Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2010
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.
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(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 11-2208938
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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 (ss.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 [ ] 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):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act).
YES [ ] NO [X]
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There were 4,546,448 shares of the Registrant's common stock with a par value of
$0.01 per share outstanding as of March 2, 2010.
INDEX
PASSUR Aerospace, Inc. and Subsidiary
PAGE
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements
Consolidated Balance Sheets as of January 31, 2010 (unaudited) 3
and October 31, 2009.
Consolidated Statements of Income (unaudited) 4
Three months ended January 31, 2010 and 2009.
Consolidated Statements of Cash Flows (unaudited) 5
Three months ended January 31, 2010 and 2009.
Notes to Consolidated Financial 6
Statements (unaudited) - January 31, 2010.
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 17
Item 4T. Controls and Procedures. 17
PART II. OTHER INFORMATION 18
Item 6. Exhibits. 18
Signatures. 19
-2-
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Balance Sheets
JANUARY 31, October 31,
2010 2009
------------ ------------
(UNAUDITED) (Audited)
ASSETS
Current assets:
Cash $ 408,553 $ 250,626
Accounts receivable, net 924,490 867,043
Prepaid expenses and other current assets 264,706 243,918
------------ ------------
Total current assets 1,597,749 1,361,587
Property, plant and equipment, net 225,669 259,231
PASSUR(R) Network, net 7,283,135 7,291,429
Software development costs, net 2,678,202 2,516,278
Other assets 267,362 282,569
------------ ------------
TOTAL ASSETS $ 12,052,117 $ 11,711,094
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 557,214 $ 407,647
Accrued expenses and other current liabilities 671,546 540,793
Deferred income, current portion 1,193,707 1,377,106
Accrued interest - related party 329,042 1,108,112
------------ ------------
Total current liabilities 2,751,509 3,433,658
Deferred income, less current portion 275,813 305,193
Notes payable - related party 14,814,880 13,914,880
------------ ------------
17,842,202 17,653,731
Commitment and contingencies
Stockholders' deficit:
Preferred shares - authorized 5,000,000 shares,
par value $.01 per share; none issued or outstanding -- --
Common shares - authorized 10,000,000 shares,
par value $.01 per share; issued
5,242,948 in 2010 and 4,990,448 in 2009 52,429 49,904
Additional paid-in capital 4,561,318 4,436,770
Accumulated deficit (8,780,357) (8,805,836)
------------ ------------
(4,166,610) (4,319,162)
Treasury stock, at cost, 696,500 shares in 2010 and 2009 (1,623,475) (1,623,475)
------------ ------------
Total stockholders' deficit (5,790,085) (5,942,637)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 12,052,117 $ 11,711,094
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-3-
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
THREE MONTHS ENDED JANUARY 31,
2010 2009
--------------- ---------------
REVENUES:
Subscriptions $ 2,198,723 $ 1,922,065
Maintenance 84,782 89,861
Other 39,897 64,459
--------------- ---------------
Total revenues 2,323,402 2,076,385
--------------- ---------------
COST AND EXPENSES:
Cost of revenues 949,033 672,252
Research and development 69,315 70,075
Selling, general, and administrative expenses 915,618 1,090,482
--------------- ---------------
1,933,966 1,832,809
--------------- ---------------
INCOME FROM OPERATIONS 389,436 243,576
Other expense:
Interest expense - related party 343,725 158,871
--------------- ---------------
Income before income taxes 45,711 84,705
Provision for income taxes 20,232 8,974
--------------- ---------------
NET INCOME $ 25,479 $ 75,731
=============== ===============
Net income per common share - basic $ .01 $ .02
=============== ===============
Net income per common share - diluted $ .00 $ .01
=============== ===============
Weighted average number of
common shares outstanding - basic 4,415,524 4,146,448
=============== ===============
Weighted average number of
common shares outstanding - diluted 5,309,169 5,327,440
=============== ===============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-4-
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED JANUARY 31,
2010 2009
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25,479 $ 75,731
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 450,314 390,764
(Recovery of) provision for doubtful accounts receivable (905) 32,584
Non cash stock compensation expense 20,185 34,093
Changes in operating assets and liabilities:
Accounts receivable (56,542) (206,693)
Prepaid expenses and other current assets (20,788) (90,219)
Other assets 15,207 (49,191)
Accounts payable 149,567 131,849
Deferred income (212,779) 18,774
