Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2015
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to _______
Commission file number 000-7642
PASSUR AEROSPACE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
New York 11-2208938
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
One Landmark Square, Suite 1900, Stamford, Connecticut 06901
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(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 7,653,199 shares of the Registrant's common stock with a par value of
$0.01 per share outstanding as of September 8, 2015.
INDEX
PASSUR Aerospace, Inc.and Subsidiary
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 2015 (unaudited)
and October 31, 2014. 3
Consolidated Statements of Income (unaudited) 4
Nine months ended July 31, 2015 and 2014.
Consolidated Statements of Income (unaudited) 5
Three months ended July 31, 2015 and 2014.
Consolidated Statements of Cash Flows (unaudited) 6
Nine months ended July 31, 2015 and 2014.
Notes to Consolidated Financial Statements (unaudited) 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. 18
PART II. OTHER INFORMATION 19
Item 5. Other Information. 19
Item 6. Exhibits. 19
Signatures. 20
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Balance Sheets
JULY 31, OCTOBER 31,
2015 2014
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(UNAUDITED)
ASSETS
Current assets:
Cash $ 940,804 $ 648,727
Accounts receivable, net 1,195,471 1,368,758
Deferred tax asset, current 452,282 537,283
Prepaid expenses and other current assets 213,718 164,179
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Total current assets 2,802,275 2,718,947
PASSUR(R) Network, net 5,957,501 5,428,490
Capitalized software development costs, net 7,468,348 6,844,509
Property and equipment, net 1,336,828 1,323,349
Deferred tax asset, non-current 1,834,088 2,035,088
Other assets 252,289 142,482
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TOTAL ASSETS $ 19,651,329 $ 18,492,865
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 610,754 $ 650,653
Accrued expenses and other current liabilities 737,790 833,292
Deferred revenue, current portion 3,202,109 1,979,873
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Total current liabilities 4,550,653 3,463,818
Deferred revenue, less current portion 205,932 90,679
Notes payable - related party 3,500,000 3,864,880
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8,256,585 7,419,377
COMMITMENT AND CONTINGENCIES
Stockholders' equity:
Preferred shares - authorized 5,000,000 shares,
par value $0.01 per share; none issued or outstanding -- --
Common shares - authorized 10,000,000 shares,
par value $0.01 per share; issued 8,428,526 and 8,225,526
at July 31, 2015 and October 31, 2014, respectively 84,285 82,255
Additional paid-in capital 15,278,062 15,273,524
Accumulated deficit (2,343,340) (2,658,816)
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13,019,007 12,696,963
Treasury stock, at cost, 775,327 shares at July 31, 2015
and 696,500 shares at October 31, 2014, respectively (1,624,263) (1,623,475)
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Total stockholders' equity 11,394,744 11,073,488
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,651,329 $ 18,492,865
================== ===================
See accompanying notes to consolidated financial statements.
3
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
NINE MONTHS ENDED JULY 31,
2015 2014
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REVENUES $ 9,229,586 $ 8,574,311
COST AND EXPENSES:
Cost of revenues 3,803,288 3,989,402
Research and development expenses 553,924 506,604
Selling, general, and administrative expenses 4,078,973 3,468,094
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8,436,185 7,964,100
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INCOME FROM OPERATIONS 793,401 610,211
Interest expense - related party 170,875 180,063
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Income before income taxes 622,526 430,148
Provision for income taxes 307,050 156,502
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NET INCOME $ 315,476 $ 273,646
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Net income per common share - basic $ .04 $ .04
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Net income per common share - diluted $ .04 $ .04
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Weighted average number of common shares outstanding - basic 7,647,066 7,433,951
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Weighted average number of common shares outstanding - diluted 7,769,760 7,713,440
================== ===================
See accompanying notes to consolidated financial statements.
