| 2. Basis of Presentation and Significant Accounting Policies | 2. Basis of Presentation and Significant Accounting Policies The consolidated financial information contained in this quarterly report on Form 10-Q represents interim 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 (GAAP). Such footnote information was included in the Company's Annual Report on Form 10-K for the year ended October 31, 2017, 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 Companys consolidated financial position as of July 31, 2018, and its consolidated results of operations for the three and nine months ended July 31, 2018, and 2017. 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 ended October 31, 2018. Certain financial information in the footnotes has been rounded to the nearest thousand for presentation purposes. Certain reclassifications have been made to the prior year financial statements in order to conform to the current years presentation. Principles of Consolidation The consolidated financial statements include the accounts of PASSUR and its wholly-owned subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Companys significant estimates include those related to revenue recognition, stock-based compensation, software development costs, the PASSUR Network and income taxes. Actual results could differ from those estimates. Revenue Recognition Policy The Company recognizes revenue in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605-15, Revenue Recognition in Financial Statements (ASC 605-15), which 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 or determinable; and (4) collectability is reasonably assured. The Companys revenues are generated by selling: (1) subscription-based, real-time decision and solution information and (2) professional services. Revenues generated from subscription agreements are recognized over the term of such executed agreements and/or the customers receipt of such data or services. In accordance with ASC 605-15, the Company recognizes revenue when persuasive evidence of an arrangement exists which is evidenced by a signed agreement, the service has been deployed, as applicable, to its hosted servers, the fee is fixed and determinable, and collection of the resulting receivable is reasonably assured. The Company records revenues pursuant to individual contracts on a month-by-month basis, as outlined by the applicable agreement. In many cases, the Company may invoice respective customers in advance of the specified period, 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 revenues invoiced for which services have yet to be rendered, in accordance with ASC 605-15. Revenues generated by professional services are recognized when services are provided. The individual offerings that are included in arrangements with the Companys customers are identified and priced separately to the customer based upon the relative fair value for each individual element sold in the arrangement irrespective of the combination of products and services which are included in a particular arrangement. As such, the units of accounting are based on each individual element sold, and revenue is allocated to each element based on selling price. Selling price is determined using vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or best estimate of selling price ("BESP") if neither VSOE or TPE is available. BESP must be determined in a manner that is consistent with that used to determine the price to sell the specific elements on a standalone basis. BESP is established considering multiple factors including, but not limited to, pricing practices with different classes of customers, geographies and other factors contemplated in negotiating the arrangement with the customer. The Company uses either VSOE or BESP. From time to time, the Company will enter into an agreement with a customer to receive a one-time fee 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, installation costs associated with the deployment of additions to the Company owned PASSUR Network, or set-up fees associated with new deployments of the Company software solutions. These fees are recognized as revenue ratably over the term of the agreement or relationship period of such arrangement, whichever is longer, but typically five years. Deferred revenue is classified on the Companys balance sheet as a liability until such time as revenue from services is properly recognized as revenue in accordance with ASC 605-15 and the corresponding agreement. Cost of Revenues Costs associated with subscription and maintenance revenues consist primarily of direct labor, depreciation of PASSUR and Surface Multilateration (SMLAT) Network Systems (both collectively, the PASSUR Network), amortization of capitalized software development costs, communication costs, data feeds, travel and entertainment, and consulting fees. Also, included in cost of revenues are costs associated with upgrades to PASSUR and SMLAT Systems necessary to make such systems compatible with new software applications, as well as the ordinary repair and maintenance of existing PASSUR and SMLAT Systems. Additionally, cost of revenues in each reporting period are impacted by: (1) the number of PASSUR and SMLAT Systems added to the PASSUR Network, which includes the cost of production, shipment, and installation of these assets, which are capitalized to the PASSUR Network; and (2) new 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. Income Taxes On December 22, 2017, the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (TCJA). Under ASC 740 Income Taxes (ASC 740), the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (3) bonus depreciation that will allow for full expensing of qualified property; (4) creating a new limitation on deductible interest expense; (5) eliminating the corporate alternative minimum tax; (6) limitation on the deductibility of executive compensation under IRC §162(m); and (7) new tax rules related to foreign operations. