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 discussed under Part II, Item 1A, "Risk
Factors" and Part I, Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", in this Quarterly Report on Form 10-Q, the
uncertainties related to the ability of the Company to sell its existing product
and professional service lines, as well as its new products and professional
services (due to potential competitive pressure from other companies or other
products), as well as the potential for terrorist attacks, 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.
Moreover, investors are cautioned to interpret many of the risks identified and
discussed in this Quarterly Report on Form 10-Q, as well as the risks set forth
above, as being heightened as a result of the ongoing and numerous adverse
impacts of COVID-19. The spread of COVID-19 has severely impacted many economies
throughout the world, with businesses being forced to cease or limit operations
for long or indefinite periods of time. Measures taken to contain the spread of
the virus, including travel bans, quarantines and closures of non-essential
services, have triggered significant disruptions to businesses worldwide, with
particular concentration on the aviation industry that the Company serves. The
federal government has responded with monetary and fiscal interventions to aid
in stabilizing the economy, and the Company has received assistance under the
Payroll Support Program for Air Carriers and Contractors, part of the
Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), as well as
subsequently enacted legislation, including the American Rescue Plan Act of 2021
(the "Rescue Act"; the grants under the CARES Act and the Rescue Act,
collectively, referred to herein as the "CARES Act grants").
The aviation and travel industries, which are served by the Company and its
products, have been severely affected by the ongoing COVID-19 outbreak,
initially as a result of travel restrictions and other measures imposed by most
jurisdictions. As a result of the pandemic, the Company has faced increased
economic pressures and experienced a significant loss of revenue from the start
of the pandemic through the nine-month period ended July 31, 2022. While the
Company anticipates a return to an improved economic environment in fiscal 2023
given the state of vaccinations and treatments available and changes in public
behaviors, the recovery depends on many factors, the outcomes of which are
uncertain or unknown at this time, such as, among other things, the scope,
severity and duration of the pandemic (including the emergence of any new
variants to the COVID-19 virus and any resurgences of cases), the continuing
actions taken to contain the pandemic or to mitigate its impact, the acceptance
and public distribution of treatments and vaccines for the disease (including
its variants), the length of time before the public feels safe to travel, the
economic stimulus programs available to affected industries and consumers, and
the status of governmental and private reopening plans. All of these variables
will impact how quickly the industry can recover, which in turn may affect the
revenue and earnings levels of the Company.
Description of Business
PASSUR® Aerospace, Inc. ("PASSUR" or the "Company"), a New York corporation
founded in 1967, is a leading business intelligence company, providing
predictive analytics and decision support technology for the aviation industry
primarily to improve the operational performance and cash flow of airlines,
airports, fixed based operators (FBOs) and air navigation service providers
(ANSPs). The Company is recognized as a leader in providing a cloud-based
platform, ARiVA™, that manages and optimizes operations for our customers.
PASSUR delivers digital solutions that are essential to global aviation
operations, meeting the needs of global air travel as well as supporting the
recovery of the aviation industry from the COVID-19 crisis. The structure and
execution of operations within the aviation industry has fundamentally changed
as a result of this crisis due to the significant change in the economics
required to support current conditions, a return to normal operations and
profitability, and to assist in mitigating health risks.
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PASSUR continues to be a pioneer applying artificial intelligence powered by
machine learning to aviation data, addressing the industry's most costly
challenges, including the management and optimization of airspace, airport
assets, aircraft, and day of flight operations.
Operational efficiency is more important now than ever to eliminate sources of
waste, variability, and inflexibility in operations. The Company addresses these
significant industry problems by using our technology platform, combined with
professional services, to provide solutions that predict, prioritize, prevent
and help the industry recover from unexpected disruptions. These disruptions
have long been seen as the cost of doing business in the industry and are even
more pronounced today and create greater uncertainty to the industry. The
Company provides actionable intelligence to enable the industry to manage their
operations more efficiently and increase profits. Our core business addresses
some of the aviation industry's most intractable and costly challenges,
including, but not limited to, underutilization of airspace and airport
capacity, delays, cancellations, and diversions. Several independent studies
have estimated the annual direct costs of such inefficiencies to airlines in the
United States at over $8 billion annually and worldwide direct cost at over $30
billion annually.
Solutions offered by PASSUR help to ensure flight completion. They cover the
entire flight life cycle, from gate to gate, and result in reductions in overall
costs and carbon emissions, while maximizing revenue opportunities, improving
operational efficiency, and enhancing the passenger experience.
The Company provides its solutions to airlines and airports in the United
States, as well as an airline in Latin America. The global market presents an
opportunity to network more customers in a broader market.
The Company's business plan is to continue to focus on increasing
subscription-based revenues from its suite of software applications, and
professional services designed to address the needs of the aviation industry and
the U.S. government. The Company helps customers alleviate constraints without
the cost of expensive infrastructure upgrades and gets them fully operational
within months, to capture more revenue during peak travel periods. The Company's
goal is to help solve problems faced by its customers and increase profits, by
focusing on:
·Improving visibility across departments;
·Improving the quality of planning data; and
·Automating data driven decision support for capacity and demand to meet the
spikes in revenue opportunity.
For the three months ended July 31, 2022, total revenue decreased 2% to
$1,484,000, compared with $1,510,000 for the same period in fiscal year 2021.
