVID-19 pandemic, the corresponding review conducted by the Company described above and the resultant write-offs taken during fiscal year 2020, the Company anticipates that its level of capitalized software development costs, including related amortization of such costs, will decrease in the future. In connection with the impairment analysis described above, the Company revised its estimate of the remaining useful life of the capitalized software development costs to three years.
The Company did not record any impairments related to capitalized software development projects in fiscal years 2017 or 2016.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following as of October 31, 20172020 and 2016:
| 2017 | 2016 | |||||||
| Payroll, payroll taxes, and benefits | $ | 565,000 | $ | 513,000 | ||||
| Professional fees | 156,000 | 148,000 | ||||||
| Travel expenses | 171,000 | 142,000 | ||||||
| Contractor fees | 172,000 | - | ||||||
| Other liabilities | 209,000 | 133,000 | ||||||
| Total | $ | 1,273,000 | $ | 936,000 | ||||
|
| 2020 |
| 2019 |
Payroll, payroll taxes, and benefits |
| $243,000 |
| $186,000 |
Professional fees |
| 181,000 |
| 197,000 |
Travel expenses |
| 29,000 |
| 73,000 |
Accrued rent |
| 145,000 |
| 151,000 |
Other liabilities |
| 123,000 |
| 182,000 |
Total |
| $721,000 |
| $789,000 |
6. Notes Payable
During the fiscal year ended October 31, 2019, the Company owed certain amounts to G.S. Beckwith Gilbert, the Company’s significant shareholder and Non-Executive Chairman of the Board, under a promissory note issued by the Company to Mr. Gilbert on January 28, 2019 (the “Fifth Gilbert Note”). The maturity date under the Fifth Gilbert Note was November 1, 2020, and the annual interest rate was 9 ¾%, with annual interest payments required to be made on October 31st of each year. The note payable was secured by the Company’s assets.
During the year ended October 31, 2017,2019, the Company paid Mr. Gilbert interest to G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, of $171,000, representing the entire fiscal year 2017 interest due, thereby meeting the payment requirements of the loan agreement. Subsequent to October 31, 2017, the Company paid all interest incurredaccrued on the note payable,Fifth Gilbert Note through JanuaryJuly 31, 20182019 in thea total amount of $66,000.equal to $516,000. During fiscal year 2017,2019, Mr. Gilbert loaned the Company an additional $1,100,000$2,100,000 to primarily fund the Company'sCompany’s near-term investment strategy to enhance the Company'sCompany’s technology platform, in the form of software development personnel, third-party contractors, and PASSUR Network infrastructure support. As of October 31, 2017,2019, the loan balance totaled $3,800,000.
On January 27, 2020, the Company and Mr. Gilbert loaned the Company an additional $925,000. As of February 12, 2018, the loan balance totaled $4,725,000.
During the fiscal year ended October 31, 2020, the Company did not pay any interest on the Sixth Gilbert Note. As of October 31, 2020, the aggregate amount owed by the Company to Mr. Gilbert was $10,692,000, consisting of a principal of $9,585,000 (which included the principal of $8,670,000 outstanding under the Sixth Gilbert Note and an additional amount of $915,000 loaned to the Company by Mr. Gilbert during the period from January 27, 2020 to October 31, 2020) and unpaid interest of $1,107,000 (which included unpaid interest of $401,000 accrued under the Fifth Gilbert Note that was included in the Sixth Gilbert Note and unpaid interest of $706,000 accrued under the Sixth Gilbert Note through October 31, 2020). In December 2020, the Company made a payment in the amount of $177,000 in respect of interest accrued under the Sixth Gilbert Note during the 2021 fiscal year.
