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 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, expenses, and related disclosures of contingent
assets and liabilities based upon accounting policies management has
implemented. The Company has identified the policies and estimates below as
critical to its 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, where such
policies affect its reported financial results. The actual impact of these
factors may differ under different assumptions or conditions.
Impact of the COVID-19 Pandemic
During the year ended October 31, 2020, the aviation and travel industries,
which are served by the Company and its products, were severely affected by the
COVID-19 outbreak. Travel restrictions and other measures imposed by most
jurisdictions resulted in a precipitous decline in demand for air travel, and
our customers in the aviation and travel industries have drastically reduced
their capacity and operations in 2020, as compared to 2019, which in turn has
resulted in a significant reduction of demand for our products and services. As
a result, the Company has faced increased economic pressures and experienced a
significant loss of revenue during the year ended October 31, 2020, which the
Company anticipates will continue into fiscal year 2021. The severity of the
downturn 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, the actions taken to contain the pandemic or to mitigate its
impact, the discovery and public distribution of treatments and vaccines for the
disease (including its variants), the length of time before the public feels
safe to travel, and the economic stimulus programs available to affected
industries and consumers. All of these variables will impact how quickly the
industry can recover and may affect the revenue and earnings levels of the
Company.
The CARES Act was enacted in March 2020 and provides economic support for, among
others, businesses in the airline industry. The Company has been granted
government funds totaling $3.0 million pursuant to the Payroll Support Program
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, the Company is required to, among other things, refrain from
conducting involuntary employee layoffs or furloughs, reducing employee rates of
pay or benefits through September 30, 2020, and paying dividends or engaging in
share repurchases through September 30, 2021. The Company is also required to
limit certain executive compensation through March 24, 2022, maintain certain
internal controls and records relating to the CARES Act funds and comply with
certain reporting requirements. The Company believes that it has operated in
compliance with all the provisions and requirements under the CARES Act during
the year ended October 31, 2020 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. During
fiscal 2020, the Company reduced its compensation expense by $1,130,000, as a
portion of the CARES Act grant proceeds received by the Company was used to fund
eligible payroll costs. If the Company does not comply with the provisions of
the CARES Act and the Payroll Support Program Agreement, the Company may be
required to repay the government funds and also be subject to other remedies.
Additionally, provisions under the CARES Act allow the Company to defer payment
of the employer's share of social security taxes incurred from March of 2020
through December 31, 2020. Under the terms of the legislation, 50% of the
deferred payroll taxes would be due and payable by December 31, 2021, and the
remaining 50% would be due and payable by December 31, 2022. The amount of
payroll taxes subject to deferred payment is approximately $111,000.
The Company has taken several actions beginning in April 2020 and prior to
receiving CARES Act funds, to mitigate the effects of the COVID-19 pandemic on
its business, as outlined below:
·Eliminated or furloughed approximately one-third of then-existing positions;
·Instituted a temporary pay reduction plan affecting essentially all of the
then-remaining employees;
·Suspended the use of outside consultants;
·Decommissioned the PASSUR Network to reduce data feed and telecom costs; and
·Reduced and/or eliminated other operating expenses that were not critical to
the short-term outlook of the Company.
The effects of the actions above were reflected in lower costs of revenues,
research and development and administrative costs in fiscal 2020, compared to
fiscal 2019, and the Company anticipates that such cost savings will continue
into fiscal 2021. 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.
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Overview
PASSUR is a global leader in digital operational excellence. The Company's
trusted platform, combined with professional services, help customers reduce
operational complexity and lower operating expenses.
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.
The Company provides its solutions to airlines and airports in the U.S., as well
as airlines and airports in Canada and Latin America. The global market presents
an opportunity to network more customers in a broader market.
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's revenues are generated by selling: (1) subscription-based
real-time decision and information solutions; and (2) professional services.
The Company's major achievements during fiscal year 2020 are summarized below:
PASSUR's resilience was notable in the pandemic-tinted year of 2020. Superior
delivery, product strength and commercial flexibility each contributed to a high
level of client retention and new client development. The Company believes that
the firm is well positioned to participate in the industry renaissance in 2021.
Even in such trying economic times, this was an exceptional year in the
development of the ARiVA Platform and PASSUR capabilities. In 2020 PASSUR:
·Pivoted from hardware driven solutions (MLATs, PASSUR radars) to data driven
decision support solutions;
·Transitioned from deploying PASSUR-only solutions to integrated value-add
solutions;
·Secured global terrestrial aircraft surveillance data partnership with Flight
Radar 24;
·Secured global satellite aircraft surveillance data partnership with Aireon;
·Secured global satellite aircraft surveillance data partnership with OAG; and
·Developed seven new products under our solutions platform (ARiVA) to deliver a
global unified operations monitoring, decision support platform.
Other Key 2020 Developments
Significant expansion of the ARiVA platform's capabilities and user community.
The ARiVA platform enables customers to better predict, prevent, and manage
disruptions in the air and on the ground, providing relevant and actionable
predictive intelligence and workflow tooling. A single, common operating
platform, ARiVA is designed for availability to all internal stakeholders, while
also supporting collaboration between airlines, airports, air navigation service
providers (ANSPs), and others. The result is a common vehicle for aviation
stakeholders to drive greater efficiencies through information exchange and
shared workflow.
