UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10‑Q


☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the Quarterly Period ended JulyJanuary 31, 20182019

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    000‑7642

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 1900, Stamford, Connecticut

06901
(Address of Principal Executive Office)(Zip Code)

Registrant's telephone number, including area code: (203) 622-4086

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]    No [   ]      
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).   Yes [X]    No [   ]  

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

Large accelerated filer[   ]Accelerated filer[  ]
Non-accelerated filer
[   ]    (Do not check if a smaller reporting company)
Smaller reporting company[X]
Emerging growth company[   ]  

If an 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]

  
There were 7,696,091 shares of the Registrant'sRegistrant’s common stock with a par value of $0.01 per share outstanding as of SeptemberMarch 1, 2018.
2019.

INDEX

PASSUR Aerospace, Inc. and Subsidiary

  Page
   
PART I. Financial Information 
  
Item 1.Financial Statements
   
 Consolidated Balance Sheets as of JulyJanuary 31, 20182019 (unaudited) and October 31, 2017.2018.3
   
 Consolidated Statements of Operations (unaudited) Three months ended JulyJanuary 31, 20182019 and 2017.2018.4
   
Consolidated Statements of Operations Stockholders’ Equity (unaudited) NineThree months ended JulyJanuary 31, 20182019 and 2017.                                         2018.
5
   
 Consolidated Statements of Cash Flows (unaudited) NineThree months ended JulyJanuary 31, 20182019 and 2017.2018.6
   
 Notes to Consolidated Financial Statements (unaudited)7
   
 Item 2.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.1415
   
Item 3.Quantitative and Qualitative Disclosures about Market Risk.2021
   
Item 4.Controls and Procedures.2021
   
PART II. Other Information21
   
Item 1.Legal Proceedings.21
   
Item 5.   5Other Information.21
   
Item 6.Exhibits.2122
   
SignaturesSignatures. 2223


2

PART I.  Financial Information      
       
Item 1. Financial Statements      
       
PASSUR Aerospace, Inc. and Subsidiary      
       
Consolidated Balance Sheets      
       
  
July 31,
2018
  
October 31,
2017 (1)
 
  (unaudited)    
Assets      
Current assets:      
Cash $32,414  $275,146 
Accounts receivable, net  1,977,155   1,359,447 
Prepaid expenses and other current assets  262,702   251,689 
Total current assets  2,272,271   1,886,282 
         
         
PASSUR Network, net  5,020,404   6,004,367 
Capitalized software development costs, net  8,235,312   8,893,414 
Property and equipment, net  651,745   852,147 
Other assets  150,894   169,635 
Total assets $16,330,626  $17,805,845 
         
Liabilities and stockholders' equity        
Current liabilities:        
Accounts payable $938,437  $984,369 
Accrued expenses and other current liabilities  1,339,875   1,273,170 
Deferred revenue, current portion  3,726,066   2,824,885 
Total current liabilities  6,004,378   5,082,424 
         
Deferred revenue, long term portion  392,549   470,831 
Note payable - related party  5,725,000   3,800,000 
Other liabilities  116,394   - 
Total liabilities  12,238,321   9,353,255 
         
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 shares, respectively, par value $0.01 per share;  issued 8,480,526 at July 31, 2018 and  October 31, 2017, respectively  84,804   84,804 
Additional paid-in capital  17,207,237   16,699,337 
Accumulated deficit  (11,266,058)  (6,397,873)
   6,025,983   10,386,268 
Treasury stock, at cost, 784,435  shares at July 31, 2018 and October 31, 2017, respectively  (1,933,678)  (1,933,678)
Total stockholders' equity  4,092,305   8,452,590 
Total liabilities and stockholders' equity $16,330,626  $17,805,845 
PART I: Financial Information

(1) Certain July 31, 2017 balances have been restated from previously reported results. Please refer to Note 2 of the Company's Annual Report on Form 10-K for the year ended October 31, 2017.Item 1.  Financial Statements
PASSUR Aerospace, Inc. and Subsidiary

      Consolidated Balance Sheets

  
January 31,
2019
  
October 31,
2018
 
  (unaudited)    
Assets      
Current assets:      
Cash $2,860,717  $100,856 
Accounts receivable, net  1,025,332   1,186,664 
Prepaid expenses and other current assets  226,718   199,173 
Total current assets  4,112,767   1,486,693 
         
         
PASSUR Network, net  4,649,011   4,800,750 
Capitalized software development costs, net  8,317,541   8,141,589 
Property and equipment, net  584,354   672,601 
Other assets  102,378   112,551 
Total assets $17,766,051  $15,214,184 
         
Liabilities and stockholders' equity        
Current liabilities:        
Accounts payable $971,034  $989,958 
Accrued expenses and other current liabilities  1,120,514   1,189,342 
Deferred revenue, current portion  5,346,382   2,847,323 
Total current liabilities  7,437,930   5,026,623 
         
Deferred revenue, long term portion  360,892   409,971 
Note payable - related party  6,960,000   6,050,000 
Other liabilities  105,202   113,273 
Total liabilities  14,864,024   11,599,867 
         
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 shares, respectively, par value $0.01 per share;  issued 8,480,526 at January 31, 2019 and  October 31, 2018, respectively
  84,804   84,804 
Additional paid-in capital  17,501,197   17,345,450 
Accumulated deficit  (12,750,296)  (11,882,259)
   4,835,705   5,547,995 

        
Treasury stock, at cost, 784,435  shares at January 31, 2019 and October 31, 2018, respectively
  (1,933,678)  (1,933,678)
Total stockholders' equity  2,902,027   3,614,317 
Total liabilities and stockholders' equity $17,766,051  $15,214,184 

See accompanying notes to consolidated financial statements.
3

PASSUR Aerospace, Inc. and Subsidiary
 
       
Consolidated Statements of Operations 
       
(Unaudited) 
    
  Three months ended 
  July 31, 
  2018   
2017 ⁽¹⁾
 
        
        
Revenues $3,715,767  $3,331,898 
         
Cost of expenses:        
Cost of revenues  3,908,281   1,508,510 
Research and development expenses  151,185   186,352 
Selling, general, and administrative expenses  2,254,846   2,107,303 
   6,314,312   3,802,165 
         
Loss from operations $(2,598,545) $(470,267)
         
Interest expense - related party  78,300   41,400 
Loss before income taxes  (2,676,845)  (511,667)
         
Provision for income taxes  -   86,500 
Net loss $(2,676,845) $(598,167)
         
Net loss per common share - basic $(0.35) $(0.08)
Net loss per common share - diluted $(0.35) $(0.08)
         
Weighted average number of common shares outstanding - basic  7,696,091   7,696,091 
Weighted average number of common shares outstanding - diluted  7,696,091   7,696,091 
(1) Certain July 31, 2017 balances have been restated from previously reported results. Please refer to Note 2 of the Company's Annual Report on Form 10-K for the year ended October 31, 2017.
PASSUR Aerospace, Inc. and Subsidiary

     Consolidated Statements of Operations

(Unaudited)

  Three months ended 
  January 31, 
  2019  2018 
       
Revenues $3,656,124  $3,513,487 
         
Cost of expenses:        
Cost of revenues  2,032,420   2,239,299 
Research and development expenses  143,955   154,666 
Selling, general, and administrative expenses  2,245,897   2,220,828 
   4,422,272   4,614,793 
         
Loss from operations $(766,148) $(1,101,306)
         
Interest expense - related party  167,919   65,713 
Loss before income taxes  (934,067)  (1,167,019)
         
Provision for income taxes  -   - 
Net loss $(934,067) $(1,167,019)
         
Net loss per common share - basic $(0.12) $(0.15)
Net loss per common share - diluted $(0.12) $(0.15)
         
Weighted average number of common shares outstanding - basic  7,696,091   7,696,091 
Weighted average number of common shares outstanding - diluted  7,696,091   7,696,091 

