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 JANUARY 31, 2011
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 000-7642
PASSUR AEROSPACE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 11-2208938
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE LANDMARK SQUARE, SUITE 1900, STAMFORD, CONNECTICUT 06901
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(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (203) 622-4086
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Indicate by check mark whether the Registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the Registrant was required to submit and post such files). YES [ ] NO [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act). YES [ ] NO [X]
================================================================================
There were 4,731,448 shares of the Registrant's common stock with a par value of
$0.01 per share outstanding as of March 9, 2011.
INDEX
PASSUR Aerospace, Inc. and Subsidiary
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of January 31, 2011 (unaudited)
and October 31, 2010. 3
Consolidated Statements of Income (unaudited) 4
Three months ended January 31, 2011 and 2010.
Consolidated Statements of Cash Flows (unaudited) 5
Three months ended January 31, 2011 and 2010.
Notes to Consolidated Financial 6
Statements (unaudited) - January 31, 2011.
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 15
Item 4. Controls and Procedures. 15
PART II. OTHER INFORMATION 16
Item 5. Other Information. 16
Item 6. Exhibits. 16
Signatures 17
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Balance Sheets
JANUARY 31, October 31,
2011 2010
--------------- ---------------
(UNAUDITED) (Audited)
ASSETS
Current assets:
Cash $ 386,948 $ 107,069
Accounts receivable, net 1,539,681 1,853,901
Prepaid expenses and other current assets 570,787 269,102
--------------- ---------------
Total current assets 2,497,416 2,230,072
PASSUR(R) Network, net 7,007,786 7,300,902
Software development costs, net 3,772,673 3,334,905
Property, plant and equipment, net 146,343 158,737
Other assets 193,039 254,030
--------------- ---------------
TOTAL ASSETS $ 13,617,257 $ 13,278,646
=============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 581,300 $ 982,431
Accrued expenses and other current liabilities 971,475 898,829
Deferred revenue, current portion 1,498,114 1,503,750
Accrued interest - related party 797,216 446,211
--------------- ---------------
Total current liabilities 3,848,105 3,831,221
Deferred revenue, less current portion 169,297 227,798
Notes payable - related party 14,814,880 14,814,880
--------------- ---------------
18,832,282 18,873,899
Commitment and contingencies
Stockholders' deficit:
Preferred shares - authorized 5,000,000 shares,
par value $.01 per share; none issued or outstanding -- --
Common shares - authorized 10,000,000 shares,
par value $.01 per share; issued 5,387,948 in 2011 and 2010 53,879 53,879
Additional paid-in capital 4,828,928 4,758,816
Accumulated deficit (8,474,357) (8,784,473)
--------------- ---------------
(3,591,550) (3,971,778)
Treasury stock, at cost, 696,500 shares in 2011 and 2010 (1,623,475) (1,623,475)
--------------- ---------------
Total stockholders' deficit (5,215,025) (5,595,253)
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 13,617,257 $ 13,278,646
=============== ===============
See accompanying notes to consolidated financial statements.
3
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED JANUARY 31,
2011 2010
------------- --------------
REVENUES $ 3,510,396 $ 2,323,402
COST AND EXPENSES:
Cost of revenues 1,499,587 949,033
Research and development 75,160 69,315
Selling, general, and administrative expenses 1,274,528 915,618
------------- --------------
2,849,275 1,933,966
------------- --------------
INCOME FROM OPERATIONS 661,121 389,436
Interest expense - related party 351,005 343,725
------------- --------------
Income before income taxes 310,116 45,711
Provision for income taxes -- 20,232
------------- --------------
NET INCOME $ 310,116 $ 25,479
============= ==============
Net income per common share - basic $ .07 $ .01
============= ==============
Net income per common share - diluted $ .06 $ .00
============= ==============
Weighted average number of common shares outstanding - basic 4,691,448 4,415,524
============= ==============
Weighted average number of common shares outstanding - diluted 5,505,012 5,309,169
============= ==============
See accompanying notes to consolidated financial statements.