The evolution of ARiVA in 2020 reflects the continued development of a suite of
defined products reflecting different levels of market need and value delivered.
The suite of ARiVA products launched includes:
ARiVA TEMPO Dynamic gate-to-gate global flight tracking.
ARiVA AWARE Continuous forecasts and alerts to achieve the most efficient
execution of the daily operation.
ARiVA WORKFLOW Integrated communication and collaboration on shared workflow
platform, including Air Traffic Flow Management (ATFM) and Airport
Collaborative Decision Making (ACDM) to maximize use of existing
assets and capacity.
ARiVA INTEL Data, reporting, and analytical tools that enable insights into
operational performance to drive continuous improvement.
ARiVA BIZAV A complete set of tools to help forecast and manage the operation.
ARiVA LFM Landing Fee Management ensures all landing fees and related
charges are being fully and accurately captured and billed.
ARiVA STRATEGY Integrated Operations Strategy and Planning - Designing the best
operational foundation to execute from.
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Growth in airports and business aviation
PASSUR was successful in retaining all key airport customers in 2020 while
adding several new airports to the PASSUR network. These results were achieved
in the midst of unparalleled financial challenges driven by the COVID-19
pandemic. The ARiVA platform, and PASSUR's ability to tailor commercial and
technical solutions to reflect clients' unique circumstances, were primary
drivers.
Additionally, the business aviation market showed signs of a faster recovery
than commercial aviation, which yielded a number of new customer agreements with
Fixed Base Operators (FBOs) of various sizes. This trend is expected to continue
in FY21.
Implementation of ARiVA WORKFLOW at Aeromexico
ARiVA WORKFLOW is one of the ARiVA products launched in 2020, with Aeromexico as
the launch customer. Aeromexico deployed several core ARiVA WORKFLOW
capabilities to optimize the flow of traffic on the airfield, in order to ensure
reduced fuel burn, schedule fidelity, and optimal passenger experience. All
PASSUR solutions being implemented at Aeromexico were migrated in 2020 to the
ARiVA platform, sunsetting all PASSUR legacy programs in use at the airline.
Launch of PASSUR Partnership Program
PASSUR's partnership program was launched with the overriding objective of
adding value for our customers by forming alliances with other companies and
organizations that can enhance or accelerate the capabilities and benefits we
deliver. We look for partnerships that add value to our core technology stack,
solutions architecture and delivery, market responsiveness, and commercial
innovation.
Partnership with Aireon
PASSUR and Aireon concluded an agreement that will integrate Aireon's global,
gate-to-gate, space-based ADS-B dataset, into PASSUR's ARiVA platform. This
integration will be the first to feature Aireon's air traffic service (ATS)
surveillance-quality data feed and include high-fidelity, low latency airport
surface surveillance and global International Civil Aviation Organization
Global Aeronautical Distress Safety System (ICAO GADSS) compliant flight
tracking on PASSUR's ARiVA platform - making ARiVA the first platform to offer
global, space-based, operational-quality surface surveillance and collaborative
airfield management solutions to any airline, airport, or business aviation
service provider in the world. The partnership will also power PASSUR's
predictive arrival times (ETA) and constraint forecasting services, in order to
deliver advanced disruption management capabilities.
FlightRadar24
ARiVA is powered by FlightRadar24 (FR24) Commercial Services, the world's
largest independent terrestrial ADS-B receiver network. FR24 data is fused in
ARiVA with multiple live data sources including Aireon space-based ADS-B;
surface radar; airline schedules and flight plans and event data from ANSPs and
airlines; airport status data; and weather data - to create a single truth about
the flight track, the airport, and the airspace. Integration of FR24
surveillance into ARiVA enables PASSUR to offer the most comprehensive global
flight tracking, predictive services, disruption forecasting and management, and
BI reporting.
OAG
ARiVA is powered by OAG's live Flight Status data. This information is fused
with data from terrestrial and satellite ADS-B sources; flight plans; event data
from ANSPs, airports, and carriers; and airport weather data, to build the most
authoritative flight, airport, and airspace data objects in the world.
Expansion of IATA Operations Coordination Platform for COVID and Global
Disruption Management Requirements
In April 2020, PASSUR announced an agreement to develop a global portal to
assist the airline industry in managing the severe disruption caused by
COVID-19. The ITOP Global Contingency Portal (GCP) provides real-time sharing of
critical aviation operational information around the world.
ITOP GCP is modeled on the existing IATA Tactical Operations Portal (ITOP)
solution, developed and maintained by PASSUR for IATA North America operations
support desk, co-located at the FAA Air Traffic Command and System Control
Center (ATCSCC). ITOP GCP is a collaborative information and advisory service
used to notify aviation stakeholders globally about critical updates, news,
directives, and developments related to COVID-19.
In July 2020, PASSUR concluded an agreement to implement an enhanced ITOP-GCP
where data and events related to disruptions globally will be managed by IATA
stakeholders using the ARiVA platform - Americas, Asia Pacific (North Asia,
South Asia, ASEAN, SW Pacific), Europe, Middle East, and Africa. ITOP Global
will be a single platform for collaborative coordination of global
contingencies, providing IATA members and affiliated stakeholders with the tools
needed to: manage contingencies for any region in the world based on ICAO
standards for contingency event management; collaborate in real time with
aviation stakeholders in secure channels; and receive IATA real time operations
support for all global regions, tailored to users' specific needs and
geographical areas of focus.