See accompanying notes to consolidated financial statements.
4


PASSUR Aerospace, Inc. and Subsidiary
PASSUR Aerospace, Inc. and Subsidiary 
       
Consolidated Statements of Operations 
       
(Unaudited)
    
  Nine months ended 
  July 31, 
  2018   
2017 ⁽¹⁾
 
        
        
Revenues $10,731,096  $10,371,235 
         
Cost of expenses:        
Cost of revenues  8,173,702   4,757,598 
Research and development expenses  455,014   600,205 
Selling, general, and administrative expenses  6,751,959   5,814,285 
   15,380,675   11,172,088 
         
Loss from operations $(4,649,579) $(800,853)
         
Interest expense - related party  214,100   122,850 
Other loss  4,506   5,221 
Loss before income taxes  (4,868,185)  (928,924)
         
Benefit for income taxes  -   (208,890)
Net loss $(4,868,185) $(720,034)
         
Net loss per common share - basic $(0.63) $(0.09)
Net loss per common share - diluted $(0.63) $(0.09)
         
Weighted average number of common shares outstanding - basic  7,696,091   7,693,069 
Weighted average number of common shares outstanding - diluted  7,696,091   7,693,069 

(1) Certain July 31, 2017 balances have been restated from previously reported results. Please refer to Note 2Consolidated Statements of the Company's Annual Report on Form 10-K for the year ended October 31, 2017.
Stockholders’ Equity

(Unaudited)

  Three Months ended January 31, 2019 
        Additional        Total 
  Common Stock  Paid-In  Accum.  Treasury  Stockholders 
  Shares  Amount  Capital  Deficit  Stock  Equity 
                   
Balance at October 31, 2018  8,480,526  $84,804  $17,345,450  $(11,882,259) $(1,933,678) $3,614,317 
                         
      Stock-based compensation expense          155,747           155,747 
      Net loss              (934,067)      (934,067)
   ��  Effect of new accounting standard
              66,030       66,030 
Balance at January 31, 2019  8,480,526   84,804   17,501,197   (12,750,296)  (1,933,678)  2,902,027 
                         
                         
                         
  Three Months ended January 31, 2018 
          Additional          Total 
  Common Stock  Paid-In  Accum.  Treasury  Stockholders 
  Shares  Amount  Capital  Deficit  Stock  Equity 
                         
Balance at October 31, 2017  8,480,526  $84,804  $16,699,337  $(6,397,873) $(1,933,678) $8,452,590 
                         
      Stock-based compensation expense          171,112           171,112 
      Net loss              (1,167,019)      (1,167,019)
Balance at January 31, 2018  8,480,526   84,804   16,870,449   (7,564,892)  (1,933,678)  7,456,683 

See accompanying notes to consolidated financial statements.
5
PASSUR Aerospace, Inc. and Subsidiary
 
       
Consolidated Statements of Cash Flows 
       
(Unaudited) 
    
    
Nine months ended
July 31,
 
  2018   
2017 ⁽¹⁾
 
        
Cash flows from operating activities       
Net loss $(4,868,185) $(720,034)
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation and amortization  2,723,450   2,170,169 
Benefit for deferred taxes  -   (218,816)
Provision for doubtful accounts  7,500   161,344 
Provision for obsolete and slow moving PASSUR Network parts and supplies  229,500   - 
Other Liabilities  116,394   - 
Stock-based compensation  507,900   408,050 
Loss from impairment charges  1,246,354   - 
Changes in operating assets and liabilities:        
Accounts receivable  (625,208)  225,277 
Prepaid expenses and other current assets  (42,699)  (102,555)
Other assets  18,741   22,710 
Accounts payable  (45,930)  255,989 
Accrued expenses and other current liabilities
  (11,595)  (83,900)
Accrued interest - related party  78,300   - 
Deferred revenue  822,899   200,171 
Total adjustments  5,025,606   3,038,439 
Net cash provided by operating activities  157,421   2,318,405 
         
Cash flows used in investing activities        
PASSUR Network  (320,601)  (762,368)
Software development costs  (1,844,224)  (2,012,705)
Property and equipment  (160,328)  (253,795)
Net cash used in investing activities  (2,325,153)  (3,028,868)
         
Cash flows from financing activities        
Proceeds from notes payable - related party  1,925,000   - 
Net cash provided by financing activities  1,925,000   - 
         
Decrease in cash  (242,732)  (710,463)
         
Cash - beginning of period  275,146   1,523,655 
Cash - end of period $32,414  $813,192 
         
Supplemental cash flow information        
Cash paid during the period for:        
Interest - related party $135,800  $122,850 
Income taxes $5,545  $71,196 

PASSUR Aerospace, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(1) Certain July 31, 2017 balances have been restated from previously reported results. Please refer to Note 2 of the Company's Annual Report on Form 10-K for the year ended October 31, 2017(Unaudited).

    
Three months ended
January 31,
 
  2019  2018 
       
Cash flows from operating activities      
Net loss $(934,067) $(1,167,019)
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation and amortization  824,882   830,472 
Other Liabilities  (8,071)  5,517 
Stock-based compensation  155,747   171,112 
Changes in operating assets and liabilities:        
Accounts receivable  161,332   380,840 
Prepaid expenses and other current assets  (37,718)  (118,938)
Other assets  10,173   13,532 
Accounts payable  (18,924)  631,590 
Accrued expenses and other current liabilities
  (68,828)  (157,111)
Deferred revenue  2,516,010   1,967,337 
Total adjustments  3,534,603   3,724,351 
Net cash provided by operating activities  2,600,536   2,557,332 
         
Cash flows used in investing activities        
PASSUR Network  (53,718)  (114,456)
Software development costs  (695,794)  (548,272)
Property and equipment  (1,163)  (38,398)
Net cash used in investing activities  (750,675)  (701,126)
         
Cash flows from financing activities        
Proceeds from notes payable - related party  910,000   925,000 
Net cash provided by financing activities  910,000   925,000 
         
Increase in cash  2,759,861   2,781,206 
         
Cash - beginning of period  100,856   275,146 
Cash - end of period $2,860,717  $3,056,352 
         
Supplemental cash flow information        
Cash paid during the period for:        
Interest - related party $167,919  $65,713 

See accompanying notes to consolidated financial statements.
6

PASSUR Aerospace, Inc. and Subsidiary

Notes to Consolidated Financial Statements

       JulyJanuary 31, 20182019

 (Unaudited)

1. 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 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 extensive experience in airline, airport, and business aviation operations, finance, air traffic management, systems automation, and data visualization, with specific expertise in the operational and business needs, requirements, objectives, and constraints of the aviation industry.

PASSUR'sPASSUR’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 and their customers.

PASSUR'sPASSUR’s information solutions are used by the five largest North American airlines, more than 60 airport customers, including 20 of the top 30 North American airports (with PASSUR solutions also used at the remaining ten airports by one or more airline customers), over a hundred business aviation customers, and the U.S. government.

PASSUR provides data aggregation and consolidation, information, decision support, predictive analytics, collaborative solutions, and professional services. To enable this unique offering, PASSUR owns and operates the largest commercial passive radar network 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'sPASSUR’s industry-leading algorithms and business logic included in its products.

Solutions offered by PASSUR help to ensure flight completion, covering the entire flight life cycle, from gate to gate, and result in reductions in overall costs and carbon emissions, while helping to maximize revenue opportunities, as well as improving operational efficiency and enhancing the passenger experience.

