10-Q 1 t305623.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JULY 31, 2009 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________ Commission file number 000-7642 PASSUR AEROSPACE, INC. ----------------------- (Exact Name of Registrant as Specified in Its Charter) NEW YORK 11-2208938 -------------------------------- ----------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 47 ARCH STREET, GREENWICH, CONNECTICUT 06830 --------------------------------------- ---------- (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code: (203) 622-4086 ----------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No ---- ---- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No X ---- ---- ================================================================================ There were 4,293,948 shares of common stock with a par value of $0.01 per share outstanding as of September 10, 2009. INDEX PASSUR Aerospace, Inc. and Subsidiary Page PART I. FINANCIAL INFORMATION 4 Item 1. Financial Statements Consolidated Balance Sheets - July 31, 2009 (unaudited) and October 31, 2008. 4 Consolidated Statements of Operations (unaudited) Nine months ended July 31, 2009 and 2008. 5 Consolidated Statements of Operations (unaudited) Three months ended July 31, 2009 and 2008. 6 Consolidated Statements of Cash Flows (unaudited) Nine months ended July 31, 2009 and 2008. 7 Notes to Consolidated Financial Statements (unaudited) - July 31, 2009. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 15 Item 4. Controls and Procedures. 24 PART II. OTHER INFORMATION 25 Item 6. Exhibits. 25 Signatures. 26 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
PASSUR Aerospace, Inc. and Subsidiary Consolidated Balance Sheets JULY 31, October 31, 2009 2008 ------------ ------------ (UNAUDITED) (Audited) ASSETS Current assets: Cash $ 320,445 $ 217,316 Accounts receivable, net 1,053,085 629,888 Prepaid expenses and other current assets 242,382 146,473 ------------ ------------ Total current assets 1,615,912 993,677 Property, plant and equipment, net 236,873 380,181 PASSUR(R) Network, net 6,956,534 6,904,158 Software development costs, net 2,330,407 1,990,547 Other assets 309,249 101,183 ------------ ------------ Total assets $ 11,448,975 $ 10,369,746 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 495,228 $ 615,639 Accrued expenses and other current liabilities 657,818 834,132 Deferred income, current portion 1,341,054 1,070,693 Accrued expenses-related party 788,069 -- ------------ ------------ Total current liabilities 3,282,169 2,520,464 Deferred income, less current portion 349,915 187,970 Notes payable--related party 13,914,880 13,814,880 ------------ ------------ 17,546,964 16,523,314 Commitment and contingencies Stockholders' deficit: Preferred shares - authorized 5,000,000 shares, par value $.01 per share; none issued or outstanding -- -- Common shares--authorized 10,000,000 shares, par value $.01 per share; issued 4,990,448 in 2009 and 4,842,948 in 2008 49,904 48,429 Additional paid-in capital 4,425,076 4,381,528 Accumulated deficit (8,949,494) (8,960,050) ------------ ------------ (4,474,514) (4,530,093) Treasury Stock, at cost, 696,500 shares in 2009 and 2008 (1,623,475) (1,623,475) ------------ ------------ Total stockholders' deficit (6,097,989) (6,153,568) ------------ ------------ Total liabilities and stockholders' deficit $ 11,448,975 $ 10,369,746 ============ ============ SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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PASSUR Aerospace, Inc. and Subsidiary Consolidated Statements of Operations (Unaudited) NINE MONTHS ENDED JULY 31, 2009 2008 -------------- -------------- Revenues: Subscriptions $ 6,306,629 $ 5,240,293 Maintenance 278,686 302,096 Other 171,317 65,359 -------------- -------------- Total revenues 6,756,632 5,607,748 -------------- -------------- Cost and expenses: Cost of revenues 2,610,719 1,770,742 Research and development 204,707 216,622 Selling, general, and administrative expenses 3,134,207 2,766,969 -------------- -------------- 5,949,633 4,754,333 -------------- -------------- Income from operations 806,999 853,415 Other income (expense): Interest income 108 4,445 Interest expense--related party (788,069) (442,722) -------------- -------------- Income before income taxes 19,038 415,138 Provision for income taxes 8,482 8,847 -------------- -------------- Net income $ 10,556 $ 406,291 ============== ============== Net income per common share--basic $ -- $ .10 ============== ============== Net income per common share--diluted $ -- $ .07 ============== ============== Weighted average number of common shares outstanding--basic 4,156,173 4,124,824 ============== ============== Weighted average number of common shares outstanding--diluted 5,237,018 5,436,958 ============== ============== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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PASSUR Aerospace, Inc. and Subsidiary Consolidated Statements of Operations (Unaudited) THREE MONTHS ENDED JULY 31, 2009 2008 -------------- -------------- Revenues: Subscriptions $ 2,187,935 $ 1,873,254 Maintenance 91,795 108,884 Other 56,225 15,857 -------------- -------------- Total revenues 2,335,955 1,997,995 -------------- -------------- Cost and expenses: Cost of revenues 1,051,451 558,918 Research and development 74,687 67,333 Selling, general, and administrative expenses 982,314 1,089,379 -------------- -------------- 2,108,452 1,715,630 -------------- -------------- Income from operations 227,503 282,365 Other income (expense): Interest income -- 591 Interest expense--related party (320,042) (151,309) -------------- -------------- (Loss) income before income taxes (92,539) 131,647 (Recovery of) provision for income taxes (547) 4,723 -------------- -------------- Net (loss) income $ (91,992) $ 126,924 ============== ============== Net (loss) income per common share--basic $ (.02) $ .03 ============== ============== Net (loss) income per common share--diluted $ (.02) $ .02 ============== ============== Weighted average number of common shares outstanding--basic 4,175,307 4,146,448 ============== ============== Weighted average number of common shares outstanding--diluted 4,175,307 5,423,639 ============== ============== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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PASSUR Aerospace, Inc. and Subsidiary Consolidated Statements of Cash Flows (Unaudited) NINE MONTHS ENDED JULY 31, 2009 2008 (See Note 2) ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 10,556 $ 406,291 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,233,188 1,007,705 Provision for (recovery of) doubtful accounts (22,350) 54,161 receivable Non cash stock compensation expense 22,898 67,286 Changes in operating assets and liabilities: Accounts receivable (400,847) (307,256) Prepaid expenses and other current assets (95,909) (60,972) Other assets (208,066) (55,013) Accounts payable (120,411) 58,312 Deferred income 432,306 293,184 Accrued expenses and other current liabilities 611,755 562,238 ----------- ----------- Total adjustments 1,452,564 1,619,645 ----------- ----------- Net cash provided by operating activities 1,463,120 2,025,936 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES PASSUR(R) Network (842,623) (1,965,731) Software development costs (614,815) (598,451) Capital expenditures (24,678) (205,707) ----------- ----------- Net cash used in investing activities (1,482,116) (2,769,889) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable-related party 100,000 600,000 Proceeds from exercise of stock options 22,125 18,950 ----------- ----------- Net cash provided by financing activities 122,125 618,950 ----------- ----------- Increase (decrease) in cash 103,129 (125,003) Cash--beginning of period 217,316 286,992 ----------- ----------- Cash--end of period $ 320,445 $ 161,989 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Income taxes $ 8,482 $ 8,847 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-7- PASSUR Aerospace, Inc. and Subsidiary Notes to Consolidated Financial Statements July 31, 2009 (Unaudited) 1. NATURE OF BUSINESS PASSUR Aerospace, Inc. (the "Company", "we", or "our") is a business intelligence company which develops predictive analytics built on proprietary algorithms and on the concurrent integration and simultaneous mining of multiple databases. We believe we are positioned to provide the industry standard in business intelligence dashboards and predictive analytics for aviation organizations. PASSUR serves over 50 airport customers (including 8 of the top 10), dozens of airlines (including 6 of the top 8 North American airlines), more than 200 corporate aviation customers, as well as the U.S. government. We believe PASSUR's predictive analytics solutions system saves our customers millions of dollars by providing "Predict and Proactively Act" solutions. Our system simultaneously scans, correlates, and mines information from our private passive radar system together with multiple additional government and private databases--enabling problems, trends, and patterns of behavior in flight operations to be identified before they happen. We believe our system offers greater value to customers than the older "Review and Respond" model previously used by most aviation organizations on an after-the-incident basis. PASSUR's system is driven by our proprietary, patented, business intelligence software which is powered by a unique network of 115 company-owned passive radars located primarily in North America, with one located at each of the top 35 U.S. airports. Flight tracks are updated every 4.6 seconds, thereby providing a system which is user-friendly and useful for decision making. Other PASSURs are located in Europe and Asia. 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The consolidated financial information contained in this Form 10-Q represents condensed financial data and, therefore, does not include all footnote disclosures required to be included in financial statements prepared in conformity with accounting principles generally accepted in the United States. Such footnote information was included in the Company's annual report on Form 10-K for the year ended October 31, 2008, filed with the Securities and Exchange Commission ("SEC"); the consolidated financial data included herein should be read in conjunction with that report. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company's consolidated financial position at July 31, 2009, and its consolidated results of operations and cash flows for the nine months ended July 31, 2009 and 2008. Subsequent events were evaluated through September 14, 2009, the date these financial statements were issued. -8- Management is addressing the Company's working capital and stockholders' deficiencies by aggressively marketing the Company's PASSUR(R) information capabilities in its existing product lines, as well as in new products, which are continually being developed and deployed. The Company intends to increase the size and related airspace coverage of its owned "PASSUR(R) Network," by continuing to install PASSUR(R) Systems throughout the United States and certain foreign countries. In addition, management believes that expanding its existing software suite of products, which address the wide array of needs of the aviation industry, through the continued development of new product offerings, will continue to lead to increased growth in the Company's customer base and subscription-based revenues. Additionally, 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, and if such external financing is not consummated, the Company has a commitment to receive additional financial support from its significant shareholder and Chairman through August 20, 2010. Such commitment for financial support may be in the form of additional loans to the Company, in addition to the deferral of principal and interest payments due on the existing loans, if deemed necessary. The results of operations for the interim period stated above are not necessarily indicative of the results of operations to be recorded for the full fiscal year ending October 31, 2009. Certain financial information in the footnotes have been rounded to the nearest thousand for presentation purposes. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of PASSUR Aerospace, Inc. and its wholly-owned subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation. REVENUE RECOGNITION POLICY The Company follows the provisions of the American Institute of Certified Public Accountants Statement of Position 97-2, or SOP 97-2, SOFTWARE REVENUE RECOGNITION, as amended. SOP 97-2 delineates the accounting practices for software products, maintenance and support services, and consulting revenue. Under SOP 97-2, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is determinable, and collection of the resulting receivable is probable. For arrangements involving multiple elements (e.g., maintenance, support, and other services), the Company allocates revenue to each element of the arrangement based on vendor-specific objective evidence of its fair value, or for products not being sold separately, the objective and verifiable fair value established by management. The Company recognizes service and maintenance revenues on a straight-line basis over the service contract period. Revenues for data subscription services are recognized on a monthly basis upon the execution of an agreement and the customer's receipt of the data. The Company recognizes license fee revenues on a straight-line basis over the term of the license agreement, which typically does not exceed five years. -9- The Company recognizes initial set up fee revenues and associated costs on a straight-line basis over the estimated life of the customer relationship period, typically five years. ACCOUNTS RECEIVABLE The Company uses installment license and/or maintenance agreements as part of its standard business practice. The Company has a history of successfully collecting amounts due under the original payment terms, without making concessions on payments, software products, maintenance, or other services. Net accounts receivable are comprised of either the monthly, quarterly, or annual committed amounts due from customers pursuant to the terms of each respective customer's agreement. These account receivable balances include unearned revenue attributable to deferred subscription revenues, deferred maintenance revenues, and unamortized license fee revenues. Deferred revenue amounts represent fees billed prior to actual performance of services, which will be recognized as revenue over the respective license agreement term, which typically does not exceed five years. Accounts receivable balances also include initial set up fees billed when the service is performed and revenues relating to these set up fees are recognized on a straight-line basis over the estimated life of the customer relationship period, typically five years. As of July 31, 2009, the provision for doubtful accounts was approximately $31,000, compared to $54,000, recorded as of the fiscal year ended October 31, 2008. The Company monitors the outstanding accounts receivable balance and believes the $31,000 provision is reasonable. COST OF REVENUES The Company has not segregated its cost of revenues between cost of system revenues and cost of subscription and maintenance revenues, as it is not practicable to segregate such costs. Costs associated with system revenues consist primarily of purchased materials, direct labor, and overhead costs. Costs associated with subscription and maintenance revenues consist primarily of direct labor, communication costs, depreciation of PASSUR(R) Network assets, amortization of software development costs, and overhead cost allocations. Also included in cost of revenues are costs associated with the upgrades of PASSUR(R) systems necessary to make such systems compatible with new software applications, as well as the ordinary repair and maintenance of existing PASSUR(R) Network systems. Additionally, cost of revenues in each reporting period is impacted by: (1) the number of PASSUR(R) units produced, upgraded, shipped, and installed during the year which are added to the PASSUR(R) Network and (2) capitalized costs associated with software development projects, collectively referred to as "Capitalized Assets", which are depreciated and/or amortized over their respective useful lives and charged to cost of revenues. PASSUR(R) NETWORK The PASSUR(R) Network installations, which include the direct and indirect production and installation costs incurred for each of the Company-owned PASSUR(R) Systems (the "PASSUR(R) Network"), are recorded at cost, net of accumulated depreciation. Depreciation is charged to cost of revenues and is calculated using the straight-line method over the estimated useful life of the asset, which is estimated at seven years. Units that are not placed into service are not depreciated until they are placed into service. -10- CAPITALIZED SOFTWARE COSTS The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 86, "ACCOUNTING FOR THE COSTS OF SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED." Costs incurred to develop computer software products as well as significant enhancements to software features of the existing products to be sold or otherwise marketed, are capitalized after technological feasibility is established and ending when the product is available for release to customers. Once the software products become available for general release to the public, the Company begins to amortize such costs to cost of revenues. Amortization of capitalized software costs is provided on a product-by-product basis based on the greater of the ratio of current gross revenues to the total of current and anticipated future gross revenues or the straight-line method over the estimated economic life of the product beginning at the point the product becomes available for general release, typically over five years. Costs incurred to improve and support products after they become available for general release are charged to expense as incurred. Costs incurred to enhance products are capitalized. The assessment of recoverability of capitalized software development costs requires the exercise of judgment by management. In the opinion of management, all such costs capitalized as of July 31, 2009 are recoverable through anticipated future sales of such applicable products. DEFERRED INCOME Deferred income includes advances received on subscription services and/or maintenance agreements, which are derived from the Company's PASSUR(R) Network and which may be prepaid either annually or quarterly, as well as the unamortized portion of one-time payments received for license fees relating to Company software applications. Revenues from subscription and maintenance services are recognized as income ratably over the subscription and/or maintenance period that coincides with the respective agreement. The Company recognizes license fee revenues on a straight-line basis over the term of the license agreement, which typically does not exceed five years. The Company recognizes initial set up fee revenues and associated costs on a straight-line basis over the estimated life of the customer relationship period, typically five years. 