| 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, 2019, 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 necessary to present fairly the Company’s consolidated financial position as of April 30, 2020, and its consolidated results of operations for the three and six months ended April 30, 2020, and 2019. 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, 2020. Certain financial information in the footnotes has been rounded to the nearest thousand for presentation purposes. Liquidity The Company’s current liabilities, excluding deferred revenue, exceeded its current assets by $1,527,000 as of April 30, 2020. The outstanding amount under the note payable to a related party, G.S. Beckwith Gilbert, the Company’s significant shareholder and Non-Executive Chairman (the “Existing Gilbert Note”), was $10,214,000 as of April 30, 2020, with an annual interest rate of 9 ¾% and a maturity of November 1, 2021. At April 30, 2020, the notes payable balance included accrued interest on the Existing Gilbert Note of $629,000, representing interest incurred during the fourth quarter of 2019 through and including the second quarter of 2020. The Company’s stockholders’ deficit was $11,586,000 at April 30, 2020. The Company had a net loss of $12,314,000, including an impairment charge of $9,874,000, for the six months ended April 30, 2020. If the Company’s business does not generate sufficient cash flows from operations to meet its operating cash requirements, the Company will attempt to obtain external financing on commercially reasonable terms. However, the Company has received a commitment from G.S. Beckwith Gilbert, dated June 19, 2020, that if the Company, at any time, is unable to meet its obligations through June 19, 2021, G.S. Beckwith Gilbert will provide the Company with the necessary continuing financial support to meet such obligations. Such commitment for financial support may be in the form of additional advances or loans to the Company, in addition to the deferral of principal and/or interest payments due on the existing loans, if deemed necessary. The note payable is secured by the Company’s assets. 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 Company’s 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 Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers ("Topic 606") The Company derives revenue primarily from subscription-based, real-time decision and solution information and professional services. Revenues are recognized when control of these services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. The Company determines revenue recognition through the following steps: · · · · · A. Nature of Performance Obligations Subscription services revenue Subscription services revenue is comprised of cloud-based subscription fees that provide the customer the right to access the Company’s software and receive support and updates, if any, for a period of time. The Company has determined such access represents a stand-ready service provided continually throughout the contract term. As such, control and satisfaction of this stand-ready performance obligation is deemed to occur over time. The Company’s subscription contracts include a fixed amount of consideration that is recognized ratably over the non-cancellable contract term, beginning on the date that access is made available to the customer. The passage of time is deemed to be the most faithful depiction of the transfer of control of the services as the customer simultaneously receives and consumes the benefit provided by the Company’s performance. Subscription contracts are generally one to three years in length, billed either monthly, quarterly or annually, typically in advance, which coincides with the terms of the agreement. The Company’s subscription contracts do not have a significant financing component and customer invoices are typically due within 30 days. There is no significant variable consideration related to these arrangements. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether transfer of control to customers has occurred. Professional services revenue Professional services primarily consist of value assessments and customer training services. Payment for professional services is generally a fixed fee or a fee based on time and materials. The obligation to provide professional services is generally satisfied over time, with the customer simultaneously receiving and consuming the benefits as the Company satisfies its performance obligations. For professional services, revenue is recognized by measuring progress toward the complete satisfaction of the Company’s obligation. Progress for services that are contracted for a fixed price is generally measured based on hours incurred as a portion of total estimated hours, and as a practical expedient, progress for services that are contracted for time and materials is generally based on the amount the Company has the right to invoice. Professional services contracts are generally one year or less in length, billed either in advance, upon pre-defined milestones or as services are rendered, in accordance with the terms of the agreement. The Company’s professional service contracts do not have a significant financing component and customer invoices are typically due within 30 days. Material rights Contracts with customers may include material rights which are also performance obligations. Material rights primarily arise when the contract gives the customer the right to renew subscription services at a discounted price in the future. This may occur from time to time when the Company’s contracts provide an implicit discount as the customer pays a nonrefundable up-front fee in connection with the initial services contract that it does not have to pay again in order to renew the service. These non-refundable up-front fees are not related to any promised service that the customer benefits from other than providing access to the subscription service. Revenue allocated to material rights is recognized when the customer exercises the right over the estimated renewal period of five years or when the right expires. If exercised by the customer, the amount previously deferred for the material right is included in the