10-Q 1 t306054.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, 2010 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 (I.R.S. Employer Identification No.) of Incorporation or Organization) ONE LANDMARK SQUARE, SUITE 1900, STAMFORD, CONNECTICUT 06901 ------------------------------------------------------ -------------- (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 the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if a 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 4,661,448 shares of the Registrant's common stock with a par value of $0.01 per share outstanding as of September 8, 2010. INDEX PASSUR Aerospace, Inc. and Subsidiary PAGE ---- PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements Consolidated Balance Sheets as of July 31, 2010 (unaudited) 3 and October 31, 2009. Consolidated Statements of Operations (unaudited) 4 Nine months ended July 31, 2010 and 2009. Consolidated Statements Operations (unaudited) 5 Three months ended July 31, 2010 and 2009. Consolidated Statements of Cash Flows (unaudited) 6 Nine months ended July 31, 2010 and 2009. Notes to Consolidated Financial 7 Statements (unaudited) - July 31, 2010. Item 2. Management's Discussion and Analysis of Financial 13 Condition and Results of Operations. Item 3. Quantitative and Qualitative Disclosures about Market Risk. 18 Item 4T. Controls and Procedures. 18 PART II. OTHER INFORMATION 19 Item 6. Exhibits. 19 Signatures. 20 2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PASSUR Aerospace, Inc. and Subsidiary Consolidated Balance Sheets
JULY 31, October 31, 2010 2009 ---------------------------- (UNAUDITED) (Audited) ASSETS Current assets: Cash $ 259,874 $ 250,626 Accounts receivable, net 1,127,435 867,043 Prepaid expenses and other current assets 476,084 243,918 ---------------------------- Total current assets 1,863,393 1,361,587 Property, plant and equipment, net 207,257 259,231 PASSUR(R) Network, net 7,336,803 7,291,429 Software development costs, net 3,032,031 2,516,278 Other assets 233,310 282,569 ---------------------------- TOTAL ASSETS $ 12,672,794 $ 11,711,094 ============================ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 798,073 $ 407,647 Accrued expenses and other current liabilities 714,680 540,793 Deferred revenue, current portion 1,064,549 1,377,106 Accrued interest - related party 622,848 1,108,112 ---------------------------- Total current liabilities 3,200,150 3,433,658 Deferred revenue, less current portion 214,054 305,193 Notes payable - related party 14,914,880 13,914,880 ---------------------------- 18,329,084 17,653,731 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 5,357,948 in 2010 and 4,990,448 in 2009 53,579 49,904 Additional paid-in capital 4,693,948 4,436,770 Accumulated deficit (8,780,342) (8,805,836) ---------------------------- (4,032,815) (4,319,162) Treasury stock, at cost, 696,500 shares in 2010 and 2009 (1,623,475) (1,623,475) ---------------------------- Total stockholders' deficit (5,656,290) (5,942,637) ---------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 12,672,794 $ 11,711,094 ============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3 PASSUR Aerospace, Inc. and Subsidiary Consolidated Statements of Operations (Unaudited)
NINE MONTHS ENDED JULY 31, 2010 2009 ----------------------- REVENUES: Subscriptions $7,101,844 $6,306,629 Maintenance 255,028 278,686 Other 140,631 171,317 ----------------------- Total revenues 7,497,503 6,756,632 ----------------------- COST AND EXPENSES: Cost of revenues 3,292,878 2,610,719 Research and development 218,842 204,707 Selling, general, and administrative expenses 2,915,477 3,134,099 ----------------------- 6,427,197 5,949,525 ----------------------- INCOME FROM OPERATIONS 1,070,306 807,107 Interest expense - related party 1,016,573 788,069 ----------------------- Income before income taxes 53,733 19,038 Provision for income taxes 28,239 8,482 ----------------------- NET INCOME $ 25,494 $ 10,556 ======================= Net income per common share - basic $ .01 $ -- ======================= Net income per common share - diluted $ -- $ -- ======================= Weighted average number of common shares outstanding - basic 4,517,254 4,156,173 ======================= Weighted average number of common shares outstanding - diluted 5,374,299 5,237,018 =======================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 PASSUR Aerospace, Inc. and Subsidiary Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED JULY 31, 2010 2009 ------------------------- REVENUES: Subscriptions $ 2,656,622 $ 2,187,935 Maintenance 82,895 91,795 Other 31,371 56,225 ------------------------- Total revenues 2,770,888 2,335,955 ------------------------- COST AND EXPENSES: Cost of revenues 1,239,946 1,051,451 Research and development 75,555 74,687 Selling, general, and administrative expenses 1,031,197 981,767 ------------------------- 2,346,698 2,107,905 ------------------------- INCOME FROM OPERATIONS 424,190 228,050 Interest expense - related party 343,042 320,042 ------------------------- Income (loss) before income taxes 81,148 (91,992) Provision for income taxes 8,007 -- ------------------------- NET INCOME (LOSS) $ 73,141 $ (91,992) ========================= Net income (loss) per common share - basic $ .02 $ (.02) ========================= Net income (loss) per common share - diluted $ .01 $ (.02) ========================= Weighted average number of common shares outstanding - basic 4,590,741 4,175,307 ========================= Weighted average number of common shares outstanding - diluted 5,463,424 4,175,307 =========================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5 PASSUR Aerospace, Inc. and Subsidiary Consolidated Statements of Cash Flows (Unaudited)