On January 29, 2021, the Company and Mr. Gilbert entered into a Seventh Debt Extension Agreement effective January 29, 2021, pursuant to which the Company cancelled the Sixth Gilbert Note and issued Mr. Gilbert a new promissory note (the “Seventh Gilbert Note”) in the amount of $10,692,000, consisting of a principal of $9,585,000 and unpaid interest of
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. Notes Payable (continued)
$1,107,000 accrued under the Sixth Gilbert Note through October 31, 2020. Under the terms of the Seventh Gilbert Note, the Company agreed to pay the unpaid interest of $1,107,000 accrued under the Sixth Gilbert Note and included in the Seventh Gilbert Note (as described above) at the time and on the terms set forth in the Seventh Gilbert Note. Under the terms of the Seventh Gilbert Note, the maturity date of the loan was extended to November 1, 2022, and the annual interest rate remained at 9 ¾%, with annual interest payments required to be made on October 31st of each year (although any accrued interest can be paid before such time without penalty). The note payable is secured by the Company'sCompany’s assets. The Company has paid all interest incurred onamendments to the Fourth ReplacementSixth Gilbert Note through October 31, 2017, totaling $171,000. Subsequentwere determined to October 31, 2017,be a modification of the Company paid all interest incurred ondebt instrument and no gain or loss was recorded as a result of the note payable, through January 31, 2018transactions.
As described in the amountmore detail in Note 1, “Description of $66,000.
7. Leases
In February 2016, the FASB issued ASU 2016-02, which amends the ASC and creates Topic 842, Leases (“Topic 842”). Topic 842 requires lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous GAAP on the balance sheet. On November 1, 2019, the Company adopted Topic 842 using the modified retrospective transition approach permitted under the new standard for leases that existed at November 1, 2019 and, accordingly, the prior comparative periods were not restated. Under this method, the Company was required to assess the remaining future payments of existing leases as of November 1, 2019. Additionally, as of the date of adoption, the Company elected the package of practical expedients that did not require the Company to assess whether expired or existing contracts contain leases as defined in Topic 842, did not require reassessment of the lease classification (i.e., operating lease vs. finance lease) for expired or existing leases, and did not require a change to the accounting for previously capitalized initial direct costs.
The note payableadoption of this standard impacted the Company’s consolidated balance sheet due to the recognition of ROU assets and associated lease liabilities related to operating leases as compared to the previous accounting. The accounting for finance leases under Topic 842 is secured byconsistent with the Company's assets.prior accounting for capital leases. The impact of the adoption of this standard on the Company’s consolidated statement of earnings and consolidated statement of cash flows was not material.
Per the guidance of Topic 842, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset. The Company recognizes a lease liability and a related ROU asset at the commencement date for leases on its consolidated balance sheet, excluding short-term leases as noted below. The lease liability is equal to the present value of unpaid lease payments over the remaining lease term. The Company’s lease term at the commencement date may reflect options to extend or terminate the lease when it is reasonably certain that such options will be exercised. To determine the present value of the lease liability, the Company uses an incremental borrowing rate, which is defined as the rate of interest that the Company would have to pay to borrow (on a collateralized basis over a similar term) an amount equal to the lease payments in similar economic environments. The ROU asset is based on the corresponding lease liability adjusted for certain costs such as initial direct costs, prepaid lease payments and lease incentives received. Both operating and finance lease ROU assets are reviewed for impairment, consistent with other long-lived assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. After a ROU asset is impaired, any remaining balance of the ROU asset is amortized on a straight-line basis over the shorter of the remaining lease term or the estimated useful life.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Leases
After the lease commencement date, the Company evaluates lease modifications, if any, that could result in a change in the accounting for leases. For a lease modification, an evaluation is performed to determine if it should be treated as either a separate lease or a change in the accounting of an existing lease. In addition, significant changes in events or circumstances within the Company’s control are assessed to determine whether a change in the accounting for leases is required.