Accrued expenses and other current liabilities 130,753 152,481
Accrued interest - related party (779,070) 158,871
----------- -----------
Total adjustments (304,058) 573,313
----------- -----------
Net cash (used in) provided by operating activities (278,579) 649,044
CASH FLOWS FROM INVESTING ACTIVITIES
PASSUR(R) Network (287,873) (564,037)
Software development costs (255,842) (165,116)
Capital expenditures (26,667) (3,698)
----------- -----------
Net cash used in investing activities (570,382) (732,851)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - related party 900,000 --
Proceeds from exercise of stock options 106,888 --
----------- -----------
Net cash provided by financing activities 1,006,888 --
----------- -----------
Increase (decrease) in cash 157,927 (83,807)
Cash - beginning of period 250,626 217,316
----------- -----------
Cash - end of period $ 408,553 $ 133,509
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest - related party $ 1,122,794 $ --
Income taxes $ 20,232 $ 8,974
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-5-
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements
January 31, 2010
(Unaudited)
1. NATURE OF BUSINESS
PASSUR Aerospace, Inc. (the "Company", "PASSUR(R)", "we", or "our") is a
business intelligence company which develops predictive analytics built on
proprietary algorithms and on concurrent integration and simultaneous mining of
multiple databases. The Company believes it is positioned to provide the
industry standard in business intelligence dashboards and predictive analytics
for aviation organizations.
The Company's principal business is to provide business intelligence and
predictive analytics solutions which save money and make available mission
critical information for aviation organizations. These analytics are derived
from its proprietary PASSUR(R) Network of live flight information, updated every
4.6 seconds, and include decision support software, predictive analytics, and
web-delivered collaborative decision solutions enhanced by professional
services, provided by industry experts.
PASSUR(R) serves most major airlines (including six of the top seven North
American airlines, as well as, the top five hub airlines), over fifty airport
customers (including ten of the top fifteen North American airports), and more
than two hundred corporate aviation customers.
The Company believes its predictive analytics save its customers millions of
dollars by providing "Predict and Proactively Act" solutions. The PASSUR(R)
system simultaneously scans, correlates, and mines information from its
proprietary private passive radar system together with multiple additional
government and private databases - enabling problems, trends, and patterns of
behavior in flight operations to be identified before they happen.
The PASSUR(R) Network includes one hundred and thirty Company-owned passive
radars located primarily in North America, with one located at each of the top
thirty-five U.S. airports. Other PASSUR(R)s are located in Europe and Asia.
Flight tracks are updated every 4.6 seconds, thereby providing a system which is
user-friendly and useful for decision making.
-6-
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial information contained in this Form 10-Q represents
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.
Such footnote information was included in the Company's annual report on Form
10-K for the year ended October 31, 2009, filed with the Securities and Exchange
Commission ("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's consolidated financial position at January 31, 2010, and its
consolidated results of operations and cash flows for the three months ended
January 31, 2010 and 2009. Subsequent events were evaluated through the date
this Form 10-Q was filed with the SEC.
Management is addressing the Company's working capital and stockholders'
deficiencies by aggressively marketing the Company's PASSUR(R) information
capabilities in its existing product lines, as well as in new products, which
are continually being developed and deployed. The Company intends to increase
the size and related airspace coverage of its owned "PASSUR(R) Network," by
continuing to install PASSUR(R) Systems throughout the United States and certain
foreign countries. In addition, management believes that expanding its existing
software suite of products, which address the wide array of needs of the
aviation industry, through the continued development of new product offerings,
will continue to lead to increased growth in the Company's customer base and
subscription-based revenues. Additionally, if the Company's business plan does
not generate sufficient cash flows from operations to meet the Company's
operating cash requirements, the Company will attempt to obtain external
financing, and if such external financing is not consummated, the Company has a
commitment to receive the necessary continuing financial support to meet its
obligations from its significant shareholder and Chairman through March 8, 2011.
