Attached files
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 JULY 31, 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 of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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]
================================================================================
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There were 7,344,501 shares of the Registrant's common stock with a par value of
$0.01 per share outstanding as of September 4, 2013.
Page 1 of 21
INDEX
PASSUR Aerospace, Inc. and Subsidiary
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 2013
(unaudited) and October 31, 2012. 3
Consolidated Statements of Income (unaudited)
Nine months ended July 31, 2013 and 2012. 4
Consolidated Statements of Income (unaudited)
Three months ended July 31, 2013 and 2012. 5
Consolidated Statements of Cash Flows (unaudited)
Nine months ended July 31, 2013 and 2012. 6
Notes to Consolidated Financial Statements
(unaudited) - July 31, 2013. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 18
Item 4. Controls and Procedures. 19
PART II. OTHER INFORMATION 19
Item 5. Other Information. 19
Item 6. Exhibits. 20
Signatures. 21
Page 2 of 21
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Balance Sheets
JULY 31, October 31,
2013 2012
-------------- ---------------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 976,801 $ 261,053
Accounts receivable, net 1,054,535 1,475,665
Deferred tax asset, current 542,062 584,562
Prepaid expenses and other current assets 178,159 130,830
-------------- ---------------
Total current assets 2,751,557 2,452,110
PASSUR(R) Network, net 5,486,544 6,065,222
Capitalized software development costs, net 5,949,978 5,543,402
Property, plant and equipment, net 1,302,774 1,044,463
Deferred tax asset, non-current 2,817,144 2,817,144
Other assets 165,474 193,426
-------------- ---------------
TOTAL ASSETS $ 18,473,471 $ 18,115,767
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 500,955 $ 668,238
Accrued expenses and other current liabilities 737,042 727,647
Deferred revenue, current portion 1,929,648 1,478,141
-------------- ---------------
Total current liabilities 3,167,645 2,874,026
Deferred revenue, less current portion 150,996 189,944
Notes payable - related party 4,764,880 4,764,880
-------------- ---------------
8,083,521 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 8,041,001 in
fiscal year 2013 and 7,889,640 in fiscal year 2012 80,410 78,896
Additional paid-in capital 15,040,419 15,120,556
Accumulated deficit (3,107,404) (3,289,060)
-------------- ---------------
12,013,425 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 10,389,950 10,286,917
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,473,471 $ 18,115,767
============== ===============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 3 of 21
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
NINE MONTHS ENDED JULY 31,
2013 2012
-------------- ---------------
REVENUES $ 8,078,439 $ 9,942,653
COST AND EXPENSES:
Cost of revenues 4,341,246 4,583,324
Research and development expenses 475,316 357,412
Selling, general, and administrative expenses 2,782,620 3,670,603
-------------- ---------------
7,599,182 8,611,339
-------------- ---------------
INCOME FROM OPERATIONS 479,257 1,331,314
Interest expense - related party 216,802 219,880
-------------- ---------------
Income before income taxes 262,455 1,111,434
Provision for income taxes 80,799 15,771
-------------- ---------------
NET INCOME $ 181,656 $ 1,095,663
============== ===============
Net income per common share - basic $ .03 $ .15
============== ===============
Net income per common share - diluted $ .02 $ .14
============== ===============
Weighted average number of common shares outstanding - basic 7,236,371 7,182,169
============== ===============
Weighted average number of common shares outstanding - diluted 7,776,540 8,011,755
============== ===============
See accompanying notes to consolidated financial statements.
Page 4 of 21
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
THREE MONTHS ENDED JULY 31,
2013 2012
-------------- ---------------
REVENUES $ 2,742,681 $ 2,946,865
COST AND EXPENSES:
Cost of revenues 1,426,091 1,403,923
Research and development expenses 164,781 144,080
Selling, general, and administrative expenses 942,170 1,158,739
-------------- ---------------
2,533,042 2,706,742
-------------- ---------------
INCOME FROM OPERATIONS 209,639 240,123
Interest expense - related party 73,062 73,828
-------------- ---------------
Income before income taxes 136,577 166,295
Provision for income taxes 31,223 10,125
-------------- ---------------
NET INCOME $ 105,354 $ 156,170
============== ===============
Net income per common share - basic $ .01 $ .02
============== ===============
Net income per common share - diluted $ .01 $ .02
============== ===============
Weighted average number of common shares outstanding - basic 7,299,666 7,193,140
============== ===============
Weighted average number of common shares outstanding - diluted 7,814,895 8,018,570
============== ===============
See accompanying notes to consolidated financial statements.
