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EX-32.1 - PASSUR Aerospace, Inc.exh32-2.txt
EX-32.1 - PASSUR Aerospace, Inc.exh32-1.txt
EX-10.1 - PASSUR Aerospace, Inc.exh10-1.txt
EX-31.1 - PASSUR Aerospace, Inc.exh31-1.txt
EX-32.2 - PASSUR Aerospace, Inc.exh31-2.txt


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

                                   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 APRIL 30, 2013

                                       OR

             { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

               For the transition period from _______ to _______

                        Commission file number 000-7642

                             PASSUR AEROSPACE, INC.

  ---------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

NEW YORK                                                 11-2208938
(State or Other Jurisdiction                         (I.R.S. Employer
of 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 [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):

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]

================================================================================
--------------------------------------------------------------------------------

There were 7,288,183 shares of the Registrant's common stock with a par value of
$0.01 per share outstanding as of June 4, 2013.


INDEX PASSUR Aerospace, Inc. and Subsidiary PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of April 30, 2013 (unaudited) and October 31, 2012. 3 Consolidated Statements of Income (unaudited) 4 Six months ended April 30, 2013 and 2012. Consolidated Statements of Income (unaudited) 5 Three months ended April 30, 2013 and 2012. Consolidated Statements of Cash Flows (unaudited) 6 Six months ended April 30, 2013 and 2012. Notes to Consolidated Financial Statements (unaudited) - April 30, 2013. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk. 15 Item 4. Controls and Procedures. 15 PART II. OTHER INFORMATION 15 Item 5. Other Information. 15 Item 6. Exhibits. 16 Signatures. 17 Page 2 of 22
PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PASSUR Aerospace, Inc. and Subsidiary Consolidated Balance Sheets APRIL 30, October 31, 2013 2012 ------------- ------------- (UNAUDITED) ASSETS Current assets: Cash $ 1,059,428 $ 261,053 Accounts receivable, net 885,402 1,475,665 Deferred tax asset, current 569,562 584,562 Prepaid expenses and other current assets 220,876 130,830 ------------- ------------- Total current assets 2,735,268 2,452,110 PASSUR(R) Network, net 5,658,730 6,065,222 Capitalized software development costs, net 5,791,764 5,543,402 Property, plant and equipment, net 1,246,086 1,044,463 Deferred tax asset, non-current 2,817,144 2,817,144 Other assets 176,535 193,426 ------------- ------------- TOTAL ASSETS $ 18,425,527 $ 18,115,767 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 355,469 $ 668,238 Accrued expenses and other current liabilities 597,787 727,647 Deferred revenue, current portion 2,211,614 1,478,141 ------------- ------------- Total current liabilities 3,164,870 2,874,026 Deferred revenue, less current portion 167,798 189,944 Notes payable - related party 4,764,880 4,764,880 ------------- ------------- 8,097,548 7,828,850 COMMITMENT AND CONTINGENCIES Stockholders' equity: 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 7,984,683 in fiscal year 2013 and 7,889,640 in fiscal year 2012 79,847 78,896 Additional paid-in capital 15,084,365 15,120,556 Accumulated deficit (3,212,758) (3,289,060) ------------- ------------- 11,951,454 11,910,392 Treasury stock, at cost, 696,500 shares in fiscal years 2013 and 2012 (1,623,475) (1,623,475) ------------- ------------- Total stockholders' equity 10,327,979 10,286,917 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,425,527 $ 18,115,767 ============= ============= See accompanying notes to consolidated financial statements. Page 3 OF 22
PASSUR Aerospace, Inc. and Subsidiary Consolidated Statements of Income (Unaudited) SIX MONTHS ENDED APRIL 30, 2013 2012 ------------- --------------- REVENUES $ 5,335,758 $ 6,995,788 COST AND EXPENSES: Cost of revenues 2,915,155 3,179,401 Research and development 310,535 213,332 Selling, general, and administrative expenses 1,840,449 2,512,511 ------------- --------------- 5,066,139 5,905,244 ------------- --------------- INCOME FROM OPERATIONS 269,619 1,090,544 Interest expense - related party 143,741 146,051 ------------- --------------- Income before income taxes 125,878 944,493 Provision for income taxes 49,576 5,000 ------------- --------------- NET INCOME $ 76,302 $ 939,493 ============= =============== Net income per common share - basic $ .01 $ .13 Net income per common share - diluted ============= =============== $ .01 $ .12 ============= =============== Weighted average number of common shares outstanding - basic 7,204,200 7,176,624 ============= =============== Weighted average number of common shares outstanding - diluted 7,842,211 8,003,504 ============= =============== See accompanying notes to consolidated financial statements. Page 4 of 22
