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2. Restatement of Previously Issued Consolidated Financial Statement
 12 Months Ended
Oct. 31, 2017
Notes  
2. Restatement of Previously Issued Consolidated Financial Statement

2. Restatement of Previously Issued Consolidated Financial Statement

 

In connection with the preparation, review and audit of the Company's consolidated financial statements required to be included in this Annual Report on Form 10-K for the year ended October 31, 2017, management identified certain errors in the Company's current and historical consolidated financial statements. A conclusion was reached by the Audit Committee of the Company's Board of Directors, in consultation with management and the Company's independent registered public accounting firm, that the Company's previously issued consolidated financial statements for fiscal years 2016, along with each of the three quarters included in fiscal year 2017, and the opening balance sheet of fiscal year 2016, needed to be restated. This Note 2 to the consolidated financial statements discloses the nature of the restatement matters and shows the impact of the revised amounts for the year ended October 31, 2016 and the restated unaudited quarterly financial data for the interim periods in fiscal year 2017, which is immaterial to each statement of operations for each individual quarter, and is, collectively referred to as the “Restatement.”

 

The Restatement corrects errors primarily related to: (1) the capitalization of certain operating costs associated with software development which should have been expensed as incurred are contained in the Company’s financial statements; and (2) the capitalization of certain operating costs associated with the manufacturing and installation of fixed assets. The Company has also identified one other adjustment described below in items (3) that have been corrected as part of this Restatement.

 

Adjustments needed to correct errors

 

(1)

Capitalized software – The Company capitalized certain internally developed software costs that did not meet criteria for deferral under ASC 350-40, Internal-Use Software. During the preparation of its financial statements for the year ended October 31, 2017, management became aware of a potential misapplication of the Internal-Use Software guidance in relation to its accounting for capitalized costs of internally developed software, associated with certain general and administrative expenses (collectively, "G&A costs"). The Company has historically capitalized these G&A costs as part of its capitalized internally developed software. However, the Company revised its application of the internally developed software guidance to expense all G&A costs in the period incurred during the development of internally used software. This correction of an error, which created an over-capitalization of certain software expenses, an understatement of operating expenses, and an overstatement of certain balance sheet accounts, required a restatement of the Company’s previously issued financial statements.

 

(2)

Fixed Assets – The Company capitalized certain fixed asset costs that did not meet criteria for deferral under ASC 360, Property, Plant and Equipment. During the preparation of its financial statements for the year ended October 31, 2017, management became aware of a potential misapplication of the Property, Plant and Equipment guidance in relation to its accounting for capitalized costs associated with the manufacturing and installation of fixed assets, associated with certain general and administrative expenses (collectively, "G&A costs"). The Company has historically capitalized these G&A costs as part of its manufacturing and installation of fixed assets. However, the Company corrected its application of the Property, Plant and Equipment guidance to expense all G&A costs in the period incurred during the manufacturing and installation of property, plant and equipment. This correction of an error, which created an over-capitalization of certain manufacturing and installation costs, an understatement of operating expenses, and an overstatement of certain balance sheet accounts, required a restatement of the Company’s previously issued financial statements.

 

(3)

Income taxes – During the first quarter of fiscal year 2017, the Company recorded approximately $198,000 tax provision as a result of the Company adjusting its deferred tax asset relating to net operating losses in various state jurisdictions the carrying value of certain state deferred tax assets related to periods prior to fiscal year 2016.

 

The Restatement resulted in adjustments to opening retained earnings and certain assets as of November 1, 2016, related to fiscal year 2015 and prior. The cumulative effect of those adjustments decreased previously reported retained earnings by approximately $1,016,000, decreased previously reported PASSUR Network assets by approximately $600,000, decreased previously reported capitalized software development costs by approximately $800,000, and increased deferred tax assets by approximately $325,000. The table below summarizes the effects of the cumulative Restatement adjustments recorded to all periods prior to November 1, 2016 on previously reported retained earnings, PASSUR Network assets, capitalized software development costs, and deferred tax assets:

 

October 31, 2015

Select Balance Sheet Accounts

As Reported

Adjustments

As Restated

Reference

PASSUR Network, net

 $   5,902,751

 $         (554,088)

 $   5,348,663

2

Capitalized software development costs, net

 $   7,684,603

 $         (786,894)

 $   6,897,709

1

Deferred tax asset, non-current

 $   1,658,557

 $          325,234

 $   1,983,791

1-3

Total stockholders' equity

 $ 11,473,100

 $      (1,015,748)

