PASSUR AEROSPACE, INC. Forward Looking Statements
The information provided in this Quarterly Report on Form 10-Q (including,
without limitation, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Liquidity and Capital Resources" below) contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 regarding the Company's future plans, objectives,
and expected performance. The words "believe," "may," "will," "could," "should,"
"would," "anticipate," "estimate," "expect," "project," "intend," "objective,"
"seek," "strive," "might," "likely result," "build," "grow," "plan," "goal,"
"expand," "position," or similar words, or the negatives of these words, or
similar terminology, identify forward-looking statements. These statements are
based on assumptions that the Company believes are reasonable, but are subject
to a wide range of risks and uncertainties, and a number of factors could cause
the Company's actual results to differ materially from those expressed in the
forward-looking statements referred to above. These factors include, without
limitation, the risks and uncertainties discussed under "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the uncertainties related to the ability of the Company to sell its
existing product and professional service lines, as well as its new products and
professional services (due to potential competitive pressure from other
companies or other products), as well as the potential for terrorist attacks,
changes in fuel costs, airline bankruptcies and consolidations, economic
conditions, and other risks detailed in the Company's periodic report filings
with the
Moreover, investors are cautioned to interpret many of the risks identified and
discussed in this Quarterly Report on Form 10-Q, as well as the risks set forth
above, as being heightened as a result of the ongoing and numerous adverse
impacts of COVID-19. The spread of COVID-19 has severely impacted many economies
throughout the world, with businesses being forced to cease or limit operations
for long or indefinite periods of time. Measures taken to contain the spread of
the virus, including travel bans, quarantines and closures of non-essential
services have triggered significant disruptions to businesses worldwide, with
particular concentration on the aviation industry that the Company serves. The
federal government has responded with monetary and fiscal interventions to aid
in stabilizing the economy and the Company has received assistance under the
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The aviation and travel industries, which are served by the Company and its
products, were severely affected by the COVID-19 outbreak as a result of travel
restrictions imposed by most jurisdictions. As a result of the pandemic, the
Company faces increased economic pressures and has experienced a significant
loss of revenue during the six-month period ended
Description of Business
PASSUR®
PASSUR delivers digital solutions that are essential to global aviation operations, meeting the needs of global air travel as well as supporting the recovery of the aviation industry from the COVID-19 crisis. The structure and execution of operations within the aviation industry has fundamentally changed as a result of this crisis due to the significant change in the economics required to support current conditions, a return to normal operations and profitability, and to assist in mitigating health risks.
PASSUR continues to be a pioneer applying artificial intelligence powered by machine learning to aviation data, addressing the industry's most costly challenges, including the management and optimization of airspace, airport assets, aircraft, and day of flight operations.
Operational efficiency is more important now than ever to eliminate sources of
waste, variables, and inflexible operations for increased profits. The Company
addresses this significant industry problem by applying 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, creating greater uncertainty to the
industry. The Company provides actionable intelligence to enable the industry to
manage their operations more efficiently. 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
Solutions offered by PASSUR help to ensure flight completion. They cover the entire flight life cycle, from gate to gate, and result in reductions in overall costs and carbon emissions, while maximizing revenue opportunities, improving operational efficiency, and enhancing the passenger experience.
The Company provides its solutions to airlines and airports in
The 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
·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.
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For the three months ended
For the six months ended
Excluding the impact of the impairment charge, the loss from operations was
Results of Operations Revenues
Management concentrates its efforts on the sale of business intelligence, predictive analytics, and decision support product applications. Such efforts include the continued development of existing products, new product offerings and to a lesser extent, professional services.
The Company is a supplier and partner to the air transportation industry. Many of the Company's customers 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 in the latter part of fiscal year 2020 and continuing into fiscal 2021.
Although the Company's revenue is primarily subscription based, during the latter part of 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.
For the three months ended
For the six months ended
The decreases in subscription revenues for the three and six months ended
As previously disclosed, the Company had engaged in discussions with two of its
customers about the possible renewal of certain contracts which had expired at
various times from
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--------------------------------------------------------------------------------Expenses
In response to the uncertainty surrounding the prospects of airlines and
airports and the travel industry as a result of the continuing global COVID-19
pandemic and the declines in revenue that the Company has experienced in fiscal
year 2020 continuing into the first half of fiscal 2021, partly as a result of
the pandemic, the Company reviewed its operating costs to more closely align
those costs with its outlook for the foreseeable future. The Company has taken
steps to reduce its operating costs going forward, which steps have included
terminating or furloughing certain positions and instituting a temporary pay
reduction plan beginning in the second quarter of 2020, suspending the use of
outside consultants where possible, rationalizing the PASSUR Network, and
reducing and/or eliminating other operating expenses that were not critical to
the short-term outlook of the Company. As a result, during both the three and
six months ended
The Company anticipates that further reductions in cash operating costs will be achieved as a result of eligible personnel expenses being funded using the grant proceeds received by the Company under the CARES Act Payroll Support Program.