Certain of the Company’s leases provide for variable lease payments for the right to use an underlying asset that vary due to changes in facts and circumstances occurring after the commencement date, other than the passage of time. Variable lease payments that are dependent on an index or rate (e.g., Consumer Price Index) are included in the initial measurement of the lease liability, the initial measurement of the ROU asset, and the lease classification test based on the index or rate as of the commencement date. Any changes from the commencement date estimation of the index- and rate-based variable payments are expensed as incurred in the period of the change. Variable lease payments that are not known at the commencement date
and are determinable based on the performance or use of the underlying asset, are not included in the initial measurement of the lease liability or the ROU asset, but instead are expensed as incurred. The Company'sCompany’s variable lease payments primarily include common area maintenance and real estate taxes.
Upon the adoption of Topic 842, the Company made the following accounting policy elections:
·Certain of the Company’s contracts contain lease components as well as non-lease components. Unless an accounting policy is elected to the contrary, the contract consideration must be allocated to the separate lease and non-lease components in accordance with Topic 842. For purposes of allocating contract consideration, the Company elected not to separate the lease components from non-lease components for all asset classes. This was applied to all existing leases as of November 1, 2019 and will be applied to new leases on an on-going basis.
·The Company elected not to apply the measurement and recognition requirements of Topic 842 to short-term leases (i.e., leases with a term of 12 months or less). Accordingly, short-term leases will not be recorded as ROU assets or lease liabilities on the Company’s consolidated balance sheets, and the related lease payments will be recognized in net earnings on a straight-line basis over the lease term.
As a result of the adoption of Topic 842, the Company recognized operating lease ROU assets and liabilities of $1,497,000 and $1,620,000, respectively, as of November 1, 2019. The Company did not have any finance lease ROU assets and liabilities.
The Company has operating leases primarily for offices and PASSUR and SMLAT systems, with remaining terms of approximately 4 months to 4.7 years. Some of the Company’s lease contracts include options to extend the leases for up to five years, while others include options to terminate the leases within 1 year. As of October 31, 2019, the Company’s headquarters, located in Stamford, Connecticut are subject towere located in a 5,300 square foot office at an average annual cost of $220,000, under a lease through January 31, 2018,expiring on June 30, 2023. On October 6, 2020, the Company modified this agreement, reducing the amount of square footage under rental and extending the term to June 30, 2025, at anthe reduced average annual rental rate of $235,000.$61,000. The Company's software development and manufacturing facility, located in Bohemia, New York, is subject to a lease through October 31, 2018, at an average annual rental rate of $139,000. The Company'sCompany’s primary software development facility, located in Orlando, Florida, is subject to a lease through August 31, 2021, at an average annual rental rate of $67,000. These$74,000. During 2020, the Company reached settlement agreements with landlords to terminate several existing leases and vacate its facilities in Bohemia, New York, Vienna, Virginia and Irving, Texas. Activities previously performed at these locations have been consolidated into the Company’s remaining facilities.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Leases (continued)
A summary of total lease costs and other information for the period relating to the Company’s operating leases is as follows:
Year Ended | ||
Total lease cost | October 31, 2020 | |
Operating lease cost | $806,810 | |
Short-term lease cost | $209,543 | |
Variable lease cost | $48,171 | |
Total | $1,064,524 | |
Other information | ||
Cash paid for amounts included in the measurement of lease liabilities: | ||
Operating cash flows from operating leases | $778,204 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $14,418 | |
Weighted-average remaining lease term - operating leases | 3.3 | years |
Weighted-average discount rate - operating leases | 9.75% |
The total future minimum lease payments, over the remaining lease term, relating to the Company’s operating leases for each of the next five fiscal years and thereafter is as follows:
Fiscal Year Ended October 31: | Operating Leases | ||
2021 | $201,571 | ||
2022 | 122,494 | ||
2023 | 85,792 | ||
2024 | 62,545 | ||
2025 | 40,393 | ||
Thereafter | - | ||
Total future minimum lease payments | $512,795 | ||
Less imputed interest | (72,699) | ||
Total | $440,096 |
The following table summarizes scheduled maturities of the Company’s contractual obligations relating to operating leases for which cash flows are fixed and determinable as of October 31, 2020:
Fiscal Year Ended October 31: | Payments Due in | ||
2021 | $121,981 | ||
2022 | 60,590 | ||
2023 | 60,590 | ||
2024 | 60,590 | ||
2025 | 40,393 | ||
Thereafter | - | ||
Total contractual obligations | $344,144 |
(1)Minimum operating lease commitments only include base rent. Certain leases provide for additional payments ofcontingent rents that are not measurable at inception and primarily include common area maintenance and real estate taxestaxes. These amounts are excluded from minimum operating lease commitments and other operating expenses over the base amount in the rental agreement. Other short-term operating leases are included below. All other operating leases are under a month-to-month arrangement. Rent expense, which includes utilities, was $645,000 and $590,000 for the year ended October 31, 2017 and 2016, respectively.