4
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
THREE MONTHS ENDED JULY 31,
2015 2014
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REVENUES $ 3,244,075 $ 2,865,319
COST AND EXPENSES:
Cost of revenues 1,296,796 1,300,968
Research and development expenses 185,550 171,325
Selling, general, and administrative expenses 1,670,334 1,168,614
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3,152,680 2,640,907
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INCOME FROM OPERATIONS 91,395 224,412
Interest expense - related party 54,285 59,262
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Income before income taxes 37,110 165,150
Provision for income taxes 14,690 36,408
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NET INCOME $ 22,420 $ 128,742
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Net income per common share - basic $ -- $ .02
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Net income per common share - diluted $ -- $ .02
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Weighted average number of common shares outstanding - basic 7,630,482 7,529,026
================== ===================
Weighted average number of common shares outstanding - diluted 7,753,176 7,812,157
================== ===================
See accompanying notes to consolidated financial statements.
5
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED JULY 31,
2015 2014
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 315,475 $ 273,646
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,237,699 2,088,122
Provision for deferred taxes 286,000 153,352
Provision for doubtful accounts 6,675 97,295
Stock-based compensation 226,613 236,242
Changes in operating assets and liabilities:
Accounts receivable 166,612 522,421
Prepaid expenses and other current assets (49,539) (132,053)
Other assets (109,806) 3,037
Accounts payable (39,899) (100,143)
Accrued expenses and other current liabilities (95,501) (61,870)
Deferred revenue 1,337,489 (37,497)
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Total adjustments 3,966,343 2,768,906
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Net cash provided by operating activities 4,281,818 3,042,552
CASH FLOWS FROM INVESTING ACTIVITIES
PASSUR(R) Network (1,309,357) (654,319)
Software development costs (1,769,847) (1,349,081)
Property and equipment (324,824) (275,340)
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Net cash used in investing activities (3,404,028) (2,278,740)
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CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (271,954) --
Surrender of shares to pay withholding taxes -- (180,026)
Proceeds from the exercise of stock options 51,120 31,500
Repayments of note payable - related party (364,880) (500,000)
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Net cash used in financing activities (585,714) (648,526)
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Increase in cash 292,077 115,286
Cash - beginning of period 648,727 454,650
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Cash - end of period $ 940,804 $ 569,936
================== ====================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest - related party $ 170,875 $ 180,063
Income taxes $ 34,812 $ 3,150
See accompanying notes to consolidated financial statements.
6
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements
July 31, 2015
(Unaudited)
1. NATURE OF BUSINESS
PASSUR Aerospace, Inc. ("PASSUR(R)" or the "Company") is a business
intelligence, predictive analytics, and big data company. Our mission is to
connect the world's aviation professionals onto a single platform to improve
global air traffic efficiencies.
PASSUR(R) has a broad and global customer network. PASSUR(R)'s products are used
by all of the top North American airlines, over 125 airlines worldwide, over 60
airports including 73% of the top 30 airports, approximately 200 business
aviation organizations, and the US government.
Our core business addresses some of aviation's most intractable and costly
operational and financial challenges, including underutilization of airspace and
airport capacity, delays, cancellations, and diversions.
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.
We provide airlines and airports the ability to get the most out of today's air
traffic management system. As the Federal Aviation Administration ("FAA") brings
new capabilities online, we, with our customers, will have the ability to
develop additional efficiency solutions.
Essentially all commercial companies using the airspace depend on information
from the FAA for flight tracking. PASSUR(R) augments and integrates FAA
information with data from PASSUR(R)'s independent network (the largest passive
commercial radar network in the world), which has over 180 radar locations
covering North America from coast to coast. PASSUR(R) provides faster aircraft
position updates (from one to 4.6 seconds), and more complete information on
aircraft. PASSUR(R)'s sensors receive aircraft and drone signals in Mode A, C,
S, and Automatic Dependent Surveillance-Broadcast ("ADS-B"), providing position,
altitude, beacon code, and tail number, among other information.
PASSUR(R) receives signals from aircraft that, when combined with our historical
database of aircraft and airport behavior, including information recorded by our
network over the last 10 years, allows us to know more about what has happened
historically, and what is happening in real-time. In addition, the historical
database, also accessible in real-time, allows us to predict how aircraft, the
airspace, and airports are going to perform, and more importantly, how the
aircraft, the airspace, and airport should perform.
7
PASSUR(R) offers companies products that are commercially proven, commercially
accepted, and with a demonstrated Return on Investment ("ROI") for airlines and
airports - providing a critical bridge between the commercial and government
opportunities of the FAA's Next Generation Air Transportation System
("NextGen"), the new national airspace system due for implementation across the
United States in stages over the next 10 years. NextGen proposes to transform
the U.S. air traffic control system from an aging ground-based system to a
satellite-based system.