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. -11- NET INCOME PER SHARE INFORMATION Basic net income per share is computed based on the weighted average number of shares outstanding. Diluted net income per share is based on the sum of the weighted average number of common shares outstanding and common stock equivalents. Shares used to calculate net income per share are as follows: FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED JULY 31, ENDED JULY 31, -------------------- --------------------- 2009 2008 2009 2008 --------- --------- --------- --------- Basic weighted average shares 4,175,307 4,146,448 4,156,173 4,124,824 outstanding Effect of dilutive stock options -- 1,277,191 1,080,845 1,312,134 --------- --------- --------- --------- Diluted weighted average shares outstanding 4,175,307 5,423,639 5,237,018 5,436,958 ========= ========= ========= ========= Weighted average shares which are not included in the calculation of diluted net income per share because their impact is anti-dilutive Stock options 1,598,000 500,309 517,155 465,366 STOCK BASED COMPENSATION The Company follows FASB No. 123R "Share-Based Compensation" which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options was determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for stock options in footnote disclosures required under SFAS No. 123. Such fair value is recognized as expense over the service period, net of estimated forfeitures. For the three and nine months ended July 31, 2009 and 2008, stock compensation expense of approximately $11,000 and $23,000, and $34,000 and $67,000, respectively, was incurred by the Company and primarily charged to selling, general, and administrative expenses. For the three and nine months ended July 31, 2009, stock compensation expense was reduced approximately $5,000 and $46,000, respectively, due to reversals for the forfeiture of options with a service condition previously issued to employees terminated in the quarters ended April 30, 2009 and July 31, 2009. FAIR VALUE OF FINANCIAL INSTRUMENTS The recorded amounts of the Company's cash, receivables, accounts payable, and accrued liabilities approximate their fair values principally because of the short-term nature of these items. The fair value of related party debt is not practical to determine. -12- RECLASSIFICATIONS Certain amounts as previously reported have been reclassified to conform to current year classifications. The Company historically classified certain components of the PASSUR(R) Network as inventory and based upon its prior year re-evaluation of the use of these assets, the Company had reclassified these components as part of the PASSUR(R) Network non-current assets. The Company does not intend to sell the PASSUR(R) systems. There is no balance sheet or income statement effect due to this reclassification. Accordingly, for the nine months ended July 31, 2008, operating cash flows increased and investing cash flows decreased by approximately $61,000. RECENT ACCOUNTING PRONOUNCEMENTS In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally accepted Accounting Principles - a replacement of FASB Statement No. 162. The FASB Accounting Standards Codification ("Codification") will be the single source of authoritative nongovernmental U.S. generally accepted accounting principles ("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. The Codification does not change GAAP and will not have a material impact on the Company's consolidated financial statements. The Company adopted SFAS No. 157 "Fair Value Measurement," ("SFAS No. 157") on November 1, 2008. SFAS No. 157 defines fair value, establishes a methodology for measuring fair value, and expands the required disclosure for fair value measurements. On February 12, 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position No. SFAS 157-2, "Effective Date of FASB Statement No. 157," which amends SFAS No. 157 by delaying its effective date by one year for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of SFAS No. 157 for the Company's financial assets and financial liabilities did not have a material impact on its consolidated financial statements. Effective November 1, 2009, SFAS No. 157 will also apply to all other fair value measurements for the Company. The Company is evaluating the effect the implementation of SFAS No. 157 will have on its non-financial assets and non-financial liabilities on its consolidated financial statements. In December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, in-process research and development, and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS 141R is effective for fiscal years beginning after December 15, 2008. The Company has not yet evaluated the impact, if any, of adopting this pronouncement. -13- In December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests (NCI) and classified as a component of equity. This new consolidation method will significantly change the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company has not yet evaluated the impact, if any, of adopting this pronouncement. 