PASSUR'sPASSUR’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, including its independent network of surveillance sensors installed throughout North America creating coast to coast coverage, as well as locations in Europe and Asia; government data; customer data; and data from third party partners. PASSUR'sPASSUR’s sensors receive aircraft and drone signals in Mode A, C, S, and Automatic Dependent Surveillance-Broadcast ("ADS-B"(“ADS-B”), providing position, altitude, beacon code, and tail number, among other information. 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 1015 years, allow 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.
7

2. Basis of Presentation and Significant Accounting Policies

The consolidated financial information contained in this quarterly report on Form 10-Q represents interim condensed financial data and, therefore, does not include all footnote disclosures required to be included in financial statements prepared in conformity with accounting principles generally accepted in the United States ("GAAP"(“GAAP”). Such footnote information was included in the Company's Annual Report on Form 10-K for the year ended October 31, 2017,2018, filed with the Securities and Exchange Commission ("SEC"(“SEC”); the consolidated financial data included herein should be read in conjunction with that report. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company'sCompany’s consolidated financial position as of JulyJanuary 31, 2018,2019, and its consolidated results of operations for the three and nine months ended JulyJanuary 31, 2018,2019, and 2017.2018.

The results of operations for the interim period stated above are not necessarily indicative of the results of operations to be recorded for the full fiscal year ended October 31, 2018.2019.

Certain financial information in the footnotes has been rounded to the nearest thousand for presentation purposes.

Certain reclassifications have been madeLiquidity

The Company’s current assets exceeded current liabilities, excluding deferred revenue by $2,021,000 as of January 31, 2019. The note payable to a related party, G.S. Beckwith Gilbert, the Company’s significant shareholder and Chairman, was $6,960,000 at January 31, 2019, with a maturity of November 1, 2020. The Company’s stockholders’ equity was $2,902,000 at January 31, 2019. The Company had a net loss of $934,000 for the three months ended January 31, 2019.

If the Company’s business does not generate sufficient cash flows from operations to meet its 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. Beckwith Gilbert, dated March 18, 2019, that if the Company, at any time, is unable to meet its obligations through March 18, 2020, G.S. Beckwith Gilbert will provide the Company with the necessary continuing financial support to meet such obligations. Such commitment for financial support may be in the form of additional advances or loans to the prior year financial statementsCompany, in order to conformaddition to the current year's presentation.deferral of principal and/or interest payments due on the existing loans, if deemed necessary. The note payable is secured by the Company’s assets.

Principles of Consolidation

The consolidated financial statements include the accounts of PASSUR and its wholly-owned subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with 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.

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.entitled.

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. Revenues are recognized when control of these services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.
8
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.

The Company recognized revenue during the three months ended January 31, 2019, of $3,656,000 under Topic 606, which was not materially different from what would have been recognized under Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition ("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 adopting Topic 606.

Revenues generated from
A. Nature of performance obligations

Subscription services revenue

Subscription services revenue is comprised of cloud-based subscription agreements arefees 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 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 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 are provided.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.
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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 individual offeringscommissions that the Company pays for obtaining a contract with a customer are included in arrangements withconditional on future service provided by the Company's customersemployee. Therefore, since these costs are identified and priced separately to the customer based upon the relative fair value for each individual element sold in the arrangement irrespective of the combination of products and services which are included in a particular arrangement.  As such, the units of accounting arenot incremental solely based on each individual element sold, and revenue is allocated to each element based on selling price. Selling price is determined using vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE isobtaining a contract, the Company does not available, or best estimate of selling price ("BESP") if neither VSOE or TPE is available. BESP must be determined in a manner that is consistent with that used 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.defer any commission costs.

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B. Disaggregation

From time to time, the Company will enter into an agreement with aThe disaggregation of revenue by customer to receive 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 numberand type of users, installation costs associated with the deployment of additions to the Company owned PASSUR Network, or set-up fees associated with new deploymentsperformance obligation is as follows:

Revenue by customer: 
Three Months
Ended
January 31,
2019
 
Airlines $2,218,000 
Airports  1,423,000 
Other  15,000 
Total Revenue $3,656,000 



Revenue by type of performance obligation: 
Three Months
Ended
January 31,
2019
 
Subscription services $3,596,000 
Professional services  60,000 
Total Revenue $3,656,000 


C. Contract Balances

The opening and closing balances of the Company software solutions.  These feesCompany's accounts receivable, unbilled receivables, and deferred revenues are recognized as revenue ratably overfollows:

  
Accounts
Receivable
  
Unbilled
Receivable
  
Deferred
Revenue
 
Balance at November 1, 2018 $1,175,000  $12,000  $3,191,000 
             
Balance at January 31, 2019 $978,000  $47,000  $5,707,000 

The difference in the termopening and closing balances of the agreement or relationship period of such arrangement, whichever is longer, but typically five years.Company’s unbilled receivable and deferred revenue primarily results from the timing difference between the Company’s performance and the customer’s payment.

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 classified onrecognized as the Company'sCompany satisfies its performance obligations. The Company generally invoices its customers in monthly, quarterly or annual installments for subscription services. Accordingly, the deferred revenue balance sheetdoes 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 three months ended January 31, 2019 that was included in the deferred revenue balance at November 1, 2018 was $2,325,000.

Unbilled accounts receivable relates to the delivery of subscription and professional services for which the related billings will occur in a liability until such timefuture period.
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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 revenue from services is properlyof the end of the reporting period, and when the Company expects to recognize the revenue.

  
12 months
or less
  
Greater than
12 months *
 
Subscription services $8,235,000  $2,255,000 
Professional services $40,000  $24,000 
Material rights $175,000  $312,000 

*Approximately 97% of these amounts 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 accordance with ASC 605-15customer contracts and excludes future billing amounts for which the correspondingcustomer has a termination for convenience right in their agreement.

Cost of Revenues

Costs associated with subscription and maintenance revenues consist primarily of direct labor, depreciation of PASSUR and Surface Multilateration ("SMLAT"(“SMLAT”) Network Systems (both collectively, the "PASSUR Network"“PASSUR Network”), amortization of capitalized software development costs, communication costs, data feeds, travel and entertainment, and consulting fees. Also, included in cost of revenues are costs associated with upgrades to PASSUR and SMLAT Systems necessary to make such systems compatible with new software applications, as well as the ordinary repair and maintenance of existing PASSUR and SMLAT Systems. Additionally, cost of revenues in each reporting period areis impacted by: (1) the number of PASSUR and SMLAT Systems added to the PASSUR Network, which includes the cost of production, shipment, and installation of these assets, which are capitalized to the PASSUR Network; and (2) new capitalized costs associated with software development projects. Both of these are referred to as "Capitalized Assets"“Capitalized Assets” and are depreciated and/or amortized over their respective useful lives and charged to cost of revenues.

Income Taxes

On December 22, 2017 the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act ("TCJA"(“TCJA”).  Under ASCAccounting Standards Codification (“ASC”) 740, "Income Taxes" ("ASC 740"), the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted.  The TCJA makesmade broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducingreduced the U.S. federal corporate tax rate from 35% to 21%; effective January 1, 2018; (2) changingchanged the rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (3) bonus depreciation that will allow for fullaccelerated expensing ofon certain qualified property; (4) creatingcreated a new limitation on deductible interest expense;expense to 30% of tax adjusted EBITDA through 2021 and then 30% of tax adjusted EBIT thereafter; (5) eliminatingeliminated the corporate alternative minimum tax; and (6) limitationimposed further limitations on the deductibility of executive compensation under IRC §162(m); and (7) new for tax rules related to foreign operations.years beginning after December 31, 2017.

On December 22, 2017,As the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidancereduction in the U.S. federal corporate tax rate is administratively effective on accountingJanuary 1, 2018, our blended U.S. federal tax rate for the fiscal year ended October 31, 2018 was approximately 23.2%. The U.S. federal corporate tax effects of TCJA.rate for the fiscal year ended on and after October 31, 2019 is 21%. The purpose of SAB 118 was to address any uncertainty or diversity of view in applying ASC Topic 740 in the reporting period in which the TCJA was enacted. SAB 118 addresses situations where the accounting is incomplete for certainCompany recorded an income tax effects of the TCJA upon issuance of a company's financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA.  Additionally, SAB 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.