Management is addressing the Company's working capital deficiency (which is only
caused by its deferred revenue balance) 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.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial information contained in this quarterly report on
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("GAAP"). Such footnote information was included in the Company's
Annual Report on Form 10-K for the year ended October 31, 2014, 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 as of
July 31, 2015, and its consolidated results of operations and cash flows for the
nine months ended July 31, 2015 and 2014.
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, 2015.
Certain financial information in the footnotes has been rounded to the nearest
thousand for presentation purposes.
8
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PASSUR(R) 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 the Financial Accounting
Standards Board's Accounting Standards Update No. 605-15, "Revenue Recognition
in Financial Statements" ("FASB ASC 605-15")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 FASB ASC 605-15, we recognize revenue when
persuasive evidence of an arrangement exists which is evidenced by a signed
agreement, the service has been deployed, as applicable, to its hosted servers,
the fee is fixed and determinable, and collection of the resulting receivable is
reasonably assured. The Company records revenues pursuant to individual
contracts on a month-by-month basis, as outlined by the applicable agreement. In
many cases, the Company may invoice respective customers in advance of the
specified period, either quarterly or annually, which coincides with the terms
of the agreement. In such cases, the Company will defer at the close of each
month and/or reporting period any subscription or maintenance revenues invoiced
for which services have yet to be rendered, in accordance with FASB ASC 605-15.
Revenues generated by professional services are recognized over the term of such
executed agreements.
The individual offerings that are included in arrangements with our customers
are identified and priced separately to the customer based upon the stand alone
price for each individual element sold in the arrangement irrespective of the
combination of products and services which are included in a particular
arrangement. As such, the units of accounting are based on each individual
element sold, and revenue is allocated to each element based on selling price.
Selling price is determined using vendor-specific objective evidence ("VSOE") if
available, third-party evidence ("TPE") if VSOE is not available, or best
estimate of selling price ("BESP") if neither VSOE or TPE is available. BESP
must be determined in a manner that is consistent with that used to determine
the price to sell the specific elements on a standalone basis. Our best estimate
of selling price is established considering multiple factors including, but not
limited to, pricing practices with different classes of customers, geographies
and other factors contemplated in negotiating the arrangement with the customer.
9
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) and Surface Multilateration
("SMLAT")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) and SMLAT Systems necessary to make such
systems compatible with new software applications, as well as the ordinary
repair and maintenance of existing PASSUR(R) and SMLAT Systems. Additionally,
cost of revenues in each reporting period is impacted by: (1) the number of
PASSUR(R) and SMLAT Systems added to the Network, which includes 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. The Company records accounts receivables for agreements where
amounts due from customers are contractually required and are non-refundable.
The carrying amount of accounts receivables is reduced by a valuation allowance
that reflects our best estimate of the amounts that will not be collected. Net
accounts receivable is comprised of the monthly, quarterly, or annually
committed amounts due from customers pursuant to the terms of each respective
customer's agreement. Account receivable balances include amounts attributable
to deferred revenues.
The provision for doubtful accounts was $37,000 and $30,000 as of July 31, 2015
and October 31, 2014, respectively. In addition to reviewing delinquent accounts
receivable, the Company considers many factors in estimating our reserve,
including historical data, experience, customer types, credit worthiness and
economic trends. The Company monitors its outstanding accounts receivable
balances and believes the provision is reasonable.
10
PASSUR(R) NETWORK
The PASSUR(R) Network is comprised of PASSUR(R) and SMLAT Systems, which
includes the direct and indirect production, shipping, and installation costs
incurred for each PASSUR(R) and SMLAT 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 five to seven years. PASSUR(R) and SMLAT 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 FASB ASC 350-40, "Internal-Use Software."
FASB 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 the capitalization of 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 shorter of the estimated useful life of the software or revenues, typically
five years. The Company capitalized $577,000 of costs related to software
development projects in the three months ended July 31, 2015, and capitalized
$1,770,000 of costs related to software development projects in the nine months
ended July 31, 2015. As of July 31, 2015, the Company had $1,671,000 of software
development projects still in development and yet to begin amortization.