 $ 10,457,352

1-3

 

The following tables summarize the impact of the Restatement on our previously reported Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Cash Flows for the year ending October 31, 2016:

 

October 31, 2016

 

Select Balance Sheet Accounts

As Reported

Period Adjustments

Prior Period Adjustments

As Restated

Reference

PASSUR Network, net

 $ 5,739,753

 $         12,756

 $    (554,088)

 $ 5,198,421

2

Capitalized software development costs, net

 $ 8,263,533

 $       123,399

 $    (786,894)

 $ 7,600,038

1

Deferred tax asset, non-current

 $ 1,250,833

 $      (53,100)

 $       325,234

 $ 1,522,967

1-2

Total stockholders' equity

 $12,327,187

 $         83,055

 $  (1,015,748)

 $11,394,494

1-2

 

October 31, 2016

Select Statement of Operations Accounts

As Reported

Adjustments

As Restated

Reference

Cost of revenues

 $   6,377,104

 $         (136,155)

 $   6,240,949

1-2

Income from operations

 $   1,207,904

 $          136,155

 $   1,344,059

1-2

Income tax expense

 $     589,923

 $            53,100

 $     643,023

1-2

Net income

 $     434,648

 $            83,055

 $     517,703

1-2

Net income per common share - basic

 $          0.06

 $               0.01

 $          0.07

Net income per common share - diluted

 $          0.06

 $               0.01

 $          0.07

October 31, 2016

Select Statement of Cash Flows Accounts

As Reported

Adjustments

As Restated

Reference

Net income

 $     434,648

 $            83,055

 $     517,703

1-2

Depreciation and amortization

 $   3,341,349

 $         (450,808)

 $   2,890,541

1-2

Provision for deferred taxes

 $     540,505

 $            53,100

 $     593,605

Net cash provided by operating activities

 $   4,910,053

 $         (314,653)

 $   4,595,400

1-2

PASSUR Network

 $    (776,138)

 $          154,040

 $    (622,098)

2

Capitalized software development

 $ (2,423,811)

 $          160,613

 $ (2,263,198)

1

Net cash used in investing activities

 $ (3,530,126)

 $          314,653

 $ (3,215,473)

1-2

 

The following tables summarize the impact of the Restatement on our previously reported unaudited Consolidated Balance Sheets, unaudited Consolidated Statements of Operations, and unaudited Consolidated Statements of Cash Flows for each of the quarters of fiscal year 2017:

 

Three months ended January 31, 2017

Select Balance Sheet Accounts

As Reported

Period Adjustments

Prior Period Adjustments

As Restated

Reference

PASSUR Network, net

 $   5,686,154

 $          (18,833)

 $     (541,332)

 $   5,125,989

2

Capitalized software development costs, net

 $   8,419,097

 $            27,068

 $     (663,495)

 $   7,782,670

1

Deferred tax asset, non-current

 $   1,165,039

 $                  -  

 $       272,134

 $   1,437,173

Total stockholders' equity

 $ 12,212,596

 $             8,235

 $     (932,693)

 $ 11,288,138

1-2

Six months ended April 30, 2017

Select Balance Sheet Accounts

As Reported

Period Adjustments

Prior Period Adjustments

As Restated

Reference

PASSUR Network, net

 $   5,918,106

 $          (55,970)

 $     (560,165)

 $   5,301,971

2

Capitalized software development costs, net

 $   8,616,778

 $            22,783

 $     (636,427)

 $   8,003,134

1

Deferred tax asset, non-current

 $   1,358,400

 $                  -  

 $       272,134

 $   1,630,534

Total stockholders' equity

 $ 12,287,185

 $          (33,187)

 $     (924,458)

 $ 11,329,540

1-2

Nine months ended July 31, 2017

Select Balance Sheet Accounts

As Reported

Period Adjustments

Prior Period Adjustments

As Restated

Reference

PASSUR Network, net

 $   6,169,478

 $          (35,256)

 $     (616,135)

 $   5,518,087

2

Capitalized software development costs, net

 $   8,957,601

 $            16,449

 $     (613,644)

 $   8,360,406

1

Deferred tax asset, non-current

 $   1,271,900

 $                  -  

 $       272,134

 $   1,544,034

Total stockholders' equity

 $ 11,861,213

 $          (18,807)

 $     (957,645)

 $ 10,884,761

1-2

 

Three months ended January 31, 2017

Select Statement of Operations Accounts

As Reported

Adjustments

As Restated

Reference

Cost of revenues

 $   1,690,009

 $            (8,235)

