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 years ended October 31, 2021 and 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, coupled with the public's reluctance to travel
during this time, resulted in a precipitous decline in demand for air travel,
and our customers in the aviation and travel industries drastically reduced
their capacity and operations from 2020 into 2021 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 two-year period ended
October 31, 2021. The Company anticipates a return to an improved economic
environment in fiscal 2022 given the state of vaccinations, treatments
available, and changes in public behaviors. The recovery, however, 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 any variants to the
COVID-19 virus, the continuing actions to contain the pandemic or to mitigate
its impact, the acceptance and public distribution of treatments and vaccines
for the disease (including its variants), and the length of time before the
public feels safe to travel. All of these variables will impact how quickly the
industry can recover and may affect the revenue and earnings levels of the
Company. See "Risk Factors".
The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), enacted
in March 2020, as well as subsequently enacted legislation, including the
American Rescue Plan Act of 2021 (the "Rescue Act"), have provided economic
support for, among others, businesses in the airline industry. The Company has
received grants under both the CARES Act and the Rescue Act (collectively
referred to herein as "CARES Act grants"), totaling approximately $6,498,000, as
described in more detail below.
1.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 ("PSP1"). The relief payments were
received in three installments from July 2020 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 Company has used such relief payments for such purpose. The
Payroll Support Program Agreement provides that 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,
as well as other conditions including prohibitions on share repurchases and
dividends through September 30, 2021, and certain limitations on executive
compensation.
2.On February 12, 2021, the Company received an additional "top off"
disbursement of $875,000 under PSP1, subject to the terms and conditions
described above.
3.On March 5, 2021, the Company entered into a Payroll Support Program Extension
Agreement with the U.S. Department of the Treasury for an award the Company
received under the CARES Act Payroll Support Program ("PSP2"). The total amount
awarded to the Company under PSP2 was approximately $1,310,000. The relief
payments under PSP2 were received in two installments of approximately $655,000
each on March 8, 2021 and April 26, 2021. As with the original grant under
PSP1, PSP2 proceeds are to be used exclusively for the continuation of payment
of certain employee wages, salaries, and benefits. The Company has used such
relief payments for such purpose. The Payroll Support Program Extension
Agreement for PSP2 provides that 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 March 31, 2021, or the date
on which the Company has expended all of the payroll support, as well as other
conditions including prohibitions on share repurchases and dividends through
March 31, 2022, and certain limitations on executive compensation.
4.On April 16, 2021, the Company entered into a Payroll Support Program 3
Agreement with the U.S. Department of the Treasury for an award the Company
received under the Rescue Act (PSP3"). The total amount awarded to the Company
under PSP3 was approximately $1,310,000. The first installment, in the amount
of approximately $655,000, was received by the Company on April 29, 2021. The
second installment of approximately $655,000 was received by the Company on May
27, 2021. The Company does not anticipate any additional stimulus grant
payments under the Payroll Support Programs. As with the original
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grants under PSP1 and PSP2, proceeds under PSP3 are to be used exclusively for
the continuation of payment of certain employee wages, salaries, and benefits.
The Company has used such proceeds for such purpose. The Payroll Support
Program 3 Agreement provides that 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 September 30, 2021, or the
date on which the Company has expended all of the payroll support under PSP3, as
well as other conditions including prohibitions on share repurchases and
dividends through September 30, 2022, and certain limitations on executive
compensation. The amount of unused stimulus funding as of October 31 2021 and
2020 was $856,000 and $1,934,000 (exclusive of $3,495,000 in grants received
after October 31, 2020), respectively, and is shown in the balance sheet under
current liabilities as Accrued Liabilities - Stimulus Funding.
The Company believes that it has operated in compliance with all the provisions
and requirements under the CARES Act and the Rescue Act during the two-year
period ended October 31, 2021 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
the years ended October 31, 2021 and 2020, the Company reduced its compensation
expense by $4,578,000 and $1,130,000, respectively, as the CARES Act grant
proceeds received by the Company were used to fund eligible payroll costs. If
the Company does not comply with the provisions of the CARES Act, the Rescue Act
and the Payroll Support Program Agreements, the Company may be required to repay
the government funds and also be subject to other remedies.