The loss/income from operations for the three months ended July 31, 2022
declined to a loss of $1,188,000, as compared with income from operations of
$202,000 for the same period in fiscal year 2021. For the three months ended
July 31, 2022, the net loss was $1,489,000, or $0.19 per diluted share, as
compared to a net loss of $64,000, or $0.01 per diluted share, for the same
period in fiscal year 2021. During the three months ended July 31, 2022 and July
31, 2021, the Company used the CARES Act financing for eligible payroll costs to
offset a portion of its total eligible payroll costs by $0 and $1,189,000,
respectively. The Company expended the remaining balance of funds received under
the various Payroll Support Programs during the three months ended January 31,
2022.
For the nine months ended July 31, 2022, total revenue decreased 7% to
$4,341,000, as compared with $4,670,000 for the same period in fiscal year 2021.
The income from operations for the nine months ended July 31, 2022 decreased to
a loss of $2,461,000, as compared to income from operations of $811,000 for the
same period in fiscal year 2021. For the nine months ended July 31, 2022, the
net loss was $3,294,000, or $0.43 per diluted share, as compared to net income
of $21,000, or $0.00 per diluted share, for the same period in fiscal year 2021.
During the nine months ended July 31, 2022 and July 31, 2021, the Company was
able to use the CARES Act financing for eligible payroll costs to offset a
portion of its total eligible payroll costs by $789,000 and $3,377,000,
respectively. The Company expended the remaining balance of funds received under
the various Payroll Support Programs during the three months ended January 31,
2022.
Results of Operations
Revenues
Management concentrates its efforts on the sale of business intelligence,
predictive analytics, and decision support product applications. Such efforts
include the continued development of existing products, new product offerings
and to a lesser extent, professional services.
The Company is a supplier and partner to the air transportation industry. Many
of the Company's customers continue to be impacted by the ongoing COVID-19
outbreak, which caused a precipitous decline in demand for air travel and
resulted in our customers in the aviation and travel industries drastically
reducing their capacity and operations from 2020 into 2021, as compared to 2019.
As a result, the Company has experienced downturns in its revenues from the
start of the global pandemic and continuing into fiscal 2022. While many of the
Company's customers are now experiencing increases in air travel volume,
spending to invest in programs to promote operational efficiencies and
productivity usually lag such increases. As a result, the Company experienced
downturns in its revenues
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year-to-date in fiscal 2022 compared with fiscal year 2021. The Company
continues to believe that its products and professional service engagements are
critical to the efficient operation of the air transportation market.
For the three months ended July 31, 2022, total revenues decreased by $26,000,
or 2%, to $1,484,000, as compared with $1,510,000 for the same period in 2021.
The decrease in total revenues was primarily due to a decrease in subscription
revenue of $27,000, or 2%. Professional services revenue of $171,000 was a
slight increase as compared with the same period in the prior year. The decrease
in subscription revenue was concentrated in the Airport sector, primarily due to
the expiration of a large Canadian airport contract that was not renewed.
For the nine months ended July 31, 2022, total revenues decreased by $329,000,
or 7%, to $4,341,000, as compared with $4,670,000 for the same period in 2021.
The decrease in total revenues was primarily due to a decrease in subscription
revenues of $234,000, as compared with the same period in the prior year. The
decrease in subscription revenue was primarily due to the expiration of a large
Canadian airport contract that was not renewed. Professional services revenue
declined $95,000 or 24% to $296,000 during the nine months ended July 31, 2022
compared with $391,000 during the same period ended July 31, 2021 as a result of
the non-recurrence of a one-time consulting project in the prior year.
The decreases in subscription revenues for the three and nine months ended July
31, 2022 were primarily due to decreases in airport business, partially offset
by incremental revenue recognized in fiscal year 2022, mainly related to data
services.
Expenses
In response to the uncertainty surrounding the prospects of airlines and
airports and the travel industry as a result of the continuing global COVID-19
pandemic and the declines in revenues that the Company has experienced from the
start of the global pandemic and continuing into the first three quarters of
fiscal 2022, the Company has reviewed its operating costs to more closely align
those costs with its outlook for the foreseeable future. Prior to receiving the
CARES Act funds, the Company took steps to reduce its operating costs going
forward, which steps included terminating or furloughing certain positions and
instituting a temporary pay reduction plan beginning in the second quarter of
2020, reducing the use of outside consultants where possible, rationalizing the
PASSUR Network, and reducing and/or eliminating other operating expenses that
were not critical to the short-term outlook of the Company. During the nine
months ended July 31, 2022, the Company continued to benefit from these cost
savings when compared to the same period for the prior year. However, such
savings were offset in the current fiscal quarter by the impact of lower federal
stimulus credits available to the Company and investments made by the Company in
infrastructure and marketing. The Company anticipates the continuation of these
cost savings programs into the remainder of fiscal year 2022 to offset the
additional technology infrastructure and marketing costs. However, if the
recovery of the air transportation industry accelerates and revenue levels
quickly return to pre-COVID-19 levels, these levels of cost savings may not be
practicable or sustainable to support the operations necessary for the increased
level of revenue.