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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.
PASSUR Network
Certain of PASSUR's services have traditionally relied on our proprietary
network of sensors for aircraft surveillance - the PASSUR and Surface
Multilateration ("SMLAT") Network Systems (both collectively, the "PASSUR
Network"). During the second quarter of fiscal year 2020, in light of the FAA's
mandate for ADS-B equipage on aircrafts operating in most U.S. airspace,
effective January 2020, and parallel adoption of ADS-B requirements in much of
the world, the Company performed a comprehensive review of its data feeds,
specifically those associated with the PASSUR Network units, and external ADS-B
data feeds to determine if these external data feeds provide sufficient
redundant data as to that generated from the existing PASSUR installations. The
Company determined that such services could be powered by a combination of FAA
data plus commercial ADS-B aggregator feeds and other data feeds available to
the Company, which would provide a more cost-effective solution and allow us to
focus more on value-added analytics, and less on sensor technology. In this
regard, the Company reviewed and decommissioned approximately half of its PASSUR
Network system assets during the second quarter of fiscal 2020. It is the
Company's intention to decommission all remaining PASSUR Network system assets
in fiscal 2021. As a result, during the year ended October 31, 2020, the
Company wrote off the carrying value applicable to the PASSUR Network systems of
approximately $3,565,000, and lease assets applicable to these PASSUR locations
of approximately $175,000 during the second quarter of fiscal 2020, which
amounts were included as an impairment charge for the year ended October 31,
2020. The write-off amount included PASSUR System and SMLAT System assets as
well as inventory of finished and spare parts.
Revenues
Management concentrates its efforts on the sale of business intelligence,
predictive analytics, and decision support product applications, utilizing data
primarily derived from external sources and, to a lesser extent, the PASSUR
Network (which is currently in the process of being decommissioned, as described
above). 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 have been severely impacted by the COVID-19 outbreak
and the rapid decline in air travel. As a result, the Company experienced
downturns in its revenues for fiscal year 2020.
Although the Company's revenue is primarily subscription based, during fiscal
2020, several customers requested, and the Company agreed to, the suspension of
certain services to those customers, or the provision of services free of charge
during a specific period of time. Additionally, one customer requested extended
terms of payment, which request the Company also accepted. The Company believes
that these decisions were in the best interests of the Company as a partner to
the aviation industry and will benefit the Company in the longer term. The
Company continues to believe that its products and professional service
engagements are critical to the efficient operation of the air transportation
market.
In fiscal year 2020, total revenues decreased $3.5 million, or 23%, to
$11,529,000, as compared to $15,046,000 in fiscal year 2019. The decrease in
total revenues was primarily due to a decrease in subscription revenue of $3.8
million or 27%, which was partially offset by an increase in consulting and
other revenue of $283,000 to $593,000, as compared to fiscal year 2019.
The decrease in subscription revenue of $3.8 million was primarily due to
several expiring airline and airport contracts that were not renewed, which were
offset in part by new contracts for subscription services closed during fiscal
year 2020 and net incremental revenue recognized during both periods in fiscal
years 2019 and 2020 related to new contracts closed during fiscal year 2019.
As previously disclosed, the Company engaged in ongoing discussions with two of
its customers about the possible renewal of certain existing contracts which had
expired at various times from January 31, 2020 through May 31, 2020, but certain
parts of these contracts had been renewed on a short-term interim basis. These
contracts were not renewed in full or in part, which resulted in the loss of
potential revenue generated from these contracts of approximately $4,197,000 for
fiscal 2020, as compared to the full fiscal year of 2019. Additionally, the
Company agreed with one of its customers to a temporary suspension of billings
during the period from August 1, 2020 through October 31, 2020 as a result of
the COVID-19 pandemic. This reduced the Company's fourth quarter revenue by
approximately $513,000.
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The increase in consulting and other revenue of $283,000 to $593,000 for the
year ended October 31, 2020, as compared to $310,000 for the same period in
2019, was due to several new professional service agreements entered into in
fiscal 2020.
The Company continues to enhance its wide selection of products by developing
and deploying new software applications and solutions to better address
customers' needs, all of which are easily deliverable 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, amortization of previously capitalized software development costs,
communication costs, data feeds, travel and entertainment, and consulting fees.
Previously, cost of revenues in each reporting period was impacted by
capitalized costs associated with software development and data center projects,
costs associated with upgrades to PASSUR and SMLAT Systems necessary to make
such systems compatible with new software applications (all referred to as
"Capitalized Assets"), depreciation of PASSUR and SMLAT Systems as well as the
ordinary repair and maintenance of existing PASSUR and SMLAT Systems.
Additionally, cost of revenues in each previous reporting period was impacted by
the number of PASSUR and SMLAT System units added to the PASSUR Network, which
included the production, shipment, and installation of these assets (largely
installed by unaffiliated outside contractors), which had previously been
capitalized to the PASSUR Network. The labor and fringe benefit costs of the
Company employees involved in creating Capitalized Assets were capitalized,
rather than expensed, and amortized over three years, as determined by their
projected useful life. The Company did not capitalize any software development
costs, as well as network and data center costs subsequent to January 31, 2020.