Page 5 of 21
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED JULY 31,
2013 2012
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 181,656 $ 1,095,663
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,958,227 1,805,593
Provision for deferred taxes 42,500 --
(Recovery of) doubtful accounts receivable (17,340) (14,967)
Stock-based compensation expense 202,295 180,503
Changes in operating assets and liabilities:
Accounts receivable 438,470 410,883
Prepaid expenses and other current assets (47,329) 132,354
Other assets 27,952 8,017
Accounts payable (167,283) (466,703)
Accrued expenses and other current liabilities 9,395 (42,525)
Deferred revenue 412,559 47,452
-------------- ----------------
Total adjustments 2,859,446 2,060,607
-------------- ----------------
Net cash provided by operating activities 3,041,102 3,156,270
CASH FLOWS FROM INVESTING ACTIVITIES
PASSUR(R) Network, net (331,618) (1,057,936)
Software development costs, net (1,266,399) (1,523,468)
Property, plant and equipment, net (446,419) (339,878)
-------------- ----------------
Net cash used in investing activities (2,044,436) (2,921,282)
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Surrender of shares to pay withholding taxes (286,261) --
Proceeds from exercise of stock options 5,343 9,900
-------------- ----------------
Net cash (used in) provided by financing activities (280,918) 9,900
============== ================
Increase in cash 715,748 244,888
Cash - beginning of period 261,053 299,455
-------------- ----------------
Cash - end of period $ 976,801 $ 544,343
============== ================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest - related party $ 216,802 $ 219,880
Income taxes $ 41,465 $ --
See accompanying notes to consolidated financial statements.
Page 6 of 21
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements
July 31, 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 23 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-three 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.
Page 7 of 21
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 September 5, 2013, that if the Company, at any time, is unable to meet its
obligations through September 5, 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 July 31, 2013, and its
consolidated results of operations and cash flows for the nine months ended July
31, 2013 and 2012.
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.
Page 8 of 21
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.
Page 9 of 21
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.
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 $63,000 and $80,000 as of July 31, 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 July 31,
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
$745,000 of software development projects in development as of July 31, 2013.
There are several new software developments projects scheduled to begin in
fiscal year 2013.
Page 10 of 21
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
$10,727,000 for income tax purposes as of July 31, 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 would be 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. As of July
31, 2013, the Company's deferred tax asset was $3,359,000, as a result of the
reversal of the valuation allowance since it was determined it is more likely
than not that the net operating loss carry-forward would be used.
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.
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.
Page 11 of 21
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 NINE MONTHS ENDED
JULY 31, JULY 31,
2013 2012 2013 2012
-------------- ------------- ------------ ------------
Basic weighted average shares outstanding 7,299,666 7,193,140 7,236,371 7,182,169
Effect of dilutive stock options 515,229 825,430 540,169 829,586
------------- ------------- ------------- -------------
Diluted weighted average shares outstanding 7,814,895 8,018,570 7,776,540 8,011,755
============= ============= ============= =============
Weighted average shares which are not included
in the calculation of diluted net income per
share because their impact is anti-dilutive
Stock options 631,271 551,070 606,331 546,914
============= ============= ============= =============
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 $62,000 and $202,000 and $73,000 and
$181,000 for the three and nine months ended July 31, 2013 and 2012,
respectively, and was primarily included in selling, general, and administrative
expenses.
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 July 31, 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 July 31, 2013.
Page 12 of 21
The Company has received a commitment from G.S. Beckwith Gilbert, dated
September 5, 2013, that if the Company, at any time, is unable to meet its
obligations through September 5, 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 13 of 21
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 23 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-three 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.
Page 14 of 21
The Company's airline, airport, and business aviation revenue increased
$106,000, or 5%, and $406,000, or 6%, to $2,456,000 and $7,298,000, for the
three and nine months ended July 31, 2013, as compared to the same periods in
fiscal year 2012, due primarily to new customer contracts. The Company's
professional service and government revenue decreased $287,000, or 82%, and
$2,212,000, or 97%, to $61,000 for the three and nine months ended July 31,
2013, as compared to the same periods in fiscal year 2012, primarily due to the
completion of a professional service engagement and government contract in
fiscal year 2012. As a result, total revenue decreased $204,000, or 7%, and
$1,864,000 or 19%, to $2,743,000 and $8,078,000 for the three and nine months
ended July 31, 2013, from $2,947,000 and $9,943,000 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.