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. The amount of payroll taxes subject to deferred
payment is approximately $139,000. Under the terms of the legislation, 50% of
the deferred payroll taxes were due and paid by December 31, 2021, and the
remaining 50% are due and payable by December 31, 2022.
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
(all furloughed employees were offered an opportunity to return, subsequent to
the Company receiving the CARES Act funds);
·Instituted a temporary pay reduction plan affecting essentially all of the
then-remaining employees;
·Reduced 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 years 2021 and 2020,
compared to fiscal 2019, and the Company anticipates that such cost savings will
continue into fiscal 2022. 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. See "Risk
Factors."
Overview
PASSUR is a global leader in digital operational excellence. The Company's
trusted platform, combined with professional services, helps 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 an airline in 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.
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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 2021 are summarized below:
Despite the ongoing difficulties that the COVID-19 pandemic presented for the
aviation industry, PASSUR was able to secure 19 new contracts with a mix of new
customers and existing customers with incremental revenue and renew 42 of 48
contracts, with the six losses directly attributed to reduced flight volumes due
to the COVID-19 pandemic.
In 2021, PASSUR:
·Launched a new data service (ARiVADATA ) in August, 2021, leading to several
new customer wins
·Continued to enhance the ARiVATM platform, aligned to revenue and market
opportunities
·Began the process of migrating from our co-location infrastructure to a cloud
based, secure, resilient, and scalable platform
·Integrated an additional 25,000 terrestrial ADS-B sensors, completed the
integration of Aireon satellite surface and in-flight data feeds
·Enhanced the value of the ARiVATM platform through improvements in
implementation of machine learning capabilities and enhanced algorithms
Key 2021 Developments
Introduction of the ARiVADATA Data Service
ARiVADATA is one of the market leading aviation data solutions, designed to
reduce operating costs by providing predictive and real-time insights into
complex aviation operations, delivered through an application program interface
(API). Some features include:
·Global predictive aircraft situational awareness through machine learning
·Real time operations control (airborne operations and airfield operations)
·Gate-to-gate surface and airborne tracking on a single platform
·Compliance with the ICAO GADSS mandate (described below)
·Traffic analysis
·Statistical reporting
As of January 1, 2023, the ICAO GADSS mandate requires aircraft to be
continuously tracked anywhere in the globe, including over water, mountains, and
other uncontrolled airspace, with a minimum update rate of 15 minutes
- switching to updates every one (1) minute under "distress conditions."
In 2021, PASSUR was able to create the ARiVA Global Feed (AGF), which fuses
over 44 data feeds, including from multiple government, ANSP, and commercial
surveillance sources. AGF consolidates in one feed all of the data required by
operators and aviation software support companies to maintain GADSS aircraft
tracking compliance.
New Customer Wins and Renewals
During 2021, despite the ongoing difficulties that the COVID-19 pandemic
presented for the aviation industry, in a testament to our ability to meet
customer needs and continue to assist them in achieving meaningful operational
savings, PASSUR was able to secure 19 new contract wins, through a mix of new
customers and existing customers with incremental revenue, on our new ARiVATM
platform, while at the same time renewing and migrating 42 customer contracts,
from our legacy services to the ARiVATM platform. New wins and renewals crossed
all customer segments, including Airports, Airlines as well as FBOs.
Expansion of the PASSUR Partnership Footprint
PASSUR has now taken what we believe to be a market leading position in terms of
our global ADS-B coverage through the addition of the AirNav Systems ADS-B
network into our satellite and existing extensive terrestrial ADS-B coverage.
Migration of the ARiVATM Platform to Cloud-Based Computing
In 2020, PASSUR took the opportunity to migrate away from a hardware-based data
collection platform and become an aggregator of global data. In 2021, PASSUR
started a similar journey to migrate from our legacy, hardware-based co-location
infrastructure platform, to a cloud-based platform. Starting with development
instances, the Company believes that it is poised to successfully transition all
of our key products to the cloud by the second quarter of fiscal year 2022. We
believe this will aid PASSUR in achieving greater security, resiliency, and cost
performance, in addition to positioning us for scalable growth moving forward.
