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 Period ended JulyJanuary 31, 20202021

OR

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______  to _______

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 every Interactive Data File required to be submitted 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 accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 

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]

Securities registered pursuant to Section 12(b) of the Act: None

There were 7,712,091 shares of the Registrant’s common stock with a par value of $0.01 per share outstanding as of SeptemberMarch 1, 2020.2021.

INDEX

PASSUR Aerospace, Inc. and Subsidiary

See accompanying notes to consolidated financial statementsstatements.

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PASSUR Aerospace, Inc. and Subsidiary

Consolidated Statements of Operations

(Unaudited)

See accompanying notes to consolidated financial statements.

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PASSUR Aerospace, Inc. and Subsidiary

Consolidated Statements of OperationsStockholders’ Equity

(Unaudited)

See accompanying notes to consolidated financial statements.

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PASSUR Aerospace, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to consolidated financial statements.

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PASSUR Aerospace, Inc. and Subsidiary

Notes to Consolidated Financial Statements

JulyThree Months Ended January 31, 20202021

(Unaudited)

1.Nature of Business 

PASSUR® Aerospace, Inc. (“PASSUR” or the “Company”), a New York corporation founded in 1967, is a globalleading business intelligence company, providing predictive analytics and decision support technology for the aviation industry primarily to improve the operational performance and cash flow of airlines, airports, fixed based operators (FBOs) and air navigation service providers (ANSPs). The Company is recognized as a leader in digital operational excellence.  The Company reduces operational complexity by deliveringproviding a trustedcloud-based platform, combined with professional services to help lower operating expenses.  

Operational efficiency is more important now than ever to eliminate sources of waste, variables,ARiVA™, that manages and inflexibleoptimizes operations in order to increase profits. The Company addresses these significant aviation industry problems by applying its technology platform, combined with professional services, to provide solutions that predict, prioritize, prevent and help the industry recover from unexpected disruptions.  These disruptions have long been seen as the cost of doing business in the industry and are even more pronounced today, creating greater uncertainty for the industry. The Company provides actionable intelligence to enable businesses in the industry manage their operations more efficiently.our customers.

PASSUR delivers digital solutions that are used by someessential to global aviation operations, meeting the needs of global air travel as well as supporting the recovery of the largestaviation industry from the COVID-19 crisis.   The structure and execution of operations within the aviation industry has fundamentally changed as a result of this crisis due to the significant change in the economics required to support current conditions, a return to normal operations and profitability, and to assist in mitigating health risks.

PASSUR continues to be a pioneer applying artificial intelligence powered by machine learning to aviation data, addressing the industry’s most costly challenges, including the management and optimization of airspace, airport assets, aircraft, and day of flight operations.

The Company provides its solutions to airlines and airports in the United States, as well as by airlines and airports in Canada Europe, and Latin America.  The global market presents an opportunity to network more customers in a broader market.  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 is a supplier and partner to the air transportation industry. Many of the Company’s customers have beencontinue to be severely impacted by the COVID-19 outbreak and the rapid decline in air travel.  As a result, the Company anticipates downturns in its revenues forto continue at least through the remainderend of the year.Company’s second fiscal quarter in 2021.

Although the Company’s revenue is primarily subscription based, during fiscal 2020, several customers have requested, and the Company has agreed, to the suspension of certain services to those customers, or the provision of services free of charge during a specific period of time.  Additionally, one customer has requested extended terms of payment, which request the Company has also accepted.  The Company believes that these decisions arewere in the best interests of the Company as a partner to the aviation industry and will benefit the Company in the longer term.  The Company continues to believe that its products and professional service engagements are critical to the efficient operation of the air transportation market.    

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”). Such footnote information was included in the Company's Annual Report on Form 10-K for the year ended October 31, 2019,2020, filed with the Securities and Exchange Commission (“SEC”); on January 29, 2021; 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 necessary to present fairly the Company’s consolidated financial position as of JulyJanuary 31, 2020,2021, and its consolidated results of operations for the three and nine months ended JulyJanuary 31, 2021 and January 31, 2020, and 2019.respectively.

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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 ending October 31, 2020.2021.

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

Liquidity

The Company’s current liabilities excluding(excluding deferred revenue and certain CARES Act grant proceeds accounted for as accrued liabilities (as described in more detail in “Impact of the COVID-19 Pandemic” below),proceeds) exceeded its current assets by $348,000$338,000 as of JulyJanuary 31, 2020.2021.  The outstanding amount under the note payable to a related party, G.S. Beckwith Gilbert, the Company’s significant shareholder and Non-Executive Chairman (the “Existing Gilbert Note”), was $10,453,000 as of

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July 31, 2020,the Board, with an annual interest rate of 9 ¾% and a maturity of November 1, 2021. At July2022, was $10,692,000 at January 31, 2021, which amount included additional loans made by Mr. Gilbert in fiscal 2020 of $1,435,000, bringing the notes payableprincipal balance owed to $9,585,000, plus capitalized accrued and unpaid interest of $1,107,000.  The capitalized interest included accrued interest on the Existing Gilbert Note of $868,000, representing interest$200,000 incurred during the fourth quarter of fiscal 2019 through and includingall the thirdfiscal 2020 interest of $907,000. The Company has paid the interest due for the first quarter of 2020.2021 in the amount of $266,400.  The Company’s stockholders’ equity had a deficit was $11,721,000of $11,175,000 at JulyJanuary 31, 2020.2021. The Company had aachieved net lossincome of $12,564,000, including an impairment charge of $9,874,000,$135,000 for the ninethree months ended JulyJanuary 31, 2020.2021.

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 September 14, 2020,March 9, 2021, that if the Company, at any time, is unable to meet its obligations through September 14, 2021,March 10, 2022, 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 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 CARES Act was enacted in March 2020 and provided economic support for, among others, businesses in the aviation industry.  The Company has received three grants under the CARES Act, totaling approximately $5,188,000, as described in more detail below.

1.In July 2020, the Company entered into an agreement with the U.S. Department of the Treasury to receive an aggregate of $3,003,000 in emergency relief through the CARES Act Payroll Support Program (“PSP1”). The relief payments were received in three installments from July 2020 through September 2020.  Pursuant to the Payroll Support Program Agreement, the relief payments must be used exclusively for the continuation of payment of certain employee wages, salaries and benefits.  The relief payments are conditioned on the Company’s agreement to, among other things, refrain from conducting involuntary employee layoffs or furloughs through September 30, 2020.  Other conditions include prohibitions on share repurchases and dividends through September 30, 2021, and certain limitations on executive compensation.   