Inbenefit in connection with the Company's initial analysis ofTCJA, that was offset by reducing the impact of the TCJA, we recorded a provisional decrease in ourCompany’s valuation allowance on its deferred tax assets and liabilities of approximately $1,442,000 as a result ofliabilities.  The Company completed its accounting for the TCJA and the reduction in the federal tax rate to 21%.  Such amount was fully offset by a change in our valuation allowance. As the reduced federal tax rate of 21% is administratively effective at the beginning of the Company's fiscal year, the Company is using a blended federal statutory rate of 23.21% for computing the change in the deferred tax assets and liabilities as of January 1,October 31, 2018.

While the Company is able to make a reasonable estimate of the impact of the reduction in the corporate rate, it may be affected by other analyses related to the TCJA. Accordingly, the Company is still in the process of evaluating the impacts of the TCJA and considers the amounts recorded to be provisional as of July 31, 2018.
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The Company'sCompany’s provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company'sCompany’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. For both the three and nine months ended JulyJanuary 31, 2019 and 2018, the Company did not record anyrecorded an income tax expense. For the three and nine months ended July 31, 2017, the Company recorded a provision (benefit) of $87,000 and a benefit of $209,000.zero.  The Company is projecting that its annual effective tax rate for the three and nine months ended JulyJanuary 31, 20182019 is 0%, therefore, no income tax benefit has been provided on the Company's year to date pre-tax losses as the Company'sCompany’s net deferred tax assets are not realizable on a more-likely-than-not-basis.more-likely-than-not basis.
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Accounts Receivable

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. 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. The Company'sCompany’s accounts receivable balances included $36,000$47,000 of unbilled receivables associated with contractually committed services provided to existing customers during the three and nine months ended JulyJanuary 31, 2018,2019, which will be invoiced subsequent to JulyJanuary 31, 2018.2019. As of October 31, 2017,2018, the Company'sCompany’s accounts receivable balance included $51,000$12,000 of unbilled receivables associated with contractually committed services provided to existing customers.

The provision for doubtful accounts was $159,000 as of JulyJanuary 31, 2018,2019 and $184,000 as of October 31, 2017,2018, 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.

PASSUR Network

The PASSUR Network is comprised of PASSUR and SMLAT Systems, which includes the direct production, shipping, and installation costs incurred for each PASSUR and SMLAT System, which are recorded at cost, net of accumulated depreciation. The Company capitalized $87,000 and $212,000$61,000 of PASSUR Network costs, for the three and nine months ended JulyJanuary 31, 2018, respectively. These amounts exclude $48,000 and $109,000 of2019. Additionally, the Company purchased parts purchased, related tofor the PASSUR Network totaling $1,000 and used $9,000 of parts for repairs  during the three and nine months ended JulyJanuary 31, 2018, respectively.2019.

For the three and nine months ended JulyJanuary 31, 2017,2018, the Company capitalized $213,000 and $605,000, respectively,$67,000 of PASSUR Network costs. These amounts exclude $87,000 and $158,000 ofAdditionally, the Company purchased parts purchased related tofor the PASSUR Network totaling $52,000 and used $4,000 of parts for repairs during for the three and nine months ended JulyJanuary 31, 2017, respectively.2018.

Depreciation expenses related to the Company-owned PASSUR Network was $213,000$205,000 and $565,000$176,000 for the three and nine months ended JulyJanuary 31, 2018, respectively,2019 and $112,000 and $443,000 for the three and nine months ended July 31, 2017,2018, respectively. Depreciation is charged to cost of revenues and is recorded using the straight-line method over the estimated useful life of the asset, which is estimated at five years for SMLAT Systems and seven years for PASSUR Systems.

The net carrying balance of the PASSUR Network as of JulyJanuary 31, 2018,2019, and October 31, 2017,2018, was $5,020,000$4,649,000 and $6,004,000,$4,801,000, respectively. Included in the net carrying balance as of JulyJanuary 31, 2019 and October 31, 2018, were parts and finished goods for the PASSUR Network totaling $1,969,000,$1,869,000 and $1,892,000, respectively, which have not yet been installed. As of October 31, 2017, $2,278,000 of parts and finished goods for the PASSUR Network were included in the net carrying balance of the PASSUR Network. PASSUR Network assets which are not installed are carried at cost and not depreciated until installed.

In accordance with the Company's policy on long-lived assets, during the third quarter of fiscal year 2018, the Company determined it had an excess of non-critical PASSUR Network parts and supplies, which resulted in an increase of $230,000 in the reserve to approximately $270,000. Additionally, during the third quarter, the Company determined that certain PASSUR Network assets were no longer likely to generate future revenue as a result of a change in a customer's requirements at a specific location, which resulted in an impairment charge and write-off of approximately $510,000. These costs were recorded within "Cost of Revenues".
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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.  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 improve and support products after they become available are charged to expense as incurred.

The Company capitalized $542,000$696,000 and $1,844,000$548,000 of software development costs for the three and nine months ended JulyJanuary 31, 2019 and 2018, respectively.  For the three and nine months ended July 31, 2017, the Company capitalized $770,000 and $2,013,000, of software development costs, respectively.

The Company amortized $666,000$520,000 and $1,766,000$519,000 of capitalized software development costs for the three and nine months ended JulyJanuary 31, 2018, respectively,2019 and $413,000 and $1,252,000, for the three and nine months ended July 31, 20172018, respectively. The Company records amortization of the software on a straight-line basis over the estimated useful life of the software, typically over five years within "Cost“Cost of Revenues"Revenues”.

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During the third quarter of fiscal year 2018, the Company reviewed the value of its capitalized software products and determined that one capitalized software product would no longer be marketed or made available for subscription sales as currently developed, which resulted in an impairment charge and write-off of the carrying amount of approximately $736,000. These costs were recorded within "Cost of Revenues".

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'sasset’s revised life.

During the third quarter of fiscal year 2018, the Company recorded approximately $230,000, $510,000 and $736,000, a total of $1,476,000, of costs associated with an increase in the provision for obsolete and slow moving PASSUR Network parts and supplies, an impairment charge and write-off of carrying amounts related to  certain PASSUR Network systems, and capitalized software development costs, respectively. Please refer to footnotes above for further details. The Company did not have any additions to inventory reserves, impairment charges, or write-offs during the three and nine months ended July 31, 2017.

Deferred Tax Asset

Each reporting period, the Company assesses the realizability of its deferred tax assets to determine if it is more-likely-than-not that some portion, or all, of the deferred tax asset will be realized.  The Company considered all available positive and negative evidence including the reversal of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operating results. The ultimate realization of a deferred tax asset is ultimately dependent on sufficient taxable income within the available carryback and/or carryforward periods to utilize the deductible temporary differences.  Based on the weight of available evidence including recent financial operating results, the Company determined that its net deferred tax assets are not realizable on a more-likely-than-not basis and has recordedthat a full valuation allowance is required against its net deferred tax assets and liabilities.assets.

At JulyOctober 31, 2018, the Company had available federal net operating loss carryforwards of $12,780,000, of which $4,715,000 are indefinite lived and $8,065,000 which will expire in various tax years from fiscal year 2022 through fiscal year 2038.
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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 payables 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 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.

Net Loss per Share Information

Basic net loss 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. The Company'sCompany’s 2009 Stock Incentive Plan, which expired on February 24, 2019, allows for a cashless exercise. Shares used to calculate net loss per share are as follows:

 For the three months ended  For the nine months ended  For the three months ended 
 July 31,  July 31,  January 31, 
 2018  2017  2018  2017  2019  2018 
Basic Weighted average shares outstanding  7,696,091   7,696,091   7,696,091   7,693,069   7,696,091   7,696,091 
Effect of dilutive stock options  -   -   -   -   -   - 
Diluted weighted average shares outstanding  7,696,091   7,696,091   7,696,091   7,693,069   7,696,091   7,696,091 
                
     
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.  1,632,000   1,454,000   1,632,000   1,454,000   1,734,500   1,624,000 


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Stock-Based Compensation

The Company follows FASB ASC 718, "Compensation-Stock“Compensation-Stock Compensation,"” which requires the measurement of compensation cost for all stock-based awards at fair value on the 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 was 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 $166,000$156,000 and $508,000$171,000 for the three and nine months ended JulyJanuary 31, 2018, respectively.  For the three2019 and nine months ended July 31, 2017, stock-based compensation expense was $153,000 and $408,000,2018, respectively.  Stock-based compensation is primarily included in selling, general, and administrative expenses.