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Setting the Stage for Global Expansion
In the past, PASSUR revenue growth was challenged due to dependencies on its
proprietary hardware network, deployed at specific locations, mainly within the
continental United States. Over the last 18 months, PASSUR has gone through a
major evolution to become a next-generation SaaS company and has focused on
sourcing and aggregating global data feeds (satellite as well as terrestrial),
as well as additional data or information required to enhance the ARiVATM
platform's effectiveness. As part of this evolution, PASSUR substantially
enhanced our platform capabilities to enable new and existing services to be
delivered across all customer segments on a global basis. These enhancements
include improvements to our artificial intelligence/machine learning engine,
visualization, alerting, and collaborative decision-making capabilities.
By delivering these enhancements in 2021, PASSUR believes, subject to the
factors described under "Risk Factors", that it is now optimally positioned to
service all stakeholders within the aviation industry on a global basis.
PASSUR Network
Certain of PASSUR's services 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. As a result, during the
year ended October 31, 2020, the Company wrote off the total remaining 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. The Company essentially completed the decommissioning process
during fiscal year 2021.
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 years 2021 and 2020, as compared to
revenues for fiscal year 2019. See "Risk Factors."
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 2021, total revenues decreased $5.4 million, or 47%, to
$6,157,000, as compared to $11,529,000 in fiscal year 2020. The decrease in
total revenues was primarily due to a decrease in subscription revenue of $5.2
million or 47%, and a decrease in consulting and other revenue of $186,000 to
$407,000, as compared to fiscal year 2020.
The decrease in subscription revenue of $5.2 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 2021 and net incremental revenue recognized during both periods in fiscal
years 2020 and 2021 related to new contracts closed during fiscal year 2020.
The Company was 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 $2,322,000 for fiscal 2020.
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 fiscal
2020 revenue by approximately $513,000.
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The decrease in consulting and other revenue of $186,000 to $407,000 for the
year ended October 31, 2021, as compared to $593,000 for the same period in
2020, was due to several new professional service agreements entered into in
fiscal 2020 that did not recur in fiscal 2021.
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. In this regard, the Company reviewed and
decommissioned approximately half of its PASSUR Network system assets during the
second quarter of fiscal 2020. The total balance attributable to the PASSUR
Network was written off as of April 30, 2020, as described in more detail below.
The Company essentially completed the decommissioning process during fiscal
year 2021. In prior periods, 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 related 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 continue to decrease
in the future.
Cost of revenues decreased $3,900,000, or 63%, to $2,277,000 for the year ended
October 31, 2021, as compared to $6,187,000 in fiscal year 2020. During fiscal
year 2021, 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 that began in fiscal year 2020 due to the ongoing global COVID-19
pandemic (which uncertainty has continued), 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 years ended October 31, 2021 and 2020, the
Company was able to use grants under the CARES Act and the Rescue Act to offset
its compensation expense in cost of revenues by $1,995,000 and $473,000,
respectively. Without the grants under the CARES Act and Rescue Act, Cost of
revenues would have been $4,272,000 and $6,660,000 for the years ending October
31, 2021 and 2020, respectively. See "Risk Factors."
Costs of revenues was 37% of revenue in fiscal year 2021 compared with 54% in
fiscal year 2020.
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 $131,000, or 39%, to $207,000 for
fiscal year 2021, as compared to $338,000 for fiscal year 2020. 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 years ended
October 31, 2021 and 2020, the Company was able to use grants under the CARES
Act and the Rescue Act to offset its research and development compensation
expense by $127,000 and $16,000, respectively. Without the grants under the
CARES Act and Rescue Act, Research and Development expenses would have been
$334,000 and $354,000 for the years ending October 31, 2021 and 2020,
respectively. See "Risk Factors."