Such continuing financial support may be in the form of additional loans to the
Company, in addition to the deferral of principal and/or interest payments due
on the outstanding loans, if deemed necessary.
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, 2010.
Certain financial information in the footnotes have been rounded to the nearest
thousand for presentation purposes.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PASSUR Aerospace,
Inc. and its wholly-owned subsidiary. All significant inter-company transactions
and balances have been eliminated in consolidation.
-7-
REVENUE RECOGNITION POLICY
The Company follows the provisions of FASB ASC 985-605 (SOP 97-2, "SOFTWARE
REVENUE RECOGNITION"), as amended. ASC 985-605 delineates the accounting
practices for software products, maintenance, and support services and
consulting revenue. Under ASC 985-605, the Company recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
determinable, and collection of the resulting receivable is probable. For
arrangements involving multiple elements (e.g. maintenance, support, and other
services), the Company allocates revenue to each element of the arrangement
based on vendor-specific objective evidence of its fair value, or for products
not being sold separately, the objective and verifiable fair value established
by management.
The Company recognizes service and maintenance revenues on a straight-line basis
over the service contract period. Revenues for data subscription services are
recognized on a monthly basis upon the execution of an agreement and the
customer's receipt of the data.
The Company recognizes license fee revenues on a straight-line basis over the
term of the license agreement, which typically does not exceed five years.
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.
ACCOUNTS RECEIVABLE
The Company uses installment license and/or maintenance agreements as part of
its standard business practice. The Company has a history of successfully
collecting all amounts due under the original payment terms, without making
concessions on payments, software products, maintenance, or other services. Net
accounts receivable are composed of either the monthly, quarterly, or annual
committed amounts due from customers pursuant to the terms of each respective
customer's agreement. These account receivable balances include unearned revenue
attributable to deferred subscription revenues, deferred maintenance revenues,
and unamortized license fee revenues. Deferred revenue amounts represent fees
billed prior to actual performance of services, which will be recognized as
revenue over the respective license agreement term, which typically does not
exceed five years.
Accounts receivable balances also include initial set up fees billed when the
service is performed and revenues are recognized on a straight-line basis over
the estimated life of the customer relationship period, typically five years.
As of January 31, 2010, the provision for doubtful accounts was approximately
$42,000, compared to $43,000, recorded as of the fiscal year ended October 31,
2009. The Company monitors its outstanding accounts receivable balances and
believes the $42,000 provision is reasonable.
COST OF REVENUES
The Company has not segregated its cost of revenues between cost of system
revenues and cost of subscription and maintenance revenues, as it is not
practicable to segregate such costs. Costs associated with system revenues
consist primarily of purchased materials, direct labor, and overhead costs.
Costs associated with subscription and maintenance revenues consist primarily of
direct labor, depreciation of PASSUR(R) Network assets, amortization of software
development costs, communication costs, data feeds, and allocated overhead
costs. Also included in costs of revenues are costs associated with the upgrades
of PASSUR(R) Systems necessary to make such systems compatible with new software
applications, as well as the ordinary repair and maintenance of existing
PASSUR(R) Network Systems. Additionally, cost of revenues in each reporting
period is impacted by: (1) the number of PASSUR(R) Network units added, which
include the production, shipment, and installation of these assets, which are
capitalized to the PASSUR(R) Network; and (2) capitalized costs associated with
software development programs which are expensed in cost of revenues.
-8-
PASSUR(R) NETWORK
The PASSUR(R) Network installations, which include the direct and indirect
production and installation costs incurred for each of the Company-owned
PASSUR(R) Systems (the "PASSUR(R) Network"), are recorded at cost, net of
accumulated depreciation. Depreciation is charged to cost of revenues and is
calculated using the straight-line method over the estimated useful life of the
asset, which is estimated at seven years. Units that are not placed into service
are not depreciated until they are placed in service.
CAPITALIZED SOFTWARE COSTS
The Company follows the provisions of FASB ASC 985-20 (SFAS 86, "ACCOUNTING FOR
THE COSTS OF SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED.") Costs
incurred to develop computer software products as well as significant
enhancements to software features of the existing products to be sold or
otherwise marketed, are capitalized, after technological feasibility is
established and ending when the product is available for release to customers.