Cost of Revenues
For the three months ended July 31, 2022, cost of revenues increased $648,000,
or 112%, to $1,227,000, as compared to $579,000 for the same period in fiscal
year 2021. For the three months ended July 31, 2022 and July 31, 2021, the
Company used the CARES Act financing for eligible payroll costs to offset a
portion of its costs of revenues by $0 and $521,000, respectively. Excluding the
impact of the CARES Act grants, cost of revenues were $1,227,000 and $1,100,000
for the three months ended July 31, 2022 and July 31, 2021, respectively, an
increase of $127,000. For the nine months ended July 31, 2022, cost of revenues
increased $1,397,000, or 81%, to $3,112,000, as compared to $1,715,000 in the
same period in fiscal year 2021. For the nine months ended July 31, 2022 and
July 31, 2021, the Company was able to use the CARES Act financing for eligible
payroll costs to offset a portion of its costs of revenues by $341,000 and
$1,404,000, respectively. Excluding the impact of the CARES Act grants, cost of
revenues were $3,453,000 and $3,119,000 for the nine months ended July 31, 2022
and July 31, 2021, respectively, an increase of $334,000. See Part II, Item 1A,
"Risk Factors", in this Quarterly Report on Form 10-Q. The increases in cost of
revenues during the three- and nine-month periods ended July 31, 2022 compared
with the respective periods in fiscal 2021, were primarily attributable to lower
federal stimulus credits available to offset compensation costs and, for the
nine month period ended July 31, 2022, higher costs of technology
infrastructure, such as cloud hosting fees, professional services, and
restricted stock amortization costs. These increases were partially offset by
savings in the areas of data feeds and communication costs.
For the reasons explained above in Part I, Item 1, "Notes to Consolidated
Financial Statements - 2. Basis of Presentation and Significant Accounting
Policies - Capitalized Software Development Costs", in this Quarterly Report on
Form 10-Q, going forward, the Company anticipates lower levels of capitalized
software costs, including amortization expenses associated with these assets, as
the Company's technological efforts are focused more on maintenance of existing
products.
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Research and Development
For the three months ended July 31, 2022, research and development expenses
increased by $35,000, or 63%, to $91,000, as compared with $56,000 for the same
period in fiscal year 2021. For the three months ended July 31, 2022 and July
31, 2021, the Company used the CARES Act financing for eligible payroll costs to
offset a portion of its research and development expenses by $0 and $31,000,
respectively. Excluding the impact of the CARES Act grants, research and
development expenses were $91,000 and $87,000 for the three months ended July
31, 2022 and July 31, 2021, respectively, an increase of $4,000. For the nine
months ended July 31, 2022, research and development expenses increased $91,000,
or 58%, to $248,000, as compared to $157,000 for the same period in fiscal year
2021. For the nine months ended July 31, 2022 and July 31, 2021, the Company was
able to use the CARES Act financing for eligible payroll costs to offset a
portion of its research and development costs by $20,000 and $95,000,
respectively. Excluding the impact of the CARES Act grants, research and
development costs were $268,000 and $252,000 for the nine months ended July 31,
2022 and July 31, 2021, respectively, an increase of $16,000. See Part II, Item
1A, "Risk Factors", in this Quarterly Report on Form 10-Q. The increases in
research and development expenses during the three- and nine-month periods ended
July 31, 2022, as compared with the respective periods in fiscal 2021, were
primarily attributable to lower federal stimulus credits available to offset
higher compensation costs.
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. The Company anticipates
that it will continue to invest in its software portfolio to develop, maintain,
and support existing and newly developed applications for its customers.
Selling, General, and Administrative
For the three months ended July 31, 2022, selling, general, and administrative
expenses increased $681,000, or 101%, to $1,353,000, as compared to $672,000 for
the same period in fiscal year 2021. For the three months ended July 31, 2022
and July 31, 2021, the Company used the CARES Act financing for eligible payroll
costs to offset a portion of its selling, general and administrative expenses by
$0 and $637,000, respectively. Excluding the impact of the CARES Act grants,
selling, general and administrative expenses were $1,353,000 and $1,309,000 for
the three months ended July 31, 2022 and July 31, 2021, respectively, an
increase of $44,000. For the nine months ended July 31, 2022, selling, general
and administrative expenses increased $1,455,000, or 73%, to $3,442,000, as
compared to $1,987,000 for the same period in fiscal year 2021. For the nine
months ended July 31, 2022 and July 31, 2021, the Company was able to use the
CARES Act financing for eligible payroll costs to offset a portion of its
selling, general and administrative expenses by $428,000 and $1,878,000,
respectively. Excluding the impact of the CARES Act grants, selling, general and
administrative expenses were $3,870,000 and $3,865,000 for the nine months ended
July 31, 2022 and July 31, 2021, respectively, an increase of $5,000. See Part
II, Item 1A, "Risk Factors", in this Quarterly Report on Form 10-Q. The
increases in selling, general, and administrative expenses for the three- and
nine- month periods ended July 31, 2022, as compared with the respective periods
in fiscal 2021, were primarily due to lower federal stimulus credits available
to offset compensation costs, higher compensation and marketing costs.