2.On February 12, 2021, the Company received an additional “top off” disbursement of $875,000 under PSP1, subject to the terms and conditions described above. 

3.On March 5, 2021, the Company entered into a Payroll Support Program Extension Agreement (“PSP2”) with the U.S. Department of the Treasury for an award the Company will receive under the CARES Act Payroll Support Program.  The total amount expected to be awarded to the Company under PSP2 is approximately $1,310,000.  On March 8, 2021, the Company received approximately $655,000 of the funds expected under PSP2.  As with the original grant under PSP1, PSP2 proceeds are to be used exclusively for the continuation of payment of certain employee wages, salaries, and benefits. The relief payments are conditioned on the Company’s agreement to, among other things, refrain from conducting involuntary employee layoffs or furloughs through the later of March 31, 2021, or the date on which the Company has expended all of the payroll support.  Other conditions include prohibitions on share repurchases and dividends through March 31, 2022, and certain limitations on executive compensation.   

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.

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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’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”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers ("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.  

A.Nature of Performance Obligations  

Subscription services revenue

Subscription services revenue is comprised of cloud-based subscription fees that provide the customer the right to access the Company’s software and receive support and updates, if any, for a period of time. The Company has determined such access represents a stand-ready service provided continually throughout the contract term. As such, control and satisfaction of this stand-ready performance obligation is deemed to occur over time. The Company’s subscription contracts include a fixed amount of consideration that is recognized ratably over the non-cancellable 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

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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.

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

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are rendered, in accordance with the terms of the agreement. The Company’s professional service contracts do not have a significant financing component and customer invoices are typically due within 30 days.

Material rights

Contracts with customers may include material rights which are also performance obligations. Material rights primarily arise when the contract gives the customer the right to renew subscription services at a discounted price in the future. This may occur from time to time when the Company’s contracts provide an implicit discount as the customer pays a nonrefundable up-front fee in connection with the initial services contract that it does not have to pay again in order to renew the service. These non-refundable up-front fees are not related to any promised service that the customer benefits from other than providing access to the subscription service.  Revenue allocated to material rights is recognized when the customer exercises the right over the estimated renewal period of five years or when the right expires. If exercised by the customer, the amount previously deferred for the material right is included in the transaction price of the renewal contract and allocated to the services included in that contract. If expired, revenue is recognized as subscription services revenue in the period the right expired. If the up-front fees do not provide the customer with a material right, then the amount is included in the transaction price of the initial services contract and allocated to the performance obligations in that contract.

Contracts with multiple performance obligations

Some of the Company’s contracts with customers contain multiple distinct performance obligations. For these contracts, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis.  The standalone selling price reflects the price the Company would charge for a specific service if it was sold separately in similar circumstances and to similar customers. The Company maximizes the use of directly observable transactions to determine the standalone selling prices for its performance obligations. For subscription services, the Company separately determines the standalone selling prices by type of solution and customer demographics. For professional services, the Company separately determines standalone selling price by type of services.

Other policies and judgments

The commissions that the Company pays for obtaining a contract with a customer are conditional on future service provided by the employee. Therefore, since these costs are not incremental solely based on obtaining a contract, the Company does not defer any commission costs.

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B.Disaggregation 

The disaggregation of revenue by customer and type of performance obligation is as follows:  

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C.Contract Balances 

The opening and closing balances of the Company's accounts receivable, unbilled receivables, and deferred revenues are as follows:

The differences in the opening and closing balances of the Company’s unbilled receivable and deferred revenue primarily result 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 recognized as the Company satisfies its performance obligations. The Company generally invoices its customers in monthly, quarterly or annual installments for subscription services. Accordingly, the deferred revenue balance does not generally represent the total contract value of annual or multi-year, non-cancellable 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 and nine months ended JulyJanuary 31, 20202021 that was included in the deferred revenue balance at November 1, 20192020 was $140,000 and $2,862,000, respectively.$741,000.

Unbilled accounts receivable relates to the delivery of subscription and/or professional services for which the related billings will occur in a future 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 of the end of the reporting period, and when the Company expects to recognize the revenue.

*Approximately 99%98% of thesesubscription services and 74% of material rights 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 customer contracts and excludes future billing amounts for which the customer has a termination for convenience right in their agreement.

Cost of Revenues  

Costs associated with subscription and maintenance revenues consistedconsist primarily of direct labor, depreciationamortization of PASSUR and Surface Multilateration (“SMLAT”) Network Systems (both collectively, the “PASSUR Network”), amortization ofpreviously capitalized software development costs, communication costs, data feeds, travel and entertainment, and consulting fees.  Also, included inPreviously, cost of revenues werein each reporting period was impacted by capitalized costs associated with software development and data center projects, costs associated with upgrades to PASSUR and SMLATSurface Multilateration (“SMLAT”) Systems necessary to make such systems compatible with new software applications (all referred to as “Capitalized Assets”), depreciation of PASSUR and SMLAT Systems as well as the ordinary repair and maintenance of existing PASSUR and SMLAT Systems. Additionally, cost of revenues in each previous reporting period has beenwas impacted by: (1)by the number of PASSUR and SMLAT SystemsSystem units added to the PASSUR Network, which included the cost of production, shipment, and installation of these assets (largely installed by unaffiliated outside contractors), which werehad previously been capitalized to the PASSUR Network;Network. The PASSUR Network was written off as of April 30, 2020, as described in more detail below.  The labor and (2) new

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fringe benefit costs of the Company employees involved in creating Capitalized Assets were capitalized, costs associated withrather than expensed, and amortized over three years, as determined by their projected useful life. The Company did not capitalize any software development projects. Bothcosts, as well as network and data center costs subsequent to January 31, 2020.  Given business conditions in the aviation industry surrounding the unprecedented COVID-19 pandemic, the Company’s software efforts were concentrated in the areas of these are referred to as “Capitalized Assets” and were depreciated and/or amortized over their respective useful lives and charged to costmaintenance of revenues.existing products.