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Recent Accounting Pronouncements Adopted

In March 2016,May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2016-09, "ImprovementsTopic 606. Topic 606 supersedes the revenue recognition requirements in Topic 605, and requires the recognition of revenue when promised goods or services are transferred to Employee Share-Based Payment Accounting." The new guidance on accountingcustomers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for employee share-based payment awards was designed to simplifythose goods or services. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the accounting related to several aspectsdeferral of accounting for share-based payment transactions, including income tax consequencesincremental costs of share-based payment transactions, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of cash flows. The new standard is effective for the annual period beginning after December 15, 2016, including interim reporting periods within that period, which forobtaining a contract with a customer.

On November 1, 2018, the Company will be effective November 1, 2018.  In accordance with the new guidance, the Company has made a policy election to account for forfeitures when they occur.  The Company adopted this guidance during the quarter ended January 31, 2018,Topic 606 using the modified retrospective transition method with nowhich 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 its consolidated financial statements and related disclosures because the Company has a full valuation allowance on its current and non-current deferred tax assets and liabilities.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Assets. This ASU is intended to simplify the presentation of deferred taxes on the balance sheet and will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. This guidance will be effective beginning in 2018, with early adoption permitted.accounting for nonrefundable up-front fees. The Company adopted this guidancerecognized revenue during the quarterthree months ended January 31, 2019, of $3,656,000 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 with no materialdue to the impact to its consolidated financial statements and related disclosures because the Company has a full valuation allowance on its current and non-current deferred tax assets and liabilities.

Recent Accounting Pronouncements Not Yet Adoptedof adopting Topic 606.

In May 2017, the FASB issued ASU 2017-09, "Compensation—“Compensation—Stock Compensation: Topic 718"718” — Scope of Modification 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 forThe Company adopted this guidance during the Company beginning November 1, 2018quarter ended January 31, 2019, using the prospective method, with no material impact to its consolidated financial statements and will be applied prospectively.related disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, which amends the ASC and creates Topic 842, Leases ("(“Topic 842"842”). Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous GAAP on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018, which will be effective for the Company beginning November 1, 2019, and early adoption is permitted. The Company's preliminary analysis indicates that the Company will recognize a liability for remaining lease payments and a right-of-use asset related to the Company's operating lease covering its corporate office facilityand other facilities that expires inthrough various dates through June 2023 and other office locations.2023. The Company is in the initial stages of evaluating the effect of the standard on the Company's financial statements.

In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers: Topic 606" ("ASU 2014-09"), to supersede nearly all-existing revenue recognition guidance under GAAP.  The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services, ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing  GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new standard is effective for the annual period beginning after December 15, 2017, including interim reporting periods within that period, which will be effective for the Company beginning November 1, 2018.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented ("Full Retrospective Method") or retrospectively with the cumulative effect of applying the guidance recognized in retained earnings as of the date of adoption ("Modified Retrospective Method"). The Company has formed an implementation team and has begun the process of evaluating the impact of the adoption of ASU 2014-09 to its consolidated financial statements, accounting policies and processes. The Company expects that it will adopt the new standard using the Modified Retrospective Approach. The Company continues to evaluate the impacts of the new standard, the impact on its consolidated financial statements, as well as the changes that may be required to systems and processes to meet the new standard's reporting and disclosure requirements.
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3. Notes Payable – Related Party

The Company has a note payable to G.S. Beckwith Gilbert, the Company'sCompany’s Chairman and significant stockholder, of $5,725,000$6,960,000 (the "Existing“Existing Gilbert Note"Note”) as of JulyJanuary 31, 2018.2019. The Existing Gilbert Note bears a maturity date of November 1, 2019,2020, with an annual interest rate of 6%9.75%. Interest payments are due by October 31st of each fiscal year. During the ninethree months ended JulyJanuary 31, 2018,2019, Mr. Gilbert loaned the Company an additional $1,925,000$910,000 (which amount is included in the outstanding amount of the Existing Gilbert Note described in the first sentence of this paragraph). The Company has paid interest incurred on the Existing Gilbert Note through April 30, 2018,January 31, 2019, totaling $136,000.  As of July 31, 2018, the Company's accrued expenses and other current liabilities included accrued interest, on the Existing Gilbert Note of $78,000.$168,000. The Existing Gilbert Note is secured by the Company'sCompany’s assets.

On January 28, 2019, the Company entered into a Fifth Debt Extension Agreement with G.S. Beckwith Gilbert, the Company’s Chairman and significant stockholder, effective January 28, 2019, pursuant to which the Company and Mr. Gilbert agreed to modify certain terms and conditions of the existing debt agreement with Mr. Gilbert (the “Existing Gilbert Note”). The maturity date of the Existing Gilbert Note was due on November 1, 2019, and the total amount of principal and first quarter of fiscal year 2019 interest due and owing as of January 28, 2019, was $7,122,000. Pursuant to the Fifth Debt Extension Agreement, the Company issued a new note to Mr. Gilbert in the principal amount of $6,960,000 (the “Fifth Replacement Note”) in exchange for the Existing Gilbert Note and the Company agreed to pay the first quarter of fiscal year 2019 accrued interest under the Existing Gilbert Note as of January 28, 2019, in an amount equal to $162,000, at the time and on the terms set forth in the Existing Gilbert Note. Under the terms of the Fifth Replacement Note, the maturity date was extended to November 1, 2020, and the annual interest rate remained at 9 3/4%. Interest payments under the Fifth Replacement Note shall be made annually on October 31st of each year. The Fifth Replacement Note is secured by the Company’s assets.
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The Company evaluated its financial position as of JulyJanuary 31, 2018,2019, including an operating loss of $4,650,000$766,000 and working capital deficit of $3,732,000$3,325,000 and has requested and received a commitment from G.S. Beckwith Gilbert, dated September 14, 2018,March 18, 2019, that if the Company, at any time, is unable to meet its obligations through September 14, 2019,March 18, 2020, Mr. Gilbert will provide the Company with 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 by the Company's assets.
The amount of the Company's obligations under the Existing Gilbert Note has increased by $3,025,000 since July 31, 2017, and a continuation of the Company's strategic initiatives will require further increased funding. In exchange for agreeing to fund those initiatives as necessary and in consideration for providing a commitment to the Company that if the Company, at any time, is unable to meet its obligations through September 14, 2019, Mr. Gilbert will provide the necessary continuing financial support to the Company in order for the Company to meet such obligations, the Board approved an increase in the interest rate on the Note to 9 3/4%, effective September 10, 2018.  Mr. Gilbert abstained from the vote. 

Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

The information provided in this Quarterly Report on Form 10-Q (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 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 its 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 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.

Description of Business

The Company provides data aggregation and consolidation, information, decision support, predictive analytics, collaborative solutions, and professional services. To enable this unique offering, PASSUR® owns and operates the largest commercial passive radar network 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'sPASSUR’s industry-leading algorithms and business logic included in its products.
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PASSUR'sPASSUR’s information solutions are used by the five largest North American airlines, more than 60 airport customers, including at the top 30 North American airports (with PASSUR solutions also used at the remaining ten airports by one or more airline customers), over a hundred business aviation customers, as well as the U.S. government.

Our core business addresses some of 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. 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.