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the tax effects of TCJA. The purpose of SAB 118 was to address any uncertainty or diversity of view in applying ASC Topic 740 in the reporting period in which the TCJA was enacted. SAB 118 addresses situations where the accounting is incomplete for certain income tax effects of the TCJA upon issuance of a companys financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment. In connection with the Companys initial analysis of the impact of the TCJA, we recorded a provisional decrease in our deferred tax assets and liabilities of approximately $1,442,000 as a result of TCJA and the reduction in the federal tax rate to 21%. Such amount was fully offset by a change in our valuation allowance. As the reduced federal tax rate of 21% is administratively effective at the beginning of the Companys fiscal year, the Company is using a blended federal statutory rate of 23.21% for computing the change in the deferred tax assets and liabilities as of January 1, 2018. While the Company is able to make a reasonable estimate of the impact of the reduction in the corporate rate, it may be affected by other analyses related to the TCJA. Accordingly, the Company is still in the process of evaluating the impacts of the TCJA and considers the amounts recorded to be provisional as of July 31, 2018. The Companys provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Companys year-to-date tax provision with the effective rate that it expects to achieve for the full year. For the three and nine months ended July 31, 2018, the Company did not record any income tax expense. For the three and nine months ended July 31, 2017, the Company recorded a provision of ( 86500 ) (208890) Accounts Receivable The Company has a history of successfully collecting all amounts due from its customers under the original terms of its subscription agreements without making concessions. The Company records accounts receivables for agreements where amounts due from customers are contractually required and are non-refundable. The carrying amount of accounts receivables is reduced by a valuation allowance that reflects the Companys best estimate of the amounts that will not be collected. Net accounts receivable is comprised of the monthly, quarterly, or annual committed amounts due from customers pursuant to the terms of each respective customers agreement. Account receivable balances include amounts attributable to deferred revenues. The Companys accounts receivable balances included $36,000 of unbilled receivables associated with contractually committed services provided to existing customers during the three and nine months ended July 31, 2018, which will be invoiced subsequent to July 31, 2018. As of October 31, 2017, the Companys accounts receivable balance included $51,000 of unbilled receivables associated with contractually committed services provided to existing customers. The provision for doubtful accounts was $159,000 as of July 31, 2018, and $184,000 as of October 31, 2017, respectively. In addition to reviewing delinquent accounts receivable, the Company considers many factors in estimating its reserve, including historical data, experience, customer types, credit worthiness, and economic trends. The Company monitors its outstanding accounts receivable balances and believes the provision is adequate. PASSUR Network The PASSUR Network is comprised of PASSUR and SMLAT Systems, which includes the direct production, shipping, and installation costs incurred for each PASSUR and SMLAT System, which are recorded at cost, net of accumulated depreciation. The Company capitalized $87,000 and $212,000 of PASSUR Network costs, for the three and nine months ended July 31, 2018, respectively. These amounts exclude $48,000 and $109,000 of parts purchased, related to the PASSUR Network, for the three and nine months ended July 31, 2018, respectively. For the three and nine months ended July 31, 2017, the Company capitalized $213,000 and $605,000, respectively, of PASSUR Network costs. These amounts exclude $87,000 and $158,000 of parts purchased related to the PASSUR Network for the three and nine months ended July 31, 2017, respectively. Depreciation expenses related to the Company-owned PASSUR Network was $213,000 and $565,000 for the three and nine months ended July 31, 2018, respectively, and $112,000 and $443,000 for the three and nine months ended July 31, 2017, respectively. Depreciation is charged to cost of revenues and is recorded using the straight-line method over the estimated useful life of the asset, which is estimated at five years for SMLAT Systems and seven years for PASSUR Systems. The net carrying balance of the PASSUR Network as of July 31, 2018, and October 31, 2017, was 5020404 6004367 In accordance with the Companys policy on long-lived assets, during the third quarter of fiscal year 2018, the Company determined it had an excess of non-critical PASSUR Network parts and supplies, which resulted in an increase of 229,500 Capitalized Software Development Costs The Company follows the provisions of ASC 350-40, Internal Use Software (ASC 350-40). ASC 350-40 provides guidance for determining whether computer software is internal-use software, and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes the costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the software are capitalized if it is determined that these upgrades or enhancements add additional functionality to the software. Costs incurred to improve and support products after they become available are charged to expense as incurred. The Company capitalized $542,000 and 1, 844,224 2,012,705 The Company amortized $666,000 and $1,766,000 of capitalized software development costs for the three and nine months ended July 31, 2018, respectively, and $413,000 and $1,252,000, for the three and nine months ended July 31, 2017 respectively. The Company records amortization of the software on a straight-line basis over the estimated useful life of the software, typically over five years within Cost of Revenues. During the third quarter of fiscal year 2018, the Company reviewed the value of its capitalized software products and determined that one capitalized software product would no longer be marketed or made available for subscription sales as currently developed, which resulted in an impairment charge and write-off of the carrying amount of approximately $736,000. These costs were recorded within Cost of Revenues. 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 assets revised life. During the third quarter of fiscal year 2018, the Company recorded approximately $230,000, $510,000 and $736,000, a total of $1,476,000, of costs associated with an increase in the provision for obsolete and slow moving PASSUR Network parts and supplies, an impairment charge and write-off of carrying amounts related to certain PASSUR Network systems, and capitalized software development costs, respectively. Please refer to footnotes above for further details. The Company did not have any additions to inventory reserves, impairment charges, or write-offs during the three and nine months ended July 31, 2017. Deferred Tax Asset Each reporting period, the Company assesses the realizability of its deferred tax assets to determine if it is more-likely-than-not that some portion, or all, of the deferred tax asset will be realized. The Company considered all available positive and negative evidence including the reversal of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operating results. The ultimate realization of a deferred tax asset is ultimately dependent on sufficient taxable income within the available carryback and/or carryforward periods to utilize the deductible temporary differences. Based on the weight of available evidence including recent financial operating results, the Company determined that its net deferred tax assets are not realizable on a more-likely-than-not basis and has recorded a full valuation allowance against its net deferred tax assets and liabilities. At July 31, 2018, the Company had available federal net operating loss carryforwards of $8,065,000, which will expire in various tax years from fiscal year 2022 through fiscal year 2038. Deferred Revenue Deferred revenue includes amounts attributable to advances received or billings related to customer agreements, which are contractually required and are non-refundable, and may be prepaid either annually, quarterly, or monthly. Deferred revenues from such customer agreements are recognized as revenue ratably over the period that coincides with the respective agreement. 