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PASSUR AEROSPACE, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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, without limitation, the risks and uncertainties related to the ability of the Company to sell PASSUR(R) Network Systems information capabilities in its existing product and professional service lines, as well as in new products and professional services (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 continued war on terrorism, changes in fuel costs, airline bankruptcies and consolidations, economic conditions, and other risks detailed in the Company's periodic report filings with the SEC. Other uncertainties which could impact the Company include, without limitation, 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 include, without limitation, uncertainties relating to: (1) the Company's ability to find and maintain the personnel necessary to sell, manufacture, and service its products; (2) its ability to adequately protect its intellectual property; (3) its ability to secure future financing; and (4) 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. 15 DESCRIPTION OF BUSINESS PASSUR Aerospace, Inc. 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 offers vertical expertise in the aviation market - providing data consolidation, information, decision support, predictive analytics, collaborative solutions, and professional services for aviation operations worldwide. The Company's principal business is to provide business intelligence and predictive analytics solutions which save money, enhance operational efficiency, increase safety and security, and improve the passenger experience. These analytics are derived from the Company's PASSUR(R) Proprietary Surveillance Network (the "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. The Company serves most major airlines (including five of the top six North American airlines, as well as the top five hub and spoke airlines), approximately fifty airport customers (including twenty-two of the top thirty North American airports), and approximately two hundred corporate aviation customers, as well as the U.S. government, including the FAA and TSA. The Company believes its predictive analytics save its customers costs annually by enabling preemptive decision making and more effective operational planning. The PASSUR(R) System simultaneously scans, correlates, and pulls information from the Company's PASSUR(R) Network together with multiple additional government and private databases. The PASSUR(R) Network includes one hundred and fifty-four Company-owned PASSUR(R) Radar Systems, covering ninety-eight of the top one hundred North American 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. The Company delivers these tools primarily on "web-dashboards," - a single page or screen which aggregates many different sets of information into a simplified presentation of performance indicators and exception alerts to support quick decisions and information useful in predicting future situations. Almost all of the PASSUR(R) solutions have a live or real-time component, and most also include alerts, decision support, collaborative components, immediate playback or review, as well as analysis. The PASSUR(R) products are protected by multiple patents and patent pending applications. 16 RESULTS OF OPERATIONS REVENUES 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 and professional services designed to address the needs of the aviation industry and the U.S.government. The Company will continue to market the business intelligence, predictive analytics, and decision support product applications and solutions derived from the PASSUR(R) Network. Such efforts include the continued development of new products, professional services, and existing product enhancements. There were one hundred and fifty-four Company-owned PASSUR(R) Systems located at airports worldwide as of April 30, 2011. Redundant PASSUR(R) Systems have been installed at major customer locations. Revenues increased by $961,000, or 40%, and $2,148,000, or 45%, to $3,365,000 and $6,875,000, for the three and six months ended April 30, 2011, respectively, as compared to the same periods in fiscal year 2010. New customer subscriptions and existing customer upgrades to the Company's suite of software applications accounted for 97% and 81% of these increases, and new customer engagements for professional services accounted for 3% and 19% of these increases for the three and six months ended April 30, 2011, respectively. Revenue for the quarter ended April 30, 2011 decreased $145,000 as compared to the first quarter of fiscal year 2011 primarily due to the completion of a professional service engagement in the first quarter. The Company continues to develop and deploy new software applications and solutions, as well as a 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. 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 units added to the Network, 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. 17 Cost of revenues increased by $371,000, or 34%, and $921,000, or 45%, for the three and six months ended April 30, 2011, respectively, as compared to the same periods in fiscal year 2010. These increases consisted of payroll and related costs of $206,000 and $466,000 and consulting fees of $6,000 and $215,000, for the three and six months ended April 30, 2011, respectively, as well as increases in depreciation and amortization and communication costs. When the Company ships and installs its PASSUR(R) Network Systems there is a reduction in cost of revenues due to the fact that the labor related costs for these processes is capitalized, rather than expensed as a component of costs of revenue. Fewer systems were shipped and installed in the first six months of fiscal year 2011 than in the same period of the previous fiscal year, which resulted in a $283,000 and $501,000 increase in cost of revenue for the three and six months ended April 30, 2011, respectively, as these corresponding costs were capitalized in the prior fiscal year. The increase in cost of revenues for the three and six months ended April 30, 2011 described above, was partially offset by increases of $266,000 and $577,000 in the capitalization of software development costs during the three and six months ended April 30, 2011, respectively, as compared to the same periods in fiscal year 2010, as these labor costs are otherwise generally classified as cost of revenues due to the fact that the Company's software developers also perform subscription and maintenance-related duties. The Company employed five additional programmers, whose primary responsibilities are new software development, in the six months ended April 30, 2011, as compared to the same period in the prior fiscal year. RESEARCH AND DEVELOPMENT Research and development expenses were $76,000 and $151,000 for the three and six months ended April 30, 2011, respectively, as compared to $74,000 and $143,000 for the same periods in fiscal year 2010. 