PASSUR AEROSPACE, INC. Results of Operations
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
Overview
The Company provides a complete set of integrated, collaborative tools to allow airlines, airports, and air navigation service providers to better predict, prioritize, prevent, and recover from inevitable unexpected disruptions. These disruptions have long been seen as the cost of doing business in the industry, which we have proven can be mitigated, in part, through the integrated use of our software.
As such, we provide digital solutions to the global travel industry and help customers improve punctuality, optimize turn times and gate utilization, ensure schedule integrity (e.g., passenger connections), improve block-time performance, and reduce fuel burn/emissions.
The Company provides its solutions to the largest airlines and airports in the
US. Currently over 60% of all flights in the US are, in some form, managed by
the PASSUR software. Additionally, we provide our proven, established
capabilities to the global airline and airport industry, with solutions now
implemented in
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, among others.
Several independent studies have estimated the annual direct costs of such
inefficiencies to airlines in
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.
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The Company's revenues are generated by selling: (1) subscription-based real-time decision and solutions information and (2) professional services.
The Company's major achievements during fiscal year 2019 are summarized below:
1. Launched PASSUR's new digital platform, Ariva™ - a new generation of the
PASSUR decision support platform, powered by a number of predictive
technologies including Machine Learning, that enables customers to greatly
increase the efficiency enhancing and cost saving operational and customer
service benefits provided by PASSUR
Ariva is the next generation of the PASSUR platform, enabling customers to better predict, prevent, and manage disruptions in the air and on the ground - allowing them to be even more proactive as a result of advance intelligence. Ariva provides a unified solution for proactively managing decisions that have a direct impact on key objectives such as On Time Performance (OTP), customer satisfaction, aircraft/gate utilization and schedule/block performance, among others.
This new cloud-based platform is a result of a multi-year design and development process involving a collaboration with PASSUR, its customers, and outside consultants.
Ariva is a single, common operating platform, providing customers with new tools to help them work towards optimizing their flight operations, while enhancing the customer experience. It is designed to be available to all internal stakeholders, while also supporting collaboration between airlines, airports, air navigation service providers (ANSPs), and others, creating a common vehicle programmed aviation stakeholders to drive greater efficiencies through information exchange and shared workflow.
2. Continued expansion into international markets: Two New Latin American
airlines contracted for PASSUR digial technology solutions and professional
services
Aeromexico contracted for PASSUR'S integrated suite of traffic management
solutions - focusing on hub optimization, operational resilience, and on time
performance to support Aeromexico's growth plans. Aeromexico's primary
objectives are to increase the capacity of
PASSUR is implementing many of the core elements of its Ariva platform, adapted
from its original US configuration, for customers in
Avianca contracted for a consulting study to help them enhance network
operational excellence, with a focus on its
PASSUR subject matter experts from the company's Business Intelligence and Solution Architect teams focused on (1) assessing constraints, inefficiencies, and challenges in the current Traffic Flow Management environment, and in related operational areas; (2) identifying opportunities to realize early improvements; and (3) identifying opportunities where digital technology can be used to achieve objectives like On-Time Performance, asset/aircraft utilization, capacity growth, hub optimization, completion factor, and disruption mitigation/recovery.
3. Expanded US and international deployments of PASSUR's Disruption Management
Platform which is designed to reduce costly delays and cancellations, and
accelerate recovery to normal operations.
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RDM is a major component of PASSUR's Disruption Management Platform. It includes
a coordination and information exchange module that aggregates data about the
status, and operational intent of all key stakeholders - including airport
operations, airlines, Air Navigation Service Providers (e.g.,
The inaugural customer for RDM was
4. Released its next-generation flight trajectory prediction solution to the
Global Market
PASSUR introduced the latest version of its unique flight trajectory solution
capability, powered by a number of predictive technologies including Machine
Learning, designed to optimize airline and airport systems and processes that
depend on accurate trajectories. PASSUR's trajectory solutions are now deployed
in the US,
• Increasing On-Time Performance/Punctuality (without increasing block-time) • Helping to ensure all aircraft are met at the gate on-time • Enhancing passenger protection programs (USA and Canada Tarmac Delay Rules;
European EU261 rules)
• Ensuring optimal use of all gate resources for faster turn times/aircraft
utilization
• Prioritizing flights for on-time connections
• Increasing capacity at congested/delayed airports using the same
infrastructure
• Reducing fuel burn (shorter taxi times, fewer diversions) and corresponding
CO2 emissions
Recent noteworthy achievements include:
• A 12%-point OTP improvement using PASSUR technology in six months at an
airline customer:
• PASSUR's diagnostic, data and digital solutions also helped an airline
achieve block-time gains worth $9MM/year
• Today, 63% of daily scheduled commercial flights in the US use PASSUR
Flight Trajectory Prediction technology
• 125+ airlines worldwide now participate in PASSUR's global collaboration
platform
5. Two additional airlines deployed or increased their use of PASSURs flight
trajectory prediction solutions:
• A top 5 US airline expanded its integration of PASSUR's flight trajectory
prediction technology, upgrading to the newest, advanced version for its
entire US domestic market. This version increases the accuracy and
prediction horizon to pre-departure, through the turn at the next
destination, and continuing to the following flight leg. It can also
forecast whether a flight will achieve its minimum turn time at the next
destination.