4
PASSUR Aerospace, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED JANUARY 31,
2011 2010
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 310,116 $ 25,479
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 489,838 450,314
Provision for (recovery of) doubtful accounts receivable 55,526 (905)
Stock-based compensation expense 70,112 20,185
Changes in operating assets and liabilities:
Accounts receivable 258,694 (56,542)
Prepaid expenses and other current assets (301,685) (20,788)
Other assets 60,991 15,207
Accounts payable (401,131) 149,567
Accrued expenses and other current liabilities 72,646 130,753
Deferred revenue (64,137) (212,779)
Accrued interest - related party 351,005 (779,070)
------------ -------------
Total adjustments 591,859 (304,058)
------------ -------------
Net cash provided by (used in) operating activities 901,975 (278,579)
CASH FLOWS FROM INVESTING ACTIVITIES
PASSUR(R) Network (42,993) (287,873)
Software development costs (566,671) (255,842)
Property, plant and equipment (12,432) (26,667)
------------ -------------
Net cash used in investing activities (622,096) (570,382)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - related party -- 900,000
Proceeds from exercise of stock options -- 106,888
------------ -------------
Net cash provided by financing activities -- 1,006,888
------------ -------------
Increase in cash 279,879 157,927
Cash - beginning of period 107,069 250,626
------------ -------------
Cash - end of period $ 386,948 $ 408,553
============ =============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest - related party $ -- $ 1,122,794
Income taxes $ 8,865 $ 20,232
See accompanying notes to consolidated financial statements.
5
PASSUR Aerospace, Inc. and Subsidiary
Notes to Consolidated Financial Statements
January 31, 2011
(Unaudited)
1. NATURE OF BUSINESS
PASSUR Aerospace, Inc. (the "Company", "PASSUR(R)", "we", or "our") is a
business intelligence company which develops predictive analytics built on
proprietary algorithms and on concurrent integration and simultaneous mining of
multiple databases. The Company offers vertical expertise in the aviation market
- providing data consolidation, information, decision support, predictive
analytics, collaborative solutions, and professional services for aviation
operations worldwide.
The Company's principal business is to provide business intelligence and
predictive analytics solutions which save money, enhance operational efficiency,
increase safety and security, and improve the passenger experience. These
analytics are derived from the Company's PASSUR(R) Proprietary Surveillance
Network (the "PASSUR(R) Network") of live flight information, updated every 4.6
seconds, and include decision support software, predictive analytics, and
web-delivered collaborative decision solutions, enhanced by professional
services provided by industry experts.
The Company serves most major airlines (including five of the top six North
American airlines, as well as the top five hub and spoke airlines),
approximately fifty airport customers (including twenty-two of the top thirty
North American airports), and approximately two hundred corporate aviation
customers, as well as the U.S. government, including the Federal Aviation
Administration ("FAA") and Transportation Security Administration ("TSA").
The Company believes its predictive analytics save its customers costs annually
by enabling preemptive decision-making and more effective operational planning.
The PASSUR(R) System simultaneously scans, correlates, and pulls information
from the Company's PASSUR(R) Network together with multiple additional
government and private databases.
The PASSUR(R) Network includes one hundred and fifty-four Company-owned
PASSUR(R) Radar Systems, covering ninety-eight of the top one hundred North
American airports. Other PASSUR(R)s are located in Europe and Asia. Flight
tracks are updated every 4.6 seconds, thereby providing a system which is
user-friendly and useful for decision-making.
The Company delivers these tools primarily on "web-dashboards," - a single page
or screen which aggregates many different sets of information into a simplified
presentation of performance indicators and exception alerts to support quick
decisions and information useful in predicting future situations. Almost all of
the PASSUR(R) solutions have a live or real-time component, and most also
include alerts, decision support, collaborative components, immediate playback
or review, as well as analysis. The PASSUR(R) products are protected by multiple
patents and patent pending applications.
6
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial information contained in this Form 10-Q represents
condensed financial data and, therefore, does not include all footnote
disclosures required to be included in financial statements prepared in
conformity with accounting principles generally accepted in the United States.
Such footnote information was included in the Company's annual report on Form
10-K for the year ended October 31, 2010, filed with the Securities and Exchange
Commission ("SEC"); the consolidated financial data included herein should be
read in conjunction with that report. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the Company's consolidated financial position at January 31, 2011, and its
consolidated results of operations and cash flows for the three months ended
January 31, 2011 and 2010.
Management is addressing the Company's working capital and stockholders'
deficiencies 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. Additionally, if
the Company's business plan does not generate sufficient cash flows from
operations to meet the Company's operating cash requirements, the Company will
attempt to obtain external financing, and if such external financing is not
obtained, the Company has received an unconditional and irrevocable commitment
from its significant shareholder and Chairman to receive the necessary
continuing financial support to meet such obligations through March 14, 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, 2011.