Certain of PASSUR’s services have traditionally relied on our proprietary network of sensors for aircraft surveillance.surveillance - the  PASSUR and SMLAT Network Systems (both collectively, the “PASSUR Network”).  During the second quarter of fiscal year 2020, in light of the FAA's mandate for ADS-B equipage on aircrafts operating in most U.S. airspace, effective January 2020, and parallel adoption of ADS-B requirements in much of the world, the Company performed a comprehensive review of its data feeds, specifically those associated with the PASSUR Network units, and external ADS-B data feeds to determine if these external data feeds provide sufficient redundant data as to that generated from the existing PASSUR installations. The Company determined that such services can nowcould be powered by a combination of FAA data plus commercial ADS-B aggregator feeds and other data feeds available to the Company. This providesCompany, which would provide a more cost-effective solution and will allow us to focus more on value-added analytics, and less on sensor technology.  In this regard, the Company reviewed and decommissioned approximately half of its PASSUR Network system assets.  It isassets during the Company’s intention to decommission all remaining PASSUR Network system assets throughout the remaindersecond quarter of this fiscal year.2020.  As a result, during the three monthsyear ended April 30,October 31, 2020, the Company wrote off the carrying value applicable to the PASSUR Network systems of approximately $3,565,000, and lease assets applicable to these PASSUR locations of approximately $175,000 during the second quarter of fiscal 2020, which amounts arewere included as an impairment charge for the nine monthsyear ended JulyOctober 31, 2020.  The write-off amount includesincluded PASSUR System and SMLAT System assets as well as inventory of finished and spare parts.

Additionally, due to the financial and economic hardships being experienced by the Company’s customers and air transportation support vendors in the current COVID-19 environment, there has been a sufficient amount of uncertainty surrounding the ability of our customers to either renew and/or maintain their current levels of committed contracts with the Company. As a result, during the second quarter of fiscal year 2020, the Company conducted a review of its customer contracts to determine whether an impairment had occurred.  In order to determine whether or not an impairment had occurred, we looked at existing contracted revenue, adjusted for future uncertainties, and compared those amounts with the net carrying value of the related software development asset. Where the contracted revenue amount was less than the net carrying value of the software development asset, we noted an impairment.  As a result, during the three months ended April 30, 2020, the Company wrote off previously capitalized software development costs totaling approximately $6,134,000 due to impairment.impairment during fiscal 2020. The amount of these charges and write-offs arewere included as an impairment charge for the nine-month periodyear ended JulyOctober 31, 2020 totaling $9,874,000.

As a result of the FAA mandate andindustry changes in response to the COVID-19 pandemic (described in “Impact of the COVID-19 Pandemic,” below), the corresponding review conducted by the Company which resulted inand the commencement of the decommissioning of the PASSUR Network, as well as industry changes in response to the COVID-

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19 pandemic (as described in more detail below),resultant write-offs taken during fiscal 2020, the Company anticipates that the costs of maintaining and operating these systems, including depreciation along with related amortizationits level of capitalized software development costs, including related amortization of such costs, will decrease duringin the balance of the fiscal year.future.

Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”("CARES Act") was enacted in response to provide economic relief to those impacted by the COVID-19 pandemic.  Under FASB Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, the effects of changes in tax rates and tax laws are recognized in the period in which the new legislation is enacted. The CARES Act made various tax law changes, including, among others:other things: (i) modifiedmodifications to the federal net operating loss rules, including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes; (ii) enhanced recoverability of AMT tax credit carryforwards; (iii) delayed payment of employer payroll taxes; (iv) increased the limitation on business interest expenses under IRC Section 163(j) for the 2019 and 2020 tax years to permit additional expensing of interest; (ii)and (v) enacted a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k); (iii) made modifications to.  As of October 31, 2020, the federal net operating loss rules, including to permit federalCompany had approximately $25,377,000 of net operating losses, incurred in 2018, 2019, or 2020 towhich cannot be carried back to the five preceding taxableprior years in order to generate a refund for previouslytax refunds since no tax had been paid income taxes; and (iv) enhancedin those years by the recoverability of corporate alternative minimum tax (AMT) credits.  Given the Company’s full valuation allowance position, the CARES Act did not have a material impact on the financial statements.Company.

The Company’s provision for income taxes consists of federal, state and foreign taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary.

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The estimated annual effective tax rate for the fiscal year ending October 31, 2021 is 0%. This calculation reflects estimated income tax expense based on our current year annual pretax income forecast which is offset by a reduction in the valuation allowance. The Company maintains a full valuation allowance against its deferred tax assets.

For the ninethree months ended JulyJanuary 31, 2021, the Company recorded an income tax provision of $0.  The effective tax rate for the three months ended January 31, 2021 is 0% on pretax income of $135,000.  The effective rate differs from the U.S. federal corporate tax rate of 21% due to the use of net operating losses offset by a reduction in the valuation allowance.

For the three months ended January 31, 2020, the Company recorded an income tax provision of $31,560,$32,000, which wasis attributable to foreign withholding tax. The effective tax rate for the ninethree months ended JulyJanuary 31, 2020 was (0.3)(5.7)% and differed from the U.S. federal corporate taxstatutory rate of 21% due toas a result of the foreign withholding taxes.tax recorded during the three months ended January 31, 2020. The Company did not record an income tax benefit onin its pre-tax losses as the Company maintains a full valuation allowance against its net deferred tax assets and the net deferred tax assets were not realizable on a more-likely-than-not basis.

For both the three and nine months ended July 31, 2019, the Company did not record an income tax provision (benefit). The Company projected that its annual effective tax rate for the nine months ended July 31, 2019 was 0% as the Company’s net deferred tax assets were not realizable on a more-likely-than-not basis.

Accounts Receivable

The Company records accounts receivable for agreements where amounts due from customers are contractually required and are non-refundable. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects the Company’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’s agreement. Accounts receivable balances include amounts attributable to deferred revenues. The Company’s accounts receivable balances included $78,000$76,000 of unbilled receivables associated with contractually committed services provided to existing customers as of the ninethree months ended JulyJanuary 31, 2020,2021, which will be invoiced subsequent to JulyJanuary 31, 2020.2021. At October 31, 2019,2020, the Company’s accounts receivable balance included $100,000$53,000 of unbilled receivables associated with contractually committed services provided to existing customers during the twelve months ended October 31, 2019.2020.