Once the software products become available for general release to the public,
the Company begins to amortize such costs to cost of revenues.
Amortization of capitalized software costs is provided on a product-by-product
basis based on the greater of the ratio of current gross revenues to the total
of current and anticipated future gross revenues or the straight-line method
over the estimated economic life of the product beginning at the point the
product becomes available for general release, typically over five years. Costs
incurred to improve and support products after they become available for general
release are charged to expense as incurred. Costs incurred to enhance products
are capitalized. The assessment of recoverability of capitalized software
development costs requires the exercise of judgment by management. In the
opinion of management, all such costs capitalized as of January 31, 2010 are
recoverable through anticipated future sales of such applicable products.
DEFERRED INCOME
Deferred income includes advances received on subscription services and/or
maintenance agreements, which are derived from the Company's PASSUR(R) Network
and which may be prepaid either annually or quarterly, as well as the
unamortized portion of one-time payments received for license fees relating to
Company software applications. Revenues from subscription and maintenance
services are recognized as income ratably over the subscription and/or
maintenance period that coincides with the respective agreement.
The Company recognizes license fee revenues on a straight-line basis over the
term of the license agreement, which typically does not exceed five years.
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.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment when circumstances indicate
the carrying amount of an asset may not be recoverable. Impairment is recognized
to the extent the sum of undiscounted estimated future cash flows expected to
result from the use of the asset is less than the carrying value. Assets to be
disposed of are carried at the lower of their carrying value or fair value, less
costs to sell. The Company evaluates the periods of amortization continually in
determining whether later events and circumstances warrant revised estimates of
useful lives. If estimates are changed, the unamortized costs will be allocated
to the increased or decreased number of remaining periods in the revised life.
-9-
NET INCOME PER SHARE INFORMATION
Basic net income per share is computed based on the weighted average number of
shares outstanding. Diluted net income per share is based on the sum of the
weighted average number of common shares outstanding and common stock
equivalents. Shares used to calculate net income per share are as follows:
FOR THE THREE MONTHS ENDED
JANUARY 31,
2010 2009
--------- ---------
Basic weighted-average shares outstanding 4,415,524 4,146,448
Effect of dilutive stock options 893,645 1,180,992
--------- ---------
Diluted weighted-average shares outstanding 5,309,169 5,327,440
========= =========
Diluted weighted-average shares outstanding
Weighted-average shares which are not
included in the calculation of diluted net
income per share because their impact
is anti-dilutive
Stock options 510,855 604,508
========= =========
STOCK-BASED COMPENSATION
The Company follows FASB ASC 718 (SFAS 123R, "Share-Based Payments") which
requires measurement of compensation cost for all stock-based awards at fair
value on date of grant and recognition of compensation 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
expense over the service period, net of estimated forfeitures. For the three
months ended January 31, 2010 and 2009, stock compensation expense of $20,000
and $34,000, respectively, was primarily charged to selling, general, and
administrative expenses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of the Company's cash, receivables, accounts payable, and
accrued liabilities 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'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.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2009, the FASB issued Accounting Standards Update (ASU) 2009-13,
"Revenue Recognition (Topic 605) -- Multiple-Deliverable Revenue Arrangements"
(ASU 2009-13) and ASU 2009-14, "Software (Topic 985) -- Certain Revenue
Arrangements That Include Software Elements" (ASU 2009-14). ASU 2009-13 modifies
the requirements that must be met for an entity to recognize revenue from the
sale of a delivered item that is part of a multiple-element arrangement when
other items have not yet been delivered. ASU 2009-14 modifies the software
revenue recognition guidance to exclude from its scope tangible products that
contain both software and non-software components that function together to
deliver a product's essential functionality. These new updates become effective
on a prospective basis for the Company's fiscal year ended October 31, 2011,
although early adoption is permitted. The Company has not yet evaluated the
impact, if any, of adopting these updates.