NINE MONTHS ENDED JULY 31, 2010 2009 -------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 25,494 $ 10,556 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,389,031 1,233,188 Stock-based compensation expense 77,920 22,898 Changes in operating assets and liabilities: Accounts receivable, net (260,392) (423,197) Prepaid expenses and other current assets (232,166) (95,909) Other assets 49,259 (208,066) Accounts payable 390,426 (120,411) Deferred revenue (403,696) 432,306 Accrued expenses and other current liabilities 173,887 (176,314) Accrued interest - related party (485,264) 788,069 -------------------------- Total adjustments 699,005 1,452,564 -------------------------- Net cash provided by operating activities 724,499 1,463,120 CASH FLOWS FROM INVESTING ACTIVITIES PASSUR(R) Network (959,882) (842,623) Software development costs (811,147) (614,815) Capital expenditures (127,155) (24,678) -------------------------- Net cash used in investing activities (1,898,184) (1,482,116) -------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable - related party 1,000,000 100,000 Proceeds from exercise of stock options 182,933 22,125 -------------------------- Net cash provided by financing activities 1,182,933 122,125 -------------------------- Increase in cash 9,248 103,129 Cash - beginning of period 250,626 217,316 -------------------------- Cash - end of period $ 259,874 $ 320,445 ========================== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest - related party $ 1,501,837 $ -- Income taxes $ 28,239 $ 8,482
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6 PASSUR Aerospace, Inc. and Subsidiary Notes to Consolidated Financial Statements July 31, 2010 (Unaudited) 1. NATURE OF BUSINESS PASSUR Aerospace, Inc. (the "Company", "PASSUR(R)", "we", or "our") is a business intelligence company which develops predictive analytics built on proprietary algorithms and on concurrent integration and simultaneous mining of multiple databases. The Company believes it is positioned to provide the industry standard in business intelligence dashboards and predictive analytics for aviation organizations. To the best of our knowledge, PASSUR(R) is the only business intelligence and predictive analytics company with a vertical expertise in the aviation market - providing information, decision support, predictive analytics, collaborative solutions, and professional services for complete, turn-key operations. The Company's principal business is to provide business intelligence and predictive analytics solutions which save money and make available mission critical information for aviation organizations. These analytics are derived from its proprietary PASSUR(R) Network of live flight information, updated every 4.6 seconds, and include decision support software, predictive analytics, and web-delivered collaborative decision solutions enhanced by professional services, provided by industry experts. PASSUR(R) serves most major airlines (including six of the top seven North American airlines, as well as the top five hub airlines), over fifty airport customers (including ten of the top fifteen North American airports), and more than two hundred corporate aviation customers, as well as the US Government. The Company believes its predictive analytics save its customers millions of dollars by providing "Predict and Proactively Act" solutions. The PASSUR(R) Network simultaneously scans, correlates, and mines information from its proprietary 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. The PASSUR(R) Network includes one hundred and forty-nine Company-owned passive radars located primarily in North America, with one located at each of the top thirty-five U.S. airports. Other PASSUR(R)s are located in Europe and Asia. Flight tracks are updated every 4.6 seconds, thereby providing a system which is user-friendly and useful for decision making. 7 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, 2009, 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, 2010, and its consolidated results of operations and cash flows for the nine months ended July 31, 2010 and 2009. 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 suite of software 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 31, 2011. 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. 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, 2010. 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. 8 REVENUE RECOGNITION POLICY The Company follows the provisions of FASB ASC 985-605 (SOP 97-2, "SOFTWARE REVENUE RECOGNITION"), as amended. ASC 985-605 delineates the accounting practices for software products, maintenance, support services, and professional services revenue. Under ASC 985-605, 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 performs certain professional services for customers on a subscription basis that have stand-alone value. Such subscription based professional services are recognized over the subscription period. 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. 