Loss/Income from Operations
For the three months ended July 31, 2022, income from operations decreased by
$1,390,000 to a loss of $1,188,000, as compared with income from operations of
$202,000 for the same period in fiscal year 2021. For the three months ended
July 31, 2022 and July 31, 2021, the Company used the CARES Act financing for
eligible payroll costs to offset a portion of its total eligible payroll costs
by $0 and $1,189,000, respectively. Excluding the impact of the CARES Act
grants, the loss from operations for the three months ended July 31, 2022
remained unchanged at $1,188,000 while income from operations for the three
months ended July 31, 2021 decreased by $1,189,000 to a loss of $987,000. The
increase in the loss from operations of $201,000 was primarily due to decreases
in revenue coupled with higher compensation costs, as a result of lower federal
stimulus credits available, and increased technology infrastructure and
marketing costs, as compared to the same periods in fiscal year 2021. For the
nine months ended July 31, 2022, income from operations decreased by $3,272,000
to a loss of $2,461,000, as compared with income from operations of $811,000 for
the same period in fiscal year 2021. For the nine months ended July 31, 2022 and
July 31, 2021, the Company was able to use the CARES Act financing for eligible
payroll costs to offset a portion of its total eligible payroll costs by
$789,000 and $3,377,000, respectively. Excluding the impact of the CARES Act
grants, the loss from operations for the nine months ended July 31, 2022
increased by $789,000 to a loss of $3,250,000 and income from operations for the
nine months ended July 31, 2021 decreased by $3,377,000 to a loss of $2,566,000.
The increase in the loss from operations of $684,000 was primarily due to
decreases in revenue coupled with higher compensation costs, as a result of
lower federal stimulus credits available, and increased technology
infrastructure and marketing costs, as compared to the same periods in fiscal
year 2021.
Interest Expense - Related Party
Interest expense - related party increased $35,000, or 13% for the three months
ended July 31, 2022, as compared to the same period in fiscal 2021, and
increased $42,000, or 5%, for the nine months ended July 31, 2022, as compared
to the same period in fiscal year 2021, due to the higher principal balance
outstanding on the note during fiscal year 2022.
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Net Loss/Income
The net loss was $1,489,000, or $0.19 per diluted share, for the three months
ended July 31, 2022, as compared to a net loss of $64,000, or $0.01 per diluted
share, for the same period in 2021. The net loss for the three months ended July
31, 2022 was not affected by the usage of proceeds from the CARES Act grants,
while the net loss for the three months ended July 31, 2021 increased by
$1,189,000 to a loss of $1,253,000 (exclusive of the impact of the CARES Act
grants). The net loss was $3,294,000, or $0.43 per diluted share, for the nine
months ended July 31, 2022, as compared to net income of $21,000, or $0.00 per
diluted share, for the same period in 2021. Excluding the impact of the CARES
Act grants, the net loss for the nine months ended July 31, 2022 increased by
$789,000 to a loss of $4,083,000, while the net income for the nine months ended
July 31, 2021 decreased by $3,377,000 to a net loss of $3,356,000. See Part II,
Item 1A, "Risk Factors", in this Quarterly Report on Form 10-Q. The increase in
net losses for the three- and nine- month periods ended July 31, 2022,
respectively, as compared with the same periods in the prior fiscal year, was
the result of lower levels of revenue, coupled with lower levels of federal
stimulus funds available to offset eligible compensation costs, coupled with
higher infrastructure and marketing costs.
Liquidity and Capital Resources
The Company's current liabilities exceeded its current assets (excluding
deferred revenues) by $940,000 as of July 31, 2022.
The note payable to a related party, G.S. Beckwith Gilbert, the Company's
significant shareholder and Non-Executive Chairman of the Board, with a maturity
of November 1, 2023, was $12,492,000 at July 31, 2022. The Company has accrued
and unpaid interest under these borrowings for the first nine months of fiscal
2022 in the amount of $833,000, which amount is included in accrued expenses and
other current liabilities at July 31, 2022. During fiscal year 2021, the Company
paid Mr. Gilbert all accrued interest incurred for fiscal 2021 in the amount of
$1,057,000. The Company's stockholders' equity had a deficit of $14,083,000 at
July 31, 2022. The Company reported a net loss of $3,294,000 for the nine months
ended July 31, 2022.
On January 29, 2021, the Company and Mr. Gilbert entered into a Seventh Debt
Extension Agreement effective January 29, 2021, pursuant to which the Company
cancelled an outstanding promissory note in the amount of $9,071,000 issued to
Mr. Gilbert on January 27, 2020 (the "Sixth Gilbert Note") and issued Mr.
Gilbert a new promissory note (the "Seventh Gilbert Note") in the amount of
$10,692,000, consisting of a principal of $9,585,000 and unpaid interest of
$1,107,000 accrued under the Sixth Gilbert Note through October 31, 2020. Under
the terms of the Seventh Gilbert Note, the Company agreed to pay the unpaid
interest of $1,107,000 accrued under the Sixth Gilbert Note and included in the
Seventh Gilbert Note at the time and on the terms set forth in the Seventh
Gilbert Note. Under the terms of the Seventh Gilbert Note, the maturity date of
the loan was extended to November 1, 2022, and the annual interest rate remained
at 9 ¾%, with annual interest payments required to be made on October 31st of
each year (although any accrued interest can be paid before such time without
penalty). The note payable was secured by the Company's assets. The amendments
to the Sixth Gilbert Note were determined to be a modification of the debt
instrument and no gain or loss was recorded as a result of the transactions.