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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 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’s goal is to help solve problems faced by its customers based on the following product development objectives:

1)Continue developing decision support solutions built on business intelligence, predictive analytics, and web-dashboard technology;
  
2)Continue integrating multiple additional industry data sets into its integrated aviation database, including data from a variety of additional aircraft, airspace, and ground surveillance technologies, in order to ensure that PASSUR is the primary choice for data integration and management for large aviation organizations;
  
3)Continue extending the reach of the PASSUR Network, which provides the proprietary backbone for many of the Company'sCompany’s solutions; and
  
4)Continue developing the Company'sCompany’s professional service capabilities, in order to ensure that its solutions can be fully implemented in its customers'customers’ work environments, with minimal demand on customers'customers’ internal resources.

For the three months ended JulyJanuary 31, 2018,2019, total revenue increased 12%4% to $3,716,000,$3,656,000, compared with $3,332,000$3,513,000 for the same period in fiscal year 2017.2018. Loss from operations for the three months ended JulyJanuary 31, 2018,2019, was $2,599,000$766,000 compared to $470,000$1,101,000 for the same period in fiscal year 2017.2018. For the three months ended JulyJanuary 31, 2018,2019, net loss was $2,677,000$934,000 or $0.35$0.12 per diluted share, compared to a net loss of $598,000$1,167,000 or $0.08$0.15 per diluted share, in the same period in fiscal year 2017.2018.

For the nine months ended July 31, 2018, total revenue increased 3% to $10,731,000, compared with $10,371,000 for the same period in fiscal year 2017. Loss from operations for the nine months ended July 31, 2018, was $4,650,000 compared to $801,000 for the same period in fiscal year 2017. For the nine months ended July 31, 2018, net loss was $4,868,000 or $0.63 per diluted share, compared to net loss of $720,000 or $0.09 per diluted share, in the same period in fiscal year 2017.

Results of Operations

Revenues

Management concentrates its efforts on the sale of business intelligence, predictive analytics, and decision support product applications, utilizing data primarily derived from the PASSUR Network. Such efforts include the continued development of existing products, new product offerings and to a lesser extent, professional services.

For the three months ended JulyJanuary 31, 2018,2019, total revenues increased by $384,000,$143,000, or 12%4%, to $3,716,000,$3,656,000, as compared with $3,332,000$3,513,000 for the same period in 2017.2018. The increase in total revenues was primarily due to (i) an increase in subscription revenue of $267,000$91,000 or 8%3% and (ii) an increase in our consulting revenue of $117,000$52,000 to $155,000,$108,000, as compared with the prior year.

For the nine months ended July 31, 2018, total revenues increased by $360,000, or 3%, to $10,731,000, as compared with $10,371,000 for the same period in 2017. The increase in total revenues for the nine months ended July 31, 2018, was due to (i) an increase in subscription revenue of $158,000 or 2% and (ii) an increase in our consulting revenue of $206,000 to $324,000, as compared with the same period in 2017.
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The increase in subscription revenue for both the three and nine months end JulyJanuary 31, 2018,2019, was primarily due to (i) new contracts closed during fiscal year 2018, and (ii) net incremental revenue recognized during the periodsperiod in fiscal 20182019 related to new contracts closed during fiscal year 2017.2018. These increases were offset by expired contracts during the three and nine months ended JulyJanuary 31, 2018, respectively.2019.

The Company continues to enhance its wide selection of products and develop and deploy new software applications and solutions to better address customers'customers’ needs, all of which are easily delivered 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, depreciation of PASSUR and SMLAT Network Systems, amortization of capitalized software development costs, communication costs, data feeds, travel and entertainment, and consulting fees. Also included in cost of revenues are costs associated with upgrades to PASSUR and SMLAT Systems necessary to make such systems compatible with new software applications, as well as the ordinary repair and maintenance of existing PASSUR and SMLAT Systems. Additionally, cost of revenues in each reporting period is impacted by: (1) the number of PASSUR and SMLAT System units added to the PASSUR Network, which includes the production, shipment, and installation of these assets (currently largely installed by unaffiliated outside contractors), which are capitalized to the PASSUR Network; and (2) capitalized costs associated with software development and data center projects; and (3) data center projects, (all referred to  as "Capitalized Assets"“Capitalized Assets”). The labor and fringe benefit costs of Company employees involved in creating Capitalized Assets are capitalized, rather than expensed, and amortized, usually over five or seven years, as determined by their projected useful life. The Company does not break down its costs by product.

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Cost of revenues increased $2,400,000,decreased $207,000, or 159%9%, to $3,908,000$2,032,000 for the three months ended JulyJanuary 31, 2018,2019, as compared with the same period in fiscal year 2017. Cost2018. During the three months ended January 31, 2019, the cost of revenues increased $3,416,000decrease was primarily attributable to an increase in capitalized costs associated with software development projects of approximately $148,000. When the Company uses its employees to manufacture PASSUR and SMLAT Systems, build capital assets, and ship and install PASSUR and SMLAT Systems in the field, or 72%,for software development, there is a reduction in cost of revenues due to $8,174,000the fact that the labor-related costs for these systems are capitalized, rather than expensed and amortized over 7 years for PASSUR or 5 years for SMLAT systems. The remaining decreases for the ninethree months ended JulyJanuary 31, 2018,2019 were due to the net decreases in other accounts within cost of revenues as compared withto the same period in fiscal year 2017. During the three and nine months ended July 31, 2018, the cost of revenues increases were significantly impacted by the increases in reserves for PASSUR Network parts and supplies,  impairment charges and write-off during the quarter ended July 31, 2018, of the carrying amounts of certain assets totaling approximately $1,476,000, which was comprised of (i) an increase in the PASSUR Network parts and supplies  reserve of approximately $230,000 ; (ii) an impairment charge and write-off of certain PASSUR Network assets of approximately $510,000, which assets were determined to no be longer likely to generate future revenue as a result of a change in a customer's requirements at a specific location; and (iii) an impairment charge and write-off  a capitalized software product of approximately $736,000, which the Company determined it would no longer market for subscription sales as currently developed.

Additionally, contributing to the increases in cost of revenues for the three and nine months ended July 31, 2018, as compared with the same period in fiscal year 2017 were (i) an increase in total personnel related costs of approximately $294,000 and $819,000, respectively, which further enhanced our ability to provide our software portfolio offerings globally; (ii) an increase in amortization expense associated with our capitalized software projects of approximately $253,000 and $514,000, respectively;  (iv) a decrease in capitalized costs associated with the PASSUR Network of $126,000 and $393,000, respectively,  and (v) a decrease in capitalized cost associated with software development costs of $228,000 and $168,000, respectively. The remaining increases for the three and nine months ended July 31, 2018 were due to the net increase in data and license fees and other accounts within cost of revenues for each period respectively.2018.

Finally, as we continue to release product enhancements/new versions to itsour existing product offerings, and new product offerings, our amortization expenses associated with the historical software capitalization is anticipated to increase. As a result, we anticipate that our software capitalization and amortization expense, when netted, will not have a significant impact on our financial results.

Research and Development

Research and development expenses decreased $35,000,$11,000, or 19%7%, to $151,000,$144,000, for the three months ended JulyJanuary 31, 2018,2019, as compared to $186,000$155,000 for the same period in fiscal year 2017.  Research and development expenses decreased $145,000, or 24%, to $455,000, for the nine months ended July 31, 2018, as compared to $600,000 for the same period in fiscal year 2017. For both the three and nine months ended July 31, 2018, the decreases2018.  The decrease in research and development werewas primarily attributable to a reductionan increase in personnel related costs allocated to research and development from cost of revenues from research and selling, general and administrative expensesdevelopment as compared to prior year
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year.

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 software and information products. The Company anticipates that it will continue to invest in its software portfolio to develop, maintain, and support existing and newly developed applications for its customers.