PASSUR Aerospace, Inc. and Subsidiary Consolidated Statements of Income (Unaudited) THREE MONTHS ENDED APRIL 30, 2013 2012 ------------- --------------- REVENUES $ 2,661,232 $ 3,532,004 COST AND EXPENSES: Cost of revenues 1,399,599 1,503,623 Research and development 163,579 117,594 Selling, general, and administrative expenses 942,359 1,274,161 ------------- --------------- 2,505,537 2,895,378 ------------- --------------- INCOME FROM OPERATIONS 155,695 636,626 Interest expense - related party 70,680 72,223 ------------- --------------- Income before income taxes 85,015 564,403 Provision for income taxes 21,031 5,000 ------------- --------------- NET INCOME $ 63,984 $ 559,403 ============= =============== Net income per common share - basic $ .01 $ .08 ============= =============== Net income per common share - diluted $ .01 $ .07 ============= =============== Weighted average number of common shares outstanding - basic 7,215,632 7,178,140 ============= =============== Weighted average number of common shares outstanding - diluted 7,844,278 8,006,908 ============= =============== See accompanying notes to consolidated financial statements. Page 5 of 22
PASSUR Aerospace, Inc. and Subsidiary Consolidated Statements of Cash Flows (Unaudited) SIX MONTHS ENDED APRIL 30, 2013 2012 ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 76,302 $ 939,493 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,311,639 1,201,083 Provision for deferred taxes 15,000 -- (Recovery of) provision for doubtful accounts receivable (23,850) 11,527 Stock-based compensation expense 140,321 107,749 Changes in operating assets and liabilities: Accounts receivable 614,113 79,226 Prepaid expenses and other current assets (90,046) (156,813) Other assets 16,891 (6,570) Accounts payable (312,769) (200,578) Accrued expenses and other current liabilities (129,860) (117,128) Deferred revenue 711,327 188,458 ------------- -------------- Total adjustments 2,252,766 1,106,954 ------------- -------------- Net cash provided by operating activities 2,329,068 2,046,447 CASH FLOWS FROM INVESTING ACTIVITIES PASSUR(R) Network, net (200,928) (810,887) Software development costs, net (829,702) (1,056,795) Property, plant and equipment, net (324,502) (179,586) ------------- -------------- Net cash used in investing activities (1,355,132) (2,047,268) ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Surrender of shares to pay withholding taxes (180,904) -- Proceeds from exercise of stock options 5,343 9,900 ------------- -------------- Net cash (used in) provided by financing activities (175,561) 9,900 ============= ============== Increase in cash Cash - beginning of period 798,375 9,079 Cash - end of period 261,053 299,455 ------------- -------------- $ 1,059,428 $ 308,534 ============= ============== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest - related party $ 143,741 $ 149,051 Income taxes $ 65,762 $ -- See accompanying notes to consolidated financial statements. Page 6 of 22
PASSUR Aerospace, Inc. and Subsidiary Notes to Consolidated Financial Statements April 30, 2013 (Unaudited) 1. NATURE OF BUSINESS PASSUR Aerospace, Inc. ("PASSUR(R)" or 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. PASSUR(R) serves all of the 8 largest North American airlines, all 5 of the major hub carriers, more than 60 airport customers, including 24 of the top 30 North American airports, and approximately 200 corporate aviation customers, as well as the U.S. government, using a recurring-revenue subscription model. PASSUR(R)'s products include a suite of web-based solutions that address the aviation industry's most intractable and costly challenges, including underutilization of airspace and airport capacity, delays, cancellations, and diversions, among other inefficiencies. Solutions offered by PASSUR(R) cover the entire flight life cycle, from gate to gate, and result in reductions in overall costs, fuel costs, and emissions, while maximizing revenue opportunities, as well as improving operational efficiency, and enhancing the passenger experience. The Company provides data consolidation, information, decision support, predictive analytics, collaborative solutions, and professional services. PASSUR(R) owns and operates what the Company believes is the largest commercial air traffic surveillance and passive radar network in the world, with one hundred and sixty-two passive radar locations, powering a unique, proprietary database that is accessible in real time, on demand, for critical and timely decision-making with nationwide coverage to support network-wide systemic deployments. The Company's database contains over 10 years of archived data derived from the network. The Company's network has a unique flight tracking data source available to the private sector, which is based on independent, non-U.S. government data, while including all publicly available government feeds as well. The Company's unique data supplements the government feeds and offers faster updates, with flight tracks updated every 1 to 4.6 seconds, enabling better flight tracking and more cost effective decision-making during irregular operations. Management is addressing the Company's working capital deficiency by aggressively marketing the Company's PASSUR(R) Network Systems information capabilities in its existing product and professional service lines, as well as in new products and professional services, which are continually being developed and deployed. Management believes that expanding its existing suite of software products and professional services, which address the wide array of needs of the aviation industry, through the continued development of new product and service offerings, will continue to lead to increased growth in the Company's customer-base and subscription-based revenues. 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. However, the Company has received a commitment from its significant shareholder and Chairman, G.S. Beckwith Gilbert, dated June 10, 2013, that if the Company, at any time, is unable to meet its obligations through June 10, 2014, G.S. Beckwith Gilbert will provide the necessary continuing financial support to the Company in order for the Company to meet such obligations. 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, 2012, 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 April 30, 2013, and its consolidated results of operations and cash flows for the six months ended April 30, 2013 and 2012. Page 7 of 22