During the year ended October 31, 2021, the Company paid Mr. Gilbert all accrued
interest due for the fiscal 2021 year under the Sixth Gilbert Note and the
Seventh Gilbert Note in the amount of $1,057,000.
On January 26, 2022, the Company and Mr. Gilbert entered into an Eighth Debt
Extension Agreement, effective as of January 26, 2022, pursuant to which the
Company cancelled the Seventh Gilbert Note and issued Mr. Gilbert a new
promissory note (the "Eighth Gilbert Note") in the amount of $10,692,000, which
represented the total amount due and owing under the Seventh Gilbert Note as of
January 26, 2022. Under the terms of the Eighth Gilbert Note, the maturity date
of the loan was extended to November 1, 2023, and the annual interest rate
remained 9 ¾%, with annual interest payments required to be made on October 31st
of each year (although any accrued interest can be paid before such time without
penalty). The note payable is secured by the Company's assets.
On April 30, 2022, the Company and Mr. Gilbert entered into a Ninth Debt
Replacement Agreement, effective as of March 15, 2022, pursuant to which the
Company cancelled the Eighth Gilbert Note and issued Mr. Gilbert a new
promissory note (the "Ninth Gilbert Note") in the amount of $11,692,000, which
represented the total amount due and owing under the Eighth Gilbert Note as of
January 26, 2022. Under the terms of the Ninth Gilbert Note, the maturity date
of the loan remains November 1, 2023, and the annual interest rate remained
9.75%, with annual interest payments required to be made on October 31st of each
year (although any accrued interest can be paid before such time without
penalty). The note payable is secured by the Company's assets.
On July 31, 2022, the Company and Mr. Gilbert entered into a Tenth Debt
Replacement Agreement, effective as of May 1, 2022, pursuant to which the
Company cancelled the Ninth Gilbert Note and issued Mr. Gilbert a new promissory
note (the "Tenth Gilbert Note") in the amount of $12,492,000, which represented
the total amount due and owing under the Ninth Gilbert Note plus additional
borrowings during the three months ended July 31, 2022. Under the terms of the
Tenth Gilbert Note, the maturity date of the loan remains November 1, 2023, and
the annual interest rate remained 9.75%, with annual interest payments required
to be made on October 31st of each year (although any accrued interest can be
paid before such time without penalty). The note payable is secured by the
Company's assets.
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During the first nine months of fiscal 2022, the Company did not make any
payments to Mr. Gilbert for interest accrued under the Seventh Gilbert Note, the
Eighth Gilbert Note, and the Ninth Gilbert Note through July 31, 2022. The total
amount of accrued interest due was $833,000, which amount is included in accrued
expenses and other current liabilities at July 31, 2022. During the nine months
ended July 31, 2021, the Company paid Mr. Gilbert interest accrued on the Sixth
Gilbert Note in the total amount of $791,000. During the nine-month period ended
July 31, 2022, Mr. Gilbert made additional loans to the Company under the Tenth
Gilbert Note in the amount of $1,800,000. Mr. Gilbert did not loan the Company
any additional funds during the nine-month period ended July 31, 2021.
Management is addressing the Company's working capital deficiency by
aggressively marketing the Company's 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 the
continued development of its existing suite of software products and
professional services, which address the wide array of needs of the aviation
industry, will continue to lead to increased growth in the Company's
customer-base and subscription-based revenues. However, there are no assurances
that such growth will be achieved.
The Company has evaluated its financial position as of July 31, 2022, including
an operating loss of $2,461,000 for the nine months ended July 31, 2022, a
working capital deficit of $940,000 (excluding deferred revenues) and
shareholders' equity deficit of $14,083,000 as of July 31, 2022, and has
requested and received a commitment from Mr. Gilbert, dated September 12, 2022,
that if the Company, at any time, is unable to meet its obligations through
September 13, 2023, Mr. Gilbert will provide the Company with the necessary
continuing financial support to meet such obligations. Such commitment for
financial support may be in the form of additional advances or loans to the
Company, in addition to the deferral of principal and/or interest payments due
on the existing loans, if deemed necessary.
The CARES Act, enacted in March 2020, as well as subsequently enacted
legislation, including the Rescue Act, have provided economic support for, among
others, businesses in the aviation industry. The Company has received proceeds
from the CARES Act grants, totaling approximately $6,498,000, as described in
more detail below.
1.The Company has been granted government funds of approximately $3.0 million in
the aggregate pursuant to the PSP1 for Air Carriers and Contractors under the
CARES Act. Pursuant to the Payroll Support Program Agreement entered into by the
Company with the U.S. Department of the Treasury in July 2020, the relief
payments must be used exclusively for the continuation of payment of certain
employee wages, salaries and benefits. The Company has used such relief payments
for such purpose. Pursuant to the terms of the Payroll Support Program
Agreement, the Company must, among other things, refrain from conducting
involuntary employee layoffs or furloughs or reducing employee rates of pay or
benefits through September 30, 2020, refrain from paying dividends or engaging
in share repurchases through September 30, 2021, and limit certain executive
compensation through March 24, 2022. Pursuant to the terms of the Payroll
Support Program Agreement, the Company must maintain certain internal controls
and records relating to the CARES Act funds and comply with certain reporting
requirements.
2.On February 12, 2021, the Company received an additional "top off"
disbursement of $875,000 under PSP1, subject to the terms and conditions
described above.