3. RELATED PARTY TRANSACTIONS During the nine months ended July 31, 2009, G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, loaned the Company an additional $100,000, bringing the principal amount of notes due to Mr. Gilbert to $13,914,880 on July 31, 2009. The notes mature on November 1, 2011. Interest accrued at the annual rate of 4.5% from November 1, 2008 to January 31, 2009, payable in cash. Beginning February 1, 2009 through October 31, 2011, the annual interest rate is 9% payable as follows: interest at the annual rate of 6% will be payable in cash plus the remaining interest at the annual rate of 3% will be payable at the option of the Company in cash or "paid in kind" and added to the principal of the note. Interest payments shall be made annually at October 31 of each year. During fiscal 2008, Mr. Gilbert loaned the Company an additional $1,200,000, bringing the principal amount of notes due to Mr. Gilbert to $13,814,880 on October 31, 2008, and which mature on November 1, 2011. The notes payable-related party are classified as long-term liabilities because no amounts are due before November 1, 2011. The Company has a commitment from Mr. Gilbert that if the Company, at any time, is unable to meet its obligations through August 20, 2010, 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 interest payments due on the existing loans, if deemed necessary. The notes are secured by the Company's assets. -14- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DESCRIPTION OF BUSINESS PASSUR Aerospace, Inc. (the "Company", "we", or "our") is a business intelligence company which develops predictive analytics built on proprietary algorithms and on the concurrent integration and simultaneous mining of multiple databases. We believe we are positioned to provide the industry standard in business intelligence dashboards and predictive analytics for aviation organizations. PASSUR serves over 50 airport customers (including 8 of the top 10), dozens of airlines (including 6 of the top 8 North American airlines), more than 200 corporate aviation customers, as well as the U.S. government. We believe PASSUR's predictive analytics solutions system saves our customers millions of dollars by providing "Predict and Proactively Act" solutions. Our system simultaneously scans, correlates, and mines information from our private passive radar system together with multiple additional government and private databases--enabling problems, trends, and patterns of behavior in flight operations to be identified before they happen. We believe our system offers greater value to customers than the older "Review and Respond" model previously used by most aviation organizations on an after-the-incident basis. PASSUR's system is driven by our proprietary, patented, business intelligence software which is powered by a unique network of 115 company-owned passive radars located primarily in North America, with one located at each of the top 35 U.S. airports. Flight tracks are updated every 4.6 seconds, thereby providing a system which is user-friendly and useful for decision making. Other PASSURs are located in Europe and Asia. -15- RESULTS OF OPERATIONS REVENUES Revenues during the three and nine months ended July 31, 2009 increased by approximately $338,000, or 17%, and $1,149,000 or 20%, respectively, to approximately $2,336,000 and $6,757,000, respectively, when compared to the same periods in fiscal 2008. This increase was primarily due to the continued development and deployment of new software applications, the Company's marketing efforts, as well as the wide selection of products which address customers' needs together with ease of delivery through web-based applications. These efforts resulted in new customers subscribing to the Company's suite of software applications and higher subscriptions from some of its existing customers. Management concentrates its efforts on the sale of business intelligence and decision support product applications utilizing data primarily derived from the PASSUR(R) Information Network. Such efforts include the continued development of new product applications, as well as enhancements and maintenance of existing applications. As a result, during the three and nine months ended July 31, 2009, subscription-based revenues increased approximately $315,000, or 17%, and $1,066,000, or 20%, respectively, compared to the same periods in fiscal 2008. The Company's business plan is to continue to focus on increasing subscription-based revenues from the suite of software applications, and to develop new applications designed to address the needs of the aviation industry. The Company shipped ten and installed twelve Company-owned PASSUR(R) Systems during the nine months ended July 31, 2009. For the same period in fiscal 2008 the Company shipped eighteen and installed twenty-one Company-owned PASSUR(R) Systems (installations include systems shipped during the current and previous fiscal year). The shipped and installed PASSUR(R) Systems were capitalized as part of the Company-owned "PASSUR(R) Information Network." The Company will continue to expand the PASSUR(R) Information Network by shipping and installing additional PASSUR(R) Systems throughout fiscal 2009. The Company is continuing its manufacturing program in fiscal 2009 and there were thirty PASSUR(R)'s in the process of being built as of July 31, 2009. Management anticipates that future PASSUR(R) sites will provide increased coverage for the PASSUR(R) Information Network by increasing the Company's ability to contract with new customers at such locations and by providing existing customers with additional data solutions. The Company will continue to market the data generated from the PASSUR(R) Information Network directly to the aviation industry and organizations that serve, or are served by, the aviation industry. There were one hundred and eleven Company-owned PASSUR(R) Systems located at various airports worldwide as of July 31, 2009. COST OF REVENUES Costs associated with subscription and maintenance revenues consist primarily of direct labor, depreciation of PASSUR(R) Network assets, amortization of software development costs, communication costs, data feeds, and allocated overhead costs. Also included in cost of revenues are costs associated with the upgrades of PASSUR(R) Systems necessary to make older systems compatible with new software applications, as well as the ordinary repair and maintenance of existing network systems. Additionally, cost of revenues in each reporting period is impacted by: (1) the number of PASSUR(R) units produced, upgraded, shipped, and installed during the year which are added to the PASSUR(R) Network and (2) capitalized costs associated with software development projects, collectively referred to as "Capitalized Assets", which are depreciated and/or amortized over their respective useful lives and charged to cost of