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, 2013. Certain financial information in the footnotes has 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. REVENUE RECOGNITION POLICY The Company recognizes revenue in accordance with FASB ASC 605-15, ("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 Company's revenues are generated by selling: (1) subscription-based, real-time decision and solution information; (2) professional services; and (3) annual maintenance contracts for PASSUR(R) Radar Systems. Revenues generated from subscription and maintenance agreements are recognized over the term of such executed agreements and/or customer's 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 the Company's 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. COST OF REVENUES Costs associated with subscription and maintenance revenues consist primarily of direct labor, depreciation of PASSUR(R) 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(R) Systems necessary to make such systems compatible with new software applications, as well as the ordinary repair and maintenance of existing PASSUR(R) Systems. Additionally, cost of revenues in each reporting period is impacted by: (1) the number of PASSUR(R) Systems added to the Network, which include the cost of production, shipment, and installation of these assets, which are capitalized 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. ACCOUNTS RECEIVABLE The Company has a history of successfully collecting all amounts due from its customers under the original terms of its subscription agreements without making concessions. 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. Account receivable balances include amounts attributable to deferred and/or unamortized revenues, as well as initial set-up fees. Page 8 of 22
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 $57,000 and $80,000 as of April 30, 2013 and October 31, 2012, respectively. The Company monitors its outstanding accounts receivable balances and believes the provision is reasonable. The pre-petition receivable from American Airlines is less than the provision of doubtful accounts as of April 30, 2013. PASSUR(R) NETWORK The PASSUR(R) Network is comprised of PASSUR(R) Systems, which include the direct and indirect production, shipping, and installation costs incurred for each PASSUR(R) 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(R) 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. Costs incurred to improve and support products after they become available are charged to expense as incurred. The Company records amortization of the software on a straight-line basis over the estimated useful life of the software, typically five years. The Company had $1,418,000 of software development projects in development as of April 30, 2013. There are several new software developments projects scheduled to begin in fiscal year 2013. 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. DEFERRED TAX ASSET The Company had available a federal net operating loss carry-forward of $10,864,000 for income tax purposes as of April 30, 2013, which will expire in various tax years from fiscal year 2020 through fiscal year 2029. The Company evaluates whether a valuation allowance related to deferred tax assets is required each reporting period. A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized. DEFERRED REVENUE 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. Page 9 of 22
FAIR VALUE OF FINANCIAL INSTRUMENTS The recorded amounts of the Company's receivables and payables approximate their fair values, principally because of the short-term nature of these items. The fair value of related party debt is not practicable to determine due primarily to the fact that the Company's related party debt is held by its Chairman and significant shareholder, and the Company does not have any third-party debt with which to compare. Additionally, on a recurring basis, the Company uses fair value measures when analyzing asset impairments. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present, and the review indicates that the assets will not be fully recoverable based on the undiscounted estimated future cash flows expected to result from the use of the asset, their carrying values are reduced to estimated fair value. NET 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. The Company's 2009 Stock Incentive Plan allows for a cashless exercise. Shares used to calculate net income per share are as follows: FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED APRIL 30, APRIL 30, 2013 2012 2013 2012 ----------- ------------ ------------ ----------- Basic weighted average shares outstanding 7,215,632 7,178,140 7,204,200 7,176,624 Effect of dilutive stock options 628,646 828,768 638,011 826,880 ----------- ------------ ------------ ----------- Diluted weighted average shares outstanding 7,844,278 8,006,908 7,842,211 8,003,504 =========== ============ ============ =========== Weighted average shares which are not included in the calculation of diluted net income per share because their impact is anti-dilutive Stock options 588,854 512,732 579,488 514,620 =========== ============ ============ =========== STOCK-BASED COMPENSATION 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 $66,000 and $35,000 and $140,000 and $108,000 for the three and six months ended April 30, 2013 and 2012, respectively, and was primarily included in selling, general, and administrative expenses. Page 10 of 22
3. NOTES PAYABLE - RELATED PARTY The Company had a note payable to G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, of $4,765,000 as of April 30, 2013 and October 31, 2012. The note payable bears a maturity date of November 1, 2014, with an annual interest rate of 6%. Interest payments are due by October 31 of each fiscal year. The Company has paid all interest incurred on the note payable through April 30, 2013. The Company has received a commitment from G.S. Beckwith Gilbert, dated June 10, 2013, that if the Company, at any time, is unable to meet its obligations through June 10, 2014, G.S. Beckwith Gilbert will provide the necessary continuing financial support to the Company in order for the Company to meet such obligations. Such commitment for financial support may be in the form of additional advances or loans to the Company, in addition to the deferral of principal and/or interest payments due on the existing loans, if deemed necessary. The note payable is secured by the Company's assets. The Company believes that its liquidity is adequate to meet operating and investment requirements through October 31, 2013. During such period the Company does not anticipate borrowing additional funds from G.S. Beckwith Gilbert, although it has received a commitment from G.S. Beckwith Gilbert to do so if the Company requires additional funds. 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 related to the ability of the Company to sell PASSUR(R) Network Systems information capabilities in its existing product and professional service lines, as well as in new products and professional services (due to potential competitive pressure from other companies or other products), as well as the current uncertainty in the aviation industry due to terrorist events, the continued war on terrorism, 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; (3) its ability to secure future financing; and (4) 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. Page 11 of 22
DESCRIPTION OF BUSINESS PASSUR Aerospace, Inc. ("PASSUR(R)" or 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. PASSUR(R) serves all of the 8 largest North American airlines, all 5 of the major hub carriers, more than 60 airport customers, including 24 of the top 30 North American airports, and approximately 200 corporate aviation customers, as well as the U.S. government, using a recurring-revenue subscription model. PASSUR(R)'s products include a suite of web-based solutions that address the aviation industry's most intractable and costly challenges, including underutilization of airspace and airport capacity, delays, cancellations, and diversions, among other inefficiencies. Solutions offered by PASSUR(R) cover the entire flight life cycle, from gate to gate, and result in reductions in overall costs, fuel costs, and emissions, while maximizing revenue opportunities, as well as improving operational efficiency, and enhancing the passenger experience. The Company provides data consolidation, information, decision support, predictive analytics, collaborative solutions, and professional services. PASSUR(R) owns and operates what the Company believes is the largest commercial air traffic surveillance and passive radar network in the world, with one hundred and sixty-two passive radar locations, powering a unique, proprietary database that is accessible in real time, on demand, for critical and timely decision-making with nationwide coverage to support network-wide systemic deployments. The Company's database contains over 10 years of archived data derived from the network. The Company's network has a unique flight tracking data source available to the private sector, which is based on independent, non-U.S. government data, while including all publicly available government feeds as well. The Company's unique data supplements the government feeds and offers faster updates, with flight tracks updated every 1 to 4.6 seconds, enabling better flight tracking and more cost effective decision-making during irregular operations. RESULTS OF OPERATIONS REVENUES Management concentrates its efforts on the sale of business intelligence, predictive analytics, and decision support product applications, utilizing data primarily derived from the PASSUR(R) Network. Such efforts include the continued development of new products, professional services, and existing product enhancements. The Company's airline, airport, and business aviation revenue increased $115,000, or 5%, and $279,000, or 6% to $2,532,000 and $5,040,000, for the