Given business conditions in the aviation industry surrounding the
unprecedented COVID-19 pandemic, the Company's software efforts were
concentrated in the areas of maintenance of existing products.
As a result of the industry changes in response to the COVID-19 pandemic
(described in "Impact of the COVID-19 Pandemic," above), the corresponding
review conducted by the Company and the resultant write-offs taken during fiscal
2020, the Company anticipates that its level of capitalized software development
costs, including related amortization of such costs, will decrease in the
future.
Cost of revenues decreased $2,181,000, or 26%, to $6,187,000 for the year ended
October 31, 2020, as compared to $8,368,000 in fiscal year 2019. During fiscal
year 2020, cost of revenues decreased as a result of decreases in personnel
costs as well as reductions in depreciation and amortization expense and
consulting costs, which were offset in part by a decrease in capitalized
software development costs as a result of the Company not incurring any
capitalized software costs subsequent to January 31, 2020. In response to the
uncertainty surrounding the prospects of airlines and airports and the travel
industry for fiscal 2020 and beyond given the global COVID-19 pandemic, during
the second quarter of fiscal year 2020, the Company undertook a review of its
operating costs to more closely align those costs with its forecast for revenue.
Prior to receiving CARES Act financing, the Company realized cost savings
during fiscal 2020 from reductions in force, furloughs and temporary reductions
in salaries, combined with the continued reduction in the use of outside
development consultants. Also, as part of this review, the Company exited three
leased facilities and terminated the related lease agreements. For the year
ended October 31, 2020, the Company was able to use CARES Act financing to
offset its compensation expense by $473,000.
Costs of revenues was 54% of revenue in fiscal year 2020 and 56% in fiscal year
2019.
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 $218,000, or 39%, to $338,000 for
fiscal year 2020, as compared to $556,000 for fiscal year 2019. The decrease in
research and development was primarily attributable to a decrease in personnel
related costs as compared to the prior year, as a result of the reductions in
force and salary reduction programs discussed earlier. For the year ended
October 31, 2020, the Company was able to use CARES Act financing to offset its
compensation expense by $16,000.
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 2020 and 2019. Research and
development expenses are funded by current operations.
Selling, General, and Administrative
Selling, general, and administrative expenses decreased $2,787,000, or 30%, to
$6,467,000 for the year ended October 31, 2020, as compared to $9,254,000 in the
same period in 2019. The decrease was primarily due to decreases in personnel
related costs, professional and other consulting expenses, marketing and travel
costs. These decreases were the result of the Company's concerted efforts to
streamline its operations in line with the reduced level of revenue due to the
impact of the COVID-19 pandemic (as described above). For the year ended
October 31, 2020, the Company was able to use proceeds from the PSP grant of the
CARES Act to offset its compensation expense by $641,000. Also, as part of the
review of its operating costs described above, the Company exited three leased
facilities (during June and July 2020) and terminated the related lease
agreements and reduced the leased square footage at another location, reducing
rent
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expenses by approximately $62,000 as compared to fiscal 2019. Annualized rent
savings related to these undertakings represent approximately $311,000.
Impairment Charges
Certain of PASSUR's services have traditionally relied on our proprietary
network of sensors for aircraft surveillance. During the second quarter of 2020,
in light of the FAA's mandate for ADS-B equipage on aircrafts operating in most
U.S. airspace, effective January 2020, and parallel adoption of ADS-B
requirements in much of the world, the Company performed a comprehensive review
of its data feeds, specifically those associated with the PASSUR Network units
and external ADS-B data feeds to determine if these external data feeds provide
sufficient redundant data as to that generated from the existing PASSUR
installations. The Company determined that such services could be powered by a
combination of FAA data plus commercial ADS-B aggregator feeds and other date
feeds available to the Company, which would provide a more cost-effective
solution and allow the Company to focus more on value-added analytics and less
on sensor technology. In this regard, the Company reviewed and decommissioned
approximately half of the PASSUR Network system assets during the second quarter
of fiscal 2020. It is the Company's intention to decommission all remaining
PASSUR Network system assets during fiscal 2021. As a result, the Company wrote
off net assets applicable to the PASSUR Network systems of approximately
$3,565,000, and lease assets applicable to these PASSUR locations of
approximately $175,000 during the second quarter of fiscal 2020, which amounts
were included in the impairment charge for the year ended October 31, 2020. The
write-off amount included PASSUR System and SMLAT System assets as well as
inventory of finished and spare parts.
As a result of the FAA mandate and the corresponding review conducted by the
Company, which resulted in the commencement of the decommissioning of the PASSUR
Network, the Company anticipates that the costs of maintaining and operating
these systems, including depreciation and data feed costs, will decrease
materially in the future.
Additionally, during the second quarter of 2020, given the impact of the current
COVID-19 environment on customers, there was a sufficient amount of uncertainty
surrounding the ability of customers to continue to perform their contracts with
the Company and the Company's ability to generate revenue from such contracts.