transaction price of the renewal contract and allocated to the services included in that contract. If expired, revenue is recognized as subscription services revenue in the period the right expired. If the up-front fees do not provide the customer with a material right, then the amount is included in the transaction price of the initial services contract and allocated to the performance obligations in that contract. Contracts with multiple performance obligations Some of the Company’s contracts with customers contain multiple distinct performance obligations. For these contracts, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The standalone selling price reflects the price the Company would charge for a specific service if it was sold separately in similar circumstances and to similar customers. The Company maximizes the use of directly observable transactions to determine the standalone selling prices for its performance obligations. For subscription services, the Company separately determines the standalone selling prices by type of solution and customer demographics. For professional services, the Company separately determines standalone selling price by type of services. Other policies and judgments The commissions that the Company pays for obtaining a contract with a customer are conditional on future service provided by the employee. Therefore, since these costs are not incremental solely based on obtaining a contract, the Company does not defer any commission costs. B. Disaggregation The disaggregation of revenue by customer and type of performance obligation is as follows: Three Months Ended Six Months Ended Revenue by type of customer: April 30, 2020 April 30, 2020 Airlines $ 1,676,000 $ 4,294,000 Airports 1,463,000 2,854,000 Other 40,000 256,000 Total Revenue $ 3,179,000 $ 7,404,000 Three Months Ended Six Months Ended Revenue by type of performance obligation: April 30, 2020 April 30, 2020 Subscription services $ 3,077,000 $ 7,034,000 Professional services 102,000 370,000 Total Revenue $ 3,179,000 $ 7,404,000 C. Contract Balances The opening and closing balances of the Company's accounts receivable, unbilled receivables, and deferred revenues are as follows: Accounts Receivable Unbilled Receivable Deferred Revenue Balance at November 1, 2019 $ 1,041,000 $ 100,000 $ 3,241,000 Balance at April 30, 2020 $ 809,000 $ 108,000 $ 1,822,000 The differences in the opening and closing balances of the Company’s unbilled receivable and deferred revenue primarily results from the timing difference between the Company’s performance and the customer’s payment. Deferred revenue includes amounts billed to customers for which the revenue recognition criteria has not yet been met. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the Company’s subscription services and, to a lesser extent, professional services. Deferred revenue is recognized as the Company satisfies its performance obligations. The Company generally invoices its customers in monthly, quarterly or annual installments for subscription services. Accordingly, the deferred revenue balance does not generally represent the total contract value of annual or multi-year, non-cancellable subscription arrangements. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent. The amount of revenue recognized during the three and six months ended April 30, 2020 that was included in the deferred revenue balance at November 1, 2019 was $298,000 and $2,721,000, respectively. Unbilled accounts receivable relates to the delivery of subscription and/or professional services for which the related billings will occur in a future period. D. Transaction Price Allocated to the Remaining Performance Obligation The following table discloses the aggregate amount of the transaction price allocated to the remaining performance obligations as of the end of the reporting period, and when the Company expects to recognize the revenue. 12 months or less Greater than 12 months * Subscription services $ 4,946,000 $ 977,000 Professional services $ 77,000 $ - Material rights $ 131,000 $ 289,000 *Approximately 94% of these amounts are expected to be recognized between 12 and 36 months. The table above includes amounts billed and not yet recognized as revenue, as well as, unrecognized future committed billings in customer contracts and excludes future billing amounts for which the customer has a termination for convenience right in their agreement. Cost of Revenues Costs associated with subscription and maintenance revenues consisted 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 were 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 has been impacted by: (1) the number of PASSUR and SMLAT Systems added to the PASSUR Network, which included the cost of production, shipment, and installation of these assets, which were 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 were depreciated and/or amortized over their respective useful lives and charged to cost of revenues. As a result of the FAA mandate and the corresponding review conducted by the Company, which resulted in the commencement of the decommissioning of the PASSUR Network, as well as industry changes in response to the COVID-19 pandemic (as described in more detail below), the Company anticipates that the costs of maintaining and operating these systems, including depreciation along with related amortization of capitalized software development costs, will decrease during the balance of the fiscal year. Certain of PASSUR’s services have traditionally relied on our proprietary network of sensors for aircraft surveillance. During the three months ended April 30, 2020, in light of the FAA’s mandate for ADS-B equipage on aircrafts operating in most U.S. airspace, effective January 2020, and parallel adoption of ADS-B requirements in much of the world, the Company performed a comprehensive review of its data feeds, specifically those associated with the PASSUR Network units and external ADS-B data feeds to determine if these external data feeds provide sufficient redundant data as to that generated from the existing PASSUR installations. The Company determined that such services can now be powered by a combination of FAA data plus commercial ADS-B aggregator