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 2021 and 2020. Research and
development expenses are funded by current operations.
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Selling, General, and Administrative
Selling, general, and administrative expenses decreased $3,947,000, or 61%, to
$2,520,000 for the year ended October 31, 2021, as compared to $6,467,000 in the
same period in 2020. 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 years ended
October 31, 2021 and 2020, the Company was able to use proceeds from the PSP
grants of the CARES Act and the Rescue Act to offset its compensation expense
within selling, general and administrative expense by $2,456,000 and $641,000,
respectively. Without the grants under the CARES Act and Rescue Act, Selling,
general, and administrative expenses would have been $4,976,000 and $7,108,000
for the years ending October 31, 2021 and 2020, respectively. See "Risk
Factors." 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. Annualized rent savings related to these undertakings
represent approximately $311,000.
Impairment Charges
Certain of PASSUR's services 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. As a
result, the Company wrote off net assets applicable to the total book value of
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. The
Company essentially completed the decommissioning process during fiscal year
2021.
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 during fiscal year 2020, the Company anticipates that the costs of
maintaining and operating these systems, including depreciation and related 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.
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 continue to 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.
Income/(Loss) from Operations
Income from operations for the year ended October 31, 2021 was $1,153,000, an
increase of $12,490,000, or 110%, as compared to a loss from operations of
$11,338,000 for the year ended October 31, 2020 (inclusive of the impact of the
impairment charges recorded during the second quarter of 2020). Excluding the
impact of the impairment charges of $9,874,000 in fiscal 2020, income from
operations in fiscal 2021 improved by $2,616,000, or 179%, from a loss of
$1,463,000 for the year ended October 31, 2020. The improvement in income from
operations (excluding the impairment charges) was primarily due to a decrease in
operating expenses of $7,988,000, or 62%, as compared to fiscal year 2020, which
was partially offset by a decrease in revenue of $5,371,000, or 47%. Income
from Operations for the year ended October 31, 2021 would have decreased by
$4,578,000, to a loss of ($3,425,000) in the absence of funding from the CARES
Act and Rescue Act, while the Loss from Operations for the year ended October
31, 2020 would have increased by $1,130,000 to ($12,468,000) in the absence of
funding from the CARES Act.
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Interest Expense - Related Party
Interest expense - related party for the year ended October 31, 2021 increased
$150,000, or 17%, as compared to the same period in 2020, due to the higher
average principal balances on the note payable to Mr. Gilbert (described below)
during fiscal year 2021.
Income/(Loss) Before Income Taxes
Income before income taxes for the year ended October 31, 2021 increased
$12,363,000, or 101%, to $96,000, as compared to the loss before income taxes of
$12,267,000 for the fiscal year 2020 (including the effect of the impairment
charges of $9,874,000 recorded during the second quarter of 2020). Excluding
the impairment charges, income before income taxes for the year ended October
31, 2021 represented an improvement of $2,489,000 from the loss before income
taxes for the year ended October 31, 2020. The improvement was the result of
the cost control measures put in place during fiscal 2020. Income before income
taxes for the year ended October 31, 2021 would have decreased by $4,578,000, to
a loss of ($4,482,000) in the absence of funding from the CARES Act and Rescue
Act, while the Loss before income taxes for the year ended October 31, 2020
would have increased by $1,130,000 to ($13,397,000) in the absence of funding
from the CARES Act.
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, 2021, the Company recorded an income tax
provision of $3,000 on pre-tax income of $96,000, resulting in a 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, 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.
Net Loss
The Company had net income of $93,000, or $0.01 per diluted share, for the year
ended October 31, 2021, as compared to a net loss of $12,304,000, or $1.60 per
diluted share, for fiscal year 2020 (inclusive of the impact of the impairment
charges of $9,874,000 recorded during the second quarter of 2020). Net Income
for the year ended October 31, 2021 would have decreased by $4,578,000, to a
loss of ($4,485,000) in the absence of funding from the CARES Act and Rescue
Act, while the Net Loss for the year ended October 31, 2020 would have increased
by $1,130,000 to ($13,434,000) in the absence of funding from the CARES Act.
