1. Description of Business and Significant Accounting Policies
Nature of Business
The Company is a leading aviation business intelligence company that provides predictive analytics and decision-support technology for the aviation industry based on its unique, proprietary technology and real-time accessible databases, supported by a number of leading industry experts, and a proven management team, experienced in the use of Big Data. The Company believes it operates under one operating segment.
Basis of Presentation
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.
Certain financial information in the footnotes has been rounded to the nearest thousand for presentation purposes.
Revenue Recognition Policy
The Company recognizes revenue in accordance with FASB ASC 605-15, (SAB 104, Revenue Recognition in Financial Statements) which requires that four basic criteria must be met before revenues can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured.
The Companys revenues are generated by selling: (1) subscription-based, real-time decision and solution information; (2) professional services; and (3) annual maintenance contracts for PASSUR® Radar Systems.
Revenues generated from subscription and maintenance agreements are recognized over the term of such executed agreements and/or customers receipt of such data or services. In accordance with ASC 605-15, we recognize revenue when persuasive evidence of an arrangement exists which is evidenced by a signed agreement, the service has been deployed, as applicable, to its hosted servers, the fee is fixed and determinable, and collection of the resulting receivable is reasonably assured. The Company records revenues pursuant to individual contracts on a month-by-month basis, as outlined by the applicable agreement. In many cases, the Company may invoice respective customers in advance of the specified period, either quarterly or annually, which coincides with the terms of the agreement. In such cases, the Company will defer at the close of each month and/or reporting period, any subscription or maintenance revenues invoiced for which services have yet to be rendered, in accordance with ASC 605-15. Revenues generated by professional services are recognized over the term of such executed agreements or as provided.
From time to time, the Company will enter into an agreement with a customer to receive a one-time fee for rights including, but not limited to, the rights to use certain data at an agreed upon location(s) for a specific use and/or for an unlimited number of users. These fees are recognized as revenue ratably over the term of the agreement or expected useful life of such arrangement, whichever is longer, but typically five years.
Deferred revenue is classified on the Companys balance sheet as a liability until such time as revenue from services is properly recognized as revenue in accordance with ASC 605-15 and the corresponding agreement.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Management has evaluated subsequent events after the balance sheet date, through the issuance of the financial statements, for appropriate accounting and disclosure.
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. Net accounts receivable is comprised of the monthly, quarterly, or annual committed amounts due from customers pursuant to the terms of each respective customers agreement. Account receivable balances include amounts attributable to deferred and/or unamortized revenues, as well as initial set-up fees.
American Airlines parent corporation, AMR Corporation, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code on November 29, 2011. In December 2011, the Company was notified by American Airlines that it will continue operating under the original contract between the Company and American Airlines, with an immaterial revision.
The provision for doubtful accounts was $80,000 and $94,000 as of October 31, 2012 and 2011, respectively. The Company monitors its outstanding accounts receivable balances and believes the provision is reasonable. The pre-petition receivable from American Airlines is less that the provision of doubtful accounts as of October 31, 2012.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of the related assets. Amortization of leasehold improvements is calculated on a straight-line basis over the estimated useful life of the improvements or the term of the lease, including renewal options expected to be exercised, whichever is shorter.
The PASSUR® Network is comprised of PASSUR® Systems, which include the direct and indirect production, shipping, and installation costs incurred for each PASSUR® System, which 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. PASSUR® Systems which are not installed, raw materials, work-in-process, and finished goods components are carried at cost and no depreciation is recorded.
Capitalized Software Development Costs
The Company follows the provisions of ASC 350-40, Internal Use Software. ASC 350-40 provides guidance for determining whether computer software is internal-use software, and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes the costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the software are capitalized if it is determined that these upgrades or enhancements add additional functionality to the software. The Company capitalized $1,886,000 as of October 31, 2012 and $2,023,000 as of October 31, 2011. The Company records amortization of the software on a straight-line basis over the estimated useful life of the software, typically five years.
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.
Cost of Revenues
Costs associated with subscription and maintenance revenues consist primarily of direct labor, depreciation of PASSUR® Network Systems, amortization of Capitalized software development costs, communication costs, data feeds, allocated overhead costs, travel and entertainment, and consulting fees. Also included in cost of revenues are costs associated with upgrades to PASSUR® Systems necessary to make such systems compatible with new software applications, as well as the ordinary repair and maintenance of existing PASSUR® Systems. Additionally, cost of revenues in each reporting period is impacted by: (1) the number of PASSUR® Systems added to the Network, which include the cost of production, shipment, and installation of these assets, which are capitalized to the PASSUR® 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.
The Company follows the liability method of accounting for income taxes. Deferred income taxes are recorded to reflect the temporary differences in the tax bases of the assets or liabilities and their reported amounts in the financial statements. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Companys financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount currently estimated to be realized. The Company follows ASC 740, Income Taxes, where tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in tax returns that do not meet these recognition and measurement standards. At October 31, 2012, the Company did not have any uncertain tax positions. As permitted by ASC 740-10, the Companys accounting policy is to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in its income tax provision.
Research and Development Costs
Research and development costs are expensed as incurred.
Net 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 for fiscal years 2012 and 2011 are as follows:
Basic weighted average shares outstanding
Effect of dilutive stock options
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
Deferred revenue includes amounts attributable to advances received on customer agreements, which may be prepaid either annually or quarterly. Revenues from such customer agreements are recognized as income ratably over the period that coincides with the respective agreement.
The Company recognizes initial set-up fee revenues and associated costs on a straight-line basis over the estimated life of the customer relationship period, typically five years.
Fair Value of Financial Instruments
The recorded amounts of the Companys 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 Companys 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.
The Company follows FASB ASC 718 Compensation-Stock Compensation, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant, and recognition of stock-based compensation expense over the service period for awards expected to vest. The fair value of stock options was determined using the Black-Scholes valuation model. Such fair value is recognized as an expense over the service period, net of forfeitures. Stock-based compensation expense was $251,000 and $259,000 in fiscal years 2012 and 2011, respectively, and was primarily included in selling, general, and administrative expenses.
The Companys stock options vest over a period of three and five years. The fair value for these stock options was estimated at the date of grant using a Black-Scholes stock option pricing model, with the following weighted average assumptions for fiscal years 2012 and 2011; risk-free interest rates of 3.51% to 3.54%, volatility factor of the expected market price of the Companys common stock of 109% to 117%, no dividend yield, and a weighted average expected life of the stock options of 6.5 years.
The Companys comprehensive income is equivalent to that of the Companys total net income for fiscal years 2012 and 2011.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and IFRS, and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 became effective for the Company for the quarter ended April 30, 2012 and its adoption did not have a material effect on the Company's operating results or financial position.