three and six months ended April 30, 2013, as compared to the same periods in fiscal year 2012. During the three and six months ended April 30, 2013, there was no professional service and government revenue, resulting in a decrease of $961,000, and $1,922,000, respectively, as compared to the same periods in fiscal year 2012, primarily due to the completion of a government contract and a professional services engagement in fiscal year 2012. As a result, total revenue decreased $871,000, or 25%, and $1,660,000 or 24%, to $2,661,000 and $5,336,000 for the three and six months ended April 31, 2013, from $3,532,000 and $6,996,000 for the same periods in fiscal year 2012. The Company continues to develop and deploy new software applications and solutions, as well as a wide selection of products which address customers' needs, easily delivered through web-based applications, as well as other new products which include stand-alone professional services. COST OF REVENUES Costs associated with subscription and maintenance revenues consist primarily of direct labor, depreciation of PASSUR(R) 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(R) Systems necessary to make such systems compatible with new software applications, as well as the ordinary repair and maintenance of existing PASSUR(R) Systems. Additionally, cost of revenues in each reporting period is impacted by: (1) the number of PASSUR(R) System units added to the Network, 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 and data center projects. Both of these are referred to as "Capitalized Assets", and are depreciated and/or amortized over their respective useful lives and charged to cost of revenues. The Company does not break down its costs by product. Page 12 of 22
Cost of revenues decreased $104,000, or 7%, and $264,000, or 8%, for the three and six months ended April 30, 2013, as compared to the same periods in fiscal year 2012, due in part to a decrease in consulting expense of $126,000 and $252,000, due to the completion of a professional services engagement in fiscal year 2012, and communication costs decreased $120,000 and $173,000, due to the Company's continued adoption of its new network infrastructure. In addition, the Company's capitalized costs of $98,000 and $163,000 for the three and six months ended April 30, 2013, related to the shipment and installation of PASSUR(R) systems, compared to none during the same periods in fiscal year 2012. This decrease in cost of revenues was partially offset by a decrease in the capitalization of software development costs of $118,000 and $227,000, primarily due to software engineering resources being used to construct a second data center, plus an increase in amortization expense, as compared to the same periods in fiscal year 2012. RESEARCH AND DEVELOPMENT 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. Research and development expenses increased $46,000, or 39%, and $97,000, or 46%, for the three and six months ended April 30, 2013, as compared to the same periods in fiscal year 2012, primarily due to an increase in payroll and related costs as a result of an increase in headcount. The Company anticipates that it will continue to invest in research and development to develop, maintain, and support existing and newly developed applications for its customers. There were no customer-sponsored research and development activities during the three and six months ended April 30, 2013 or in the same periods in fiscal year 2012. Research and development expenses are funded by current operations. SELLING, GENERAL, AND ADMINISTRATIVE Selling, general, and administrative expenses decreased $332,000, or 26%, and $673,000, or 27%, for the three and six months ended April 30, 2013, as compared to the same periods in fiscal year 2012, due to a decrease in payroll and related costs of $249,000 and $532,000, primarily as a result of a decrease in headcount, plus decreases in travel and entertainment expenses and facilities expenses. INCOME FROM OPERATIONS Revenues decreased $871,000, or 25%, and $1,660,000, or 24%, to $2,661,000 and $5,336,000, total costs and expenses decreased $390,000, or 13%, and $839,000, or 14%, to $2,506,000 and $5,066,000, and income from operations decreased $481,000, or 76%, and $821,000, or 75%, to $156,000 and $270,000, for the three and six months ended April 30, 2013, as compared to the same periods in fiscal year 2012. INTEREST EXPENSE - RELATED PARTY Interest expense - related party decreased $1,500, or 2%, and $2,300, or 2%, for the three and six months ended April 30, 2013, as compared to the same period in fiscal year 2012. NET INCOME The Company had net income of $64,000, or $.01 per diluted share, and $76,000, or $.01 per diluted share, for the three and six months ended April 30, 2013, as compared to net income of $559,000, or $.07 per diluted share, and $939,000 or $0.12 per diluted share, for the same periods in fiscal year 2012. LIQUIDITY AND CAPITAL RESOURCES The Company's current liabilities exceeded current assets by $430,000 as of April 30, 2013. The Company received $990,000 from a customer for subscription services through January 31, 2014. In prior years that customer paid in quarterly installments. The note payable to a related party, G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, was $4,765,000 as of April 30, 2013, with a maturity of November 1, 2014. The Company's stockholders' equity was $10,328,000 as of April 30, 2013. The Company had net income of $76,000 for the six months ended April 30, 2013. Page 13 of 22