See "Risk Factors."
Impact of Inflation
In the opinion of management, inflation did not have a material effect on the
operations of the Company during fiscal year 2021, including selling prices,
capital expenditures, and operating expenses. However, the increase in
inflation during 2022 may, if continued, have a material adverse effect on the
financial performance of the Company in fiscal 2022.
Liquidity and Capital Resources
The Company's current assets exceeded its current liabilities (excluding
deferred revenue and certain CARES Act grant proceeds) by $264,000 as of October
31, 2021. The Company also expended cash in operating activities of
approximately $4.6 million and $1.4 million during the fiscal years ended
October 31, 2021 and 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, 2023 (upon the execution of the Eighth
Debt Extension Agreement, described below), was $10,692,000 at October 31, 2021,
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 has paid the interest due for the year
ended October 31, 2021 in the amount of $1,057,000. During the year ended
October 31, 2021, Mr. Gilbert did not loan the Company any additional funds.
The Company's stockholders' equity had a deficit of $11,042,000 at October 31,
2021. The Company achieved net income of $93,000 for the year ended October 31,
2021.
As of October 31, 2020, the total amount owed by the Company under a promissory
note issued by the Company to Mr. Gilbert on January 27, 2020 (the "Sixth
Gilbert Note") 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 accrued
interest of $1,107,000 (which included unpaid interest of $401,000 accrued under
a promissory note previously issued by the Company to Mr. Gilbert that was
included in the Sixth Gilbert Note and unpaid interest
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under the Sixth Gilbert Note through October 31, 2020). The maturity date under
the Sixth Gilbert Note was November 1, 2021, 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 26, 2022, the Company and Mr. Gilbert entered into an Eighth Debt
Extension Agreement, effective as of January 26, 2022, pursuant to which the
Company cancelled the Seventh Gilbert Note and issued Mr. Gilbert a new
promissory note (the "Eighth Gilbert Note") in the amount of $10,692,000. Under
the terms of the Eighth Gilbert Note, the maturity date of the loan was extended
to November 1, 2023, and the annual interest rate remained 9 ¾%, with annual
interest payments required to be made on October 31st of each year (although any
accrued interest can be paid before such time without penalty). The note
payable is secured by the Company's assets.
On January 29, 2021, the Company and Mr. Gilbert entered into a Seventh Debt
Extension Agreement, effective as of 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
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. The amendments
to the Sixth Gilbert Note were determined to be a modification of the debt
instrument and no gain or loss was recorded as a result of the transactions.
During the year ended October 31, 2021, the Company paid all accrued interest
due for the fiscal 2021 year under the Sixth Gilbert Note and the Seventh
Gilbert Note in the amount of $1,057,000.
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 26, 2022,
that if the Company, at any time, is unable to meet its obligations through
January 27, 2023, 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, enacted in March 2020, as well as subsequently enacted
legislation, including the Rescue Act, have provided economic support for, among
others, businesses in the aviation industry. The Company has received grants
under both the CARES Act and the Rescue Act, totaling approximately $6,498,000,
as described in more detail below.
1.The Company has been granted government funds of approximately $3.0 million
pursuant to the PSP1 for Air Carriers and Contractors under the CARES Act.
Pursuant to the Payroll Support Program Agreement entered into by the Company
with the U.S. Department of the Treasury, the Company has agreed to, among other
things, refrain from conducting involuntary employee layoffs or furloughs and
reducing employee rates of pay or benefits through September 30, 2020, refrain
from paying dividends or engaging in share repurchases through September 30,
2021. The Payroll Support Program Agreement also requires the Company 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.
2.On February 12, 2021, the Company received an additional "top off"
disbursement of $875,000 under PSP1, subject to the terms and conditions
described above.