| Contractual obligations | ||||
Fiscal Year Ended October 31: | under operating leases | |||
| 2018 | $ | 287,133 | ||
| 2019 | 64,002 | |||
| 2020 | 71,882 | |||
| 2021 | 61,392 | |||
| Thereafter | - | |||
| Total minimum contractual obligations | $ | 484,409 | ||
The Company does not have any finance leases or any leases that have not yet commenced.
PASSUR Aerospace, Inc. and Subsidiary9.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
The Company'sCompany’s provision for income taxes in each fiscal year consists of current federal, state, and local minimum taxes.
The income tax expense for fiscal years ended October 31, 20172020 and 20162019 consisted of the following:
| 2017 | 2016 | |||||||
| (As Restated) | ||||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | $ | 20,000 | $ | 50,000 | ||||
| Income tax provision-current | $ | 20,000 | $ | 50,000 | ||||
| Deferred: | ||||||||
| Federal | $ | 1,826,000 | $ | 514,000 | ||||
| State | $ | 116,000 | $ | 79,000 | ||||
| Total income tax expense, net | $ | 1,962,000 | $ | 643,000 | ||||
|
| 2020 |
| 2019 |
Current: |
|
|
|
|
Federal |
| $- |
| $- |
State |
| 5,000 |
| (10,000) |
Foreign |
| 32,000 |
| - |
Income tax provision-current |
| $37,000 |
| $(10,000) |
|
|
|
|
|
Deferred: |
|
|
|
|
Federal |
| - |
| - |
State |
| - |
| - |
Total income tax expense/(benefit) |
| $37,000 |
| $(10,000) |
The difference between income taxes expected at the U.S federal statutory income tax rate of 34% and the reported income tax expense are summarized as follows:
| 2020 |
| 2019 | ||
| Amount | Percent |
| Amount | Percent |
U.S. statutory tax | $(2,576,000) | 21.0% |
| $(808,000) | 21.0% |
Stock compensation | 84,000 | -0.7% |
| 102,000 | -2.6% |
Meals and entertainment | 3,000 | 0.0% |
| 9,000 | -0.2% |
State tax, net of federal benefit | (636,000) | 5.2% |
| (164,000) | 4.2% |
Other | (14,000) | 0.1% |
| 44,000 | -1.1% |
Change in Valuation Allowance | 3,176,000 | -25.9% |
| 807,000 | -21.0% |
Income tax (benefit)/expense, net | $37,000 | -0.3% |
| $(10,000) | 0.3% |
| 2017 | 2016 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| (As Restated) | ||||||||||||||||
| U.S. statutory tax | $ | (530,000 | ) | 34.0 | % | $ | 395,000 | 34.0 | % | |||||||
| Stock compensation | 174,000 | -11.2 | % | 125,000 | 10.8 | % | ||||||||||
| Meals and entertainment | 14,000 | -0.9 | % | 14,000 | 1.2 | % | ||||||||||
| State tax, net of federal benefit | (37,000 | ) | 2.4 | % | 109,000 | 9.4 | % | |||||||||
| Other | 63,000 | -4.0 | % | - | 0.0 | % | ||||||||||
| Change in Valuation Allowance | 2,278,000 | -146.1 | % | - | 0.0 | % | ||||||||||
| Income tax expense, net | $ | 1,962,000 | -125.8 | % | $ | 643,000 | 55.4 | % | ||||||||
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
The tax effect of temporary differences that give rise to deferred tax assets and liabilities as of October 31, 20172020 and 20162019 is as follows:
|
| 2020 |
| 2019 |
Deferred tax assets and liabilities: |
|
|
|
|
Net operating loss carry-forward |
| $6,356,000 |
| $3,758,000 |
Deferred Revenue |
| 72,000 |
| 92,000 |
Allowance for doubtful accounts receivable |
| 251,000 |
| 43,000 |
|
|
|
|
|
Stock compensation-nonqualified |
| 228,000 |
| 205,000 |
Accruals |
| 53,000 |
| 81,000 |