feeds and other data feeds available to the Company. This provides a more cost-effective solution and will allow us to focus more on value-added analytics, and less on sensor technology. In this regard, the Company reviewed and decommissioned approximately half of its PASSUR Network system assets. It is the Company’s intention to decommission all remaining PASSUR Network system assets throughout the remainder of this fiscal year. As a result, the Company wrote off the carrying value applicable to the PASSUR Network systems of approximately $3,565,000, and lease assets applicable to these PASSUR locations of approximately $175,000, which amounts are included as an impairment charge for the three and six months ended April 30, 2020. The write-off amount includes PASSUR System and SMLAT System assets as well as inventory of finished and spare parts. Additionally, due to the financial and economic hardships being experience by the Company’s customers and air transportation support vendors in the current COVID-19 environment, there is a sufficient amount of uncertainty surrounding the ability of our customers to either renew and/or maintain their current levels of committed contracts with the Company. In order to determine whether or not an impairment had occurred, we looked at existing contracted revenue, adjusted for future uncertainties, and compared those amounts with the net carrying value of the related software development asset. Where the contracted revenue amount was less than the net carrying value of the software development asset, we noted an impairment. As a result, the Company wrote off previously capitalized software development costs totaling approximately $6,134,000 due to impairment. The amount of these charges and write-offs are included as an impairment charge for the three and six month periods ended April 30, 2020 totaling $9,874,000. Income Taxes On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. Under FASB Accounting Standards Codification (“ASC”) Topic 740, Income Taxes The Company’s provision for income taxes consists of federal, state and foreign taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. For the six months ended April 30, 2020, the Company recorded an income tax provision of $31,560, which was attributable to foreign withholding tax. The effective tax rate for the six months ended April 30, 2020 was (0.3)% as compared to the U.S. federal corporate tax rate of 21% due to foreign withholding taxes. The Company did not record an income tax benefit on its pre-tax losses as the Company maintains a full valuation allowance against its net deferred tax assets and the net deferred tax assets were not realizable on a more-likely-than-not basis. For the six months ended April 30, 2019, the Company recorded an income tax provision (benefit) of $0. The Company projected that its annual effective tax rate for the six months ended April 30, 2019 was 0% as the Company’s net deferred tax assets were not realizable on a more-likely-than-not basis. Accounts Receivable The Company records accounts receivable for agreements where amounts due from customers are contractually required and are non-refundable. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects the Company’s 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 customer’s agreement. Accounts receivable balances include amounts attributable to deferred revenues. The Company’s accounts receivable balances included $108,000 of unbilled receivables associated with contractually committed services provided to existing customers as of the six months ended April 30, 2020, which will be invoiced subsequent to April 30, 2020. At October 31, 2019, the Company’s accounts receivable balance included $100,000 of unbilled receivables associated with contractually committed services provided to existing customers during the twelve months ended October 31, 2019. 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. However, as a result of the outbreak of the global pandemic, the Company is in discussions with several of its customers for extended terms of payment or temporary suspension of services or the provision of free services for a specified period of time. The provision for doubtful accounts was $509,000 and $165,000 as of April 30, 2020 and October 31, 2019, respectively. During the quarter ended April 30, 2020, the Company increased its provision for doubtful accounts in response to the financial and economic uncertainty facing the air transportation industry and several of the Company’s customers as a result of the COVID-19 pandemic. The Company is in discussions with several customers regarding extended terms and temporary suspension of services. 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 and includes the direct production, shipping, and installation costs incurred for each PASSUR and SMLAT systems, which are recorded at cost, net of accumulated depreciation. As described in “Cost of Revenues” above, in light of the FAA's mandate for ADS-B equipage on aircrafts operating in most U.S. airspace effective January 2020, and parallel adoption of ADS-B requirements in much of the world, we determined that services that traditionally had relied on our proprietary network of sensors for aircraft surveillance can now be powered by a combination of FAA data plus commercial ADS-B aggregator feeds and other data feds available to the Company. This provides a more cost-effective solution and will allow us to focus more on value-added analytics, and less on sensor technology. In this regard, the Company reviewed and decommissioned approximately half of the PASSUR Network system assets. It is the Company’s intention to decommission all remaining PASSUR Network system assets throughout the remainder of this fiscal year. As a result, the Company wrote off net assets applicable to the PASSUR Network systems of approximately $3,565,000, which amount is included as an impairment charge for the three and six months ended April 30, 2020. The write-off amount includes PASSUR System and SMLAT System assets as well as inventory of finished and spare parts. The Company did not capitalize any costs related to the PASSUR Network for both the three and six months ended April 