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 all amounts due under the original payment terms, without making concessions on payments, software products, maintenance, or other services. Net accounts receivable are composed 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 are recognized on a straight-line basis over the estimated life of the customer relationship period, typically five years. As of July 31, 2010, provision for doubtful accounts was approximately $50,000, compared to $43,000, recorded as of the fiscal year ended October 31, 2009. The Company monitors its outstanding accounts receivable balances and believes the $50,000 provision is reasonable. COST OF REVENUES Costs associated with subscription and maintenance revenues consist primarily of direct labor, depreciation of PASSUR(R) Network Systems, amortization of software development costs, communication costs, data feeds, allocated overhead costs, travel and entertainment, and consulting fees. Also included in cost of revenues are costs associated with upgrades to PASSUR(R) Network 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) Network Systems added, which include the production, shipment, and installation of these assets, which are capitalized to the PASSUR(R) Network System; and (2) capitalized costs associated with software development projects. Both of these are referred to as "Capitalized Assets", and are depreciated and/or amortized over their respective useful lives and charged to cost of revenues. 9 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, 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 in service. CAPITALIZED SOFTWARE COSTS The Company follows the provisions of FASB ASC 985-20 (SFAS 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, 2010 are recoverable through anticipated future sales of such applicable products. DEFERRED REVENUE Deferred revenue 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. 10 NET INCOME (LOSS) PER SHARE INFORMATION Basic net income (loss) per share is computed based on the weighted average number of shares outstanding. Diluted net income (loss) 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 (loss) per share are as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED JULY 31, ENDED JULY 31, 2010 2009 2010 2009 --------------------------------------------- Basic weighted average shares outstanding 4,590,741 4,175,307 4,517,254 4,156,173 Effect of dilutive stock options 872,683 -- 857,045 1,080,845 --------------------------------------------- Diluted weighted average shares outstanding 5,463,424 4,175,307 5,374,299 5,237,018 ============================================= Weighted average shares which are not included in the calculation of diluted net income per share because their impact is anti-dilutive Stock options 515,818 1,598,000 531,454 517,155 =============================================
STOCK-BASED COMPENSATION The Company follows FASB ASC 718 (SFAS 123R, "Share-Based Payments") 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. Such fair value is recognized as expense over the service period, net of forfeitures. For the three and nine months ended July 31, 2010 and 2009, stock-based compensation expense of $31,000 and $78,000 and $11,000 and $23,000, respectively, was primarily charged to selling, general, and administrative expenses. For the three and nine months ended July 31, 2009, stock-based compensation expense was reduced due to reversals of approximately $5,000 and $46,000, respectively, for the forfeiture of options with a service condition, previously issued to employees terminated in fiscal year 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 practicable to determine due primarily to the fact that the Company's related party debt is held by its Chairman and significant shareholder, and the Company does not have any third-party debt with which to compare. Additionally, on a recurring basis, the Company uses fair value measures when analyzing asset impairments. Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on the undiscounted estimated future cash flows expected to result from the use of the asset, their carrying values are reduced to estimated fair value. 11 RECENT ACCOUNTING PRONOUNCEMENTS In October 2009, the FASB issued Accounting Standards Update (ASU) 2009-13, "Revenue Recognition (Topic 605) -- Multiple-Deliverable Revenue Arrangements" (ASU 2009-13) and ASU 2009-14, "Software (Topic 985) -- Certain Revenue Arrangements That Include Software Elements" (ASU 2009-14). ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product's essential functionality. These new updates become effective on a prospective basis for the Company's fiscal year ended October 31, 2011, although early adoption is permitted. The Company has not yet evaluated the impact, if any, of adopting these updates. 3. RELATED PARTY TRANSACTIONS Effective November 1, 2008, the Company entered into a new agreement, renewing and extending the term of the $13,814,880 note due to G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, from one year to three years, resulting in an increase in the interest rate from 4.5% to 9% as of February 1, 2009, with a maturity of November 1, 2011. During fiscal 2009, Mr. Gilbert loaned the Company an additional $100,000, bringing the principal amount of notes due to Mr. Gilbert to $13,914,880 on October 31, 2009. The accrued interest balance on the notes was $1,108,112 as of October 31, 2009, resulting in a total of $15,022,992 due to Mr. Gilbert on October 31, 2009. Interest remained at the annual rate of 4.5% from November 1, 2008 to January 31, 2009, payable in cash. Effective February 1, 2009 through October 31, 2011, the interest rate was increased to 9% and is payable as follows: interest at the annual rate of 6% will be payable in cash with the remaining interest, at the annual rate of 3%, payable at the option of the Company in cash or "paid in kind" and added to the principal of the note. Annual interest payments are due at October 31 of each fiscal year. During October 2009, the Company entered into an agreement to extend the interest payment due to Mr. Gilbert on October 31, 2009 to December 31, 2009. This interest payment was paid in full by the Company prior to the extended payment date. During fiscal year 2010, Mr. Gilbert loaned the Company an additional $1,000,000 to fund part of the interest payment, bringing the loan balance to $14,914,880 as of July 31, 2010. During the nine months ended July 31, 2010, the Company paid Mr. Gilbert interest payments totaling $1,501,837, bringing the accrued interest balance on the notes to $622,848 as of July 31, 2010, resulting in a total of $15,537,728 due to Mr. Gilbert on July 31, 2010. The Company has a commitment from Mr. Gilbert that if the Company, at any time, is unable to meet its obligations through August 31, 2011, 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. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS The information provided in this Quarterly Report on Form 10-Q (including, without limitation, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and "Liquidity and Capital Resources", below) contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the Company's future plans, objectives, and expected performance. The words "believe," "may," "will," "could," "should," "would," "anticipate," "estimate," "expect," "project," "intend," "objective," "seek," "strive," "might," "likely result," "build," "grow," "plan," "goal," "expand," "position," or similar words, or the negatives of these words, or similar terminology, identify forward-looking statements. These statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties, and a number of factors could cause the Company's actual results to differ materially from those expressed in the forward-looking statements referred to above. These factors include, 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, airline bankruptcies and consolidations, and other risks detailed in the Company's periodic report filings with the SEC. 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. 13 DESCRIPTION OF BUSINESS The Company is a business intelligence company which develops predictive analytics built on proprietary algorithms and on concurrent integration and simultaneous mining of multiple databases. The Company believes it is positioned to provide the industry standard in business intelligence dashboards and predictive analytics for aviation organizations. To the best of our knowledge, PASSUR(R) is the only business intelligence and predictive analytics company with a vertical expertise in the aviation market - providing information, decision support, predictive analytics, collaborative solutions, and professional services for complete, turn-key operations. The Company's principal business is to provide business intelligence and predictive analytics solutions which save money and make available mission critical information for aviation organizations. These analytics are derived from its proprietary PASSUR(R) Network of live flight information, updated every 4.6 seconds, and include decision support software, predictive analytics, and web-delivered collaborative decision solutions enhanced by professional services, provided by industry experts. PASSUR(R) serves most major airlines (including six of the top seven North American airlines, as well as the top five hub airlines), over fifty airport customers (including ten of the top fifteen North American airports), and more than two hundred corporate aviation customers, as well as the US Government. The Company believes its predictive analytics save its customers millions of dollars by providing "Predict and Proactively Act" solutions. The PASSUR(R) system simultaneously scans, correlates, and mines information from its proprietary 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. The PASSUR(R) Network includes one hundred and forty-nine Company-owned passive radars located primarily in North America, with one located at each of the top thirty-five U.S. airports. Other PASSUR(R)s are located in Europe and Asia. Flight tracks are updated every 4.6 seconds, thereby providing a system which is user-friendly and useful for decision making. RESULTS OF OPERATIONS REVENUES Revenues for the three and nine months ended July 31, 2010 increased by approximately $435,000, or 19%, and $741,000, or 11%, respectively, to approximately $2,771,000 and $7,498,000, respectively, when compared to the same periods in fiscal 2009. This increase was primarily due to the continued development and deployment of new software applications and solutions, as well as the wide selection of products which address customers' needs, easily delivered through web-based applications, as well as other new products which include stand-alone professional services. These efforts resulted in new customers subscribing to the Company's suite of software applications, as well as higher subscriptions from some of its existing customers. Management concentrates its efforts on the sale of business intelligence, predictive analytics, and decision support product applications, utilizing data primarily derived from the PASSUR(R) Network. Such efforts include the continued development of new product applications, as well as enhancements and maintenance of existing applications. As a result of these efforts, for the three and nine months ended July 31, 2010, subscription-based revenues increased approximately $469,000, or 21%, and $795,000 or 13%, respectively, compared to the same periods in fiscal 2009. The Company's business plan is to continue to focus on increasing subscription-based revenues from its suite of software applications, and to develop new applications designed to address the needs of the aviation industry. 