-10-
3. RELATED PARTY TRANSACTIONS
Effective November 1, 2008, the Company entered into a new agreement, renewing
and extending the term of the $13,814,880 note due to G.S. Beckwith Gilbert, the
Company's significant shareholder and Chairman, from one year to three years,
resulting in an increase in the interest rate from 4.5% to 9% as of February 1,
2009. During fiscal 2009, Mr. Gilbert loaned the Company an additional $100,000,
bringing the principal amount of notes due to Mr. Gilbert to $13,914,880 on
October 31, 2009 with a maturity of November 1, 2011. Interest remained at the
annual rate of 4.5% from November 1, 2008 to January 31, 2009, payable in cash.
Effective February 1, 2009 through October 31, 2011, the interest rate was
increased to 9% and is payable as follows: interest at the annual rate of 6%
will be payable in cash with the remaining interest, at the annual rate of 3%,
payable at the option of the Company in cash or "paid in kind" and added to the
principal of the note. Annual interest payments are due at October 31 of each
fiscal year. During October 2009, the Company entered into an agreement to
extend the interest payment due to Mr. Gilbert on October 31, 2009 to December
31, 2009. This interest payment was paid in full by the Company prior to the
extended payment date. Mr. Gilbert loaned the Company an additional $900,000 to
fund part of this interest payment, bringing the loan balance to $14,814,880 as
of December 31, 2009 and January 31, 2010. During fiscal 2008, Mr. Gilbert
loaned the Company an additional $1,200,000, which brought the principal amount
of the note due to Mr. Gilbert to $13,814,880 as of October 31, 2008. The
Company has a commitment from Mr. Gilbert that if the Company, at any time, is
unable to meet its obligations through March 8, 2011, Mr. Gilbert will
provide the necessary continuing financial support to the Company in order for
the Company to meet such obligations. Such commitment for financial support may
be in the form of additional advances or loans to the Company, in addition to
the deferral of principal and interest payments due on the existing loans, if
deemed necessary. The notes are secured by the Company's assets.
-11-
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, among others, the uncertainties related to the ability of the
Company to sell data subscriptions from its PASSUR(R) Network and to make new
sales of its PASSUR(R) and other product lines (due to potential competitive
pressure from other companies or other products), as well as the current
uncertainty in the aviation industry due to terrorist events, the war on terror,
increased fuel costs, and airline bankruptcies and consolidations and other
risks detailed in the Company's periodic report filings with the SEC. Other
uncertainties which could impact the Company are 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 are
related to: a) the Company's ability to find and maintain the personnel
necessary to sell, manufacture, and service its products; b) its ability to
adequately protect its intellectual property; c) its ability to secure future
financing; and d) its ability to maintain the continued support of its
significant shareholder. 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'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 is a business intelligence company which develops predictive
analytics built on proprietary algorithms and on concurrent integration and
simultaneous mining of multiple databases. The Company believes it is positioned
to provide the industry standard in business intelligence dashboards and
predictive analytics for aviation organizations.
The Company's principal business is to provide business intelligence and
predictive analytics solutions which save money and make available mission
critical information for aviation organizations. These analytics are derived
from its proprietary PASSUR(R) Network of live flight information, updated every
4.6 seconds, and include decision support software, predictive analytics, and
web-delivered collaborative decision solutions enhanced by professional
services, provided by industry experts.
PASSUR(R) serves most major airlines (including six of the top seven North
American airlines, as well as, the top five hub airlines), over fifty airport
customers (including ten of the top fifteen North American airports), and more
than two hundred corporate aviation customers.
The Company believes its predictive analytics save its customers millions of
dollars by providing "Predict and Proactively Act" solutions. The PASSUR(R)
system simultaneously scans, correlates, and mines information from its
proprietary private passive radar system together with multiple additional
government and private databases - enabling problems, trends, and patterns of
behavior in flight operations to be identified before they happen.
The PASSUR(R) Network includes one hundred and thirty Company-owned passive
radars located primarily in North America, with one located at each of the top
thirty-five U.S. airports. Other PASSUR(R)s are located in Europe and Asia.
Flight tracks are updated every 4.6 seconds, thereby providing a system which is
user-friendly and useful for decision making.