ROU lease assets |
| (61,000) |
| - |
ROU lease liabilities |
| 116,000 |
| - |
Foreign tax credit |
| 32,000 |
| - |
Deferred rent |
| - |
| 29,000 |
Deferred interest |
| - |
| 97,000 |
Depreciation |
| 7,000 |
| (427,000) |
Sub-total |
| $7,054,000 |
| $3,878,000 |
Valuation allowance |
| (7,054,000) |
| (3,878,000) |
Deferred tax assets and liabilities |
| $- |
| $- |
The ultimate realization of deferred tax assets is dependent on the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losses can be utilized. We assess all positive and Subsidiary
| 2017 | 2016 | |||||||
| (As Restated) | ||||||||
| Deferred tax assets and liabilities: | ||||||||
| Net operating loss carry-forward | $ | 2,157,000 | $ | 1,696,000 | ||||
| Deferred Revenue | 178,000 | - | ||||||
| Allowance for doubtful accounts receivable | 70,000 | 19,000 | ||||||
| Stock compensation-nonqualified | 217,000 | 198,000 | ||||||
| Accruals | 58,000 | - | ||||||
| Depreciation | (402,000 | ) | 29,000 | |||||
| Sub-total | $ | 2,278,000 | $ | 1,942,000 | ||||
| Valuation allowance | (2,278,000 | ) | - | |||||
| Deferred tax assets and liabilities | $ | - | $ | 1,942,000 | ||||
At October 31, 2017,2020, the Company had available a federal net operating loss carryforwardscarryforward of $7,474,000,$25,377,000, of which $12,597,000 are indefinite lived and $12,780,000 will expire in various tax years from fiscal year 20232022 through fiscal year 2037. As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities does not include certain deferred tax assets that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting.
At October 31, 20172020 and 2016,2019, the Company did not have any uncertain tax positions. As permitted by ASC 740-10, the Company'sCompany’s accounting policy is to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in its income tax provision. The Company'sCompany’s tax return years that are subject to examination by taxing authorities are fiscal years 20142017 through 2017.
9. Stock-Based Compensation
On February 26, 2019, the Company's Board of Directors unanimously adopted the Plan, to replace the Company’s 2009 Stock Incentive Plan, as amended (the “2009 Plan”), which expired on February 24, 2019. The Plan was approved by the Company's 2009 stock option plan, whichCompany’s shareholders on April 9, 2019. The Plan became effective upon the date of its adoption by the Board and provides for the granting of stock options for up to 500,0005,000,000 shares of the Company'sCompany’s common stock. During fiscal year 2010,The Board of Directors adopted the plan was amendedFirst Amendment to provide for the granting of another 500,000 stock option shares, for a total provision of 1,000,000 stock option shares of the Company's common stockPlan, effective as of October 31, 2010. During fiscal year 2011,July 8, 2020, to modify the plan was amended for the granting of another 500,000 stock option shares, for a total provision of 1,500,000 stock option shares of the Company's common stockvesting periods as of October 31, 2011. During fiscal year 2017, the plan was amended for the granting of another 1,500,000 stock option shares, for a total provision of 3,000,000 stock option shares of the Company's common stock as of October 31, 2017.