The Company has a history of successfully collecting all amounts due from its customers under the original terms of its subscription agreements without making concessions. However, as a result of the outbreak of the global pandemic,during fiscal year 2020, several customers requested, and the Company is in discussions with several of its customers for extended terms of payment or temporaryagreed to, the suspension of certain services to those customers, or the provision of services free services forof charge during a specified period of time. Additionally, one customer requested extended terms of payment, which the Company also accepted. The Company believes that these decisions were in the best interests of the Company as a partner to the aviation industry and will benefit the Company in the longer term. The Company continues to believe that its products and professional service engagements are critical to the efficient operation of the air transportation market.

The provision for doubtful accounts was $891,000$229,000 and $165,000$948,000 as of JulyJanuary 31, 20202021 and October 31, 2019,2020, respectively. During the three and nine months ended July 31, 2020, the Company increased its provision for doubtful accounts in response to the financial and economic uncertainty facing the air transportation industry and several of the Company’s customers as a result of the COVID-19 pandemic. During the three months ended April 30, 2020,January 31, 2021, the Company granted requests by several customers regarding extended terms and temporary suspension of services.collected certain past due accounts for which a reserve had previously been established.  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.

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PASSUR Network

The PASSUR Network is comprisedCertain of PASSUR’s services have traditionally relied on our proprietary network of sensors for aircraft surveillance - the  PASSUR and SMLATSurface Multilateration (“SMLAT”) Network Systems and includes(both collectively, the direct production, shipping, and installation costs incurred for each PASSUR and SMLAT Systems, which are recorded at cost, net of accumulated depreciation. As described in “Cost of Revenues” above, during“PASSUR Network”).  During the second quarter of fiscal year 2020, in light of the FAA's mandate for ADS-B equipage on aircrafts operating in most U.S. airspace, effective January 2020, and parallel adoption of ADS-B requirements in much of the world, wethe Company performed a comprehensive review of its data feeds, specifically those associated with the PASSUR Network units, and external ADS-B data feeds to determine if these external data feeds provide sufficient redundant data as to that generated from the existing PASSUR installations. The Company determined that such services that traditionally had relied on our proprietary network of sensors for aircraft surveillance can nowcould be powered by a combination of FAA data plus commercial ADS-B aggregator feeds and other data feeds available to the Company. This providesCompany, which would provide a more cost-effective solution and will allow us to focus more on value-added analytics, and less on sensor technology.  In this regard, the Company reviewed and decommissioned approximately half of the PASSUR Network system assets.  It is the Company’s intention to decommission all remainingits PASSUR Network system assets throughoutduring the remaindersecond quarter of this fiscal year.2020.  As a result, during the three monthsyear ended April 30,October 31, 2020, the Company wrote off net assetsthe carrying value applicable to the PASSUR Network systems of approximately $3,565,000, and lease assets applicable to these PASSUR locations of approximately $175,000 during the second quarter of fiscal 2020, which amount isamounts were included as

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an impairment charge for the nine monthsyear ended JulyOctober 31, 2020.  The write-off amount includesincluded PASSUR System and SMLAT System assets as well as inventory of finished and spare parts.

The Company did not capitalize any costs related to the PASSUR Network for both the three and nine months ended JulyJanuary 31, 2020.2021 and January 31 2020, respectively. Additionally, the Company did not purchase any parts for the PASSUR Network for the three months ended January 31, 2021 and  January 31, 2020, respectively, and used $0 and $9,300 of PASSUR Network parts for repairs during the three and nine months ended JulyJanuary 31, 2021 and January 31, 2020, respectively.

Depreciation expenses related to the Company-owned PASSUR Network was $0 and $374,000$226,000 for the three and nine months ended JulyJanuary 31, 2021 and January 31, 2020, respectively. Depreciation iswas charged to cost of revenues and is recorded using the straight-line method over the estimated useful life of the asset, which was estimated at five years for SMLAT Systems and seven years for PASSUR Systems. As a result of the decommissioning of the PASSUR Network and the resulting write off of all PASSUR Network assets during the three months ended April 30,fiscal 2020, as described above, the Company will no longer incur any future depreciation expense related to the PASSUR Network.

As a result of the FAA mandate described above and the corresponding review conducted by the Company, which resulted in the commencement of the decommissioning of the PASSUR Network, the Company anticipates that the costs of maintaining and operating these systems, including depreciation, will continue to decrease materially inthroughout the balance of the fiscal year.  

The Company capitalized $61,000 of PASSUR Network costs for both the three and nine months ended July 31, 2019. Additionally, the Company used $8,000 and $30,000 of PASSUR Network parts for repairs during the three and nine months ended July 31, 2019, respectively, and did not make any material purchases of parts during the same period.

Depreciation expenses related to the Company-owned PASSUR Network was $226,000 and $642,000 for the three and nine months ended July 31, 2019, respectively.

The net carrying balance of the PASSUR Network assets after the effect of the write-off described above, was $0 and $3,949,000, as of JulyJanuary 31, 20202021 and October 31, 2019,2020, respectively. Included in the net carrying balance as of October 31, 2019, were parts and finished goods for the PASSUR Network totaling $1,831,000, which had not yet been installed.

Capitalized Software Development Costs

The Company capitalizes costs related to the development of internal use software in accordance with authoritative guidance issued by the FASB on internal-use software, ASC 350-40, “Internal-Use Software.” The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes the costs incurred during the application development stage. For periods through January 31, 2021, costs incurred relating to upgrades and enhancements to the software were capitalized if it had been determined that these upgrades or enhancements add additional functionality to the software.  Costs incurred to maintain and support products after they became available were charged to expense as incurred.  The Company did not capitalize any software development costs subsequent to January 31, 2020.

Due to the financial and economic hardships being experienced by airlines, airports and air transportation support vendors in the current COVID-19 environment, there has beenwas a sufficient amount of uncertainty surrounding the ability of our customers to continue to comply with the terms ofperform their contracts with the Company.  As a result, during the second quarter of fiscal year 2020, the Company conducted a review of its customer contracts to determine whether an impairment had occurred.  In order to determine whether or not an impairment had occurred, the Company looked at existing contracted revenue, adjusted for future uncertainties, and compared those amounts with the net carrying value of the related capitalized development cost asset.  Where the revenue amountcontribution margin was less than the net carrying value of the asset, we determined that an impairment had occurred. As a result of this analysis, during the three months ended April 30, 2020,exercise, the Company wrote-off assets totaling $6,134,000 during the second quarter of fiscal 2020, based on the assumption that the carrying value of the software capitalization was representative of 100% of the committed contract values then remaining.remaining, given the impact of the current COVID-19 environment on the aviation industry and its customers.