revenues. -16- For the three and nine months ended July 31, 2009, cost of revenues increased by approximately $493,000, or 88%, and $840,000 or 47%, respectively, compared to the same periods in fiscal 2008, primarily due to a decrease in the number of PASSUR(R) Systems added to the PASSUR(R) Network, and a decrease in the capitalization of manufacturing costs, as well as an increase in communication costs, data feeds, depreciation and amortization, and head-count related costs. RESEARCH AND DEVELOPMENT For the three and nine months ended July 31, 2009 and 2008, research and development expenses remained consistent. The Company's research and development efforts include activities associated with the enhancement, maintenance, and improvement of the Company's existing hardware, software, and information products. The Company anticipates that it will continue to invest in research and development to develop, maintain, and support the existing and newly developed applications for its PASSUR(R) customers. There were no customer sponsored research and development activities during the three and nine months ended July 31, 2009 and 2008. Research and development expenses are funded by current operations. SELLING, GENERAL AND ADMINISTRATIVE For the three months ended July 31, 2009, selling, general and administrative expenses decreased by approximately $107,000, or 10%, compared to the same period in fiscal 2008. This decrease is due primarily to reductions in head-count related costs and bad debt. For the nine months ended July 31, 2009, selling, general and administrative expenses increased by approximately $367,000, or 13%, compared to the same period in fiscal 2008. This increase is due primarily to increases in compensation costs relating to new marketing initiatives, as well as legal fees. INCOME FROM OPERATIONS: Income from operations decreased by approximately $55,000, or 19%, and $46,000, or 5%, respectively, for the three and nine months ended July 31, 2009, compared to the same periods in fiscal 2008. During the three and nine months ended July 31, 2009, revenues of approximately $2,336,000 and $6,757,000 exceeded costs and expenses of approximately $2,108,000 and $5,950,000, respectively, and resulted in income from operations of approximately $228,000 and $807,000, respectively. Revenues increased by 17% and 20%, respectively, during the three and nine months ended July 31, 2009, and total costs and expenses increased by approximately $393,000, or 23%, and $1,195,000 or 25%, respectively, compared to the same periods in fiscal 2008. -17- OTHER INCOME (EXPENSE) Interest income was not significant for the three and nine months ended July 31, 2009 and 2008. Interest expense-related party increased by approximately $169,000, or 112%, and $345,000, or 78%, respectively, for the three and nine months ended July 31, 2009, compared to the same periods in fiscal 2008. These increases are due to an increase in the interest rate from 4.5% to 9% as of February 1, 2009, as well as $700,000 in higher related-party debt during the nine month period ending July 31, 2009. NET INCOME The Company had net (loss) income of approximately $(92,000), or $(0.02) per diluted share, and $11,000, or $0.0 per diluted share, during the three and nine months ended July 31, 2009, as compared to net income, respectively, of approximately $127,000, or $.02 per diluted share, and $406,000, or $.07 per diluted share, respectively, during the same periods of fiscal 2008. This decrease in net income is primarily due a decrease in the number of PASSUR(R) Systems added to the PASSUR(R) Network, and a decrease in the capitalization of manufacturing costs, as well as, an increase in related-party interest expense during the three and nine months ended July 31, 2009, which increased by approximately $169,000 and $345,000, respectively, to approximately $320,000 and $788,000, respectively, when compared to the same periods in fiscal 2008. LIQUIDITY AND CAPITAL RESOURCES At July 31, 2009, the Company's current liabilities exceeded current assets by approximately $1,666,000. At July 31, 2009, the Company's stockholders' deficit was approximately $6,098,000. For the nine months ended July 31, 2009, the Company had net income of approximately $11,000. Management is addressing the Company's working capital and stockholders' deficiencies by aggressively marketing the Company's PASSUR(R) information capabilities in its existing product lines, as well as in new products, which are continually being developed and deployed. The Company intends to increase the size and related airspace coverage of its owned "PASSUR(R) Network," by continuing to install PASSUR(R) Systems throughout the United States and certain foreign countries. In addition, management believes that expanding its existing software suite of products, which address the wide array of needs of the aviation industry, through the continued development of new product offerings, will continue to lead to increased growth in the Company's customer base and subscription-based revenues. Additionally, 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, and if such external financing is not consummated, the Company has a commitment to receive the necessary continuing financial support to meet its obligations from its significant shareholder and Chairman through August 20, 2010. Such continuing financial support may be in the form of additional loans to the Company, in addition to the deferral of principal and/or interest payments due on the outstanding loans, if deemed necessary. -18- Net cash provided by operating activities for the nine months ended July 31, 2009 was approximately $1,463,000. Cash flow used in investing activities for the nine months ended July 31, 2009 was approximately $1,482,000, and consisted primarily of investments in the Company's PASSUR(R) Network, capitalized software development costs, and capital expenditures. Cash flow provided by financing activities for the nine months ended July 31, 2009, was approximately $122,000 primarily from notes payable-related party. No principal payments on notes payable-related party were made during the nine months ended July 31, 2009. The Company was profitable during the nine months ended July 31, 2009. To date, the Company