Selling, General, and Administrative

Selling, general, and administrative expenses increased $148,000,$25,000, or 7%1%, to $2,255,000$2,246,000 for the three months ended JulyJanuary 31, 2018,2019, as compared to $2,107,000$2,221,000 for the same period in fiscal year 2017.  Selling, general, and administrative expenses increased $938,000, or 16%, to $6,752,000 for the nine months ended July 31, 2018, as compared to $5,814,000.2018. The increase for the three and nine months ended JulyJanuary 31, 2018,2019, is primarily due to an increase in personnel related costs associated with salesprofessional and marketingconsulting expenses of $96,000. This increase was offset by (i) a decrease in depreciation expenses of approximately $160,000$27,000 and $515,000, respectively, and(ii) net decreases in general and administrative personnel related costs of $67,000 and $125,000, respectively. These increases in personnel costs are primarily due to the Company's increased investments as part of its recently commenced international operations and to achieve its revenue growth objectives.

Also contributing to the increases inmiscellaneous other accounts within selling, general and administrative expenses cost of revenues for the three months ended July 31, 2018, as compared withto the same period in fiscal year 2017 were (i) an increase in costs associated with rents for new office locations of approximately $28,000, and (ii) an increase in consulting costs of approximately $55,000. The increases in costs for three months ended July 31, 2018, were partially reduced because there was no added provision for bad debts in the period, compared with approximately $150,000 in the same period in the prior year.

Additionally, contributing to the increases in selling, general, and administrative expenses cost of revenues for the nine months ended July 31, 2018, as compared with the same period in fiscal year 2017 were (i) an increase in stock-based compensation of approximately $105,000; (ii) an increase on professional fees of approximately $54,000; (iii) an increase in travel expenses of $63,000; (iv) an increase in costs associated with rents for new office locations of approximately $105,000, and (v) an increase in consulting costs of approximately $82,000. The increases in costs for the nine months ended July 31, 2018, were partially reduced because there was no added provision for bad debts in the period, compared with approximately $150,000 in the same period in the prior year.2018.

Loss from Operations

For the three months ended JulyJanuary 31, 2018,2019, loss from operations increased $2,128,000decreased $335,000 to $2,599,000,$766,000, as compared with the same period in fiscal year 2017. For the nine months ended July 31, 2018, loss from operations increased $3,849,000 to $4,650,000, as compared to the same period in fiscal year 2017.

2018.  The increase in the loss from operations for the three months ended July 31, 2018,decrease was primarily due to (i) an increase in revenue of $143,000 or 4% and (ii) a decrease in operating expenses of $2,512,000$193,000 or 66%, which included approximately $230,000, $510,000 and $736,000 of costs, totaling $1,476,000, associated with the previously described increase in the PASSUR Network parts and supplies reserve, impairment charges and write-off of carrying amounts related to certain PASSUR Network systems and capitalized software development costs. These increases in expenses were partially offset by an increase in revenues of $384,000 or 12%4%.  The Company did not have any increases in inventory reserves, impairment charges or write-offs during the three months ended July 31, 2017.

The increase in the loss from operations for the nine months ended July 31, 2018, was primarily due to an increase in operating expenses of $4,209,000 or 38%, which included approximately $230,000, $510,000 and $736,000 of costs, totaling $1,476,000, associated with the previously described increase in the PASSUR Network parts and supplies reserve, impairment charges and write-off of carrying amounts related to certain PASSUR Network systems and capitalized software development costs. These increases in expenses were partially offset by an increase in revenues of $360,000 or 3%. The Company did not have any increases in inventory reserves, impairment charges, or write-offs during the nine months ended July 31, 2017, or during the six months ended April, 30, 2018.

Overall, excluding the increase in our reserves, impairment charges, and write-offs of the carrying amounts of certain assets discussed above, the increase in operating expenses was primarily due to hiring of new development, sales and marketing, and management professionals needed to achieve our revenue growth objectives.
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Interest Expense – Related Party

Interest expense – related party increased $37,000,$102,000, or 89%, and $91,000, or 74%156%, for the three and nine months ended JulyJanuary 31, 2018, respectively,2019, as compared to the same periods in fiscal year 2017,2018, due to the higher principal balance outstanding on the note in fiscal year 2018,2019, and the interest rate increase on the outstanding note as compared to the same period in fiscal year 2017.2018.

Net Loss

The Company had net loss of $2,677,000,$934,000, or $0.35$0.12 per diluted share for the three months ended JulyJanuary 31, 2018,2019, as compared to a net loss of $598,000,$1,167,000, or $0.08$0.15 per diluted share, for the same period in 2017. The Company had net loss of $4,868,000, or $0.63 per diluted share for the nine months ended July 31, 2018, as compared to a net loss of $720,000, or $0.09 per diluted share, for the same period in 2017.2018.

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Liquidity and Capital Resources

The Company'sCompany’s current assets are approximately equal to the Company'sexceeded its current liabilities, excluding deferred revenue, by $2,021,000 as of JulyJanuary 31, 2018.2019. The Company's stockholders'Company’s stockholders’ equity was $4,092,000$2,902,000 as of JulyJanuary 31, 2018.2019.

The outstanding principal amount under the note payable to a related party, G.S. Beckwith Gilbert, the Company'sCompany’s Chairman and significant stockholder, was $5,725,000$6,960,000 as of JulyJanuary 31, 20182019 and $3,800,000$6,050,000 as of October 31, 2017,2018, with a maturity date of November 1, 2019.2020. For the ninethree months ended JulyJanuary 31, 2018,2019, the Company paid interest incurred on the note payable totaling $136,000. As of July 31, 2018, the Company had accrued interest – related party of $78,000.$168,000. During the ninethree months ended JulyJanuary 31, 2018,2019, Mr. Gilbert loaned the Company an additional $1,925,000$910,000 (which amount is included in the outstanding principal amount due as of JulyJanuary 31, 20182019 identified above).

On February 9, 2018,January 28, 2019, the Company entered into a FourthFifth Debt Extension Agreement with Mr.G.S. Beckwith Gilbert, the Company’s Chairman and significant stockholder, effective February 9, 2018,January 28, 2019, pursuant to which the Company and Mr. Gilbert agreed to modify certain terms and conditions of the existing debt agreement with Mr. Gilbert (the "Existing“Existing Gilbert Note"Note”). The maturity date of the Existing Gilbert Note was due on November 1, 2018,2019, and the total amount of principal and first quarter of fiscal year 2019 interest due and owing as of February 9, 2018,January 28, 2019, was $4,732,000.$7,122,000. Pursuant to the FourthFifth Debt Extension Agreement, the Company issued a new note to Mr. Gilbert in the principal amount of $4,725,000$6,960,000 (the "Fourth“Fifth Replacement Note"Note”) in exchange for the Existing Gilbert Note and the Company agreed to pay the first quarter of fiscal year 2019 accrued interest under the Existing Gilbert Note as of February 9, 2018,January 28, 2019, in an amount equal to $7,000,$162,000, at the time and on the terms set forth in the Existing Gilbert Note. Under the terms of the FourthFifth Replacement Note, the maturity date was extended to November 1, 2019,2020, and the annual interest rate remained at 6%9 3/4%. Interest payments under the FourthFifth Replacement Note shall be made annually on October 31st of each year. The Existing GilbertFifth Replacement Note is secured by the Company'sCompany’s assets.

Management is addressing the Company'sCompany’s working capital deficiency by aggressively marketing the Company'sCompany’s PASSUR Network Systems information 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. However, there are no assurances that such growth will be achieved.