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 of the asset.
Assets to be disposed of are carried at the lower of their carrying value or
fair value, less estimated costs to sell. The Company evaluates the periods of
amortization continually to determine 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 useful life.
DEFERRED TAX ASSET
The Company had a federal net operating loss carry-forward of $8,842,000
available for income tax purposes as of July 31, 2015, which will expire in
various tax years from fiscal year 2021 through fiscal year 2034. 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
or all of the deferred income tax asset will not be realized. The Company's
deferred tax asset amount was $2,286,000 and $2,572,000 as of July 31, 2015 and
October 31, 2014, respectively, and it was determined that it is more likely
than not that the net operating loss carry-forward would be used. As of October
31, 2014, the Company had a federal net operating loss carry-forward of
$9,149,000 available for income tax purposes, which was set to expire in various
tax years from fiscal year 2021 through fiscal year 2034.
11
DEFERRED REVENUE
Deferred revenue includes amounts attributable to advances received on customer
agreements, which may be billed either annually or quarterly. Revenues from such
customer agreements are recognized as income ratably as services are provided.
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, accrued expenses, 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 G.S. Beckwith Gilbert, 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 gives effect to all diluted
potential common shares outstanding and common stock equivalents during the
period using the treasury stock method. 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,
2015 2014 2015 2014
-------------- ------------- ----------- -------------
Basic weighted average shares outstanding 7,630,482 7,529,026 7,647,066 7,433,951
Effect of dilutive stock options 122,694 283,131 122,694 279,489
-------------- ------------- ----------- -------------
Diluted weighted average shares outstanding 7,753,176 7,812,157 7,769,760 7,713,440
============== ============= =========== =============
Weighted average shares that are not included 908,306 575,869 908,306 579,511
in the calculation of diluted net income per
share because their impact is anti-dilutive.
These shares consist of common stock
equivalents.
12
STOCK-BASED COMPENSATION
The Company follows FASB ASC 718 "Compensation-Stock Compensation", which
requires the 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 $114,000 and $82,000 and $227,000 and
$236,000 for the three and nine months ended July 31, 2015 and 2014,
respectively, and was primarily included in selling, general, and administrative
expenses.
3. NOTES PAYABLE - RELATED PARTY
The Company has a note payable to G.S. Beckwith Gilbert, the Company's
significant shareholder and Chairman, of $3,500,000 (the "Gilbert Note") as of
July 31, 2015. The Gilbert Note bears a maturity date of November 1, 2016, 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 Gilbert Note
through July 31, 2015. During the first nine months of fiscal year 2015, the
Company made $365,000 in principal payments, bringing the principal amount of
the note payable to $3,500,000 as of July 31, 2015, as compared to $3,865,000 as
of October 31, 2014.
The Company believes that its liquidity is adequate to meet operating and
investment requirements through July 31, 2016.
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; and (3) its ability to
secure future financing. 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.
13
DESCRIPTION OF BUSINESS
PASSUR Aerospace, Inc. ("PASSUR(R)" or the "Company") is a business
intelligence, predictive analytics, and big data company. Our mission is to
connect the world's aviation professionals onto a single platform to improve
global air traffic efficiencies.
PASSUR(R) has a broad and global customer network. PASSUR(R)'s products are used
by all of the top North American airlines, over 125 airlines worldwide, over 60
airports including 73% of the top 30 airports, approximately 200 business
aviation organizations, and the US government.
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.
We provide airlines and airports the ability to get the most out of today's air
traffic management system. As the FAA brings new capabilities online, we, with
our customers, will have the ability to develop additional efficiency solutions.
Essentially all commercial companies using the airspace depend on information
from the Federal Aviation Administration ("FAA") for flight tracking. PASSUR(R)
augments and integrates FAA information with data from PASSUR(R)'s independent
network (the largest passive commercial radar network in the world), which has
over 180 radar locations covering North America from coast to coast. PASSUR(R)
provides faster aircraft position updates (from one to 4.6 seconds), and more
complete information on aircraft. PASSUR(R)'s sensors receive aircraft and drone
signals in Mode A, C, S, and Automatic Dependent Surveillance-Broadcast
("ADS-B"), providing position, altitude, beacon code, and tail number, among
other information.