In order to determine whether or not an impairment had occurred, we looked at
existing contracted revenue, adjusted for future uncertainties, and compared
those amounts with the net carrying value of the related software development
asset. Where the revenue amount was less than the net carrying value of the
software development asset, we noted an impairment. As a result of this
exercise, the Company wrote off previously capitalized software development
costs totaling approximately $6,134,000 during the second quarter of fiscal 2020
due to impairment, given the impact of the current COVID-19 environment on the
aviation industry and its customers, which amount was included in the impairment
charge for the year ended October 31, 2020.
During fiscal year 2020, the Company did not capitalize any software development
costs for any periods subsequent to January 31, 2020. As a result of the
industry changes in response to the COVID-19 pandemic, the corresponding review
conducted by the Company during the second quarter of 2020 and the resultant
write-offs, the Company anticipates that its level of capitalized software
development, along with related amortization of such costs, will decrease
materially in the future.
The total amount of these charges and write-offs are included as an impairment
charge for the year ended October 31, 2020 in the amount of $9,874,000.
Loss from Operations
Loss from operations for the year ended October 31, 2020 (inclusive of the
impact of the impairment charges recorded during the second quarter of 2020) was
$11,338,000, an increase of $8,206,000, or 262%, as compared to fiscal 2019.
Excluding the impact of the impairment charges of $9,874,000, the loss from
operations was $1,463,000, an improvement of $1,668,000, or 53%, from a loss of
$3,132,000 for the year ended October 31, 2019. The decrease in the loss from
operations (excluding the impairment charges) was primarily due to a decrease in
operating expenses of $5,185,000 or 29%, as compared to fiscal year 2019, which
was partially offset by a decrease in revenue of $3,517,000, or 23%. For the two
quarters ended July 31, 2020 and October 31, 2020, the Company had positive
income from operations. All of the previous six fiscal quarters had losses from
Operations.
Interest Expense - Related Party
Interest expense - related party for the year ended October 31, 2020 increased
$191,000, or 27%, as compared to the same period in 2019, due to the higher
principal balance on the note during fiscal year 2020.
Loss Before Income Taxes
Loss before income taxes for the year ended October 31, 2020 (including the
effect of the impairment charges of $9,874,000 recorded during the second
quarter of 2020), increased $8,419,000, or 219%, to $12,267,000, as compared to
the loss before income taxes of $3,848,000 for the fiscal year 2019. Excluding
the impairment charges, the loss before income taxes for the year ended October
31, 2020 was $2,393,000, representing an improvement of $1,455,000 from the loss
before income taxes for the year ended October 31, 2019. The improvement was
the result of the cost control measures put in place during fiscal 2020.
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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 October 31, 2020, the Company recorded an income tax
provision of $37,000 on a pre-tax loss of $12,267,000 (which includes the impact
of the impairment charges of $9,874,000), resulting in a 0.3% effective tax
rate. The difference between the effective rate and the U.S. federal statutory
rate of 21% primarily related to pre-tax losses for which no tax benefit has
been provided as the Company concluded that its deferred tax assets were not
realizable on a more-likely-than-not basis.
For the fiscal year ended October 31, 2019, the Company recorded an income tax
benefit of $10,000 on a pre-tax loss of $3,848,000, resulting in a (0.3%)
effective tax rate. The difference between the effective rate and the U.S.
federal statutory rate of 21% primarily related to pre-tax losses for which no
tax benefit has been provided as the Company concluded that its deferred tax
assets were not realizable on a more-likely-than-not basis.
Net Loss
The Company had a net loss of $12,304,000, or $1.60 per diluted share, for the
year ended October 31, 2020 (inclusive of the impact of the impairment charges
of $9,874,000 recorded during the second quarter of 2020), as compared to a net
loss of $3,837,000, or $0.50 per diluted share, for fiscal year 2019. Note that
the Company's income from operations for the quarter ended July 31, 2020, was
positive for the first time in six quarters. For the quarter ended October 31,
2020, the Company had a positive net income. All of the previous eight fiscal
quarters had net losses.
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 (excluding deferred revenue and certain CARES
Act grant proceeds), exceeded current assets by $738,000 as of October 31, 2020.
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, 2021, was $10,692,000 at October 31, 2020, which amount included
additional loans made by Mr. Gilbert in fiscal 2020 of $1,435,000, bringing the
principal balance owed to $9,585,000, plus capitalized accrued and unpaid
interest of $1,107,000. The capitalized interest included $200,000 incurred
during the fourth quarter of fiscal 2019 and all the fiscal 2020 interest of
$907,000. The Company's stockholders' equity had a deficit of $11,358,000 at
October 31, 2020. The Company had a net loss of $12,304,000 for the year ended
October 31, 2020 (inclusive of impairment charges of $9,874,000).
As of October 31, 2019, the total amount owed by the Company under a promissory
note issued by the Company to Mr. Gilbert on January 28, 2019 (the "Fifth
Gilbert Note") was $8,335,000, consisting of a principal of $8,135,000 and
interest of $200,000 accrued during the fourth quarter of fiscal year 2019. The
maturity date under the Fifth Gilbert Note was November 1, 2020, and the annual
interest rate was 9 ¾%, with annual interest payments required to be made on
October 31st of each year. The note payable was secured by the Company's assets.