Certain financial information in the footnotes has been rounded to the nearest
thousand for presentation purposes.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PASSUR Aerospace,
Inc. and its wholly-owned subsidiary. All significant inter-company transactions
and balances have been eliminated in consolidation.
REVENUE RECOGNITION POLICY
The Company follows the provisions of FASB ASC 985-605 (SOP 97-2, "Software
Revenue Recognition"), as amended. ASC 985-605 delineates the accounting
practices for software products, maintenance, support services, and professional
services revenue. Under ASC 985-605, the Company recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
determinable, and collection of the resulting receivable is probable. For
arrangements involving multiple elements (e.g. maintenance, support, and other
services), the Company allocates revenue to each element of the arrangement
based on vendor-specific objective evidence of its fair value, or for products
not being sold separately, the objective and verifiable fair value established
by management.
The Company recognizes service and maintenance revenues on a straight-line basis
over the service contract period. Revenues for data subscription services are
recognized on a monthly basis upon the execution of an agreement and the
customer's receipt of the data. The Company performs certain professional
services for customers on a subscription basis that have stand-alone value. Such
subscription-based professional services are recognized over the subscription
period.
The Company recognizes license fee revenues on a straight-line basis over the
term of the license agreement, which typically does not exceed five years.
The Company recognizes initial set-up fee revenues and associated costs on a
straight-line basis over the estimated life of the customer relationship period,
typically five years.
7
COST OF REVENUES
Costs associated with subscription and maintenance revenues consist primarily of
direct labor, depreciation of PASSUR(R) Network Systems, amortization of
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) Network Systems
necessary to make such systems compatible with new software applications, as
well as the ordinary repair and maintenance of existing PASSUR(R) Network
Systems. Additionally, cost of revenues in each reporting period is impacted by:
(1) the number of PASSUR(R) Network units added, which include the production,
shipment, and installation of these assets, which are capitalized to the
PASSUR(R) Network; and (2) capitalized costs associated with software
development 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 uses installment license and/or maintenance agreements as part of
its standard business practice. The Company has a history of successfully
collecting all amounts due under the original payment terms without making
concessions. 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. These account receivable balances include
unearned revenue attributable to deferred subscription revenues, deferred
maintenance revenues, and unamortized license fee revenues.
Accounts receivable balances also include initial set-up fees billed when the
service is performed and revenues are recognized on a straight-line basis over
the estimated life of the customer relationship period, typically five years.
The provision for doubtful accounts was $80,000 and $25,000 as of January 31,
2011 and October 31, 2010, respectively. The Company monitors its outstanding
accounts receivable balances and believes the provision is reasonable.
PASSUR(R) NETWORK
The PASSUR(R) Network includes PASSUR(R) Systems and the related software
workstations used for the data derived from PASSUR(R) Systems, as well as costs
pertaining to raw material, work-in-process, and finished goods components.
PASSUR(R) Network installations include the direct and indirect production and
installation costs incurred for each of the Company-owned PASSUR(R) Systems.
PASSUR(R) Network assets which are not installed in the PASSUR(R) Network are
carried at cost and no depreciation is recorded.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company follows the provisions of FASB ASC 985-20 (SFAS 86, "Accounting for
the Costs of Software to be Sold, Leased, or Otherwise Marketed.") Capitalized
software development costs are comprised of costs incurred to develop and
significantly enhance software products to be sold or otherwise marketed. Once
technological feasibility is established, and the software product is available
for general release to the public, the Company begins to amortize such costs to
cost of revenues.
Amortization of capitalized software costs is provided on a product-by-product
basis based on the greater of the ratio of current gross revenues to the total
of current and anticipated future gross revenues or the straight-line method
over the estimated economic life of the product beginning at the point the
product becomes available for general release, typically over five years. Costs
incurred to improve and support products after they become available for general
release are charged to expense as incurred. Costs incurred to enhance products
are capitalized. The assessment of recoverability of capitalized software
development costs requires the exercise of judgment by management. In the
opinion of management, all such costs capitalized as of January 31, 2011 are
recoverable through anticipated future sales of such applicable products.