14 The Company shipped twenty-seven and installed twenty Company-owned PASSUR(R) Systems during the nine months ended July 31, 2010 (installations include systems shipped in the current and the previous fiscal year). The shipped and installed PASSUR(R) Systems were capitalized as part of the Company owned "PASSUR(R) Network." The Company will continue to expand the PASSUR(R) Network by shipping and installing additional PASSUR(R) Systems throughout fiscal 2010. Management anticipates that future PASSUR(R) sites will provide increased coverage for the PASSUR(R) 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 business intelligence, predictive analytics, as well as decision support applications and solutions derived from the PASSUR(R) Network, directly to the aviation industry and organizations that serve, or are served by, the aviation industry. There were one hundred and forty-nine Company-owned PASSUR(R) Systems located at various airports worldwide as of July 31, 2010. 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, allocated overhead costs, travel and entertainment, and consulting fees. Also included in cost of revenues are costs associated with upgrades to 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) Network units added, which include the production, shipment, and installation of these assets, which are capitalized to the PASSUR(R) Network; and (2) capitalized costs associated with software development projects. Both of these are referred to as "Capitalized Assets", and are depreciated and/or amortized over their respective useful lives and charged to cost of revenues. For the three and nine months ended July 31, 2010, cost of revenues increased by approximately $188,000, or 18%, and $682,000, or 26%, respectively, compared to the same periods in fiscal 2009, primarily due to increases in communication costs, payroll and related costs, depreciation and amortization, consulting fees, travel and entertainment costs, as well as the absence of capitalization of manufacturing costs. No PASSUR(R) Network Systems were manufactured during the nine months ended July 31, 2010. The increase in cost of revenues was partially offset by an increase in the number of PASSUR(R) Network Systems that were shipped and installed, compared to the same periods in fiscal 2009, as well as an increase in the capitalization of software development costs. RESEARCH AND DEVELOPMENT For the three and nine months ended July 31, 2010, research and development expenses remained consistent compared to the same periods in fiscal 2009. 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, 2010. Research and development expenses are funded by current operations. SELLING, GENERAL, AND ADMINISTRATIVE For the three months ended July 31, 2010, selling, general, and administrative expenses increased by approximately $49,000, or 5%, compared to the same period in fiscal 2009, primarily due to an increase in payroll and related costs. For the nine months ended July 31, 2010, selling, general, and administrative expenses decreased by approximately $219,000, or 7%, compared to the same period in fiscal 2009, primarily due to a decrease in payroll and related costs, partially offset by an increase in consulting fees. 15 INCOME FROM OPERATIONS INCOME FROM OPERATIONS: For the three and nine months ended July 31, 2010, revenues of approximately $2,771,000 and $7,498,000, respectively, exceeded costs and expenses of approximately $2,347,000 and $6,427,000, respectively, and resulted in income from operations of approximately $424,000 and $1,070,000, respectively. For the three and nine months ended July 31, 2010, total revenues increased by approximately $435,000, or 19%, and $741,000, or 11%, respectively, total costs and expenses increased by approximately $239,000, or 11%, and $478,000, or 8%, respectively, and income from operations increased by approximately $196,000, or 86%, and $263,000, or 33%, respectively, compared to the same periods in fiscal 2009. OTHER EXPENSE The Company refinanced and extended the maturity of the Company's debt at a higher interest rate effective November 1, 2008. A higher principal balance resulted in an increase in interest expense-related party of approximately $23,000, or 7%, for the three months ended July 31, 2010, compared to the same period in fiscal 2009. A higher interest rate, as well as a higher principal balance, resulted in an increase in interest expense-related party of approximately $229,000, or 29%, for the nine months ended July 31, 2010, compared to the same period in fiscal 2009. The interest rate charged by the related party increased from 4.5% to 9%, as of February 1, 2009. The principal balance of the note as of July 31, 2010 was $1,000,000 higher as compared to the same period of the prior fiscal year. NET INCOME (LOSS) The Company had net income of approximately $73,000, or $.01 per diluted share, and $25,000, or $.00 per diluted share, respectively, for the three and nine months ended July 31, 2010, as compared to a net loss of approximately $92,000, or $.02 per diluted share, and net income of approximately $11,000, or $.00 per diluted share, respectively, for the same periods of fiscal 2009. LIQUIDITY AND CAPITAL RESOURCES At July 31, 2010, the Company's current liabilities exceeded current assets by approximately $1,337,000. The notes payable to a related party of $14,914,880 are due November 1, 2011. At July 31, 2010, the Company's stockholders' deficit was approximately $5,656,000. For the nine months ended July 31, 2010, the Company had net income of approximately $25,000. Management is addressing the Company's working capital and stockholders' deficiencies by aggressively marketing the Company's PASSUR(R) Network Systems 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 suite of software 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 31, 2011. 