Management is addressing the Company's working capital deficiency by aggressively marketing the Company's PASSUR(R) Network Systems information capabilities in its existing product and professional service lines, as well as in new products and professional services, which are continually being developed and deployed. Management believes that expanding its existing suite of software products and professional services, which address the wide array of needs of the aviation industry, through the continued development of new product and service offerings, will continue to lead to increased growth in the Company's customer-base and subscription-based revenues. 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. However, the Company has received a commitment from its significant shareholder and Chaiman, G.S. Beckwith Gilbert, dated June 10, 2013, that if the Company, at any time, is unable to meet its obligations through June 10, 2014, G.S. Beckwith Gilbert will provide the necessary continuing financial support to the Company in order for the Company to meet such obligations. Such commitment for financial support may be in the form of additional advances or loans to the Company, in addition to the deferral of principal and/or interest payments due on the existing loans, if deemed necessary. The note payable is secured by the Company's assets. The Company believes that its liquidity is adequate to meet operating and investment requirements through October 31, 2013. During such period the Company does not anticipate borrowing additional funds from G.S. Beckwith Gilbert, although it has received a commitment from G.S. Beckwith Gilbert to do so if the Company requires additional funds. Net cash provided by operating activities was $2,329,000 for the six months ended April 30, 2013, and consisted of $76,000 of net income, depreciation and amortization of $1,312,000, and stock-based compensation expense of $140,000, with the balance consisting of a reduction in operating assets and an increase in operating liabilities. Net cash used in investing activities was $1,355,000 for the six months ended April 30, 2013, expended for Capitalized software development costs, additions to the PASSUR(R) Network, and a redundant server center at an off-site location. Net cash used for financing was $176,000, for the six months ended April 30, 2013, primarily for employee's cashless exercise of stock options. 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, current economic conditions, the continued war on terrorism, and fluctuations in 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 PASSUR(R) Network Systems and its professional services remains strong. As a result, the Company anticipates an increase in future revenues from its airline and airport business. 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. Page 14 of 22
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, 2012 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 of its results of operations. The impact and any associated risks related to these policies on the Company's business operations 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, 2012, where such policies affect its reported financial results. The actual impact of these factors may differ under different assumptions or conditions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 4. CONTROLS AND PROCEDURES. DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this 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, can provide only reasonable assurance, not absolute assurance, that the objectives of the control system are met. Based on their evaluation as of the end of the period covered by this report, the Company's Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were effective at a reasonable assurance level as of April 30, 2013. 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. PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION. On June 10, 2013, the Company's significant shareholder and Chairman confirmed his commitment to provide the necessary continuing financial support to the Company in order for the Company to meet its obligations through June 10, 2014. A copy of the commitment is attached as Exhibit 10.1 to this Form 10-Q and incorporated by reference into this Item 5. Page 15 of 22
ITEM 6. EXHIBITS. 10.1 *Commitment of G.S. Beckwith Gilbert, dated June 10, 2013. 31.1 *Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 *Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 *Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 *Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.ins** XBRL Instance 101.xsd** XBRL Schema 101.cal** XBRL Calculation 101.def** XBRL Definition 101.lab** XBRL Label 101.pre** XBRL Presentation ------------------- * Filed herewith. ** Furnished herewith. Page 16 of 22
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: JUNE 13, 2013 By: /s/ James T. Barry -------------------------------------- James T. Barry President and Chief Executive Officer (Principal Executive Officer) DATED: JUNE 13, 2013 By: /s/ Jeffrey P. Devaney -------------------------------------- Jeffrey P. Devaney Chief Financial Officer, Treasurer, and Secretary (Principal Financial and Accounting Officer) Page 17 of 22