There can be no assurances, however, that the Company may not have to further reduce operating costs in the future. If the recovery of the air transportation industry accelerates and revenue levels quickly return to pre-COVID-19 levels, these levels of cost savings may not be practicable or sustainable to support the operations necessary for the increased level of revenue.
Cost of Revenues
For the three months ended
The Company continued to realize cost savings and benefits during the three and
six months ended
Going forward, the Company anticipates lower levels of capitalized software costs. In addition, as a result of the PASSUR Network decommissioning process commenced during the second quarter of fiscal 2020 and the resulting write off of certain PASSUR Network assets and capitalized software development costs, the Company anticipates that amortization expenses associated with these assets will continue to decrease in the future.
Research and Development
For the three months ended
The Company's research and development efforts include activities associated with new product development, as well as the enhancement and improvement of the Company's existing software and information products. The Company anticipates that it will continue to invest in its software portfolio to develop, maintain, and support existing and newly developed applications for its customers.
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--------------------------------------------------------------------------------Selling, General, and Administrative
For the three months ended
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
As a result of the
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
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 three and six months ended
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--------------------------------------------------------------------------------Income/(Loss) from Operations
For the three months ended
Partially offsetting these decreases was a decrease in capitalized software
development costs, resulting from the Company not incurring any capitalized
software costs during the three and six months ended
For the last twelve months, Company revenue was
Interest Expense -
Interest expense - related party increased
Net Income/(Loss)
Net loss was
Liquidity and Capital Resources
The Company's current liabilities, excluding deferred revenue and certain CARES
Act grant proceeds accounted for as accrued liabilities, exceeded its current
assets by
The note payable to a related party,
As of
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On
Management is addressing the Company's working capital deficiency by aggressively marketing the Company's capabilities in its existing product and professional service lines, as well as in new products and professional services which are continually being developed and deployed. Management believes that the continued development of its existing suite of software products and professional services, which address the wide array of needs of the aviation industry, will continue to lead to increased growth in the Company's customer-base and subscription-based revenues. However, there are no assurances that such growth will be achieved.
The Company has evaluated its financial position as of
The CARES Act was enacted in
1.The Company has been granted government funds of approximately
Pursuant to the Payroll Support Program Agreement entered into by the Company
with the
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.
2.On
3.On
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26, 2021, respectively. As with the original grant under the Payroll Support
Program, PSP2 proceeds are to 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 the later of
4.On
Net cash used in 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. 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
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.
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--------------------------------------------------------------------------------Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses, and related disclosures of
contingent assets and liabilities based upon accounting policies management has
implemented. These significant accounting policies are disclosed in Note 1 to
the Company's Annual Report on Form 10-K for the fiscal year ended
Revenue Recognition
The Company recognizes revenue in accordance with Topic 606. The Company accounts for a customer contract when both parties have approved the contract and are committed to perform their respective obligations, each party's rights can be identified, payment terms can be identified, the contract has commercial substance, and it is probable the Company will collect substantially all of the consideration to which it is entitled.
The Company derives revenue primarily from subscription-based, real-time decision and solution information and professional services. Revenues are recognized when control of these services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.
The Company determines revenue recognition through the following steps:
·Identification of the contract, or contracts, with a customer;
·Identification of the performance obligations in the contract;
·Determination of transaction price;
·Allocation of transaction price to performance obligations in the contract; and
·Recognition of revenue when, or as, the Company satisfies a performance obligation.
Subscription services revenue
Subscription services revenue is comprised of cloud-based subscription fees that provide the customer the right to access the Company's software and receive support and updates, if any, for a period of time. The Company has determined such access represents a stand-ready service provided continually throughout the contract term. As such, control and satisfaction of this stand-ready performance obligation is deemed to occur over time. The Company's subscription contracts include a fixed amount of consideration that is recognized ratably over the non-cancellable contract term, beginning on the date that access is made available to the customer. The passage of time is deemed to be the most faithful depiction of the transfer of control of the services as the customer simultaneously receives and consumes the benefit provided by the Company's performance. Subscription contracts are generally one to three years in length, billed either, monthly, quarterly or annually, typically in advance, which coincides with the terms of the agreement. The Company's subscription contracts do not have a significant financing component and customer invoices are typically due within 30 days. There is no significant variable consideration related to these arrangements. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether transfer of control to customers has occurred.
Professional services revenue
Professional services primarily consist of value assessments and customer training services. Payment for professional services is generally a fixed fee or a fee based on time and materials. The obligation to provide professional services is generally satisfied over time, with the customer simultaneously receiving and consuming the benefits as the Company
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satisfies its performance obligations. For professional services, revenue is recognized by measuring progress toward the complete satisfaction of the Company's obligation. Progress for services that are contracted for a fixed price is generally measured based on hours incurred as a portion of total estimated hours, and as a practical expedient, progress for services that are contracted for time and materials is generally based on the amount the Company has the right to invoice. Professional services contracts are generally one year or less in length, billed either in advance, upon pre-defined milestones or as services are rendered, in accordance with the terms of agreement. The Company's professional service contracts do not have a significant financing component and customer invoices are typically due within 30 days.