3.On March 5, 2021, the Company entered into a Payroll Support Program Extension
Agreement with the U.S. Department of the Treasury for an award the Company
received under the CARES Act Payroll Support Program ("PSP2"). The total amount
awarded to the Company under PSP2 was approximately $1,310,000. The relief
payments under PSP2 were received in two installments of approximately $655,000
each on March 8, 2021 and April 26, 2021. As with the original grant under
PSP1, PSP2 proceeds are to be used exclusively for the continuation of payment
of certain employee wages, salaries, and benefits. The Company has used such
relief payments for such purpose. The Payroll Support Program Extension
Agreement provides that 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 March 31, 2021, or the date on which
the Company has expended all of the payroll support, as well as other conditions
including prohibitions on share repurchases and dividends through March 31,
2022, and certain limitations on executive compensation.
4.On April 16, 2021, the Company entered into a Payroll Support Program 3
Agreement with the U.S. Department of the Treasury for an award the Company
received under the Rescue Act ("PSP3"). The total amount awarded to the Company
under PSP3 was approximately $1,310,000. The first installment, in the amount
of approximately $655,000, was received by the Company
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on April 29, 2021. The second installment of approximately $655,000 was
received by the Company on May 27, 2021. The Company does not anticipate any
additional stimulus grant payments under the Payroll Support Programs. As with
the original grants under PSP1 and PSP2, proceeds under PSP3 are to be used
exclusively for the continuation of payment of certain employee wages, salaries,
and benefits. The Company has used such proceeds for such purpose. The Payroll
Support Program 3 Agreement provides that 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 September 30,
2021, or the date on which the Company has expended all of the payroll support
under PSP3, as well as other conditions including prohibitions on share
repurchases and dividends through September 30, 2022, and certain limitations on
executive compensation. The amount of unused stimulus funding as of October 31
2021 and 2020 was $856,000 and $1,934,000 (exclusive of $3,495,000 in grants
received after October 31, 2020), respectively, and is shown in the balance
sheet under current liabilities as Accrued Liabilities - Stimulus Funding.
The Company believes that it has operated in compliance with all the provisions
and requirements under the CARES Act up through and including the period ended
October 31, 2021, 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
the years ended October 31, 2021 and 2020, the Company reduced its compensation
expenses by $4,578,000 and $1,130,000, respectively, as CARES Act and Rescue Act
grant proceeds received by the Company were used to fund eligible payroll costs.
If the Company does not comply with the provisions of the CARES Act, the Rescue
Act and the Payroll Support Program Agreements, the Company may be required to
repay the government funds and also be subject to other remedies.
Net cash used by operating activities was ($4,618,000) for the year ended
October 31, 2021, as compared to ($1,363,000) for the year ended October 31,
2020. Net cash used by operating activities in the current fiscal year
consisted of net income of $93,000, adjusted for the effects of the federal
stimulus credits utilized of ($4,578,000), depreciation and amortization of
$708,000, stock-based compensation expense of $223,000, changes in operating
lease assets and liabilities of ($126,000) and changes in the provision for
doubtful accounts of ($45,000). Additionally, cash used in operations was
negatively impacted by changes in accounts payable of ($755,000), accounts
receivable of ($101,000) prepaids and other current assets of ($88,000) and
accrued expenses of ($27,000), partially offset by changes in deferred revenue
and other assets of $78,000. The decrease in cash from operations in fiscal
2021 as compared with 2020 was the result of lower levels of revenue experienced
by the Company as a result of the COVID-19 pandemic. Net cash used in investing
activities was $55,000 for the year ended October 31, 2021, which was expended
primarily for the purchase of capital equipment, primarily computers and
servers. The decrease in capitalized software development costs in fiscal 2021
as compared with 2020 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 $3,494,000 for
year ended October 31, 2021 and was the result of grant proceeds received under
the Payroll Support Programs of the CARES Act and the Rescue Act of $3,494,000
during fiscal 2021. The Company received a total of approximately $6,500,000 of
grant proceeds under the Payroll Support Programs of the CARES Act and the
Rescue Act during the two-year period ended October 31, 2021, and does not
anticipate receiving any additional funds under these programs at the current
time.
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.