The Company capitalized $0 and $489,000 of software development costs during the three and nine months ended JulyJanuary 31, 2021 and January 31, 2020, respectively.  For the three and nine months ended July 31, 2019, the Company capitalized $634,000 and $1,977,000,

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respectively, of software development costs. In addition, the Company did not incur any capitalized software development costs during the quarter ended July 31, 2020.

The Company amortized $121,000 and $1,329,000$688,000 of capitalized software development costs during the three and nine months ended JulyJanuary 31, 2020, respectively. For the three2021 and nine months ended JulyJanuary 31, 2019, the Company amortized $631,000 and $1,743,000 of capitalized software development costs,2020, respectively. The Company previously recorded amortization of the software on a straight-line basis over the estimated useful life of the software, typically over five years within “Cost of Revenues”.  In connection with the impairment analysis described above, the Company revised its estimate of the remaining useful life of the capitalized software development costs to three years.

The Company follows the provisions of ASC 350-40, “Internal Use Software” (“ASC 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 expensed all costs incurred during the preliminary project stage of its development, and capitalized the costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the software were capitalized if it was determined that these upgrades or enhancements added additional functionality to the software. Costs incurred to improve and support products after they become available were charged to expense as incurred.  The Company did not capitalize any software development costs during the three-month period ended July 31, 2020.

As a result of the industry changes in response to the COVID-19 pandemic (described in “Impact of the COVID-19 Pandemic” below), the corresponding review conducted by the Company described above and the resultant write-offs taken during the three months ended April 30, 2020, the Company anticipates that its level of capitalized software development costs, including related amortization of such costs, will decrease in the future.  

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

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to result from the use of the asset is less than the carrying value. Assets to be disposed of are carried at the lower of their carrying value or fair value, less costs to sell. The Company evaluates the periods of amortization continually in determining whether later events and circumstances warrant revised estimates of useful lives. If estimates are changed, the unamortized costs will be allocated to the increased or decreased number of remaining periods in the asset’s revised life.

Deferred Tax AssetAssets

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 assetassets 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 its net deferred tax assets are not realizable on a more-likely-than-not basis and that a valuation allowance is required against its net deferred tax assets.  

At October 31, 2019,2020, the Company had available federal net operating loss carryforwards of $16,098,000,$25,377,000, of which $8,033,000$12,597,000 are indefinite lived, but only available to offset 80% of future taxable income, and $8,065,000$12,780,000 will expire in various tax years from fiscal year 20232022 through fiscal year 2038.

Net LossIncome/(Loss) per Share Information

Basic net income/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’s 2009 Stock Incentive Plan, which expired on February 24, 2019, and 2019 Stock Incentive Plan allow for a cashless exercise. Shares used to calculate net loss per share are as follows:

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During the second quarter of 2020, the Company recorded an impairment to its ROU assets of approximately $423,000, related to lease abandonment charges of $248,000, for the abandonment of two office locations and $175,000 related to leased assets applicable to the PASSUR network locations.  During the third quarter of 2020, the Company reached settlements on three leased locations and recorded reductions to previously recorded lease liabilities of approximately $203,000.

The total future minimum lease payments, over the remaining lease term, relating to the Company’s operating leases for the remainder of fiscal year 20202021 and for each of the next four fiscal years and thereafter is as follows:

The following table summarizes scheduled maturities of the Company’s contractual obligations relating to operating leases for which cash flows are fixed and determinable as of OctoberJanuary 31, 2019:2021:

(1)Minimum operating lease commitments only include base rent.  Certain leases provide for contingent rents that are not measurable at inception and primarily include common area maintenance and real estate taxes.  These amounts are excluded from minimum operating lease commitments and are included in the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably measurable.  Such amounts have not been material to total rent expense.   

The Company does not have any finance leases or leases that have not yet commenced as of JulyJanuary 31, 2020.

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2021.

5. Notes Payable – Related Party

The outstanding amount underDuring the note payablefiscal year ended October 31, 2019, the Company owed certain amounts to G.S. Beckwith Gilbert, the Company’s Non-Executive Chairman of the Board and significant stockholder, under a promissory note issued by the Company to Mr. Gilbert on January 28, 2019 (the “Existing“Fifth Gilbert Note”),. The maturity date under the Sixth Gilbert Note was $10,453,000 as of July 31,November 1, 2020, including accrued interest, with anand the annual interest rate ofwas 9 ¾% and a maturity date of November 1, 2021. Interest, with annual interest payments are due byrequired to be made on October 31st of each fiscal year. AtThe note payable was secured by the Company’s assets. During the year ended October 31, 2019, the Company paid Mr. Gilbert interest accrued on the Fifth Gilbert Note through July 31, 2020, the notes payable balance included accrued interest on the Existing Gilbert Note of $868,000, representing interest incurred during the fourth quarter of 2019 through and including the third quarter of 2020.in a total amount equal to $516,000. During the nine months ended July 31, 2020,fiscal year 2019, Mr. Gilbert loaned the Company an additional $1,435,000 (which amount is included$2,100,000 to primarily fund the Company’s near-term investment strategy to enhance the Company’s technology platform, in the outstanding note payable amount asform of July 31, 2020 identified above).software development personnel, third-party contractors, and PASSUR Network infrastructure support. As of September 14, 2020, the note payable balance, including accrued interest, was $10,570,000. During the nine months ended JulyOctober 31, 2019, the Company paid interest incurred onaggregate amount outstanding under the ExistingFifth Gilbert Note totaling $516,000.was $8,335,000, consisting of a principal of $8,135,000 and interest of $200,000 accrued during the fourth quarter of fiscal year 2019.