Material rights
Contracts with customers may include material rights which are also performance obligations. Material rights primarily arise when the contract gives the customer the right to renew subscription services at a discounted price in the future. This may occur from time to time when the Company's contracts provide an implicit discount as the customer pays a nonrefundable up-front fee in connection with the initial services contract that it does not have to pay again in order to renew the service. These non-refundable up-front fees are not related to any promised service that the customer benefits other than providing access to the subscription service. Revenue allocated to material rights is recognized when the customer exercises the right over the estimated renewal period of five years or when the right expires. If exercised by the customer, the amount previously deferred for the material right is included in the transaction price of the renewal contract and allocated to the services included in that contract. If expired, revenue is recognized as subscription services revenue in the period the right expired. If the up-front fees do not provide the customer with a material right, then the amount is included in the transaction price of the initial services contract and allocated to the performance obligations in that contract.
Contracts with multiple performance obligations
Some of the Company's contracts with customers contain multiple distinct performance obligations. For these contracts, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The standalone selling price reflects the price the Company would charge for a specific service if it was sold separately in similar circumstances and to similar customers. The Company maximizes the use of directly observable transactions to determine the standalone selling prices for its performance obligations. For subscription services, the Company separately determines the standalone selling prices by type of solution and customer demographics. For professional services, the Company separately determines standalone selling price by type of service.
Other policies and judgments
The commissions that the Company pays for obtaining a contract with a customer are conditional on future service provided by the employee. Therefore, since these costs are not incremental solely based on obtaining a contract, the Company does not defer any commission costs.
Leases
During the first quarter of fiscal year 2020, the Company adopted Topic 842
using the modified retrospective transition approach permitted under the new
standard for leases that existed at
The adoption of this standard impacted the Company's consolidated balance sheet due to the recognition of ROU assets and associated lease liabilities related to operating leases as compared to the previous accounting. The accounting for finance leases under Topic 842 is consistent with the prior accounting for capital leases. The impact of the adoption of this standard on the Company's consolidated statement of earnings and consolidated statement of cash flows was not material.
Per the guidance of Topic 842, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset. The Company recognizes a lease liability and a related ROU asset at the commencement date for leases on its consolidated balance sheet, excluding short-term leases as noted below. The lease liability is equal to the present value of unpaid lease payments over the remaining lease term. The Company's lease term at the commencement date may reflect
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options to extend or terminate the lease when it is reasonably certain that such options will be exercised. To determine the present value of the lease liability, the Company uses an incremental borrowing rate, which is defined as the rate of interest that the Company would have to pay to borrow (on a collateralized basis over a similar term) an amount equal to the lease payments in similar economic environments. The ROU asset is based on the corresponding lease liability adjusted for certain costs such as initial direct costs, prepaid lease payments and lease incentives received. Both operating and finance lease ROU assets are reviewed for impairment, consistent with other long-lived assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. After a ROU asset is impaired, any remaining balance of the ROU asset is amortized on a straight-line basis over the shorter of the remaining lease term or the estimated useful life.
After the lease commencement date, the Company evaluates lease modifications, if any, that could result in a change in the accounting for leases. For a lease modification, an evaluation is performed to determine if it should be treated as either a separate lease or a change in the accounting of an existing lease. In addition, significant changes in events or circumstances within the Company's control are assessed to determine whether a change in the accounting for leases is required.
Certain of the Company's leases provide for variable lease payments for the right to use an underlying asset that vary due to changes in facts and circumstances occurring after the commencement date, other than the passage of time. Variable lease payments that are dependent on an index or rate (e.g., Consumer Price Index) are included in the initial measurement of the lease liability, the initial measurement of the ROU asset, and the lease classification test based on the index or rate as of the commencement date. Any changes from the commencement date estimation of the index- and rate-based variable payments are expensed as incurred in the period of the change. Variable lease payments that are not known at the commencement date and are determinable based on the performance or use of the underlying asset, are not included in the initial measurement of the lease liability or the ROU asset, but instead are expensed as incurred. The Company's variable lease payments primarily include common area maintenance and real estate taxes.
Upon the adoption of Topic 842, the Company made the following accounting policy elections:
·Certain of the Company's contracts contain lease components as well as
non-lease components. Unless an accounting policy is elected to the contrary,
the contract consideration must be allocated to the separate lease and non-lease
components in accordance with Topic 842. For purposes of allocating contract
consideration, the Company elected not to separate the lease components from
non-lease components for all asset classes. This was applied to all existing
leases as of
·The Company elected not to apply the measurement and recognition requirements of Topic 842 to short-term leases (i.e., leases with a term of 12 months or less). Accordingly, short-term leases will not be recorded as ROU assets or lease liabilities on the Company's consolidated balance sheets, and the related lease payments will be recognized in net earnings on a straight-line basis over the lease term.
As a result of the adoption of Topic 842, the Company recognized operating lease
ROU assets and liabilities of
The Company has operating leases primarily for offices and PASSUR and SMLAT systems, with remaining terms of approximately 4 months to 4.25 years. Some of the Company's lease contracts include options to extend the leases for up to five years, while others include options to terminate the leases within 1 year.
The Company does not have any finance leases or leases that have not yet
commenced as of
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