Cost of revenues increased $22,000, or 2%, for the three months ended July 31,
2013, primarily due to the absence of manufacturing activity during the three
months ended July 31, 2013. PASSUR(R) Network systems were manufactured during
the prior fiscal year. When the Company manufactures its PASSUR(R) Network
Systems, there is a reduction in cost of revenues due to the fact that the
labor-related costs for these systems are capitalized, rather than expensed, as
a component of costs of revenue.
The absence of manufacturing activity during the quarter resulted in an increase
in cost of revenue of $125,000. In additon, amortization cost increased $42,000.
These increases were partially offset by a decrease in communication costs of
$151,000 due to the Company's continued adoption of its new network
infrastructure.
Page 15 of 21
Costs of revenues decreased $242,000, or 5%, for the nine months ended July 31,
2013, as compared to the same period in fiscal year 2012, primarily due to
decreases in communication costs of $358,000 and consulting costs of $297,000,
largely offset by an increase in labor-related costs of $297,000, due to the
absence of manufacturing activity during the fiscal year 2013. In addition,
amortization cost increased $162,000, as compared to the same period in the
prior fiscal year.
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 $21,000, or 14%, and $118,000, or 33%, for the three and nine
months ended July 31, 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 nine months ended July 31, 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 $217,000, or 19%, and
$888,000, or 24%, for the three and nine months ended July 31, 2013, as compared
to the same periods in fiscal year 2012, due to a decrease in payroll and
related costs of $210,000 and $743,000, primarily as a result of a decrease in
headcount, plus decreases in travel and entertainment expenses and facilities
expenses.
INCOME FROM OPERATIONS
Income from operations decreased $30,000, or 13%, and $852,000, or 64%, to
$210,0000 and $479,000, for the three and nine months ended July 31, 2013, as
compared to the same periods in fiscal year 2012, largely due to a decrease in
revenue of $204,000, or 7%, and $1,864,000, or 19%, respectively. This revenue
decrease was partially offset by a decrease in total costs and expenses of
$174,000, or 6%, and $1,012,000, or 12%.
INTEREST EXPENSE - RELATED PARTY
Interest expense - related party decreased $1,000, or 1%, and $3,000, or 1%, for
the three and nine months ended July 31, 2013, as compared to the same period in
fiscal year 2012.
Page 16 of 21
NET INCOME
The Company had net income of $105,000, or $.01 per diluted share, and $182,000,
or $.02 per diluted share, for the three and nine months ended July 31, 2013, as
compared to net income of $156,000, or $.02 per diluted share, and $1,096,000 or
$0.14 per diluted share, for the same periods in fiscal year 2012.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current liabilities exceeded current assets by $416,000 as of July
31, 2013. In April, 2013, the Company received $990,000 from a customer for
subscription services through January 31, 2014. The unrecognized amount of
revenue for this customer is included in the current portion of deferred
revenue. 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 July 31, 2013, with a maturity of
November 1, 2014. The Company's stockholders' equity was $10,390,000 as of July
31, 2013. The Company had net income of $182,000 for the nine months ended July
31, 2013.
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 September 5, 2013, that if the Company, at any time, is unable to meet its
obligations through September 5, 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 $3,041,000 for the nine months
ended July 31, 2013, and consisted of $182,000 of net income, depreciation and
amortization of $1,958,000, and stock-based compensation expense of $202,000,
with the balance consisting of a reduction in operating assets and an increase
in operating liabilities. Net cash used in investing activities was $2,044,000
for the nine months ended July 31, 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 $281,000, for
the nine months ended July 31, 2013, primarily for employee's cashless exercise
of stock options.
Page 17 of 21
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.
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, as 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.
Page 18 of 21
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 July 31, 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 September 5, 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
September 5, 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 19 of 21
ITEM 6. EXHIBITS.
10.1 *Commitment of G.S. Beckwith Gilbert, dated September 5, 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 20 of 21
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: SEPTEMBER 13, 2013 By: /s/ James T. Barry
------------------
James T. Barry
President and Chief
Executive Officer
(Principal Executive Officer)
DATED: SEPTEMBER 13, 2013 By: /s/ Jeffrey P. Devaney
----------------------
Jeffrey P. Devaney
Chief Financial Officer, Treasurer,
and Secretary (Principal Financial
and Accounting Officer)
Page 21 of 2