On January 27, 2020, the Company and Mr. Gilbert entered into a Sixth Debt Extension Agreement, with Mr. Gilbert, effective as of January 27, 2020, pursuant to which the Company cancelled the Fifth Gilbert Note and issued Mr. Gilbert agreed to modify certain terms and conditions of the Existing Gilbert Note. The maturity date of the Existing Gilbert Note was November 1, 2020, and the total amount of principal and interest due for the fourth quarter of fiscal year 2019 and first quarter of fiscal year 2020 and owing as of January 27, 2020, was $9,071,000. Pursuant to the Sixth Debt Extension Agreement, the Company issued a new promissory note to Mr.(the “Sixth Gilbert Note”) in the amount of $9,071,000, (the “Sixth Replacement Note”) equal toconsisting of a principal of $8,670,000 (which included the principal previously outstanding under the Fifth Gilbert Note and an additional amount of $535,000 loaned to the Company by Mr. Gilbert during the period from October 31, 2019 and January 27, 2020) and unpaid interest of $401,000 accrued interestunder the Fifth Gilbert Note through January 27, 20202020. Under the terms of $401,000, and cancelled the ExistingSixth Gilbert Note. TheNote, the Company agreed to pay the unpaid interest of $401,000 accrued interestunder the Fifth Gilbert Note and included in the Sixth ReplacementGilbert Note (as described above) at the time and on the terms set forth in the Sixth ReplacementGilbert Note. Under the terms of the Sixth ReplacementGilbert Note, the maturity date of the loan was extended to November 1, 2021, and the annual interest rate remained at 9.75%. Interest, with annual interest payments under the Sixth Replacement Note shallrequired to be made annually on October 31st of each year. The note payable was secured by the Company’s assets.

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During the fiscal year ended October 31, 2020, the Company did not pay any interest on the Sixth Gilbert Note. As of October 31, 2020, the aggregate amount owed by the Company to Mr. Gilbert was $10,692,000, consisting of a principal of $9,585,000 (which included the principal of $8,670,000 outstanding under the Sixth Gilbert Note and an additional amount of $915,000 loaned to the Company during the period from January 27, 2020 to October 31, 2020) and unpaid interest of $1,107,000 (which included unpaid interest of $410,000 accrued under the Fifth Gilbert Note that was included in the Sixth Gilbert Note and unpaid interest of $706,000 accrued under the Sixth Gilbert Note through October 31, 2020).

During the first quarter of fiscal 2021, the Company paid Mr. Gilbert interest accrued on the Sixth Gilbert Note from October 31, 2020 through January 31, 2021 in a total amount equal to $266,400. During the three months ended January 31, 2021, Mr. Gilbert did not loan the Company any additional funds.

On January 29, 2021, the Company and Mr. Gilbert entered into a Seventh Debt Extension Agreement effective January 29, 2021, pursuant to which the Company cancelled the Sixth Gilbert Note and issued Mr. Gilbert a new promissory note (the “Seventh Gilbert Note”) in the amount of $10,692,000, consisting of a principal of $9,585,000 and unpaid interest of $1,107,000 accrued under the Sixth Gilbert Note through October 31, 2020. Under the terms of the Seventh Gilbert Note, the Company agreed to pay the unpaid interest of $1,107,000 accrued under the Sixth Gilbert Note and included in the Seventh Gilbert Note (as described above) at the time and on the terms set forth in the Seventh Gilbert Note. Under the terms of the Seventh Gilbert Note, the maturity date of the loan was extended to November 1, 2022, and the annual interest rate remained at 9 ¾%, with annual interest payments required to be made on October 31st of each year (although any accrued interest can be paid before such time without penalty). The note payable is secured by the Company’s assets. The amendments to the Sixth Gilbert Note were determined to be a modification of the debt instrument and no gain or loss was recorded as a result of the transactions.

As of March 12, 2021, the note payable balance, including accrued interest, was $10,692,000.

The Company has evaluated its financial position as of JulyJanuary 31, 2020,2021, including an operating lossincome of $1,971,000 (before impairment charges)$402,000 for the ninethree months ended JulyJanuary 31, 20202021 and a working capital deficit of $348,000$338,000 (excluding deferred revenues and certain CARES Act grant proceeds accounted for as accrued liabilities) as of JulyJanuary 31, 2020,2021, and has requested and received a commitment from Mr. Gilbert, dated September 14, 2020,March 9, 2021, that if the Company, at any time, is unable to meet its obligations through September 14, 2021,March 10, 2022, Mr. 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 Company, in addition to the deferral of principal and/or interest payments due on the existing loans, if deemed necessary.

Item 2. Management’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 Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources” below) contains “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 result,” “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” and “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’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

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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’s analysis, judgments, belief, or expectation only as of such date.

Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in this Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K for the fiscal year ended October 31, 2019, as well as the risks set forth above, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. The spread of COVID-19 has severely impacted many economies throughout the world, with businesses being forced to cease or limit operations for long or indefinite periods of time.  Measures taken to contain the spread of the virus, including travel bans, quarantines and closures of non-essential services have triggered significant disruptions to businesses worldwide, with particular concentration on the aviation industry that the Company serves.  The federal government has responded with monetary and fiscal interventions to aid in stabilizing the economy and the Company has applied for and received assistance under the Payroll Support Program for Air Carriers and Contractors, part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).  

The aviation and travel industries, which are served by the Company and its products, were severely affected by the COVID-19 outbreak as a result of travel restrictions imposed by most jurisdictions.  As a result of the pandemic, the Company faces increased economic pressures and has experienced a significant loss of revenue during the three-month period ended JulyJanuary 31, 2020,2021, which the Company anticipates will continue forto impact results through the remainderfirst half of fiscal year 20202021 and possibly into fiscal year 2021.longer.  The severity of the downturn depends on many factors, the outcomes of which are uncertain or unknown at this time, such as, among other things, the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or to mitigate its impact, the discoverypublic distribution of treatments and vaccines for the disease (including its variants), the length of time before the public feels safe to travel, and the economic stimulus programs available to affected industries and consumers.  All of these variables will impact how quickly the industry can recover and may affect the revenue and earnings levels of the Company.

For further information on factors which could impact the Company and the statements contained herein, see Item 1A: Risk Factors in our Annual Report on Form 10-K for the year ended October 31, 2019. The Company undertakes no obligation to publicly update and supplement any forward-looking statements that become untrue because new information becomes available, other events occur in the future, or otherwise.

Description of Business

PASSURPASSUR® Aerospace, Inc. (“PASSUR” or the “Company”), a New York corporation founded in 1967, is a globalleading business intelligence company, providing predictive analytics and decision support technology for the aviation industry primarily to improve the operational performance and cash flow of airlines, airports, fixed based operators (FBOs) and air navigation service providers (ANSPs). The Company is recognized as a leader in providing a cloud-based platform, ARiVA™, that manages and optimizes operations for our customers.