On January 27, 2020, the Company and Mr. Gilbert entered into a Sixth Debt
Extension Agreement, effective as of January 27, 2020, pursuant to which the
Company cancelled the Fifth Gilbert Note and issued Mr. Gilbert a new promissory
note (the "Sixth Gilbert Note") in the amount of $9,071,000, consisting of a
principal of $8,670,000 (which included the principal previously outstanding
under the Fifth Gilbert Note and an additional amount of $535,000 loaned to the
Company by Mr. Gilbert during the period from October 31, 2019 and January 27,
2020) and unpaid interest of $401,000 accrued under the Fifth Gilbert Note
through January 27, 2020. Under the terms of the Sixth Gilbert Note, the Company
agreed to pay the unpaid interest of $401,000 accrued under the Fifth Gilbert
Note and included in the Sixth Gilbert Note, (as described above) at the time
and on the terms set forth in the Sixth Gilbert Note. Under the terms of the
Sixth Gilbert Note, the maturity date of the loan was extended to November 1,
2021, and the annual interest rate remained 9 ¾%, with annual interest payments
required to be made on October 31st of each year. The note payable was secured
by the Company's assets.
During the fiscal year ended October 31, 2020, the Company did not pay any
interest on the Sixth Gilbert Note. As of October 31, 2020, the aggregate
amount owed by the Company to Mr. Gilbert was $10,692,000, consisting of a
principal of $9,585,000 (which included the principal of $8,670,000 outstanding
under the Sixth Gilbert Note and an additional amount of $915,000 loaned to the
Company by Mr. Gilbert during the period from January 27, 2020 to October 31,
2020) and unpaid interest of $1,107,000 (which included unpaid interest of
$401,000 accrued under the Fifth Gilbert Note that was included in the Sixth
Gilbert Note and unpaid interest of $706,000 accrued under the Sixth Gilbert
Note through October 31, 2020). In December 2020, the Company made a payment in
the amount of $177,000 in respect of interest accrued under the Sixth Gilbert
Note during the 2021 fiscal year.
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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 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
(as described above) 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 is secured by the Company's assets.
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.
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 Mr. Gilbert, dated January 29, 2021,
that if the Company, at any time, is unable to meet its obligations through
January 30, 2022, Mr. Gilbert will provide the necessary continuing financial
support to the Company in order for the Company to meet such obligations. Such
commitment for financial support may be in the form of additional advances or
loans to the Company, in addition to the deferral of principal and/or interest
payments due on the existing loans, if deemed necessary.
The CARES Act was enacted in March 2020 and provided economic support for, among
others, businesses in the aviation industry. In July 2020, the Company entered
into an agreement with the U.S. Department of the Treasury to receive an
aggregate of $3,003,000 in emergency relief through the CARES Act Payroll
Support Program, which amounts were received in installments through September
2020. Pursuant to the Payroll Support Program Agreement, the relief payments
must be used exclusively for the continuation of payment of certain employee
wages, salaries and benefits. The relief payments are conditioned on the
Company's agreement to, among other things, refrain from conducting involuntary
employee layoffs or furloughs through September 30, 2020. Other conditions
include prohibitions on share repurchases and dividends through September 30,
2021, and certain limitations on executive compensation. The relief payments
were comprised of $3,003,000 in direct grants, received in three installments
from July 2020 through September 1, 2020.
Net cash used by operating activities was ($1,363,000) for the year ended
October 31, 2020, as compared to cash provided by operating activities of
$735,000 for the year ended October 31, 2019. Net cash used by operating
activities in the current fiscal year consisted of net loss of ($3,560,000),
after adjusting for the effect of the impairment charge of $9,874,000 and the
federal stimulus credits utilized of $1,130,000, depreciation and amortization
of $2,123,000 and stock-based compensation expense of $467,000, decreases in
deferred revenue of ($1,838,000), and an increase in accrued interest related
party of $907,000, with the balance of $538,000 consisting of changes in other
operating assets and liabilities, particularly a decrease in accounts receivable
of $376,000. The decrease in cash from operations in fiscal 2020 as compared
with 2019 was the result of lower levels of revenue experienced by the Company
as a result of the loss of several major airline customers during the year. Net
cash used in investing activities was $496,000 for the year ended October 31,
2020, which was expended for primarily for capitalized software development
costs in the first quarter of fiscal 2020. The decrease in capitalized software
development costs in fiscal 2020 as compared with 2019 was the result of the
Company's decision to focus on maintenance and support of existing products, as
a result of the change in business conditions experienced in the industry,
particularly as a result of the COVID-19 pandemic. Net cash provided by
financing activities was $4,461,000 for year ended October 31, 2020, and
consisted of proceeds from note payable - related party of $1,435,000, grant
proceeds received under the Payroll Support Program of the CARES Act of
$3,003,000, and proceeds from the exercise of stock options of $23,000. The
increase in cash from financing activities in fiscal 2020 as compared with 2019
was the result of the receipt of $3,003,000 in federal stimulus grant funds.
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, during fiscal 2020,
the Company took 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
financing. 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
uncertain outlook of the COVID-19 pandemic. 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 continuing downturn in the air transportation industry due 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 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.
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 ("GAAP"). The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities, based upon accounting policies management has
implemented. The Company has identified the policies and estimates below as
critical to its 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, where such
policies affect its reported financial results. The actual impact of these
factors may differ under different assumptions or conditions. The Company's
accounting policies that require management to apply significant judgment and
estimates include:
Revenue Recognition
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.