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. 16 Effective November 1, 2008, the Company entered into a new agreement, renewing and extending the term of the $13,814,880 note due to G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, from one year to three years, resulting in an increase in the interest rate from 4.5% to 9% as of February 1, 2009, with a maturity of November 1, 2011. During fiscal 2009, Mr. Gilbert loaned the Company an additional $100,000, bringing the principal amount of notes due to Mr. Gilbert to $13,914,880 on October 31, 2009. The accrued interest balance on the notes was $1,108,112 as of October 31, 2009, resulting in a total of $15,022,992 due to Mr. Gilbert on October 31, 2009. Interest remained at the annual rate of 4.5% from November 1, 2008 to January 31, 2009, payable in cash. Effective February 1, 2009 through October 31, 2011, the interest rate was increased to 9% and is payable as follows: interest at the annual rate of 6% will be payable in cash with the remaining interest, at the annual rate of 3%, payable at the option of the Company in cash or "paid in kind" and added to the principal of the note. Annual interest payments are due at October 31 of each fiscal year. During October 2009, the Company entered into an agreement to extend the interest payment due to Mr. Gilbert on October 31, 2009 to December 31, 2009. This interest payment was paid in full by the Company prior to the extended payment date. During fiscal year 2010, Mr. Gilbert loaned the Company an additional $1,000,000 to fund part of the interest payment, bringing the loan balance to $14,914,880 as of July 31, 2010. During the nine months ended July 31, 2010, the Company paid Mr. Gilbert interest payments totaling $1,501,837, bringing the accrued interest balance on the notes to $622,848 as of July 31, 2010, resulting in a total of $15,537,728 due to Mr. Gilbert on July 31, 2010. The Company has a commitment from Mr. Gilbert that if the Company, at any time, is unable to meet its obligations through August 31, 2011, 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. Net cash provided by operating activities for the nine months ended July 31, 2010 was approximately $724,000, and consisted primarily of approximately $1,467,000 non-cash items, primarily depreciation and amortization, approximately $25,000 of net income, as well as increases in accounts payable and accrued expenses and other current liabilities. This increase was partially offset by a decrease of approximately $485,000 of accrued interest-related party, a decrease in deferred revenue, and increases in prepaid expenses and other current assets and accounts receivable, net. Cash used in investing activities for the nine months ended July 31, 2010 was approximately $1,898,000 and consisted of investments in the Company's PASSUR(R) Network Systems, capitalized software development costs, and capital expenditures. Cash provided by financing activities for the nine months ended July 31, 2010 was approximately $1,183,000 and consisted of $1,000,000 from notes payable-related party, and approximately $183,000 of proceeds from the exercise of stock options. No principal payments on notes payable-related party were made during nine months ended July 31, 2010. The Company's revenue has increased 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 PASSUR(R) Network Systems 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. 17 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. 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. These significant accounting policies are disclosed in Note 1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2009 and there have been no material changes to such policies since the filing of such Annual Report. These policies and estimates are critical to the Company's business operations and the understanding and evaluation of our financial condition and results of operations. The impact and any associated risks related to these policies are discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2009, where such policies affect its reported financial results. The actual impact of these factors may differ under different assumptions or conditions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 4T. CONTROLS AND PROCEDURES. DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report, management carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commission's rules. The Company believes that a control system, no matter how well designed and operated, can provide only reasonable assurance, not absolute assurance, that the objectives of the control system are met. Based on their evaluation as of the end of the period covered by this report, the Company's Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were effective at a reasonable assurance level as of July 31, 2010. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING 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. 18 PART II. OTHER INFORMATION ITEM 6. EXHIBITS 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under 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) under 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. 19 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, 2010 By: /s/ James T. Barry ------------------------------------------------- James T. Barry, President and Chief Executive Officer (Principal Executive Officer) DATED: SEPTEMBER 14, 2010 By: /s/ Jeffrey P. Devaney ------------------------------------------------- Jeffrey P. Devaney, Chief Financial Officer, Treasurer, and Secretary (Principal Financial and Accounting Officer) 20