The Black-Scholes stock option valuation model was developed for use in estimating the fair value of traded stock options, which have no vesting restrictions and are fully transferable. In addition, stock option valuation models require the input of highly subjective assumptions including expected stock price volatility.
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. Stock-Based Compensation (continued)
| Number of stock options | Weighted average exercise price | Weighted average remaining contractual term (in years) | Aggregate intrinsic value | |||||||||||||
| Stock options outstanding at November 1, 2015 | 1,186,000 | $ | 3.27 | 7.1 | $ | 293,000 | ||||||||||
| Stock options granted | 240,000 | $ | 3.41 | |||||||||||||
| Stock options exercised | (37,000 | ) | $ | 0.49 | ||||||||||||
| Stock options forfeited | (60,000 | ) | $ | 2.49 | ||||||||||||
| Stock options outstanding at October 31, 2016 | 1,329,000 | $ | 3.42 | 7.1 | $ | 130,000 | ||||||||||
| Stock options granted | 380,000 | $ | 3.78 | |||||||||||||
| Stock options exercised | (15,000 | ) | $ | 2.55 | ||||||||||||
| Stock options forfeited | (100,000 | ) | $ | 3.28 | ||||||||||||
| Stock options outstanding at October 31, 2017 | 1,594,000 | $ | 3.52 | 6.9 | $ | 84,000 | ||||||||||
| Stock options exercisable at October 31, 2017 | 779,500 | $ | 3.51 | 5.0 | $ | 84,000 | ||||||||||
Information with respect to the Company’s stock options for fiscal years 2020 and 2019 is as follows:
Number of | Weighted | Weighted average | Aggregate | |||||
Stock options outstanding at November 1, 2018 | 1,522,000 | $3.47 | 6.2 | $1,800 | ||||
Stock options granted | 542,500 | $1.96 | ||||||
Stock options exercised | - | $0.00 | ||||||
Stock options forfeited | (217,500) | $1.98 | ||||||
Stock options outstanding at October 31, 2019 | 1,847,000 | $3.20 | 6.4 | $2,200 | ||||
Stock options granted | 659,500 | $1.94 | ||||||
Stock options exercised | (16,000) | $1.45 | ||||||
Stock options forfeited | (800,500) | $3.14 | ||||||
Stock options outstanding at October 31, 2020 | 1,690,000 | $2.77 | 6.9 | $- | ||||
Stock options exercisable at October 31, 2020 | 809,000 | $3.34 | 4.9 | $- |
The weighted average grant date fair value of the Company'sCompany’s stock options granted during fiscal years 20172020 and 20162019 was $3.78$1.94 and $3.41,$1.96, respectively. The total intrinsic valueThere were 16,000 options exercised during fiscal 2020 at a weighted average exercise price of $1.45. There were no stock options exercised was $25,000 and $77,000 during fiscal years 2017 and 2016, respectively.