• A major international airline deployed PASSUR's latest flight trajectory
prediction technology for all its flights to/from its largest hub. This
deployment is the first outside the US, and reflects PASSUR's major
commitment to international markets.
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
1) Continue developing decision support solutions built on business
intelligence, predictive analytics, and web-dashboard technology;
2) Continue integrating multiple additional industry data sets into its
aviation database, including data from a variety of additional aircraft,
airspace, and ground surveillance sources, to help ensure that PASSUR is
the primary choice for data integration and management for large aviation
organizations;
3) Continue extending the reach of the PASSUR Network, which provides the
proprietary backbone for many of the Company's solutions; and
4) Continue developing the Company's professional service capabilities, in
order to make sure that its solutions can be fully implemented in its
customers' work environments, with minimal demand on customers' internal
resources.
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PASSUR Network
The Company installed one Company owned Surface Multilateration ("SMLAT") Network System and one PASSUR system (installations include systems shipped in the previous fiscal year), and did not ship any Company-owned PASSUR systems during fiscal year 2019. The shipped and installed PASSUR and SMLAT Systems are capitalized as part of the Company-owned PASSUR Network. The Company will continue to expand the PASSUR Network by shipping and installing additional PASSUR and SMLAT Systems throughout fiscal year 2020 and beyond. The Company will continue to market the business intelligence, predictive analytics, as well as decision support applications and solutions derived from the PASSUR Network, directly to the aviation industry and organizations that serve, or are served by, the aviation industry. There were over 180 Company-owned PASSUR Systems located at airports worldwide at the end of fiscal year 2019. Back up PASSUR Systems have been installed at major customer locations.
Revenues
Management concentrates its efforts on the sale of business intelligence, predictive analytics, and decision support product applications, utilizing data primarily derived from the PASSUR Network. Such efforts include the continued development of existing products, new product offerings and to a lesser extent, professional services.
In fiscal year 2019, total revenues increased
The increase in subscription revenue of
The Company is engaged in ongoing discussions with two of its customers about the possible renewal of certain existing contracts that expire during fiscal year 2020. If these contracts are not renewed in full or in part, and not replaced by other revenue, there would be a material impact on the Company's revenues.
The decrease in consulting revenue of
The Company continues to enhance its wide selection of products, developing and deploying new software applications and solutions to better address customers' needs, all of which are easily delivered through web-based applications or as stand-alone professional services.
Cost of Revenues
Costs associated with subscription and maintenance revenues consist primarily of direct labor, depreciation of PASSUR and SMLAT Network Systems, amortization of capitalized software development costs, communication costs, data feeds, travel and entertainment, and consulting fees. Also included in cost of revenues are costs associated with upgrades to PASSUR and SMLAT Systems necessary to make such systems compatible with new software applications, as well as the ordinary repair and maintenance of existing PASSUR and SMLAT Systems. Additionally, cost of revenues in each reporting period is impacted by: (1) the number of PASSUR and SMLAT System units added to the PASSUR Network, which includes the production, shipment, and installation of these assets (currently largely installed by unaffiliated outside contractors), which are capitalized to the PASSUR Network; and (2) capitalized costs associated with software development and data center projects; and (3) data center projects, (all referred to as "Capitalized Assets"). The labor and fringe benefit costs of Company employees involved in creating Capitalized Assets are capitalized, rather than expensed, and amortized, usually over five or seven years, as determined by their projected useful life. The Company does not break down its costs by product.
Cost of revenues decreased
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Exclusive of the increases in reserves and impairment charge taken in fiscal
year 2018, cost of revenues in fiscal year 2019 decreased
Finally, as we continue to release product enhancements/new versions to its existing product offerings, and new product offerings, our amortization expenses associated with the historical software capitalization is anticipated to increase. As a result, we anticipate that our software capitalization and amortization expense, when netted, will not have a significant impact on our financial results.
Costs of revenues was 56% of revenue in fiscal year 2019 and 71% in fiscal year 2018 (and excluding asset reserve and impairment charges, 59% in fiscal year 2018).
Research and Development
The Company's research and development efforts include activities associated with new product development, as well as the enhancement and improvement of the Company's existing software, and information products.
Research and development expenses decreased
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. There were no customer-sponsored research and development activities during fiscal years 2019 and 2018. Research and development expenses are funded by current operations.
Selling, General, and Administrative
Selling, general, and administrative expenses increased
Loss from Operations
Loss from operations decreased
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Interest Expense -
Interest expense - related party increased
Loss before Income Taxes
Loss before taxes decreased
Income Taxes
The Company's income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect the Company's best estimate of current and future taxes to be paid. The Company's provision for income taxes in each fiscal year consists of federal and state taxes.
For the fiscal year ended
For the fiscal year ended
Net Loss
The Company had a net loss of
Impact of Inflation
In the opinion of management, inflation has not had a material effect on the operations of the Company including selling prices, capital expenditures, and operating expenses.