8
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 REVENUE
Deferred revenue includes advances received on subscription services and/or
maintenance agreements, which are derived from the Company's PASSUR(R) Network
and which may be prepaid either annually or quarterly, as well as the
unamortized portion of one-time payments received for license fees relating to
Company software applications. Revenues from subscription and maintenance
services are recognized as income ratably over the subscription and/or
maintenance period that coincides with the respective agreement.
The Company recognizes license fee revenues on a straight-line basis over the
term of the license agreement, which typically does not exceed five years.
The Company recognizes initial set up fee revenues and associated costs on a
straight-line basis over the estimated life of the customer relationship period,
typically five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of the Company's cash, receivables, accounts payable, and
accrued liabilities approximate their fair values principally because of the
short-term nature of these items. The fair value of related party debt is not
practicable to determine due primarily to the fact that the Company's related
party debt is held by its Chairman and significant shareholder, and the Company
does not have any third-party debt with which to compare.
Additionally, on a recurring basis, the Company uses fair value measures when
analyzing asset impairments. Long-lived assets and certain identifiable
intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined such indicators are present and the review
indicates that the assets will not be fully recoverable, based on the
undiscounted estimated future cash flows expected to result from the use of the
asset, their carrying values are reduced to estimated fair value.
NET INCOME PER SHARE INFORMATION
Basic net income per share is computed based on the weighted average number of
shares outstanding. Diluted net income per share is based on the sum of the
weighted average number of common shares outstanding and common stock
equivalents. Shares used to calculate net income per share are as follows:
FOR THE THREE MONTHS
ENDED JANUARY 31,
2011 2010
--------------- ----------------
Basic weighted average shares outstanding 4,691,448 4,415,524
Effect of dilutive stock options 813,564 893,645
--------------- ----------------
Diluted weighted average shares outstanding 5,505,012 5,309,169
=============== ================
Weighted average shares which are not
included in the calculation of diluted net
income per share because their impact
is anti-dilutive
Stock options 689,436 510,855
=============== ================
9
STOCK-BASED COMPENSATION
The Company follows FASB ASC 718 (SFAS 123R, "Share-Based Payments") which
requires measurement of compensation cost for all stock-based awards at fair
value on date of grant, and recognition of 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 for the three months ended January 31, 2011 was
$70,000, which is $50,000 greater than the $20,000 incurred for the three months
ended January 31, 2010, and was primarily included in selling, general, and
administrative expenses.
RECENT ACCOUNTING PRONOUNCEMENTS
Certain accounting pronouncements have been issued by the FASB and other
standard setting organizations which are not yet effective and have not yet been
adopted by the Company. The impact on the Company's financial position and
results of operations from adoption of these standards is not expected to be
material.
3. NOTES PAYABLE - RELATED PARTY
Effective November 1, 2008, the Company entered into a new agreement, renewing
and extending the term of the $13,815,000 note due to G.S. Beckwith Gilbert, the
Company's significant shareholder and Chairman, from one year to three years
with a maturity of November 1, 2011. Under the agreement, effective February 1,
2009 through October 31, 2011, the interest rate was increased from 4.5% to 9%
and is payable as follows: interest at the annual rate of 6% will be payable in
cash with the remaining interest, at the annual rate of 3%, payable at the
option of the Company in cash or "paid in kind" and added to the principal of
the note. Annual interest payments are due at October 31 of each fiscal year.
During October 2009, the Company entered into an agreement to extend the
interest payment due to Mr. Gilbert on October 31, 2009 to December 31, 2009.
This interest payment was paid in full by the Company prior to the extended due
date. During fiscal year 2009, Mr. Gilbert loaned the Company an additional
$100,000, bringing the principal amount of notes due to Mr. Gilbert to
$13,915,000 on October 31, 2009.
In fiscal year 2010, Mr. Gilbert loaned the Company an additional $1,150,000,
used in part to fund the prior fiscal year's interest payment, increasing the
principal balance to $15,065,000. During fiscal year 2010, the Company paid
fiscal year 2010 interest to Mr. Gilbert of $914,000, representing the entire
cash portion of the fiscal year 2010 interest due, thereby meeting the cash
payment requirements of the loan agreement. Total cash payments for interest
made to Mr. Gilbert in fiscal year 2010 were $2,037,000, including the remaining
fiscal year 2009 interest payment. The balance of the fiscal year 2010 interest
payable of $446,000 was accrued. In October 2010, the Company made a $250,000
principal payment, reducing loan principal to $14,815,000, resulting in a total
of $15,261,000 due to Mr. Gilbert on October 31, 2010. The accrued interest
balance on the notes was $797,000 as of January 31, 2011, resulting in a total
of $15,612,000 due to Mr. Gilbert on January 31, 2011.