PASSUR delivers digital operational excellence.solutions that are essential to global aviation operations, meeting the needs of global air travel as well as supporting the recovery of the aviation industry from the COVID-19 crisis.   The Company reduces operational complexitystructure and execution of operations within the aviation industry has fundamentally changed as a result of this crisis due to the significant change in the economics required to support current conditions, a return to normal operations and profitability, and to assist in mitigating health risks.

PASSUR continues to be a pioneer applying artificial intelligence powered by delivering a trusted platform combined with professional servicesmachine learning to help lower operating expenses.aviation data, addressing the industry’s most costly challenges, including the management and optimization of airspace, airport assets, aircraft, and day of flight operations.

Operational efficiency is more important now than ever to eliminate sources of waste, variables, and inflexible operations for increased profits. The Company addresses this significant industry problem by applying our technology platform, combined with professional services, to provide solutions that predict, prioritize, prevent and help the industry recover from unexpected disruptions. These disruptions have long been seen as the cost of doing business in the industry and are even more pronounced today, creating greater uncertainty to the industry. The Company provides actionable intelligence to enable the industry to manage their operations more efficiently.

PASSUR solutions are used by  Our core business addresses some of the largestaviation industry’s most intractable and costly challenges, including, but not limited to, underutilization of airspace and airport capacity, delays, cancellations, and diversions. Several independent studies have estimated the annual direct costs of such inefficiencies to airlines in the United States at over $8 billion annually and worldwide direct cost at over $30 billion annually.

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

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The Company provides its solutions to airlines and airports in the United States, as well as by airlines and airports in Canada Europe, and Latin America. The global market presents an opportunity to network more customers in a broader market.

The Company’s business plan is to continue to focus on increasing subscription-based revenues from its suite of software applications, and professional services designed to address the needs of the aviation industry and the U.S. government. The Company helps customers alleviate constraints without the cost of expensive infrastructure upgrades and gets them fully operational within months, to capture more revenue during peak travel periods.  The Company’s goal is to help solve problems faced by its customers and increase profits, by focusing on:

·Improving visibility across departments;  

·Improving the quality of planning data; and  

·Automating data driven decision support for capacity and demand to meet the spikes in revenue opportunity.  

For the three months ended JulyJanuary 31, 2020,2021, total revenue decreased 42%60% to $2,208,000,$1,698,000, compared with $3,798,000$4,225,000 for the same period in fiscal year 2019.2020. Income from operations for the three months ended JulyJanuary 31, 20202021 improved to $9,000,

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$402,000, compared to a loss from operations of $894,000$341,000 for the same period in fiscal year 2019.2020. For the three months ended JulyJanuary 31, 2020,2021, net lossincome was $250,000,$135,000, or $0.03$0.02 per diluted share, compared to a net loss of $1,074,000,$583,000, or $0.14$0.08 per diluted share, in the same period in fiscal year 2019.

For the nine months ended July 31, 2020, total revenue decreased 13% to $9,612,000, compared with $11,088,000 for the same period in fiscal year 2019. Loss from operations for the nine months ended July 31, 2020 (inclusive of the impairment charge of $9,874,000) was $11,845,000, compared to $2,624,000 for the same period in fiscal year 2019. Excluding the impact of the impairment charge, the loss from operations was $1,971,000 for the nine months ended July 31, 2020, an improvement of $653,000 from the same period in fiscal 2019.  For the nine months ended July 31, 2020, net loss (inclusive of the impairment charge of $9,874,000) was $12,564,000, or $1.63 per diluted share, compared to a net loss of $3,140,000, or $0.41 per diluted share, in the same period in fiscal year 2019.2020.

Results of Operations

Revenues

Management concentrates its efforts on the sale of business intelligence, predictive analytics, and decision support product applications, utilizing its extensive data base comprised of various data sources.applications. Such efforts include the continued development of existing products, new product offerings and to a lesser extent, professional services.

The Company is a supplier and partner to the air transportation industry. Many of the Company’s customers have been severely impacted by the COVID-19 outbreak and the rapid decline in air travel.  As a result, the Company experienced downturns in its revenues in the latter part of fiscal year 2020 and continuing into fiscal 2021.

Although the Company’s revenue is primarily subscription based, during the latter part of fiscal 2020, several customers requested, and the Company agreed to, the suspension of certain services to those customers, or the provision of services free of charge during a specific period of time.  Additionally, one customer requested extended terms of payment, which request the Company also accepted.  The Company believes that these decisions were in the best interests of the Company as a partner to the aviation industry and will benefit the Company in the longer term.  The Company continues to believe that its products and professional service engagements are critical to the efficient operation of the air transportation market.

For the three months ended JulyJanuary 31, 2020,2021, total revenues decreased by $1,590,000,$2,527,000, or 42%60%, to $2,208,000,$1,698,000, as compared with $3,798,000$4,225,000 for the same period in 2019.2020. The decrease in total revenues was primarily due to a decrease in subscription revenue of $1,640,000,$2,312,000, or 45%58%, which was partially offset by an increasecombined with a decrease in consulting revenue of $49,000$215,000 to $202,000, as compared with the same period in the prior year.

For the nine months ended July 31, 2020, total revenues decreased by $1,477,000, or 13%, to $9,612,000, as compared with $11,088,000 for the same period in 2019. The decrease in total revenues was primarily due to a decrease in subscription revenue of $1,916,000, or 17%, partially offset by an increase in consulting revenue of $439,000, or 139%,$54,000, as compared with the same period in the prior year.

The decrease in subscription revenue for both the three and nine months ended JulyJanuary 31, 20202021 was primarily due to several expiring airline and airport contracts that were not renewed, offset in part by new contracts for subscription services closed during fiscal year 20202021 and net incremental revenue recognized during both periods in fiscal year 20202021 related to new contracts closed during fiscal year 2019.2020, mainly related to airport business.

As previously disclosed, the Company had engaged in ongoing discussions with two of its customers about the possible renewal of certain existing contracts which had expired at various times from January 31, 2020 through May 31, 2020, but certain parts of these contracts had been renewed on a short-term interim basis. These contracts were not renewed in full or in part, which resulted in the loss of potential revenue generated from these contracts of $1,595,000 and $2,567,000$1,615,000 for the three months and nine months ended JulyJanuary 31, 2020, respectively,2021, as compared to the same periods in fiscal 2019.  In addition, the loss of revenue from these contracts not being renewed for the Company’s full fiscal year 2020 will total approximately $4,197,000, as compared to the full fiscal year of 2019.  Additionally, the Company has agreed with one of its customers to a temporary suspension of billings during the period from August 1, 2020 through October 31, 2020 as a result of the COVID-19 pandemic.  This will impact the Company’s fourth quarter revenue by approximately $513,000.2020.  