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 customers. There were no customer-sponsored research and development activities during the six months ended April 30, 2011. Research and development expenses are funded by current operations. SELLING, GENERAL, AND ADMINISTRATIVE Selling, general, and administrative expenses increased by $374,000, or 39%, and $733,000, or 39%, for the three and six months ended April 30, 2011, respectively, as compared to the same periods in fiscal year 2010, primarily due to an increase in payroll and related costs. INCOME FROM OPERATIONS Revenues increased by $961,000 or 40%, and $2,148,000 or 45%, to $3,365,000 and $6,875,000 for the three and six months ended April 30, 2011, respectively, as compared to the same periods in fiscal year 2010. Total costs and expenses increased by $747,000, or 35%, and $1,663,000, or 41%, to $2,894,000 and $5,743,000 for the three and six months ended April 30, 2011, respectively, as compared to the same periods in fiscal year 2010. Income from operations increased by $214,000, or 83%, and $486,000, or 75%, to $471,000 and $1,132,000 for the three and six months ended April 30, 2011, respectively, as compared to the same periods in fiscal year 2010. 18 INTEREST EXPENSE - RELATED PARTY Interest expense - related party was $340,000 and $691,000 for the three and six months ended April 30, 2011, respectively, as compared to $330,000 and $674,000 for the same periods in fiscal year 2010. NET INCOME (LOSS) The Company had net income of $122,000, or $.02 per diluted share, and $432,000, or $.08 per diluted share, for the three and six months ended April 30, 2011, respectively, as compared to a net loss of $73,000, or $.02 per diluted share, and $48,000, or $.01 per diluted share, respectively, for the same periods in fiscal year 2010. LIQUIDITY AND CAPITAL RESOURCES The Company's current liabilities exceeded current assets by $1,417,000 at April 30, 2011. The notes payable to a related party, G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, were $14,815,000 at April 30, 2011, with a maturity of November 1, 2011. On May 9, 2011, these notes payable were reduced by $10,000,000, and a new note payable was issued to Mr. Gilbert in the amount of $4,815,000, with a maturity of November 1, 2014, as a result of the transactions described in "Subsequent Events" below. The Company's stockholders' deficit was $5,143,000 at April 30, 2011. The Company had net income of $432,000 for the six months ended April 30, 2011. 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 and professional service lines, as well as in new products and professional services, which are continually being developed and deployed. Management believes that expanding its existing suite of software products and professional services, which address the wide array of needs of the aviation industry, through the continued development of new product and service 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 obtained, the Company has received an unconditional and irrevocable commitment from its significant shareholder and Chairman to receive the necessary continuing financial support to meet such obligations through June 6, 2012. 19 The Company has received a commitment from Mr. Gilbert, dated June 6, 2011, that if the Company, at any time, is unable to meet its obligations through June 6, 2012, Mr. Gilbert will provide the necessary continuing financial support to the Company in order for the Company to meet such obligations. As this commitment is for over one year as of April 30, 2011, the notes payable have been classified on the Company's balance sheet as a long-term liability. 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 notes are secured by the Company's assets. Net cash provided by operating activities was $1,460,000 for the six months ended April 30, 2011, and consisted of $1,180,000 non-cash items, primarily depreciation and amortization, $432,000 of net income, an increase in accrued interest-related party, and a decrease in accounts receivable due to the timing of customer invoicing. This increase in net cash provided by operating activities for the six months ended April 30, 2011 was partially offset by an increase in prepaid expenses and other current assets, primarily accrued revenue, as well as a decrease in accounts payable, primarily due to the timing of vendor invoice payments. Cash used in investing activities was $1,268,000 for the six months ended April 30, 2011, expended primarily for capitalized software development costs. Cash used in financing activities was $121,000 for the six months ended April 30, 2011, and consisted primarily of private placement financing expenditures. The Company's revenue has increased as a result of its subscription-based revenue model for the three and six months ended April 30, 2011 as compared to the same periods in fiscal year 2010. 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 changes in 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 as well as professional services 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. The Company believes that its liquidity is adequate to meet its operating and investment needs through at least October 31, 2011, and the Company does not anticipate borrowing additional funds from Mr. Gilbert during that period, although the Company has received a commitment from Mr. Gilbert to do so if the Company needs additional funds. 20 SUBSEQUENT EVENTS On May 9, 2011, as a result of the transactions described below, the Company's outstanding notes payable to Mr. Gilbert were reduced by $10,000,000, and a new note payable was issued to Mr. Gilbert in the amount of $4,815,000. On that date, the Company entered into securities purchase agreements to sell 1,044,644 shares of the Company's common stock, subject to trading restrictions, in a private placement financing with a select group of accredited investors, including certain members of the Board of Directors of the Company - 687,500 shares of restricted common stock were sold to non-affiliated investors at a price of $4.00 per share and 357,144 shares of restricted common stock were sold to three of the Company's Directors at a price of $4.20 per share, resulting in aggregate gross proceeds of $4,250,000. In addition, on the same day, the Company entered into a debt conversion agreement with G.S. Beckwith Gilbert, the Company's significant shareholder and Chairman, pursuant to which the Company (1) repaid, from the private placement, $4,250,000 of principal on the outstanding notes payable to Mr. Gilbert and (2) converted $5,750,000 of the principal amount of the notes held by Mr. Gilbert into 1,369,048 shares of common stock, subject to trading restrictions. A new note was issued to Mr. Gilbert equal to the remaining $4,815,000 principal balance of the existing notes following such conversion. The new note bears a maturity date of November 1, 2014 and the annual interest rate is 9%, payable as follows: (i) interest at the annual rate of 6% will be payable in cash, and (ii) 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. Interest payments will be made annually at October 31 of each year. 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, 2010 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 of its results of operations. The impact and any associated risks related to these policies on the Company's business operations are discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2010, where such policies affect its reported financial results. The actual impact of these factors may differ under different assumptions or conditions. 21 |