has experienced increased revenues as a result of its subscription-based revenue model. The Company is actively addressing the increasing costs associated with supporting the business, and plans to identify and reduce any unnecessary costs as part of its cost reduction initiatives. Additionally, the aviation market has been impacted by budgetary constraints, airline bankruptcies and consolidations due to the downturn in the current economy, the terrorist events of September 11, 2001, the continued war on terrorism, and increased fuel costs. The aviation market is extensively regulated by government agencies, particularly the Federal Aviation Administration 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 airports, airlines, and organizations 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. Interest by potential customers in the information and decision support software products obtained from the PASSUR(R) Network remains strong, and the Company anticipates an increase in future revenues. However, the Company cannot predict if such revenues will materialize. If sales do not increase, losses may occur. The extent of such profits or losses will be dependent on sales volume achieved and Company cost reduction initiatives. -19- 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. 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 recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" ("SAB 104"), as codified. SAB 104 requires that four basic criteria must be met before revenues can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. The Company also recognizes revenue in accordance with Statement of Position 97-2, "SOFTWARE REVENUE RECOGNITION" ("SOP 97-2"), as amended, when applicable. The Company's revenues are generated from the following: (1) subscription and maintenance agreements and (2) one-time license fees. Revenues generated from subscription and maintenance agreements are recognized over the term of such executed agreements and/or customer's receipt of such data or services. In accordance with SOP 97-2, we recognize revenue from the licensing of our software products or performance of maintenance when all of the following criteria are met: (1) we have evidence of an agreement with a customer; (2) we deliver the products/services; (3) license or maintenance agreement terms are deemed fixed or determinable and free of contingencies or uncertainties that may alter the agreement, such that the sale may not be complete and/or final; and (4) collection is probable. -20- The Company records revenues pursuant to individual contracts on a month-by-month basis, as outlined by the applicable agreement(s). In many cases, the Company may invoice respective customers in advance of specified period(s), either quarterly or annually, which coincides with the terms of the agreement. In such cases, the Company will defer at the close of each month and/or reporting period, any subscription or maintenance revenues invoiced for which services have yet to be rendered, in accordance with SOP 97-2. Our software licenses generally do not include acceptance provisions. An acceptance provision generally allows a customer to test the software for a defined period of time before committing to a binding agreement to license the software. If a subscription agreement includes an acceptance provision, the Company will not recognize revenue until the earlier of the receipt of a written customer acceptance or, if not notified by the customer to cancel the subscription agreement, the expiration of the acceptance period. From time to time, the Company will receive one-time payments from customers for rights, including but not limited to, the rights to use certain data at an agreed upon location(s) for a specific use and/or for an unlimited number of users. Such one-time payments are in the form of license fees. These fees are recognized as revenue ratably over the term of the license agreement or expected useful life of such license arrangement, whichever is longer, but typically five years. Any deferred revenue is classified on the Company's balance sheet as a liability in the deferred income account until such time as revenue from services is properly recognized as revenue in accordance with SAB 104 and/or SOP 97-2 and the corresponding agreement. -21- CAPITALIZED SOFTWARE COSTS The Company follows the provisions of Statement of Financial Accounting Standards No. 86, "ACCOUNTING FOR THE COSTS OF SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED" ("SFAS 86"). Costs incurred to develop computer hardware and software products, as well as enhancements to software features of the existing products to be sold or otherwise marketed, are capitalized after technological feasibility is established. Once the software products become available for general release to the public, the Company will begin to amortize such costs to cost of revenues. The Company's policy on capitalized software costs determines whether the costs incurred are classified as capitalized costs (in accordance with SFAS 86) or as research and development expenses. In cases where the Company capitalizes costs incurred with development of new hardware/software products, a product specification is designed and/or a working model of the respective project is developed as the guideline for the capitalization of costs associated with such project in accordance with SFAS 86. Once a product has been made available for sale and/or released for sale to the general public, the development costs of that product are no longer capitalized and amortization commences over a five-year period. Any additional costs incurred to maintain or support such product are expensed as incurred. In some cases, the Company may capitalize costs incurred in the development of enhanced versions of already existing products, but will immediately expense any additional costs incurred to maintain products which were completed and released to the general public, in accordance with SFAS 86. Management uses judgment in determining and evaluating whether development costs meet the criteria for immediate expense or capitalization. The Company's net capitalized software costs at July 31, 2009 totaled approximately $2,330,000. The carrying value of the capitalized software