The Company'sCompany’s stock options vest over a period of five years. The fair value for these stock options was estimated at the date of grant using a Black-Scholes stock option pricing model, with the following weighted average assumptions for fiscal years 20172020 and 2016:
| Years ended October 31, | ||||||||
| 2017 | 2016 | |||||||
Expected dividend yield | 0 | % | 0 | % | ||||
Expected volatility | 117 | % | 117 | % | ||||
Risk-free interest rate | 1.84-2.26 | % | 1.41 - 1.85 | % | ||||
Expected term (years) | 4.9 - 6.5 | 4.9 - 6.5 | ||||||
Discount for post-vesting restrictions | N/A | N/A | ||||||
|
| Years ended October 31, | ||
|
| 2020 |
| 2019 |
Expected dividend yield |
| 0% |
| 0% |
Expected volatility |
| 87-117% |
| 87-117% |
Risk-free interest rate |
| 0.37 – 2.94% |
| 1.43 – 2.94% |
Expected term (years) |
| 6.5 |
| 6.5 |
Discount for post-vesting restrictions |
| N/A |
| N/A |
The Company recognized share-based compensation expense for all awards issued under the Company'sCompany’s stock equity plans in the following line items in the consolidated statement of operations:
|
| 2020 |
| 2019 |
Cost of revenues |
| $11,000 |
| $17,000 |
Research and development |
| $74,000 |
| $110,000 |
Selling, general and administrative |
| $382,000 |
| $486,000 |
|
| $467,000 |
| $613,000 |
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
9. Stock-Based Compensation (continued)
| 2017 | 2016 | |||||||
| Cost of revenues | $ | 27,000 | $ | 25,000 | ||||
| Research and development | $ | 113,000 | 122,000 | |||||
| Selling, general and administrative | $ | 438,000 | 254,000 | |||||
| $ | 578,000 | $ | 401,000 | |||||
The following table summarizes the plans under which the Company granted equity compensation as of October 31, 2017:
Name of Plan | Shares Authorized | Shares Available for Grant | Shares Outstanding | Last Date for Grant of Shares | |||||||||
| PASSUR Aerospace, Inc., 2009 Stock Incentive Plan | 3,000,000 | 1,448,000 | 1,552,000 | February 24, 2019 | |||||||||
Name of Plan | Shares Authorized | Shares Available | Shares | Last Date for Grant | ||||
PASSUR Aerospace, Inc., | 3,000,000 | 0 | 1,027,500 | February 24, 2019 | ||||
PASSUR Aerospace, Inc., 2019 Stock Incentive Plan | 5,000,000 | 4,337,500 | 662,500 | February 26, 2029 | ||||
All outstanding options granted under the Company'sCompany’s equity plans have terms of ten years. The Company'sCompany’s stock options vest over a period of five years.
There was $2,247,000$784,000 of unrecognized stock-based compensation costs expected to be recognized over a weighted average period of 3.71.8 years as of October 31, 2017.2020. The Company had 814,500881,000 shares in unvested stock-based options as of October 31, 2017.
10. Major Customers
The Company'sCompany’s principal business is to provide predictive analytics and decision support technology for the aviation industry to primarily improve the operational performance and cash flow of airlines.its customers. The Company believes it operates in one operating segment. The Company performs ongoing credit evaluations of its customers and generally does not require collateral.
As of October 31, 2020, the Company had four customers each of which accounted for 45%,10% or $6,698,000,more of total revenues in fiscal year 2016.the accounts receivable balance. One customer accounted for 17%38%, or $2,555,000, a second customer$597,000, and three customers accounted for 17% or $2,460,000, and a third customer accounted for 11% or $1,683,000 of total revenues in fiscal year 2016.10% each, with balances ranging from $151,000 to $159,000. As of October 31, 2017,2019, the Company had three customers each of which accounted for 10% or more of the accounts receivable balance. OneThe customer with the largest 2020 accounts receivable balance also accounted for 21%19%, or $309,000,$224,000, of the 2019 accounts receivable balance, a second customer accounted for 16%14%, or $242,000,$173,000, and a third customer accounted for 15%,13% or $218,000. As of October 31, 2016, the Company had three customers each of which accounted for 10% or more$158,000, of the accounts receivable balance. One customer accounted for 30%, or $330,000, and a second customer accounted for 21%, or $226,000 and a third customer accounted for 14% or $157,000.balance as of October 31, 2019. Credit losses historically have been immaterial, although, there isimmaterial. However, one major customer withincluded above for fiscal 2020, had a significant past due accounts receivable balance, which is not one of the major customers described above, which the Company has fully reserved as of the fiscal year ended October 31, 2017.
The Company had foreign sales of $320,000$1,445,000 and $206,000$1,226,000 in fiscal years 20172020 and 2016,2019, respectively. All sales, including foreign sales, are denominated in U.S. dollars.
F-27