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, "Internal-Use Software." The Company expenses all costs
incurred during the preliminary project stage of its development, and
capitalizes the costs incurred during the application development stage. For
periods through October 31, 2020, costs incurred relating to upgrades and
enhancements to the software were capitalized if it had been determined that
these upgrades or enhancements add additional functionality to the software.
Costs incurred to maintain and support products after they became available were
charged to expense as incurred. The Company did not capitalize any software
development costs subsequent to January 31, 2020.
During the second quarter of 2020, due to the financial and economic hardships
being experienced by airlines, airports and air transportation support vendors
in the current COVID-19 environment, there was a sufficient amount of
uncertainty surrounding the ability of our customers to continue to perform
their contracts with the Company. In order to determine whether or not an
impairment had occurred, the Company looked at existing contracted revenue,
adjusted for future uncertainties, and compared those amounts with the net
carrying value of the related capitalized development cost asset. Where the
contribution margin was less than the net carrying value of the asset, we
determined that an impairment had occurred. As a result of this exercise, the
Company wrote-off assets totaling $6,134,000 during the second quarter of fiscal
2020, based on the assumption that the carrying value of the software
capitalization was representative of 100% of the committed contract values then
remaining, given the impact of the current COVID-19 environment on the aviation
industry and its customers.
As a result of the industry changes in response to the COVID-19 pandemic, the
corresponding review conducted by the Company described above and the resultant
write-offs taken, the Company anticipates that its level of capitalized software
development costs, including related amortization of such costs, will decrease
in the future.
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As of October 31, 2020, and 2019, the Company had $1,223,000 and $8,319,000,
respectively, of software development costs, net of amortization. The Company
has a formal program to determine when additional functionality of a product is
established and assumptions are used that reflect the Company's best estimates.
Software development costs are reported at the lower of amortized cost or net
realizable value. Net realizable value is computed as the estimated gross future
revenue from each software solution less the amount of estimated future costs of
completing and disposing of that product. Software costs are included in
"Capitalized software development costs, net" on the Company's balance sheet and
are depreciated using the straight-line method over an estimated useful life of
three years.
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 are identified and prospective
depreciation or impairment expense is adjusted accordingly.
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. The Company did not have any
increases in inventory reserves, impairment charges or write-offs during fiscal
year 2019.
Depreciation and Amortization
As of October 31, 2020, the PASSUR Network, net, Capitalized software
development costs, net, and Property and equipment, net totaled $0, $1,223,000,
and $258,000, respectively. The PASSUR Network, net, Capitalized software
development costs, net, and Property and equipment, net totaled $3,949,000,
$8,319,000, and $552,000, respectively, as of October 31, 2019. In management's
judgment, the estimated depreciable lives used to calculate the annual
depreciation and amortization expense are appropriate.
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 3 years
Property and equipment 3 to 10 years
The PASSUR Network was comprised of PASSUR and SMLAT Systems, which included the
direct production, shipping, and installation costs incurred for each PASSUR and
SMLAT System, which were recorded at cost, net of accumulated depreciation.
Depreciation was charged to cost of revenues and was recorded using the
straight-line method over the estimated useful life of the asset, which was
estimated at five years for SMLAT Systems and seven years for PASSUR Systems.
PASSUR and SMLAT Systems which were not installed, raw materials,
work-in-process, and finished goods components were carried at cost and not
depreciated until installed. During the second quarter of 2020, in light of the
FAA's mandate for ADS-B equipage on aircrafts operating in most U.S. airspace
effective January 2020, and parallel adoption of ADS-B requirements in much of
the world, the Company determined that services that traditionally had relied on
the PASSUR proprietary network of sensors for aircraft surveillance could be
powered by a combination of FAA data plus commercial ADS-B aggregator feeds and
other data feeds available to the Company, which would provide a more
cost-effective solution and allow us to focus more on value-added analytics, and
less on sensor technology. In this regard, the Company reviewed and
decommissioned approximately half of the PASSUR Network system assets during
fiscal 2020. It is the Company's intention to decommission all remaining PASSUR
Network system assets throughout fiscal 2021. As a result, the Company wrote
off net assets applicable to the PASSUR Network systems of approximately
$3,565,000, and lease assets applicable to these PASSUR locations of
approximately $175,000, which amounts were included in the impairment charge for
fiscal year 2020. The write-off amount included PASSUR System and SMLAT System
assets as well as inventory of finished and spare parts.
Total depreciation and amortization expense was $2,123,000 for the year ended
October 31, 2020. This consisted of $652,000 of depreciation expense related to
the PASSUR Network and Property and equipment, $1,451,000 of amortization
expense related to Capitalized software development costs, and $20,000 related
to one-time fee amortization. For the year ended October 31, 2019, total
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depreciation and amortization expense was $3,628,000. This consisted of
$1,232,000 of depreciation expense related to the PASSUR Network and Property
and equipment and $2,396,000 of amortization expense related to Capitalized
software development costs.
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 is
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
$467,000 and $613,000 for the year ended October 31, 2020 and 2019,
respectively, and was primarily included in selling, general, and administrative
expenses.