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. Fair Value of Financial Instruments The recorded amounts of the Companys cash, receivables, and accounts payables 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 Companys 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. Net Loss per Share Information Basic net loss per share is computed based on the weighted average number of shares outstanding. Diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the effect of common shares issuable upon exercise of stock options, using the treasury stock method in periods in which they have a dilutive effect. The Companys 2009 Stock Incentive Plan allows for a cashless exercise. Shares used to calculate net loss per share are as follows: For the three months ended For the nine months ended July 31, July 31, 2018 2017 2018 2017 Basic Weighted average shares outstanding 7,696,091 7,696,091 7,696,091 7,693,069 Effect of dilutive stock options - - - - Diluted weighted average shares outstanding 7,696,091 7,696,091 7,696,091 7,693,069 Weighted average shares which are not included in the calculation of diluted net income per share because their impact is anti-dilutive. These shares consist of stock options. 1,632,000 1,454,000 1,632,000 1,454,000 Stock-Based Compensation The Company follows FASB ASC 718, Compensation-Stock Compensation, which requires the measurement of compensation cost for all stock-based awards at fair value on the date of grant, and recognition of stock-based compensation expense over the service period for awards expected to vest. The fair value of stock options was determined using the Black-Scholes valuation model. Such fair value is recognized as an expense over the service period, net of forfeitures. Stock-based compensation expense was $166,000 and $508,000 for the three and nine months ended July 31, 2018, respectively. For the three and nine months ended July 31, 2017, stock-based compensation expense was $153,000 and $408,000, respectively. Stock-based compensation is primarily included in selling, general, and administrative expenses. Recent Accounting Pronouncements Adopted In March 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The new guidance on accounting for employee share-based payment awards was designed to simplify the accounting related to several aspects of accounting for share-based payment transactions, including income tax consequences of share-based payment transactions, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of cash flows. The new standard is effective for the annual period beginning after December 15, 2016, including interim reporting periods within that period, which for the Company will be effective November 1, 2018. In accordance with the new guidance, the Company has made a policy election to account for forfeitures when they occur. The Company adopted this guidance during the quarter ended January 31, 2018, using the modified retrospective method, with no material impact to its consolidated financial statements and related disclosures because the Company has a full valuation allowance on its current and non-current deferred tax assets and liabilities. In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Assets. This ASU is intended to simplify the presentation of deferred taxes on the balance sheet and will require an entity to present all deferred tax assets and deferred tax liabilities as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as current or non-current. This guidance will be effective beginning in 2018, with early adoption permitted. The Company adopted this guidance during the quarter ended January 31, 2018 with no material impact to its consolidated financial statements and related disclosures because the Company has a full valuation allowance on its current and non-current deferred tax assets and liabilities. Recent Accounting Pronouncements Not Yet Adopted In May 2017, the FASB issued ASU 2017-09, CompensationStock Compensation: Topic 718 Scope of Modification Accounting (ASU 2017-09), to clarify when to account for a change in the terms or conditions of a share-based payment award as a modification. Under the new standard, modification is required only if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. ASU 2017-09 will be effective for the Company beginning November 1, 2018 and will be applied prospectively. In February 2016, the FASB issued ASU 2016-02, which amends the ASC and creates Topic 842, Leases (Topic 842). Topic 842 will require lessees to recognize lease assets and lease liabilities for those leases classified as operating leases under previous GAAP on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018, which will be effective for the Company beginning November 1, 2019, and early adoption is permitted. The Company's preliminary analysis indicates that the Company will recognize a liability for remaining lease payments and a right-of-use asset related to the Company's operating lease covering its corporate office facility that expires in June 2023 and other office locations. The Company is in the initial stages of evaluating the effect of the standard on the Company's financial statements. In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all-existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services, ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new standard is effective for the annual period beginning after December 15, 2017, including interim reporting periods within that period, which will be effective for the Company beginning November 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (Full Retrospective Method) or retrospectively with the cumulative effect of applying the guidance recognized in retained earnings as of the date of adoption (Modified Retrospective Method). The Company has formed an implementation team and has begun the process of evaluating the impact of the adoption of ASU 2014-09 to its consolidated financial statements, accounting policies and processes. The Company expects that it will adopt the new standard using the Modified Retrospective Approach. The Company continues to evaluate the impacts of the new standard, the impact on its consolidated financial statements, as well as the changes that may be required to systems and processes to meet the new standards reporting and disclosure requirements. |