PASSUR(R) receives signals from aircraft that, when combined with our historical
database of aircraft and airport behavior, including that recorded by our
network over the last 10 years, allows us to know more about what has happened
historically, and what is happening in real-time. In addition, the historical
database, also accessible in real-time, allows us to predict how aircraft, the
airspace, and airports are going to perform, and more importantly, how the
aircraft, the airspace, and airport should perform.
PASSUR(R) offers companies products that are commercially proven, commercially
accepted, and with a demonstrated Return on Investment ("ROI") for airlines and
airports - providing a critical bridge between the commercial and government
opportunities of the FAA, Next Generation Air Transportation System ("NextGen"),
the new National Airspace System due for implementation across the United States
in stages over the next 10 years. NextGen proposes to transform the U.S. air
traffic control system from an aging ground-based system to a satellite-based
system.
14
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.
Revenue increased $379,000, or 13%, and $655,000, or 8%, to $3,244,000 and
$9,230,000, respectively, for the three and nine months ended July 31, 2015, as
compared to the same periods in fiscal 2014. New customer subscriptions and
existing customer upgrades to the Company's suite of software applications
increased compared to the prior year periods by $459,000, or 17%, and $887,000,
or 11%, respectively, for the three and nine months ended July 31, 2015. 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) and Surface Multilateration
("SMLAT")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) and SMLAT Systems necessary to make such
systems compatible with new software applications, as well as the ordinary
repair and maintenance of existing PASSUR(R) and SMLAT Systems. Additionally,
cost of revenues in each reporting period is impacted by: (1) the number of
PASSUR(R) and SMLAT System units added to the Network, which includes 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.
When the Company uses its employees to manufacture PASSUR(R) and SMLAT Systems,
build capital assets, and ship and install PASSUR(R) and SMLAT Systems in the
field, or for software development, 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 in the period.
Cost of revenues remained constant for the three months ended July 31, 2015, and
decreased $186,000, or 5%,for the nine months ended July 31, 2015,as compared to
the same periods in fiscal year 2014.
In the current three month period compared to the same period in the prior year,
there was a significant increase in the number of PASSUR(R) and SMLAT Systems
manufactured, shipped, and installed in the field, resulting in higher
capitalization of costs of $252,000. This increased capitalization was partially
offset by an increase in compensation related costs of $134,000 due to the
hiring of a Chief Technology Officer and additional software developers, and an
increase in the amortization of capitalized software projects of $91,000 due to
the release and sale of new products in this fiscal year.
15
In the current nine month period compared to the same period in the prior year,
the reduction in cost of revenues primarily resulted from higher capitalized
costs of $788,000 due to (1) higher capitalized software development costs, and
(2) an increase in the number of PASSUR(R) and SMLAT Systems manufactured,
shipped,and installed in the field;and was partially offset by an increase in
compensation related costs of $313,000 due to the hiring of a Chief Technology
Officer and additional software developers, higher amortization of software
development projects of $219,000 due to the release and sale of new products,
and lower capitalized data center development costs of $63,000.
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 $14,000, or 8%, and $47,000, or 9%,for the three and nine
months ended July 31, 2015, as compared to the same periods in fiscal year 2014,
primarily due to an increase in compensation related costs.
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.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses increased $502,000, or 43%,and
$611,000, or 18%, for the three and nine months ended July 31, 2015, as compared
to the same periods in fiscal year 2014. The increase in the current three and
nine months period compared to the same periods in the prior year was largely
due to an increase in compensation and related costs of $268,000 and $519,000,
respectively, primarily due to an increase in headcount. For the three months
ended July 31, 2015, recruiting costs increased $75,000 and travel and
entertainment costs increased $45,000, as compared to the same period in fiscal
2014.
INCOME FROM OPERATIONS
Income from operations decreased $133,000, or 59%,for the three months ended
July 31, 2015 and increased $182,000, or 30%, for the nine months ended July 31,
2015, to $91,000 and $793,000, respectfully, as compared to the same periods in
fiscal year 2014. This decrease in the three months ended July 31, 2015, was
largely due to an increase in total costs and expenses of $512,000, or 19%,
partially offset by an increase in revenue of $379,000, or 13%, as compared to
the same period in fiscal year 2014. This increase in the nine months ended July
31, 2015, was largely due to an increase in revenue of $655,000, or 8%,
partially offset by an increase in total costs and expenses of $473,000, or 6%,
as compared to the same period in fiscal year 2014.