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, subject to the factors
described under "Risk Factors", future revenues will increase on an annualized
basis. However, there are no guarantees that such annualized future revenue
increases will occur in the absence of funding under the CARES Act and Rescue
Act. If revenues do not increase and the Company's cost-structure is not
adjusted accordingly, losses may occur. The extent of such profits or losses
will be dependent on sales volume achieved and the Company's ability to optimize
its cost structures. See "Risk Factors."
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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.
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.
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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.
Some of the Company's contracts with its customers contain multiple performance
obligations subject to allocation of transaction prices. Some contracts contain
material rights, in the form of non-refundable up-front fees. Such fees are
amortized to income over an estimated average customer life. Differences in
actual average customer life compared with estimates may result in changes to
amounts amortized to income. In the case of professional services, revenue
recognition may be dependent on estimating the amount of time needed to complete
various tasks within a contract and estimating the actual amount of completion
at any point in time. Revisions to such estimates at any time may result in
adjustments to the amounts of revenue recognized.
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, 2021, 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, resulting from 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.
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 continue
to decrease in the future.
As of October 31, 2021, and 2020, the Company had $738,000 and $1,223,000,
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
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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 2021.
Depreciation and Amortization
As of October 31, 2021, the PASSUR Network, net, Capitalized software
development costs, net, and Property and equipment, net totaled $0, $738,000,
and $93,000, respectively. The PASSUR Network, net, Capitalized software
development costs, net, and Property and equipment, net totaled $0, $1,223,000,
and $258,000, respectively, as of October 31, 2020. 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. As a result, the Company wrote off net assets applicable to the
total book value of 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. The Company essentially completed the
decommissioning process during fiscal year 2021.
Total depreciation and amortization expense was $708,000 for the year ended
October 31, 2021. This consisted of $219,000 of depreciation expense related to
Property and equipment, $486,000 of amortization expense related to Capitalized
software development costs, and $3,000 related to one-time fee amortization. For
the year ended October 31, 2020, total depreciation and amortization expense was
$2,123,000. 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.
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Accounting for Federal Payroll Support Program ("PSP") Funds
PSP funds received under the CARES Act and the Rescue Act during fiscal years
2020 and 2021 are accounted for as grants not requiring repayment. The Company
recognizes such amounts received in income as qualifying salaries, wages and
benefits are incurred. The PSP funds advanced are conditioned upon the Company
complying with certain provisions and requirements included in the agreements.
If the Company does not comply with the provisions and requirements therein,
the PSP funds advanced would be subject to repayment. The Company believes that
it is in compliance with all provisions and requirements under the agreements
for the fiscal years 2020 and 2021.
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 volatilities, the
historical volatility of the Company's stock price, risk-free rates, expected
life, and other conditions, many of which are outside of the Company's control.
Determining these assumptions is subjective and complex and a change in the
assumptions utilized could impact the calculation of the fair value of our stock
option grants and associated compensation expense. Additionally, the Company
accounts for forfeitures when they occur. Stock-based compensation expense was
$223,000 and $467,000 for the year ended October 31, 2021 and 2020,
respectively, and was primarily included in selling, general, and administrative
expenses.
On August 16, 2021, the Company's Board of Directors adopted the Second
Amendment to the Plan, to authorize the granting of restricted stock unit (RSU)
awards under the Plan. Each RSU represents the right to receive, following
vesting, one share of the Company's Common Stock. In connection with the Second
Amendment to the Plan, the Board of Directors has authorized an aggregate of
800,000 RSU awards to be granted under the Plan. As of October 31, 2021,
797,500 RSU awards were granted under the Plan at a grant date fair market value
of $0.63 per share, which RSU awards vest ratably over a three-year period. All
797,500 RSU awards were granted on October 22, 2021.
Income Taxes
At October 31, 2021, the Company had available a federal net operating loss
carry-forward of $26,239,000 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 $13,459,000 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 weighing 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,
2021, 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, 2021, the
Company had approximately $26,239,000 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.
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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
asset locations.
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. 