Expenses

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In response to the uncertainty surrounding the prospects of airlines and airports and the travel industry as a result of the continuing global COVID-19 pandemic and the declines in revenue that the Company began to experiencehas experienced in fiscal year 2020 and into the secondfirst quarter of fiscal year 2020,2021, partly as a result of the pandemic, the Company reviewed its operating costs to more closely align those costs with its outlook for the foreseeable future. The Company has taken steps to reduce its operating costs going forward, which steps have included terminating or furloughing certain positions and instituting a temporary pay reduction plan duringbeginning in the second quarter of 2020, suspending the use of outside consultants where possible, rationalizing the PASSUR Network, and reducing and/or eliminating other operating expenses that were not critical to the short-term outlook of the Company.  As a result, during the three months ended January 31, 2021, the Company experienced a reduced level of cash operating costs through the end of the third quarter of 2020 of approximately $2,100,000, or approximately 40% when compared with an annualized run rate of expenses atto the end ofsame period for the first quarter of 2020.prior year.  The Company estimatesanticipates that the continuation of these programs into the fourth quarterlatter quarters of fiscal year 2020 would2021 will result in totaladditional savings of approximately 40%, as compared with the annualized run rate of expenses at the

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end of the first quarter of 2020.  The Company anticipates that further reductions in cash operating costs will be achieved as a result of eligible personnel expenses being funded using the grant proceeds received by the Company under the CARES Act Payroll Support Program.  There can be no assurances, however, that the Company may not have to further reduce operating costs in the future.  If the recovery of the air transportation industry accelerates and revenue levels quickly return to pre-COVID-19 levels, these levels of cost savings may not be practicable or sustainable to support the operations necessary for the increased level of revenue.

Cost of Revenues

For the three months ended JulyJanuary 31, 2020,2021, cost of revenues decreased $1,277,000,$1,716,000, or 60%75%, to $861,000,$570,000, as compared to $2,138,000$2,286,000 in the same period in fiscal year 2019. For the nine months ended July 31, 2020, cost of revenues decreased $639,000, or 10%, to $5,568,000, as compared to $6,206,000 in the same period in fiscal year 2019.2020. The decreasesdecrease in cost of revenues during these periods werethe period was primarily attributable to lower compensation, professional services, consulting, data communications costs and depreciation and amortization expenses, offset in part by a decrease in capitalized software development costs as a result of the Company not incurring any capitalized software costs during the three months ended JulyJanuary 31, 2020.2021.  In response to the uncertainty surrounding the prospects of airlines and airports and the travel industry for the remainder of the year given the global COVID-19 pandemic, during the second quarter of fiscal year 2020, the Company undertook a review of its operating costs to more closely align those costs with its forecast for revenue.  The Company continued to realize cost savings and benefits during the three months ended JulyJanuary 31, 20202021 from the previouslycost reduction programs instituted reductions in force, furloughs and temporary reductions in salaries, combined with the continued reduction in the use of outside development consultants. Also, as part of this review, the Company exited three leased facilities and terminated the related lease agreements, recording reductionsprior to its previously recorded lease liabilities of approximately $133,000.  For the nine months ended July 31, 2020, the net cost of the lease terminations was approximately $30,000.receiving CARES Act financing. For the three months ended JulyJanuary 31, 2020,2021, the Company reduced its compensation expense by $82,000, aswas able to use CARES Act financing for eligible payroll costs to offset a portion of the CARES Act grant proceeds receivedits costs of revenues by the Company was used to fund eligible payroll costs.$410,000.

Going forward, the Company anticipates lower levels of capitalized software costs. In addition, as a result of the PASSUR Network decommissioning process commenced during the second quarter ended April 30,of fiscal 2020 and the resulting write off of certain PASSUR Network assets and capitalized software development costs, the Company anticipates that depreciation and amortization expenses associated with these assets will continue to decrease in the future.

Research and Development

For the three months ended JulyJanuary 31, 2020,2021, research and development expenses decreased $77,100,$65,000, or 54%58%, to $66,000,$48,000, as compared to $143,000$112,000 for the same period in fiscal year 2019.  For the nine months ended July 31, 2020, research and development expenses decreased $145,000, or 34%, to $282,000, as compared to $426,000 for the same period in fiscal year 2019.2020.  The decreasesdecrease in research and development expenses during both periods werethe period was primarily attributable to a decrease in personnel-related costs, as compared to the same periodsperiod during the prior year.  This was a result of the reductions in force, furloughs and temporary reductions in salaries instituted during fiscal 2020, prior to receiving CARES Act financing.  For the three months ended April 30, 2020, as noted above.January 31, 2021, the Company was able to use CARES Act financing for eligible payroll costs to offset a portion of its research and development expenses by $35,000.

The Company’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.

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Selling, General, and Administrative

For the three months ended JulyJanuary 31, 2020,2021, selling, general, and administrative expenses decreased $1,139,000,$1,490,000, or 47%69%, to $1,272,000,$679,000, as compared to $2,411,000$2,168,000 for the same period in fiscal year 2019.  For the nine months ended July 31, 2020, selling, general and administrative expenses decreased $1,346,000, or 19%, to $5,733,000, as compared to $7,079,000 for the same period in fiscal year 2019.2020.  The decreasesdecrease in selling, general, and administrative expense for the three and nine months ended JulyJanuary 31, 20202021 were primarily due to decreases in compensation costs, as a result of the reductions in force, furloughs and salary reduction programs previously instituted prior to receiving CARES Act financing, in response to the COVID-19 outbreak, coupled with lower travel marketing and consulting expenses, as compared to the same periodsperiod in fiscal year 2019.2020. Also, as part of the review of its operating costs described above, during fiscal 2020, the Company exited three leased facilities and terminated the related lease agreements, recordingresulting in reductions to its previously recorded lease liabilitiesfacilities costs of approximately $71,000. For the nine months ended July 31, 2020, the net cost of the lease terminations was approximately $15,000.$92,000.  For the three months ended JulyJanuary 31,