30, 2020. Additionally, the Company did not purchase any parts for the PASSUR Network and used $0 and $9,300 of PASSUR Network parts for repairs during the three and six months ended April 30, 2020, respectively. Depreciation expenses related to the Company-owned PASSUR Network was $148,000 and $374,000 for the three and six months ended April 30, 2020, 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 was estimated at five years for SMLAT Systems and seven years for PASSUR Systems. As a result of the FAA mandate, and the corresponding review conducted by the Company, which resulted in the commencement of the decommissioning of the PASSUR Network, the Company anticipates that the costs of maintaining and operating these systems, including depreciation, will decrease materially in the balance of the fiscal year. The Company capitalized $61,000 of PASSUR Network costs for both the three and six months ended April 30, 2019. Additionally, the Company used $13,000 and $22,000 of PASSUR Network parts for repairs during the three and six months ended April 30, 2019, respectively, and did not make any material purchases of parts during the same period. Depreciation expenses related to the Company-owned PASSUR Network was $210,000 and $416,000 for the three and six months ended April 30, 2019, respectively. The net carrying balance of the PASSUR Network assets, after the effect of the write off described above as of April 30, 2020, was $0 and $3,949,000, as of April 30, 2020 and October 31, 2019, respectively. Included in the net carrying balance as of October 31, 2019, were parts and finished goods for the PASSUR Network totaling $1,831,000, which had not yet been installed. Capitalized Software Development Costs Due to the financial and economic hardships being experienced by airlines, airports and air transportation support vendors, in the current COVID-19 environment, there is a sufficient amount of uncertainty surrounding the ability of our customers to continue to perform their contracts with the Company. In order to determine whether or not an impairment had occurred, the Company looked at existing contracted revenue, adjusted for future uncertainties, and compared those amounts with the net carrying value of the related capitalized development cost asset. Where the revenue amount was less than the net carrying value of the asset, we determined that an impairment had occurred. As a result of this exercise, the Company wrote-off assets totaling $6,134,000 based on the assumption that the carrying value of the software capitalization is representative of 100% of the committed contract values remaining. The Company capitalized $0 and $489,000 of software development costs during the three and six months ended April 30, 2020, respectively. For the three and six months ended April 30, 2019, the Company capitalized $647,000 and $1,342,000, respectively, of software development costs. In addition, the Company did not incur any capitalized software development costs during the quarter ended April 30, 2020. The Company amortized $520,000 and $1,208,000 of capitalized software development costs during the three and six months ended April 30, 2020, respectively. For the three and six months ended April 30, 2019, the Company amortized $592,000 and $1,112,000 of capitalized software development costs, respectively. The Company previously recorded 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”. 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 expensed all costs incurred during the preliminary project stage of its development, and capitalized the costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the software were capitalized if it was determined that these upgrades or enhancements added additional functionality to the software. Costs incurred to improve and support products after they become available were charged to expense as incurred. The Company did not capitalize any software development costs during the three-month period ended April 30, 2020. As a result of the industry changes in response to the COVID-19 pandemic (described in “Impact of the COVID-19 Pandemic” below), the corresponding review conducted by the Company and the resultant write-offs taken, the Company anticipates that its level of capitalized software development costs, including related amortization of such costs, will decrease in the future. 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 asset’s revised life. 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 its net deferred tax assets are not realizable on a more-likely-than-not basis and that a valuation allowance is required against its net deferred tax assets. At October 31, 2019, the Company had available federal net operating loss carryforwards of $16,098,000, of which $8,033,000 are indefinite lived and $8,065,000 will expire in various tax years from fiscal year 2023 through fiscal year 2038. 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 Company’s 2009 Stock Incentive Plan, which expired on February 24, 2019, and 2019 Stock Incentive Plan allow for a cashless exercise. Shares used to calculate net loss per share are as follows: For the three months ended For the six months ended April 30, April 30, 2020 2019 2020 2019 Basic Weighted average shares outstanding 7,712,091 7,696,091 7,709,014 7,696,091 Effect of dilutive stock options - - - - Diluted weighted average shares outstanding 7,712,091 7,696,091 7,709,014 7,696,091 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. 1,831,500 1,734,500 1,831,500 1,734,500 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 $103,000 and $249,000 for the three and six months ended April 30, 2020, respectively. Stock-based compensation expense was $163,000 and $319,000 for the three and six months ended April 30, 2019, respectively. Stock-based compensation is primarily included in selling, general, and administrative expenses. Fair Value of Financial Instruments The recorded amounts of the Company’s 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 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. Recent Accounting Pronouncements Adopted In February 2016, the FASB issued ASU 2016-02, which amends the ASC and creates Topic 842, Leases . |