-12-
RESULTS OF OPERATIONS
REVENUES
Revenues for the three months ended January 31, 2010 increased by approximately
$247,000, or 12%, to approximately $2,323,000 when compared to the same period
in fiscal 2009. This increase was primarily due to the continued development and
deployment of new software applications and solutions, as well as the wide
selection of products which address customers' needs, easily delivered through
web-based applications. These efforts resulted in new customers subscribing to
the Company's suite of software applications, as well as higher subscriptions
from some of its existing customers.
Management concentrates its efforts on the sale of business intelligence,
predictive analytics, and decision support product applications, utilizing data
primarily derived from the PASSUR(R) Network. Such efforts include the continued
development of new product applications, as well as enhancements and maintenance
of existing applications. As a result, for the three months ended January 31,
2010, subscription-based revenues increased approximately $277,000, or 14%,
compared to the period in fiscal 2009.
The Company's business plan is to continue to focus on increasing
subscription-based revenues from its suite of software applications, and to
develop new applications designed to address the needs of the aviation industry.
The Company shipped eight and installed six Company-owned PASSUR(R) Systems
during the three months ended January 31, 2010 (installations include systems
shipped in the current and the previous fiscal year). The shipped and installed
PASSUR(R) Systems were capitalized as part of the Company owned "PASSUR(R)
Network." The Company will continue to expand the PASSUR(R) Network by shipping
and installing additional PASSUR(R) Systems throughout fiscal 2010. Management
anticipates that future PASSUR(R) sites will provide increased coverage for the
PASSUR(R) Network by increasing the Company's ability to contract with new
customers at such locations and by providing existing customers with additional
data solutions. The Company will continue to market the business intelligence,
predictive analytics, as well as decision support applications and solutions
derived from the PASSUR(R) Network, directly to the aviation industry and
organizations that serve, or are served by, the aviation industry. There were
one hundred and thirty Company-owned PASSUR(R) Systems located at various
airports worldwide as of January 31, 2010.
COST OF REVENUES
Costs associated with subscription and maintenance revenues consist primarily of
direct labor, depreciation of PASSUR(R) Network assets, amortization of software
development costs, communication costs, data feeds, and allocated overhead
costs. Also included in cost of revenues are costs associated with the upgrades
of PASSUR(R) Systems necessary to make older systems compatible with new
software applications, as well as the ordinary repair and maintenance of
existing network systems. Additionally, cost of revenues in each reporting
period is impacted by: (1) the number of PASSUR(R) units produced, upgraded,
shipped, and installed during the year which are added to the PASSUR(R) Network;
and (2) capitalized costs associated with software development projects. Both of
these are referred to as "Capitalized Assets", and are depreciated and/or
amortized over their respective useful lives and charged to cost of revenues.
For the three months ended January 31, 2010, cost of revenues increased by
approximately $277,000 or 41%, compared to the same period in fiscal 2009,
primarily due to increases in communication costs, payroll and related costs,
one-time fees, depreciation, data feeds, and consulting fees. No PASSUR(R)
Systems were manufactured during the three months ended January 31, 2010. The
increase was partially offset by an increase in the number of PASSUR(R) Systems
that were shipped and installed, compared to the same period in fiscal 2009, as
well as an increase in the capitalization of software development costs.
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RESEARCH AND DEVELOPMENT
For the three months ended January 31, 2010, research and development expenses
remained consistent compared to the same period in fiscal 2009. The Company's
research and development efforts include activities associated with the
enhancement, maintenance, and improvement of the Company's existing hardware,
software, and information products.
The Company anticipates that it will continue to invest in research and
development to develop, maintain, and support the existing and newly developed
applications for its PASSUR(R) customers. There were no customer sponsored
research and development activities during the three months ended January 31,
2010. Research and development expenses are funded by current operations.
SELLING, GENERAL, AND ADMINISTRATIVE
For the three months ended January 31, 2010, selling, general, and
administrative expenses decreased by approximately $175,000, or 16%, compared to
the same period in fiscal 2009. This decrease was primarily due to decreases in
sales and marketing payroll, partially offset by an increase in consulting fees.