The Company has received a commitment from Mr. Gilbert, dated March 14, 2011,
that if the Company, at any time, is unable to meet its obligations through
March 14, 2012, Mr. Gilbert will provide the necessary continuing financial
support to the Company in order for the Company to meet such obligations. As
this commitment is for over one year as of January 31, 2011, the notes payable
have been classified on the Company's balance sheet as a long-term liability.
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 notes are
secured by the Company's assets.
10
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.
DESCRIPTION OF BUSINESS
PASSUR Aerospace, Inc. is a business intelligence company which develops
predictive analytics built on proprietary algorithms and on concurrent
integration and simultaneous mining of multiple databases. The Company offers
vertical expertise in the aviation market - providing data consolidation,
information, decision support, predictive analytics, collaborative solutions,
and professional services for aviation operations worldwide.
The Company's principal business is to provide business intelligence and
predictive analytics solutions which save money, enhance operational efficiency,
increase safety and security, and improve the passenger experience. These
analytics are derived from the Company's PASSUR(R) Proprietary Surveillance
Network (the "PASSUR(R) Network") of live flight information, updated every 4.6
seconds, and include decision support software, predictive analytics, and
web-delivered collaborative decision solutions, enhanced by professional
services provided by industry experts.
The Company serves most major airlines (including five of the top six North
American airlines, as well as the top five hub and spoke airlines),
approximately fifty airport customers (including twenty-two of the top thirty
North American airports), and approximately two hundred corporate aviation
customers, as well as the U.S. government, including the FAA and TSA.
The Company believes its predictive analytics save its customers costs annually
by enabling preemptive decision making and more effective operational planning.
The PASSUR(R) System simultaneously scans, correlates, and pulls information
from the Company's PASSUR(R) Network together with multiple additional
government and private databases.
The PASSUR(R) Network has one hundred and fifty-four Company-owned PASSUR(R)
Radar Systems, covering ninety-eight of the top one hundred North American
airports. Other PASSUR(R)s are located in Europe and Asia. Flight tracks are
updated every 4.6 seconds, thereby providing a system which is user-friendly and
useful for decision-making.
11
The Company delivers these tools primarily on "web-dashboards," - a single page
or screen which aggregates many different sets of information into a simplified
presentation of performance indicators and exception alerts to support quick
decisions and information useful in predicting future situations. Almost all of
the PASSUR(R) solutions have a live or real-time component, and most also
include alerts, decision support, collaborative components, immediate playback
or review, as well as analysis. The PASSUR(R) products are protected by multiple
patents and patent pending applications.
RESULTS OF OPERATIONS
REVENUES
The Company's business plan is to continue to focus on increasing
subscription-based revenues from its suite of software applications, and to
develop new applications and professional services designed to address the needs
of the aviation industry and the U.S. government.
The Company will continue to market the business intelligence, predictive
analytics, and decision support product applications and solutions derived from
the PASSUR(R) Network. Such efforts include the continued development of new
products, professional services, and existing product enhancements. There were
one hundred and fifty-four Company-owned PASSUR(R) Systems located at airports
worldwide as of January 31, 2011. Redundant PASSUR(R) Systems have been
installed at major customer locations.
Revenues increased by $1,187,000, or 51%, to $3,510,000 as compared to the same
period in fiscal year 2010. New customer subscriptions and existing customer
upgrades to the Company's suite of software applications accounted for 68% of
this increase, and new customer engagements for professional services accounted
for 32% of this increase. 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
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) Network Systems
necessary to make such systems compatible with new software applications, as
well as the ordinary repair and maintenance of existing PASSUR(R) Network
Systems. Additionally, cost of revenues in each reporting period is impacted by:
(1) the number of PASSUR(R) Network units added 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 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.
Cost of revenues increased by $551,000, or 58%, for the three months ended
January 31, 2011 as compared to the same period in fiscal year 2010. This
increase consisted of payroll and related costs and consulting fees of $260,000
and $209,000, respectively, as well as increases in depreciation and
amortization and communication costs. When the Company ships and installs its
PASSUR(R) Network Systems there is a reduction in cost of revenues due to the
fact that the labor related costs for these processes is capitalized rather than
expensed as a component of costs of revenue. Fewer systems were shipped and
installed in the first quarter of fiscal year 2011 than in the same quarter of
the previous fiscal year, which resulted in a $218,000 increase in cost of
revenue as these corresponding costs were capitalized in the prior fiscal year.