Liquidity and Capital Resources
The Company's current liabilities exceeded current assets, excluding deferred
revenue by
On
During the year ended
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Management is addressing the Company's working capital deficiency by aggressively marketing the Company's PASSUR 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 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.
Included in the notes payable balance at
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 on commercially reasonable terms. However,
the Company has received a commitment from
Net cash provided by operating activities was
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. 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
Interest by potential customers in the Company's information and decision support software products obtained from PASSUR Network Systems and other sources and its professional services remains strong. As a result, the Company believes that future revenues will increase on an annualized basis. However, there are no guarantees that such annualized future revenue increases will occur. 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.
Off-Balance Sheet Arrangements
None.
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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
Revenue Recognition
As discussed further in Note (1) Description of Business and Significant
Accounting Policies, to the Company's consolidated financial statements, the
Company recognizes revenue in accordance with the
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.
The Company recognized revenue for the fiscal year ended
A. Nature of performance obligations
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-cancelable 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 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.
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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, which coincides with the terms of the 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 from 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 services.
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.
Capitalized Software Development Costs
As discussed further in Note (1) Description of Business and Significant
Accounting Policies, to the Company's consolidated financial statements, the
Company capitalizes costs related to the development of internal use software in
accordance with authoritative guidance issued by the FASB on internal-use
software, ASC 350-40, "
As of
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Impairment of Long-Lived Assets
As discussed further in Note (1) Description of Business and Significant Accounting Policies, to the Company's consolidated financial statements, the Company follows the provisions of FASB ASC 360-10, "Impairment and Disposal of 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.
All of the Company's capitalized assets are recorded at cost (which may also include salaries incurred during production and/or development) and depreciated and/or amortized over the asset's estimated useful life for financial statement purposes. The estimated useful life represents the projected period of time that the asset will be productively employed by the Company and is determined by management based on many factors, including historical experience with similar assets, technological life cycles, and industry standards for similar assets. Circumstances and events relating to these assets are monitored to ensure that changes in asset lives or impairments (see "Impairment of Long-Lived Assets" above) are identified and prospective depreciation or impairment expense is adjusted accordingly.
The Company's long-lived assets, which include the PASSUR Network and Property
and equipment, totaled
At each reporting period, management evaluates the carrying values of the
Company's assets. The evaluation considers the undiscounted cash flows generated
from current contractual revenue sources and the anticipated forecast revenue
derived from each asset. The Company then evaluates these revenues on an overall
basis to determine if any impairment issues exist. During fiscal year 2018, the
Company recorded approximately
Depreciation and Amortization
The PASSUR Network, net, Capitalized software development costs, net, and
Property and equipment, net totaled
Depreciation and amortization are provided on the straight-line basis over the estimated useful lives of the assets, as follows:
PASSUR Network 5 to 7 years Capitalized software development costs 5 years Property and equipment 3 to 10 years
The PASSUR Network is comprised of PASSUR and SMLAT Systems, which include the direct production, shipping, and installation costs incurred for each PASSUR and SMLAT System, which are recorded at cost, net of accumulated depreciation. Depreciation is charged to cost of revenues and is recorded using the straight-line method over the estimated useful life of the asset, which is estimated at five years for SMLAT Systems and seven years for PASSUR Systems. PASSUR and SMLAT Systems which are not installed, raw materials, work-in-process, and finished goods components are carried at cost and not depreciated until installed.
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Total depreciation and amortization expense was
Stock-Based Compensation
As discussed further in Note (9) Stock-Based Compensation to the Company's
consolidated financial statements, the Company accounts for share-based awards
in accordance with the authoritative guidance issued by the FASB on stock
compensation, FASB ASC 718, "Compensation-Stock Compensation," which requires
measurement of compensation cost for all stock-based awards at fair value on
date of grant, and recognition of stock-based compensation expense over the
service period for awards expected to vest. The fair value of stock options was
determined using the Black-Scholes valuation model to compute the estimated fair
value of share-based compensation expense. The Black-Scholes valuation model
includes assumptions regarding dividend yields, expected volatility, expected
option term and risk-free interest rates. The assumptions used in computing the
fair value of share-based compensation expense reflect the Company's best
estimates, but involve uncertainties relating to market and other conditions,
many of which are outside of the Company's control. Additionally, the Company
accounts for forfeitures when they occur. Stock-based compensation expense was
Income Taxes
At
The Company follows ASC 740, "Income Taxes," where tax benefits are recognized
only for tax positions that are more likely than not to be sustained upon
examination by tax authorities. The amount recognized is measured as the largest
amount of benefit that is greater than 50% likely to be realized upon ultimate
settlement. Unrecognized tax benefits are tax benefits claimed in tax returns
that do not meet these recognition and measurement standards. At
Recent Accounting Pronouncements Adopted
In
On
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In
In
In
Accounting Pronouncements Issued but not yet Adopted
In
The Company will adopt the new lease accounting standard as of
The Company anticipates that the adoption of the new lease accounting standard
will result in the recognition of approximately
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