INCOME FROM OPERATIONS
For the three months ended January 31, 2010, revenues of approximately
$2,323,000, exceeded costs and expenses of approximately $1,934,000, and
resulted in income from operations of approximately $389,000. For the three
months ended January 31, 2010, total revenues increased by approximately
$247,000, or 12%, total costs and expenses increased by approximately $101,000,
or 6%, and income from operations increased by approximately $146,000, or 60%,
compared to the same period in fiscal 2009.
OTHER EXPENSE
Refinancing and extending the maturity of the Company's debt at a higher
interest rate, as well as a higher principal balance, resulted in an increase in
interest expense-related party of approximately $185,000, or 116%, for the three
months ended January 31, 2010, compared to the same period in fiscal 2009. The
interest rate charged by the related party increased from 4.5% to 9%, as of
February 1, 2009. The principal balance of the note as of January 31, 2010 was
$1,000,000 higher as compared to the same period of the prior fiscal year.
NET INCOME
The Company earned net income of approximately $25,000, or $.00 per diluted
share, for the three months ended January 31, 2010, as compared to net income of
approximately $76,000, or $.01 per diluted share, for the same period of fiscal
2009. For the three months ended January 31, 2010, the Company's income from
operations was higher compared to the same period in fiscal 2009, but this
increase was more than offset by higher interest costs to a related party,
resulting in lower net income compared to the prior fiscal year.
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LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2010, the Company's current liabilities exceeded current assets
by approximately $1,154,000. The notes payable to a related party of $14,814,880
are due November 1, 2011. At January 31, 2010, the Company's stockholders'
deficit was approximately $5,790,000. For the three months ended January 31,
2010, the Company had net income of approximately $25,000.
Management is addressing the Company's working capital and stockholders'
deficiencies by aggressively marketing the Company's PASSUR(R) information
capabilities in its existing product lines, as well as in new products, which
are continually being developed and deployed. The Company intends to increase
the size and related airspace coverage of its owned "PASSUR(R) Network," by
continuing to install PASSUR(R) Systems throughout the United States and certain
foreign countries. In addition, management believes that expanding its existing
software suite of products, which address the wide array of needs of the
aviation industry, through the continued development of new product offerings,
will continue to lead to increased growth in the Company's customer base and
subscription-based revenues. Additionally, if the Company's business plan does
not generate sufficient cash flows from operations to meet the Company's
operating cash requirements, the Company will attempt to obtain external
financing, and if such external financing is not consummated, the Company has a
commitment to receive the necessary continuing financial support to meet its
obligations from its significant shareholder and Chairman through March 8, 2011.
Such continuing financial support may be in the form of additional loans to the
Company, in addition to the deferral of principal and/or interest payments due
on the outstanding loans, if deemed necessary.
Effective November 1, 2008, the Company entered into a new agreement, renewing
and extending the term of the $13,814,880 note due to G.S. Beckwith Gilbert, the
Company's significant shareholder and Chairman, from one year to three years,
resulting in an increase in the interest rate from 4.5% to 9% as of February 1,
2009. During fiscal 2009, Mr. Gilbert loaned the Company an additional $100,000,
bringing the principal amount of notes due to Mr. Gilbert to $13,914,880 on
October 31, 2009 with a maturity of November 1, 2011. Interest remained at the
annual rate of 4.5% from November 1, 2008 to January 31, 2009, payable in cash.
Effective February 1, 2009 through October 31, 2011, the interest rate was
increased to 9% and is payable as follows: interest at the annual rate of 6%
will be payable in cash with the remaining interest, at the annual rate of 3%,
payable at the option of the Company in cash or "paid in kind" and added to the
principal of the note. Annual interest payments are due at October 31 of each
fiscal year. During October 2009, the Company entered into an agreement to
extend the interest payment due to Mr. Gilbert on October 31, 2009 to December
31, 2009. This interest payment was paid in full by the Company prior to the
extended payment date. Mr. Gilbert loaned the Company an additional $900,000 to
fund part of this interest payment, bringing the loan balance to $14,814,880 as
of December 31, 2009 and January 31, 2010. During fiscal 2008, Mr. Gilbert
loaned the Company an additional $1,200,000, which brought the principal amount
of the note due to Mr. Gilbert to $13,814,880 as of October 31, 2008. The
Company has a commitment from Mr. Gilbert that if the Company, at any time, is
unable to meet its obligations through March 8, 2011, Mr. Gilbert will
provide the necessary continuing financial support to the Company in order for
the Company to meet such obligations. Such commitment for financial support may
be in the form of additional advances or loans to the Company, in addition to
the deferral of principal and interest payments due on the existing loans, if
deemed necessary. The notes are secured by the Company's assets.