If the Company'sCompany’s business plan does not generate sufficient cash flows from operations to meet the Company'sits 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. Beckwith Gilbert, dated September 14, 2018,March 18, 2019, that if the Company, at any time, is unable to meet its obligations through September 14, 2019,March 18, 2020, Mr. Gilbert will provide the Company with 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 amount of the Company's obligations under the Existing Gilbert Note has increased by $3,025,000 since July 31, 2017, and a continuation of the Company's strategic initiatives will require further increased funding. In exchange for agreeing to fund those initiatives as necessary and in consideration for providing a commitment to the Company that if the Company, at any time, is unable to meet its obligations through September 14, 2019, Mr. Gilbert will provide the necessary continuing financial support to the Company in order for the Company to meet such obligations, the Board approved an increase in the interest rate on the Note to 9 3/4%, effective September 10, 2018.  Mr. Gilbert abstained from the vote. 
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Net cash provided by operating activities was $157,000$2,601,000 for the ninethree months ended JulyJanuary 31, 2018,2019, and consisted of a net loss of $4,868,000, including a loss from impairment charges and a write-off of $1,246,000, a reserve or obsolete and slow moving PASSUR Network parts and supplies  of $230,000,$934,000, depreciation and amortization of $2,723,000,$825,000, stock-based compensation expense of $508,000$156,000 and deferred revenue of $823,000,$2,516,000, with the balance consisting of an increasea decrease in accounts receivables and prepaid expenses and other current assets and an increasea decrease in account payable, accrued expense, and operating liabilities. Net cash used in investing activities was $2,325,000$751,000 for the ninethree months ended JulyJanuary 31, 2018,2019, which was expended for capitalized software development costs and additions to the PASSUR Network, and additional computer equipment for our Bohemia, New York, and Orlando, Florida data centers.Network. Net cash provided by financing activities was $1,925,000$910,000 for the ninethree months ended JulyJanuary 31, 20182019 and consisted of proceeds from note payable – related party.  Net cash provided by operating activities decreasedincreased by $2,161,000$43,000 for the ninethree months ended JulyJanuary 31, 2018,2019, as compared to the same period in 2017.2018.

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. 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 organizations 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.

Interest by potential customers in the Company'sCompany’s information and decision support software products obtained from PASSUR Network Systems and other sources 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.
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Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

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 GAAP. 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. These significant accounting policies are disclosed in Note 1 to the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended October 31, 2017, and there have been no material changes2018. The Company had a change to such policies since the filing of such Annual Report.its Revenue Recognition policy, as described below. These policies and estimates are critical to the Company'sCompany’s 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, included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017,2018, as such policies affect its reported financial results. The actual impact of these factors may differ under different assumptions or conditions.

Revenue Recognition

The Company recognizes revenue in accordance with Topic 606, 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 identified, payment terms can be identified, the contract has commercial substance, and it is probable the Company will collect substantially all of the consideration to which it is entitled.

The Company derives revenue primarily from subscription-based, real-time decision and solution information and professional services. Revenues are recognized when control of these services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those 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.

The Company recognized revenue during the three months ended January 31, 2019, of $3,656,000 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 adopting Topic 606.

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 time is deemed to be the most faithful depiction of the transfer of control of the services as the customer simultaneously receives and consumes the benefit provided by the Company’s performance. Subscription contracts are generally one to three years in length, billed either, monthly, quarterly or annually, typically in advance, which coincides with the terms of the agreement. 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.
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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 satisfies 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 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 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 service.

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.

Recent Accounting Pronouncements

In May 2014, the FASB issued Topic 606. Topic 606 supersedes the revenue recognition requirements in Topic 605, and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer.

On November 1, 2018, the Company adopted 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 three months ended January 31, 2019, of $3,656,000 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 adopting Topic 606.
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In May 2017, the FASB issued Accounting Standards Update ("ASU") NoASU 2017-09, "Compensation—“Compensation—Stock Compensation: Topic 718"718” — Scope of Modification 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.

In March 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-09, "Improvements to Employee Share-Based Payment Accounting." The new guidance on accounting for employee share-based payment awards was designed to simplify the accounting related to several aspects of accounting for share-based payment transactions, including income tax consequences of share-based payment transactions, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of cash flows. The new standard is effective for the annual period beginning after December 15, 2016, including interim reporting periods within that period, which for the Company will be effective November 1, 2018. In accordance with the new guidance, the Company has made a policy election to account for forfeitures when they occur.  The Company adopted this guidance during the quarter ended January 31, 2018,2019, using the Modified Retrospective Method,prospective method, with no material impact to its consolidated financial statements and related disclosures because the Company has a full valuation allowance on its current and non-current deferred tax assets and liabilities.
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disclosures.

In February 2016, the FASB issued ASU 2016-02, which amends the ASC and creates Topic 842, Leases ("(“Topic 842"842”). Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous GAAP on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018, which will be effective for the Company will be the annual period ending October 31, 2020,beginning November 1, 2019, and early adoption is permitted. The Company's preliminary analysis indicates that the Company will recognize a liability for remaining lease payments and a right-of-use asset related to the Company's operating lease covering its corporate office facility that expires in June 2023 and other office locations. The Company is in the initial stages of evaluating the effect of the standard on the Company's financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Assets. This ASU is intended to simplify the presentation of deferred taxes on the balance sheet and will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. This guidance will be effective beginning in 2018, with early adoption permitted.  The Company adopted this guidance during the quarter ended January 31, 2018 with no material impact to its consolidated financial statements and related disclosures.

In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers: Topic 606" ("ASU 2014-09"), to supersede nearly all-existing revenue recognition guidance under GAAP.  The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services, ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing  GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new standard is effective for the annual period beginning after December 15, 2017, including interim reporting periods within that period, which for the Company will be the annual period ending October 31, 2019.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented ("Full Retrospective Method") or retrospectively with the cumulative effect of applying the guidance recognized in retained earnings as of the date of adoption ("Modified Retrospective Method"). The Company has formed an implementation team and has begun the process of evaluating the impact of the adoption of ASU 2014-09 to its consolidated financial statements, accounting policies and processes. The Company expects that it will adopt the new standard using the Modified Retrospective Approach.  The Company continues to evaluate the impacts of the new standard, the impact on its consolidated financial statements, as well as the changes that may be required to systems and processes to meet the new standard's reporting and disclosure requirements.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Item 4.  Controls and Procedures.

Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, 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'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. Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, 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 JulyJanuary 31, 2018.
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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) within the fiscal quarter to which this report relates, that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.

PART II. Other Information

Item 1.  Legal Proceedings

The Company is not aware of any material pending legal proceedings to which the Company is a party or to which any of its properties are subject.

Item 5.  Other Information.

The amountOn February 26, 2019, the Board of Directors of the Company's obligations underCompany, subject to shareholder approval, unanimously adopted the Existing Gilbert Note has increased2019 Stock Incentive Plan (the “Plan”), to replace the Company’s 2009 Stock Incentive Plan, as amended (the “2009 Plan”), which expired on February 24, 2019. The Plan became effective upon the date of its adoption by $3,025,000 since July 31, 2017, and a continuationthe Board, subject to shareholder approval within twelve months of the Company's strategic initiatives will require further increased funding. In exchange for agreeing to fund those initiatives as necessary and in consideration for providing a commitment to the Company that if the Company, at any time, is unable to meet its obligations through September 14, 2019, Mr. Gilbert will provide the necessary continuing financial support to the Company in order for the Company to meetdate of such obligations, the Board approved an increase in the interest rate on the Note to 9 3/4%, effective September 10, 2018.  Mr. Gilbert abstained from the vote. adoption.

On September 14, 2018,March 18, 2019, the Company'sCompany’s significant shareholder and Chairman confirmed his commitment to provide the Company with the necessary continuing financial support to the Company in order for the Company to meet its obligations through September 14, 2019.March 18, 2020. A copy of the commitment is attached as Exhibit 10.1 to this Form 10-Q and incorporated by reference into this Item 5.
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Item 6.  Exhibits.

Item 6.Exhibits.
10.1 *
Commitment of G.S. Beckwith Gilbert, dated September 14, 2018.March 18, 2019.
  
31.1 *
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
31.2 *
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
32.1 *
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
32.2 *
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
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.

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SIGNATURES

Pursuant to the requirements 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.

PASSUR AEROSPACE, INC.
Dated: September 14, 2018March 18, 2019 
By:
/s/ James T. Barry
 James T. Barry
 President and Chief Executive Officer
 
(Principal Executive Officer)
  
Dated: September 14, 2018By:March 18, 2019
By:/s/ /s/ Louis J. Petrucelly
 Louis J. Petrucelly
 Chief Financial Officer, Treasurer, and Secretary  (Principal Financial and Accounting Officer)



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