costs is dependent on the forecasted and actual future cash flows generated from such assets as determined and evaluated by management. IMPAIRMENT OF LONG-LIVED ASSETS The Company follows the provisions of Statement of Financial Accounting Standards No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" ("SFAS 144"). At each reporting period, the Company reviews long-lived assets for impairment to determine if the carrying amount of an asset may not be recoverable. Impairment is recognized when the sum of the undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value. The Company evaluates the periods of amortization continually in determining whether any events or circumstances warrant revised estimates of useful lives. -22- The Company's long-lived assets include property, plant, and equipment and the PASSUR(R) Network, which, at July 31, 2009, approximated $7,193,000, and accounted for 63% of the Company's total assets. The carrying value of long-lived assets is based on management's assessment of the anticipated future cash flows from those assets. 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. As of July 31, 2009, based upon management's evaluation of the above asset groups, no impairments of these asset groups exist. If these forecasts are not met, the Company may have to record impairment charges not previously recorded. 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") 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, among others, the uncertainties related to the ability of the Company to sell data subscriptions from its PASSUR(R) Network and to make new sales of its PASSUR(R) and other product lines (due to potential competitive pressure from other companies or other products), as well as the current uncertainty in the aviation industry due to terrorist events, the war on terror, increased fuel costs, and airline bankruptcies and consolidations. Other uncertainties which could impact the Company are uncertainties with respect to future changes in governmental regulation and the impact that such changes in regulation will have on the Company's business. Additional uncertainties are related to a) the Company's ability to find and maintain the personnel necessary to sell, manufacture, and service its products, b) its ability to adequately protect its intellectual property, c) its ability to secure future financing and d) its ability to maintain the continued support of its significant shareholder. Readers are cautioned not to place undue reliance on these forward-looking statements, which relate only to events as of the date on which the statements are made and which reflect management's analysis, judgments, belief, or expectation only as of such date. The Company undertakes no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. -23- ITEM 4. CONTROLS AND PROCEDURES. For purposes of Rules 13a-15 and 15d-15 of the Exchange Act 1934 ("Exchange Act"), the term "disclosure controls and procedures" refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized, and reported within required time periods. The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of July 31, 2009 at ensuring that required information would be disclosed on a timely basis in the Company's reports filed under the Exchange Act. As previously reported in March 2009, it came to the Company's attention that a number of reports required by Section 16(a) of the Exchange Act had inadvertently not been filed with the SEC - specifically Forms 3 (Initial Statement of Beneficial Ownership of Securities) and Forms 4 (Statement of Changes in Beneficial Ownership). In addition, the failure to file these reports was not properly documented in several of the Company's Annual Reports on Forms 10-K and Definitive Proxy Statements, as filed with the SEC. As a result of this error, the Company implemented a new procedure to track such filings and the Company has notified the delinquent filers and substantially all of the required filings have been made. In March 2009, the Company implemented a procedure whereby Section 16 filings are tracked under the supervision of the Company's Chief Financial Officer, who is also charged with reviewing the disclosures required by Item 405 of Regulation S-K in the Company's Annual Reports on Form 10-K and Definitive Proxy Statements. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) within the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. -24- PART II. OTHER INFORMATION ITEM 6. EXHIBITS 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -25- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PASSUR AEROSPACE, INC. DATED: SEPTEMBER 14, 2009 By: /s/ James T. Barry ---------------------- James T. Barry, President and Chief Executive Officer DATED: SEPTEMBER 14, 2009 By: /s/ Jeffrey P. Devaney -------------------------- Jeffrey P. Devaney, Chief Financial Officer, Treasurer, and Secretary (Principal Financial and Accounting Officer) -26-
EXHIBIT INDEX ----------------------- -------------------------------------------------------------------- ------------------------ PAPER (P) OR EXHIBIT NO. DESCRIPTION ELECTRONIC (E) ----------------------- -------------------------------------------------------------------- ------------------------ ----------------------- -------------------------------------------------------------------- ------------------------ 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of E 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ----------------------- -------------------------------------------------------------------- ------------------------ 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of E 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ----------------------- -------------------------------------------------------------------- ------------------------ 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of E the Sarbanes-Oxley Act of 2002. ----------------------- -------------------------------------------------------------------- ------------------------ 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of E the Sarbanes-Oxley Act of 2002. ----------------------- -------------------------------------------------------------------- ------------------------
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