3.On March 5, 2021, the Company entered into a Payroll Support Program Extension
Agreement with the U.S. Department of the Treasury for an award the Company
received under the CARES Act Payroll Support Program ("PSP2"). The total amount
awarded to the Company under PSP2 was approximately $1,310,000. The relief
payments under PSP2 were received in two installments of approximately $655,000
each on March 8, 2021 and April 26, 2021. As with the original grant under the
PSP1, PSP2 proceeds must be used exclusively for the continuation of payment of
certain employee wages, salaries, and benefits. The Company has used such relief
payments for such purpose. Pursuant to the terms of the Payroll Support Program
Extension Agreement, the Company must, among other things, refrain from
conducting involuntary employee layoffs or furloughs or reducing employee rates
of pay or benefits through the later of March 31, 2021, or the date on which the
Company has expended all of the payroll support, refrain from paying dividends
or engaging in share repurchases through the later of March 31, 2022, or the
date on which the Company has expended all of the payroll support, and limit
certain executive compensation through October 1, 2022. Pursuant to the terms of
the Payroll Support Program Extension Agreement, the Company must also maintain
certain internal controls and records relating to the CARES Act funds and comply
with certain reporting requirements.
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4.On April 16, 2021, the Company entered into a Payroll Support Program 3
Agreement with the U.S. Department of the Treasury for an award the Company
received under the Rescue Act ("PSP3"). The total amount awarded to the Company
under PSP3 was approximately $1,310,000. The first installment, in the amount of
approximately $655,000, was received by the Company on April 29, 2021. The
second installment of approximately $655,000 was received by the Company on May
27, 2021. The Company does not anticipate any additional stimulus grant payments
under the Payroll Support Programs. As with the original grants under PSP1 and
PSP2, proceeds under PSP3 must be used exclusively for the continuation of
payment of certain employee wages, salaries, and benefits. The Company has used
such relief payments for such purpose. Pursuant to the terms of the Payroll
Support Program 3 Agreement, the Company must, among other things, refrain from
conducting involuntary employee layoffs or furloughs or reducing employee rates
of pay or benefits through the later of September 30, 2021, or the date on which
the Company has expended all of the payroll support, refrain from paying
dividends or engaging in share repurchases through September 30, 2022, and limit
certain executive compensation through April 1, 2023. Pursuant to the terms of
the Payroll Support Program 3 Agreement, the Company must also maintain certain
internal controls and records relating to the CARES Act funds and comply with
certain reporting requirements.
The Company expended the remaining balance of funds received under the various
Payroll Support Programs during the three months ended January 31, 2022. The
amount of unused stimulus funding as of July 31, 2022 and October 31, 2021 was
$0 and $856,000, respectively, and is shown in the balance sheet under current
liabilities as Accrued Liabilities - Stimulus Funding.
The Company believes that it has operated in compliance with all the provisions
and requirements under the CARES Act, the Rescue Act and the Payroll Support
Program Agreements up through and including the period ended July 31, 2022, and
fully intends to continue to comply with all such provisions and requirements.
Consequently, the Company has accounted for the advanced funds as grants not
requiring repayment and recognized such amounts in income as qualifying
salaries, wages and benefits have been incurred. The Company reduced its
compensation expense by $0 and $1,189,000 during the three months ended July 31,
2022 and July 31, 2021, respectively, and by $789,000 and $3,377,000 during the
nine months ended July 31, 2022 and July 31, 2021, respectively, as the CARES
Act grant proceeds received by the Company were used to fund eligible payroll
costs. If the Company does not continue to comply with the provisions of the
CARES Act, the Rescue Act and the Payroll Support Program Agreements, the
Company may be required to repay the government funds and also be subject to
other remedies.
Net cash used in operating activities was $3,153,000 for the nine months ended
July 31, 2022, as compared with net cash used of $3,165,000 for the nine months
ended July 31, 2021, and consisted of a net loss of $3,294,000, which includes
the use of federal stimulus credits of ($789,000), adjustments consisting of
depreciation and amortization expenses of $443,000 and stock-based compensation
expense of $252,000, a net increase in accounts payable and accrued expenses of
$791,000, a decrease in deferred revenue of ($406,000), an increase in accounts
receivable (including changes in doubtful accounts provisions) and prepaid
expenses and other current assets of ($103,000) and ($52,000), respectively, and
changes in operating lease assets and liabilities, net, of $5,000. During the
nine months ended July 31, 2022, the Company increased its borrowing under the
notes payable - related parties by $1,800,000. During the nine months ended July
31, 2021, the Company received $3,494,000 of the CARES Act grant proceeds.
The Company actively monitors the costs associated with supporting the business,
and continually seeks to identify and reduce any unnecessary costs as part of
its cost reduction initiatives, while strategically reinvesting back into the
business as part of its long-term plans. As described above, the Company has
taken aggressive steps to reduce its cost structure, including, but not limited
to, reductions in force, furloughs and salary reduction plans. The Company will
continue to monitor costs in relation to its revenue and will take further
actions as necessary consistent with the requirements of the CARES Act, the
Rescue Act and the Payment Support Program Agreements. The Company believes that
it has the ability to reduce operating costs further if, at any time, such
adjustments would be necessary to align the Company's financial condition,
liquidity, and capital resources with the ongoing uncertain outlook resulting
from the COVID-19 pandemic or otherwise. However, if the recovery of the air
transportation industry accelerates and revenue levels quickly return to
pre-COVID-19 levels, the levels of cost savings already taken or which may be
taken by the Company may not be practical or sustainable to support the
operations necessary for the increased level of revenue. 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 customers 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.