The increase in cost of revenues for the three months ended January 31, 2011
described above, was partially offset by an increase of $311,000 in the
capitalization of software development costs during the three months ended
January 31, 2011 as compared to the same period in fiscal year 2010, as these
labor costs are otherwise generally classified as cost of revenue due to the
fact that the Company's software developers also perform subscription and
maintenance related duties. As of January 31, 2011, the Company has employed
five additional software developers as compared to the same period in the prior
fiscal year, and whose primary responsibilities are new software development.
12
RESEARCH AND DEVELOPMENT
Research and development expenses were $75,000 for the three months ended
January 31, 2011 as compared to $69,000 for the same period in fiscal year 2010.
The Company's research and development efforts include activities associated
with the enhancement, maintenance, and improvement of the Company's existing
hardware, software, and information products.
The Company anticipates that it will continue to invest in research and
development to develop, maintain, and support the existing and newly developed
applications for its customers. There were no customer-sponsored research and
development activities during the three months ended January 31, 2011. Research
and development expenses are funded by current operations.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses increased by $359,000, or 39%, for
the three months ended January 31, 2011 as compared to the same period in fiscal
year 2010, primarily due to an increase in payroll and related costs.
INCOME FROM OPERATIONS
Revenues increased by $1,187,000 or 51%, to $3,510,000 for the three months
ended January 31, 2011 as compared to the same period in fiscal year 2010. Total
costs and expenses increased by $915,000, or 47%, to $2,849,000 for the three
months ended January 31, 2011 as compared to the same period in fiscal year
2010. Income from operations increased by $272,000, or 70%, to $661,000 for the
three months ended January 31, 2011 as compared to the same period in fiscal
year 2010.
INTEREST EXPENSE - RELATED PARTY
Interest expense - related party was $351,000 for the three months ended January
31, 2011 as compared to $344,000 for the same period in fiscal year 2010.
NET INCOME
The Company had net income of $310,000, or $.06 per diluted share, for the three
months ended January 31, 2011 as compared to net income of $25,000, or $.00 per
diluted share, for the same period in fiscal year 2010.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current liabilities exceeded current assets by $1,351,000 at
January 31, 2011. The notes payable to a related party of $14,815,000 at January
31, 2011 are due November 1, 2011. The Company's stockholders' deficit was
$5,215,000 at January 31, 2011. The Company had net income of $310,000 for the
three months ended January 31, 2011.
Management is addressing the Company's working capital and stockholders'
deficiencies 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. Additionally, if
the Company's business plan does not generate sufficient cash flows from
operations to meet the Company's operating cash requirements, the Company will
attempt to obtain external financing, and if such external financing is not
obtained, the Company has received an unconditional and irrevocable commitment
from its significant shareholder and Chairman to receive the necessary
continuing financial support to meet such obligations through March 14, 2012.
13
Effective November 1, 2008, the Company entered into a new agreement, renewing
and extending the term of the $13,815,000 note due to G.S. Beckwith Gilbert, the
Company's significant shareholder and Chairman, from one year to three years
with a maturity of November 1, 2011. Under the agreement, effective February 1,
2009 through October 31, 2011, the interest rate was increased from 4.5% to 9%
and is payable as follows: interest at the annual rate of 6% will be payable in
cash with the remaining interest, at the annual rate of 3%, payable at the
option of the Company in cash or "paid in kind" and added to the principal of
the note. Annual interest payments are due at October 31 of each fiscal year.
During October 2009, the Company entered into an agreement to extend the
interest payment due to Mr. Gilbert on October 31, 2009 to December 31, 2009.
This interest payment was paid in full by the Company prior to the extended due
date. During fiscal year 2009, Mr. Gilbert loaned the Company an additional
$100,000, bringing the principal amount of notes due to Mr. Gilbert to
$13,915,000 on October 31, 2009.