Income Taxes
At October 31, 2020, the Company had available a federal net operating loss
carry-forward of $25,377,000 for U.S. federal income tax purposes. Approximately
$12,780,000 of U.S. federal net operating loss carryforwards will expire in
various tax years from fiscal year 2022 through fiscal year 2038. These net
operating losses are available to offset 100% of future taxable income. The
remaining $12,597,000 of U.S. federal net operating loss may be carried forward
indefinitely but are only available to offset 80% of future taxable income.
The Company evaluates whether a valuation allowance related to deferred tax
assets is required each reporting period. A valuation allowance is established
if, based on the weight of available evidence, it is more likely than not that
some portion or all of the deferred income tax asset will not be realized.
After weighting all available positive and negative evidence, including
cumulative losses in recent years, the Company continues to conclude that the
more likely than not threshold for the realization of deferred tax assets has
not been met.
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 October 31,
2020, the Company did not have any uncertain tax positions. As permitted by ASC
740-10, the Company's accounting policy is to prospectively classify accrued
interest and penalties related to any unrecognized tax benefits in its income
tax provision.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES
Act") was enacted to provide economic relief to those impacted by the COVID-19
pandemic. The CARES Act made various tax law changes, including, among other
things: (i) modifications to the federal net operating loss rules, including
permitting federal net operating losses incurred in 2018, 2019, and 2020 to be
carried back to the five preceding taxable years in order to generate a refund
of previously paid income taxes; (ii) enhanced recoverability of AMT tax credit
carryforwards; (iii) delayed payment of employer payroll taxes; (iv) increased
the limitation on business interest expenses under IRC Section 163(j) for the
2019 and 2020 tax years to permit additional expensing of interest; and (v)
enacted a technical correction so that qualified improvement property can be
immediately expensed under IRC Section 168(k). As of October 31, 2020, the
Company had approximately $25,377,000 of net operating losses, which cannot be
carried back to prior years to generate tax refunds since no tax had been paid
in those years by the Company.
Recent Accounting Pronouncements Adopted
In February 2016, the FASB issued ASU 2016-02, which amends the ASC and creates
Topic 842, Leases ("Topic 842"). Topic 842 requires lessees to recognize lease
assets and lease liabilities for those leases classified as operating leases
under previous GAAP on the balance sheet. On November 1, 2019, the Company
adopted Topic 842. As a result of the adoption of Topic 842, the Company
recognized operating lease right-of-use ("ROU") assets and liabilities of
$1,497,000 and $1,620,000, respectively. The Company does not have any finance
lease ROU assets and liabilities. There was no change to our consolidated
statements of operations or cash flows, as a result of the adoption. During the
year ended October 31, 2020, the Company recorded an impairment charge of
$175,000 in connection with the leases related to its PASSUR Network System
assets locations.
On November 1, 2018, the Company adopted the revenue recognition requirements of
Topic 606 using the modified retrospective transition method which resulted in
an adjustment to retained earnings for the cumulative effect of applying the
standard to all contracts not completed as of the adoption date. The comparative
information has not been restated and continues to be reported under the
accounting standards in effect for those periods. Revenue recognition remained
substantially unchanged following adoption of Topic 606 and therefore the
adoption of Topic 606 did not have a material impact on revenues. The primary
impact of adopting Topic 606 relates to the accounting for nonrefundable
up-front fees. The Company recognized revenue during the fiscal year ended
October 31, 2019, of $15,046,000 under Topic 606, which was not materially
different from what would have been recognized under Topic 605. The Company
recorded an addition to
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opening accumulated deficit and a reduction to deferred revenue of approximately
$66,000, respectively, as of November 1, 2018 due to the impact of adopting
Topic 606.
In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation
(Topic 718): Scope of Modification Accounting" ("ASU 2017-09"), to clarify when
to account for a change in the terms or conditions of a share-based payment
award as a modification. Under the new standard, modification is required only
if the fair value, the vesting conditions, or the classification of an award as
equity or liability changes as a result of the change in terms or conditions.
The Company adopted this guidance during the quarter ended January 31, 2019,
using the prospective method, with no material impact to its consolidated
financial statements and related disclosures.
Accounting Pronouncements Issued but not yet Adopted
In December 2019, the FASB issued ASU 2019-12, "Income Taxes Topic
740-Simplifying the Accounting for Income Taxes" ("ASU 2019-12"), which intended
to simplify various aspects related to accounting for income taxes. ASU 2019-12
removes certain exceptions to the general principles in Topic 740 and also
clarifies and amends existing guidance to improve consistent application of
Topic 740. This guidance is effective for fiscal years beginning after December
15, 2020, including interim periods therein, and early adoption is permitted.
Adoption of Topic 740 is not expected to have a material effect on the Company's
consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "Current Expected Credit Losses" (ASU
2016-13), which introduces an impairment model based on expected, rather than
incurred, losses. Additionally, it requires expanded disclosures regarding (a)
credit risk inherent in a portfolio and how management monitors the portfolio's
credit quality; (b) management's estimate of expected credit losses; and, (c)
changes in estimates of expected credit losses that have taken place during the
period. ASU 2016-13 is effective for fiscal years beginning after December 15,
2022. The Company has not yet quantified the impact of ASU 2016-13 on its
consolidated financial statements. However, it is not expected to have a
material effect on the Company's consolidated financial statements.
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PASSUR AEROSPACE, INC. 