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Despite the financial and economic hardships that the air transportation
industry has experienced, which includes the Company's customers and air
transportation support vendors, in the ongoing COVID-19 environment, as well as
the industry changes in response to the COVID-19 pandemic, interest by potential
customers in the Company's information and decision support software products
and its professional services remains strong. As a result, the Company believes
that, subject to the factors described under Part II, Item 1A, "Risk Factors",
in this Quarterly Report on Form 10-Q, future revenues will increase on an
annualized basis. However, there are no guarantees that such annualized future
revenue increases will occur in the absence of funding under the CARES Act and
the Rescue Act. If revenues do not increase and the Company's cost-structure is
not adjusted accordingly, losses may occur. The extent of such profits or losses
will be dependent on sales volume achieved and the Company's ability to optimize
its cost structures. See Part II, Item 1A, "Risk Factors", in this Quarterly
Report on Form 10-Q.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
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, expenses, and related disclosures of
contingent assets and liabilities based upon accounting policies management has
implemented. These significant accounting policies are disclosed in Part II,
Item 8, "Notes to Consolidated Financial Statements - 1. Description of Business
and Significant Accounting Policies", in the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 2021. These policies and estimates
are critical to the Company's business operations and an 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 Part II,
Item 7, "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, 2021, as such policies affect the Company's reported financial
results. The actual impact of these factors may differ under different
assumptions or conditions.
Revenue Recognition
The Company recognizes revenue in accordance with Topic 606. The Company
accounts for a customer contract when both parties have approved the contract
and are committed to perform their respective obligations, each party's rights
can be identified, payment terms can be identified, the contract has commercial
substance, and it is probable the Company will collect substantially all of the
consideration to which it is entitled.
The Company derives revenue primarily from subscription-based, real-time
decision and solution information and professional services. Revenues are
recognized when control of these services is transferred to the customer, in an
amount that reflects the consideration the Company expects to be entitled to in
exchange for those services.
The Company determines revenue recognition through the following steps:
·Identification of the contract, or contracts, with a customer;
·Identification of the performance obligations in the contract;
·Determination of transaction price;
·Allocation of transaction price to performance obligations in the contract;
and
·Recognition of revenue when, or as, the Company satisfies a performance
obligation.
Subscription services revenue
Subscription services revenue is comprised of cloud-based subscription fees that
provide the customer the right to access the Company's software and receive
support and updates, if any, for a period of time. The Company has determined
such access represents a stand-ready service provided continually throughout the
contract term. As such, control and satisfaction of this stand-ready performance
obligation is deemed to occur over time. The Company's subscription contracts
include a fixed amount of consideration that is recognized ratably over the
non-cancellable contract term, beginning on the date that access is made
available to the customer. The passage of time is deemed to be the most faithful
depiction of the transfer of control of the services as the customer
simultaneously receives and consumes the benefit provided by the Company's
performance. Subscription contracts are generally one to three years in length,
billed either, monthly, quarterly or annually, typically in advance, which
coincides with the terms of the agreement. The Company's subscription contracts
do not have a significant financing component and customer invoices are
typically due within 30
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days. There is no significant variable consideration related to these
arrangements. Amounts that have been invoiced are recorded in accounts
receivable and in deferred revenue or revenue, depending on whether transfer of
control to customers has occurred.
Professional services revenue
Professional services primarily consist of value assessments and customer
training services. Payment for professional services is generally a fixed fee or
a fee based on time and materials. The obligation to provide professional
services is generally satisfied over time, with the customer simultaneously
receiving and consuming the benefits as the Company satisfies its performance
obligations. For professional services, revenue is recognized by measuring
progress toward the complete satisfaction of the Company's obligation. Progress
for services that are contracted for a fixed price is generally measured based
on hours incurred as a portion of total estimated hours, and as a practical
expedient, progress for services that are contracted for time and materials is
generally based on the amount the Company has the right to invoice. Professional
services contracts are generally one year or less in length, billed either in
advance, upon pre-defined milestones or as services are rendered, in accordance
with the terms of agreement. The Company's professional service contracts do not
have a significant financing component and customer invoices are typically due
within 30 days.
Material rights
Contracts with customers may include material rights which are also performance
obligations. Material rights primarily arise when the contract gives the
customer the right to renew subscription services at a discounted price in the
future. This may occur from time to time when the Company's contracts provide an
implicit discount as the customer pays a nonrefundable up-front fee in
connection with the initial services contract that it does not have to pay again
in order to renew the service. These non-refundable up-front fees are not
related to any promised service that the customer benefits other than providing
access to the subscription service. Revenue allocated to material rights is
recognized when the customer exercises the right over the estimated renewal
period of five years or when the right expires. If exercised by the customer,
the amount previously deferred for the material right is included in the
transaction price of the renewal contract and allocated to the services included
in that contract. If expired, revenue is recognized as subscription services
revenue in the period the right expired. If the up-front fees do not provide the
customer with a material right, then the amount is included in the transaction
price of the initial services contract and allocated to the performance
obligations in that contract.