In fiscal year 2010, Mr. Gilbert loaned the Company an additional $1,150,000,
used in part to fund the prior fiscal year's interest payment, increasing the
principal balance to $15,065,000. During fiscal year 2010, the Company paid
fiscal year 2010 interest to Mr. Gilbert of $914,000, representing the entire
cash portion of the fiscal year 2010 interest due, thereby meeting the cash
payment requirements of the loan agreement. Total cash payments for interest
made to Mr. Gilbert in fiscal year 2010 were $2,037,000, including the remaining
fiscal year 2009 interest payment. The balance of the fiscal year 2010 interest
payable of $446,000 was accrued. In October 2010, the Company made a $250,000
principal payment, reducing loan principal to $14,815,000, resulting in a total
of $15,261,000 due to Mr. Gilbert on October 31, 2010. The accrued interest
balance on the notes was $797,000 as of January 31, 2011, resulting in a total
of $15,612,000 due to Mr. Gilbert on January 31, 2011.
The Company has received a commitment from Mr. Gilbert, dated March 14, 2011,
that if the Company, at any time, is unable to meet its obligations through
March 14, 2012, Mr. Gilbert will provide the necessary continuing financial
support to the Company in order for the Company to meet such obligations. As
this commitment is for over one year as of January 31, 2011, the notes payable
have been classified on the Company's balance sheet as a long-term liability.
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 notes are
secured by the Company's assets.
Net cash provided by operating activities was $902,000 for the three months
ended January 31, 2011, and consisted of $615,000 non-cash items, primarily
depreciation and amortization, $310,000 of net income, an increase in accrued
interest-related party, and a decrease in accounts receivable due to the timing
of customer invoicing. This increase in net cash provided by operating
activities for the three months ended January 31, 2011 was partially offset by
an increase in prepaid expenses and other current assets, primarily accrued
revenue, as well as a decrease in accounts payable, primarily due to the timing
of vendor invoice payments. Cash used in investing activities was $622,000 for
the three months ended January 31, 2011, expended primarily for capitalized
software development costs. There was no cash provided by or used in financing
activities for the three months ended January 31, 2011.
The Company's revenue has increased as a result of its subscription-based
revenue model for the three months ended January 31, 2011 as compared to the
same period in fiscal year 2010. The Company is actively addressing the
increasing costs associated with supporting the business, and plans to identify
and reduce any unnecessary costs as part of its cost reduction initiatives.
Additionally, the aviation market has been impacted by budgetary constraints,
airline bankruptcies and consolidations due to the downturn in the current
economy, the terrorist events of September 11, 2001, the continued war on
terrorism, and changes 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 as well as professional
services remains strong, and the Company anticipates an increase in future
revenues. However, the Company cannot predict if such revenues will materialize.
If sales do not increase, losses may occur. The extent of such profits or losses
will be dependent on sales volume achieved and Company cost reduction
initiatives.
14
The Company believes that its liquidity is adequate to meet its operating and
investment needs through at least October 31, 2011, and the Company does not
anticipate borrowing additional funds from Mr. Gilbert during that period,
although the Company has received a commitment from Mr. Gilbert to do so if the
Company needs additional funds.
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,
2010 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, 2010, where
such policies affect its reported financial results. The actual impact of these
factors may differ under different assumptions or conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management carried out an
evaluation, under the supervision, and with the participation of, the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")). The Company's disclosure controls and procedures are
designed to ensure that information required to be disclosed by the Company in
reports filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the Commission's
rules. The Company believes that a control system, no matter how well designed
and operated, can provide only reasonable assurance, not absolute assurance,
that the objectives of the control system are met. Based on their evaluation as
of the end of the period covered by this report, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that such controls and
procedures were effective at a reasonable assurance level as of January 31,
2011.
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.
15
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On March 14, 2011, 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 March 14, 2012.
A copy of the commitment is attached as Exhibit 10.1 to this Form 10-Q and
incorporated by reference into this Item 5.
ITEM 6. EXHIBITS
10.1 Commitment of G.S. Beckwith Gilbert, dated March 14, 2011.
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.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PASSUR AEROSPACE, INC.
DATED: MARCH 17, 2011 By: /s/ James T. Barry
-----------------------
James T. Barry,
President and
Chief Executive Officer
(Principal Executive Officer)
DATED: MARCH 17, 2011 By: /s/ Jeffrey P. Devaney
--------------------------
Jeffrey P. Devaney,
Chief Financial Officer,
Treasurer, and Secretary
(Principal Financial and
Accounting Officer)
1