Net cash used by operating activities for the three months ended January 31,
2010 was due primarily to an increase of approximately $779,000 of accrued
interest-related party, which more than offset approximately $470,000 non-cash
items, primarily depreciation and amortization, and approximately $25,000 net
income. Cash used in investing activities for the three months ended January 31,
2010 was approximately $570,000 and consisted of investments in the Company's
PASSUR(R) Network, capitalized software development costs, and capital
expenditures. Cash provided by financing activities for the three months ended
January 31, 2010 was approximately $1,007,000 and consisted of $900,000 from
notes payable-related party, and approximately $107,000 of proceeds from the
exercise of stock options. No principal payments on notes payable-related party
were made during three months ended January 31, 2010.
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Net cash provided by operating activities for the twelve months ended January
31, 2010 was approximately $1,452,000, primarily due to increases of
approximately $1,713,000 non-cash items, primarily depreciation and
amortization, approximately $104,000 net income, and approximately $140,000
other operating activities, offset by a decrease of approximately $505,000
accounts payable, accrued expenses, and other current liabilities. Cash used in
investing activities for the twelve months ended January 31, 2010 was
approximately $2,306,000 and consisted of investments in the Company's PASSUR(R)
Network, capitalized software development costs, and capital expenditures. Cash
provided by financing activities for the twelve months ended January 31, 2010
was approximately $1,129,000 and consisted of $1,000,000 from notes
payable-related party, and approximately $129,000 of proceeds from the exercise
of stock options. No principal payments on notes payable-related party were made
during twelve months ended January 31, 2010.
The Company was profitable for the three months ended January 31, 2010. To date,
the Company's revenue has increased as a result of its subscription-based
revenue model. The Company is actively addressing the increasing costs
associated with supporting the business, and plans to identify and reduce any
unnecessary costs as part of its cost reduction initiatives. Additionally, the
aviation market has been impacted by budgetary constraints, airline bankruptcies
and consolidations due to the downturn in the current economy, the terrorist
events of September 11, 2001, the continued war on terrorism, and increased fuel
costs. The aviation market is extensively regulated by government agencies,
particularly the Federal Aviation Administration 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's revenues
are derived from airports, airlines, 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 information and decision support software
products obtained from the PASSUR(R) Network remains strong, and the Company
anticipates an increase in future revenues. However, the Company cannot predict
if such revenues will materialize. If sales do not increase, losses may occur.
The extent of such profits or losses will be dependent on sales volume achieved
and Company cost reduction initiatives.
OFF-BALANCE SHEET ARRANGEMENTS
None.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and 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's Annual Report on Form 10-K for the fiscal year ended October 31,
2009 and there have been no material changes to such policies since the filing
of such Annual Report. These policies and estimates are critical to the
Company's business operations and the understanding and evaluation of our
financial condition and results of operations. The impact and any associated
risks related to these policies are discussed throughout Management'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, 2009, where
such policies affect its reported financial results. The actual impact of these
factors may differ under different assumptions or conditions.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES.
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, 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")). 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's
rules. The Company believes that a control system, no matter how well designed
and operated, cannot provide absolute assurance that the objectives of the
control system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been
detected. Based on their evaluation as of the end of the period covered by this
report, the Company's Chief Executive Officer and Chief Financial Officer have
concluded that such controls and procedures were effective as of January 31,
2010.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in the Company'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's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
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.
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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.
DATED: MARCH 15, 2010 By: /s/ James T. Barry
---------------------
James T. Barry,
President and Chief Executive Officer
DATED: MARCH 15, 2010 By: /s/ Jeffrey P. Devaney
----------------------
Jeffrey P. Devaney,
Chief Financial Officer, Treasurer,
and Secretary
(Principal Financial and
Accounting Officer)
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