Contracts with multiple performance obligations
Some of the Company's contracts with customers contain multiple distinct
performance obligations. For these contracts, the transaction price is allocated
to the separate performance obligations on a relative standalone selling price
basis. The standalone selling price reflects the price the Company would charge
for a specific service if it was sold separately in similar circumstances and to
similar customers. The Company maximizes the use of directly observable
transactions to determine the standalone selling prices for its performance
obligations. For subscription services, the Company separately determines the
standalone selling prices by type of solution and customer demographics. For
professional services, the Company separately determines standalone selling
price by type of service.
Other policies and judgments
The commissions that the Company pays for obtaining a contract with a customer
are conditional on future service provided by the employee. Therefore, since
these costs are not incremental solely based on obtaining a contract, the
Company does not defer any commission costs.
Some of the Company's contracts with its customers contain multiple performance
obligations subject to allocation of transaction prices. Some contracts contain
material rights, in the form of non-refundable up-front fees. Such fees are
amortized to income over an estimated average customer life. Differences in
actual average customer life compared with estimates may result in changes to
amounts amortized to income. In the case of professional services, revenue
recognition may be dependent on estimating the amount of time needed to complete
various tasks within a contract and estimating the actual amount of completion
at any point in time. Revisions to such estimates at any time may result in
adjustments to the amounts of revenue recognized.
Leases
The Company accounts for leases under the guidance of Topic 842, requiring the
recognition of ROU assets and associated lease liabilities related to operating
leases. The accounting for finance leases under Topic 842 is consistent with the
prior accounting for capital leases. The Company elected not to apply the
measurement and recognition requirements of Topic 842 to short-term leases
(i.e., leases with a term of 12 months or less). Accordingly, short-term leases
will not be recorded as ROU assets or lease liabilities on the Company's
consolidated balance sheets, and the related lease payments will be recognized
in net earnings on a straight-line basis over the lease term.
The Company recognizes a lease liability and a related ROU asset at the
commencement date for leases on its consolidated balance sheet, excluding
short-term leases as noted above. The lease liability is equal to the present
value of unpaid lease payments over the remaining lease term. The Company's
lease term at the commencement date may reflect options to extend or terminate
the lease when
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it is reasonably certain that such options will be exercised. To determine the
present value of the lease liability, the Company uses an incremental borrowing
rate, which is defined as the rate of interest that the Company would have to
pay to borrow (on a collateralized basis over a similar term) an amount equal to
the lease payments in similar economic environments. The ROU asset is based on
the corresponding lease liability adjusted for certain costs such as initial
direct costs, prepaid lease payments and lease incentives received. Both
operating and finance lease ROU assets are reviewed for impairment, consistent
with other long-lived assets, whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. After a ROU asset is
impaired, any remaining balance of the ROU asset is amortized on a straight-line
basis over the shorter of the remaining lease term or the estimated useful life.
After the lease commencement date, the Company evaluates lease modifications, if
any, that could result in a change in the accounting for leases. For a lease
modification, an evaluation is performed to determine if it should be treated as
either a separate lease or a change in the accounting of an existing lease. In
addition, significant changes in events or circumstances within the Company's
control are assessed to determine whether a change in the accounting for leases
is required.
Certain of the Company's leases provide for variable lease payments for the
right to use an underlying asset that vary due to changes in facts and
circumstances occurring after the commencement date, other than the passage of
time. Variable lease payments that are dependent on an index or rate (e.g.,
Consumer Price Index) are included in the initial measurement of the lease
liability, the initial measurement of the ROU asset, and the lease
classification test based on the index or rate as of the commencement date. Any
changes from the commencement date estimation of the index- and rate-based
variable payments are expensed as incurred in the period of the change. Variable
lease payments that are not known at the commencement date and are determinable
based on the performance or use of the underlying asset, are not included in the
initial measurement of the lease liability or the ROU asset, but instead are
expensed as incurred. The Company's variable lease payments primarily include
common area maintenance and real estate taxes.
As of July 31, 2022, the Company had operating leases primarily for offices and
its now-decommissioned PASSUR and SMLAT systems, with remaining terms of
approximately two months to 4.years. The Company's office lease contracts
include options to extend the leases for up to five years. As of July 31, 2022,
the Company did not have any finance leases or leases that had not yet commenced
as of such date. Effective as of September 1, 2021, the Company relocated its
office within Orlando, Florida, under the terms of a new 64-month lease.
Accounting for Federal Payroll Support Program ("PSP") Funds
The PSP funds received under the CARES Act and the Rescue Act during fiscal
years 2020 and 2021 are accounted for as grants not requiring repayment. The
Company recognizes such amounts received in income as qualifying salaries, wages
and benefits are incurred. As described above, the PSP funds advanced are
conditioned upon the Company complying with certain provisions and requirements
included in the Payroll Support Program Agreements. If the Company does not
comply with the provisions and requirements therein and under the CARES Act and
the Rescue Act, the PSP funds advanced would be subject to repayment. The
Company believes that it is in compliance with all applicable provisions and
requirements under the Payroll Support Program Agreements and the CARES Act and
the Rescue Act for the fiscal years 2022, 2021 and 2020.
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