 $   1,681,774

1-2

(Loss)/Income from operations

 $    (120,467)

 $              8,235

 $    (112,232)

1-2

(Benefit) provision for income taxes

 $       94,684

 $         (197,749)

 $    (103,065)

3

Net (loss)/income

 $    (256,551)

 $          205,984

 $     (50,567)

Net (loss)/income per common share - basic

 $         (0.03)

 $               0.02

 $         (0.01)

Net (loss)/income per common share - diluted

 $         (0.03)

 $               0.02

 $         (0.01)

Three months ended April 30, 2017

Select Statement of Operations Accounts

As Reported

Adjustments

As Restated

Reference

Cost of revenues

 $   1,534,126

 $            33,187

 $   1,567,313

1-2

(Loss)/Income from operations

 $    (185,166)

 $          (33,187)

 $    (218,353)

1-2

(Benefit) provision for income taxes

 $    (192,325)

 $                  -  

 $    (192,325)

Net (loss)/income

 $     (38,112)

 $          (33,187)

 $     (71,299)

Net (loss)/income per common share - basic

 $          0.00

 $              (0.01)

 $         (0.01)

Net (loss)/income per common share - diluted

 $          0.00

 $              (0.01)

 $         (0.01)

Three months ended July 31, 2017

Select Statement of Operations Accounts

As Reported

Adjustments

As Restated

Reference

Cost of revenues

 $   1,489,703

 $              18,807

 $   1,508,510

1-2

(Loss)/Income from operations

 $    (451,460)

 $           (18,807)

 $    (470,267)

1-2

(Benefit) provision for income taxes

 $        86,500

 $                       -  

 $       86,500

Net (loss)/income

 $    (579,360)

 $          (18,807)

 $    (598,167)

Net (loss)/income per common share - basic

 $         (0.08)

 $                      -  

 $         (0.08)

Net (loss)/income per common share - diluted

 $         (0.08)

 $                      -  

 $         (0.08)

 

Three months ended January 31, 2017

Select Statement of Cash Flows Accounts

As Reported

Adjustments

As Restated

Reference

Net (loss)/income

 $    (256,551)

 $          205,984

 $      (50,567)

1-3

Depreciation and amortization

 $      857,174

 $       (111,256)

 $      745,918

1-2

Provision for deferred taxes

 $        85,794

 $       (197,749)

 $    (111,955)

3

Net cash (used in)/ provided by operating activities

 $    (124,381)

 $       (103,021)

 $    (227,402)

1-3

PASSUR Network

 $    (162,795)

 $            62,658

 $    (100,137)

2

Capitalized software development

 $    (647,432)

 $            40,362

 $    (607,070)

1

Net cash used in investing activities

 $    (896,046)

 $          103,021

 $    (793,025)

1-2

Six months ended April 30, 2017

Select Statement of Cash Flows Accounts

As Reported

Adjustments

As Restated

Reference

Net (loss)/income

 $    (294,663)

 $          172,797

 $    (121,866)

1-3

Depreciation and amortization

 $    1,702,760

 $       (222,512)

 $    1,480,248

1-2

Provision for deferred taxes

 $    (107,567)

 $       (197,749)

 $    (305,316)

3

Net cash (used in)/ provided by operating activities

 $    2,339,774

 $       (247,464)

 $   2,092,310

1-3

PASSUR Network

 $    (596,533)

 $          162,453

 $    (434,080)

2

Capitalized software development

 $ (1,327,848)

 $            85,009

 $ (1,242,839)

1

Net cash used in investing activities

 $ (2,021,324)

 $          247,464

 $ (1,773,860)

1-2

Nine months ended July 31, 2017

Select Statement of Cash Flows Accounts

As Reported

Adjustments

As Restated

Reference

Net (loss)/income

 $    (874,024)

 $          153,990

 $    (720,034)

1-3

Depreciation and amortization

 $    2,519,500

 $       (349,331)

 $   2,170,169

1-2

Provision for deferred taxes

 $      (21,067)

 $       (197,749)

 $    (218,816)

3

Net cash (used in)/ provided by operating activities

 $    2,711,495

 $       (393,090)

 $   2,318,405

1-3

PASSUR Network

 $ (1,023,608)

 $          261,238

 $    (762,370)

2

Capitalized software development

 $ (2,144,555)

 $          131,850

 $ (2,012,705)

1

Net cash used in investing activities

 $ (3,421,958)

 $          393,090

 $ (3,028,868)

1-2