INTEREST EXPENSE - RELATED PARTY
Interest expense - related party decreased $5,000, or 8% and $9,000, or 5% for
the three and nine months ended July 31, 2015, as compared to the same periods
in fiscal year 2014, due to lower principal balance on the note.
NET INCOME
The Company had net income of $22,000, or $0.00 per diluted share, and $315,000,
or $0.04 per diluted share, for the three and nine months ended July 31, 2015,
as compared to net income of $129,000, or $0.02 per diluted share, and $274,000,
or $0.04 per diluted share, for the same periods in fiscal year 2014.
16
LIQUIDITY AND CAPITAL RESOURCES
The Company's current assets exceeded its current liabilities, excluding
deferred revenue,by $1,454,000 as of July 31, 2015. The note payable to a
related party, G.S. Beckwith Gilbert, the Company's significant shareholder and
Chairman, was $3,500,000 as of July 31, 2015, with a maturity of November 1,
2016 (the "Gilbert Note").
The Company's stockholders' equity was $11,395,000 as of July 31, 2015. The
Company had net income of $315,000 for the nine months ended July 31, 2015.
Management is addressing the Company's working capital deficiency (which is only
caused by its deferred revenue balance) by aggressively marketing the Company's
PASSUR(R) and SMLAT 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. The Company believes that its liquidity is
adequate to meet operating and investment requirements through July 31, 2016.
Net cash provided by operating activities was $4,282,000 for the nine months
ended July 31, 2015, and consisted of $315,000 of net income, depreciation and
amortization of $2,238,000, and stock-based compensation expense of $227,000,
with the balance offset by an increase in operating assets and liabilities. Net
cash used in investing activities was $3,404,000 for the nine months ended July
31, 2015, which was expended for capitalized software development costs,
additions to the PASSUR(R) Network, and additional servers at our redundant
server center in Orlando, Florida. Net cash used by financing was $586,000, for
the nine months ended July 31, 2015, which consisted of the repayment of note
payable of $365,000, plus the purchase of treasury stock of $272,000 and less
the exercise of stock options of $51,000.
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 FAA 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.
17
Interest by potential customers in the information and decision support software
products obtained from PASSUR(R) and SMLAT Network Systems and its professional
services remains strong. As a result, the Company anticipates an increase in
future revenues. However, the Company cannot predict if such revenues will
materialize. If sales do not increase, losses may occur. The extent of such
profits or losses will be dependent on sales volume achieved and Company cost
reduction initiatives.
OFF-BALANCE SHEET ARRANGEMENTS
None.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with GAAP. 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, 2014, 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, 2014, as such
policies affect its reported financial results. The actual impact of these
factors may differ under different assumptions or conditions.
In May 2014, the Financial Accounting Standards Board issued Accounting
Standards Update No. 2014-09, "Revenue from Contracts with Customers: Topic 606"
("ASU 2014-09"), to supersede nearly all existing revenue recognition guidance
under GAAP. The core principle of ASU 2014-09 is to recognize revenues when
promised goods or services are transferred to customers in an amount that
reflects the consideration that is expected to be received for those goods or
services. ASU 2014-09 defines a five step process to achieve this core principle
and, in doing so, it is possible more judgment and estimates may be required
within the revenue recognition process than required under existing GAAP
including identifying performance obligations in the contract, estimating the
amount of variable consideration to include in the transaction price and
allocating the transaction price to each separate performance obligation. We are
currently evaluating the impact of our pending adoption of ASU 2014-09 on our
consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
18
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, 2015.
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.
None.
ITEM 6. EXHIBITS.
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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.
19
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 11, 2015 By: /s/ James T. Barry
------------------
James T. Barry
President and Chief Executive Officer
(Principal Executive Officer)
DATED: SEPTEMBER 11, 2015 By: /s/ David M. Henderson
----------------------
David M. Henderson
Chief Financial Officer, Senior Vice
President, Treasurer, and
Secretary(Principal Financial and
Accounting Officer)
2