PASSUR AEROSPACE, IN

PSSR
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PASSUR AEROSPACE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

06/11/2021 | 01:52pm

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 discussed under "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the uncertainties related to the ability of the Company to sell its
existing product and professional service lines, as well as its new products and
professional services (due to potential competitive pressure from other
companies or other products), as well as the potential for terrorist attacks,
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; and (3) its ability to
secure future financing. 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.



Moreover, investors are cautioned to interpret many of the risks identified and
discussed in this Quarterly Report on Form 10-Q, as well as the risks set forth
above, as being heightened as a result of the ongoing and numerous adverse
impacts of COVID-19. The spread of COVID-19 has severely impacted many economies
throughout the world, with businesses being forced to cease or limit operations
for long or indefinite periods of time. Measures taken to contain the spread of
the virus, including travel bans, quarantines and closures of non-essential
services have triggered significant disruptions to businesses worldwide, with
particular concentration on the aviation industry that the Company serves. The
federal government has responded with monetary and fiscal interventions to aid
in stabilizing the economy and the Company has received assistance under the
Payroll Support Program for Air Carriers and Contractors, part of the
Coronavirus Aid, Relief and Economic Security Act ("CARES Act").



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The aviation and travel industries, which are served by the Company and its
products, were severely affected by the COVID-19 outbreak as a result of travel
restrictions imposed by most jurisdictions. As a result of the pandemic, the
Company faces increased economic pressures and has experienced a significant
loss of revenue during the six-month period ended April 30, 2021, which the
Company anticipates will continue to impact results through the remainder of
fiscal 2021 and possibly longer. The severity of the downturn depends on many
factors, the outcomes of which are uncertain or unknown at this time, such as,
among other things, the scope, severity and duration of the pandemic (including
any resurgences of cases), the actions taken to contain the pandemic or to
mitigate its impact, the public distribution of treatments and vaccines for the
disease (including its variants), the length of time before the public feels
safe to travel, the economic stimulus programs available to affected industries
and consumers, and the status of governmental and private reopening plans. All
of these variables will impact how quickly the industry can recover and may
affect the revenue and earnings levels of the Company.






Description of Business




PASSUR® Aerospace, Inc. ("PASSUR" or the "Company"), a New York corporation
founded in 1967, is a leading business intelligence company, providing
predictive analytics and decision support technology for the aviation industry
primarily to improve the operational performance and cash flow of airlines,
airports, fixed based operators (FBOs) and air navigation service providers
(ANSPs). The Company is recognized as a leader in providing a cloud-based
platform, ARiVA™, that manages and optimizes operations for our customers.



PASSUR delivers digital solutions that are essential to global aviation
operations, meeting the needs of global air travel as well as supporting the
recovery of the aviation industry from the COVID-19 crisis. The structure and
execution of operations within the aviation industry has fundamentally changed
as a result of this crisis due to the significant change in the economics
required to support current conditions, a return to normal operations and
profitability, and to assist in mitigating health risks.



PASSUR continues to be a pioneer applying artificial intelligence powered by
machine learning to aviation data, addressing the industry's most costly
challenges, including the management and optimization of airspace, airport
assets, aircraft, and day of flight operations.



Operational efficiency is more important now than ever to eliminate sources of
waste, variables, and inflexible operations for increased profits. The Company
addresses this significant industry problem by applying our technology platform,
combined with professional services, to provide solutions that predict,
prioritize, prevent and help the industry recover from unexpected disruptions.
These disruptions have long been seen as the cost of doing business in the
industry and are even more pronounced today, creating greater uncertainty to the
industry. The Company provides actionable intelligence to enable the industry to
manage their operations more efficiently. Our core business addresses some of
the aviation industry's most intractable and costly challenges, including, but
not limited to, underutilization of airspace and airport capacity, delays,
cancellations, and diversions. Several independent studies have estimated the
annual direct costs of such inefficiencies to airlines in the United States at
over $8 billion annually and worldwide direct cost at over $30 billion annually.



Solutions offered by PASSUR help to ensure flight completion. They cover the
entire flight life cycle, from gate to gate, and result in reductions in overall
costs and carbon emissions, while maximizing revenue opportunities, improving
operational efficiency, and enhancing the passenger experience.



The Company provides its solutions to airlines and airports in the United
States
, as well as airlines and airports in Canada and Latin America. The global
market presents an opportunity to network more customers in a broader market.



The Company's business plan is to continue to focus on increasing
subscription-based revenues from its suite of software applications, and
professional services designed to address the needs of the aviation industry and
the U.S. government. The Company helps customers alleviate constraints without
the cost of expensive infrastructure upgrades and gets them fully operational
within months, to capture more revenue during peak travel periods. The
Company's goal is to help solve problems faced by its customers and increase
profits, by focusing on:



·Improving visibility across departments;



·Improving the quality of planning data; and



·Automating data driven decision support for capacity and demand to meet the
spikes in revenue opportunity.



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For the three months ended April 30, 2021, total revenue decreased 54% to
$1,462,000, compared with $3,179,000 for the same period in fiscal year 2020.
Income from operations for the three months ended April 30, 2021 improved to
$207,000, compared to a loss from operations of $11,512,000 for the same period
in fiscal year 2020, inclusive of the impairment charge of $9,874,000, which is
described further below. Excluding the impact of the impairment charge, the loss
from operations was $1,638,000 for the three months ended April 30, 2020. For
the three months ended April 30, 2021, net loss was $51,000, or $0.01 per
diluted share, compared to a net loss of $11,731,000, or $1.52 per diluted
share, in the same period in fiscal year 2020, inclusive of the impairment
charge of $9,874,000.



For the six months ended April 30, 2021, total revenue decreased 57% to
$3,160,000, compared with $7,404,000 for the same period in fiscal year 2020.
Income from operations for the six months ended April 30, 2021 improved to
$609,000, compared to a loss from operations of $11,854,000 for the same period
in fiscal year 2020, inclusive of the impairment charge of $9,874,000.



Excluding the impact of the impairment charge, the loss from operations was
$1,980,000 for the six months ended April 30, 2020. For the six months ended
April 30, 2021, net income was $85,000, or $0.01 per diluted share, compared to
a net loss of $12,314,000, or $1.60 per diluted share, in the same period in
fiscal year 2020, inclusive of the impairment charge of $9,874,000.






Results of Operations



Revenues




Management concentrates its efforts on the sale of business intelligence,
predictive analytics, and decision support product applications. Such efforts
include the continued development of existing products, new product offerings
and to a lesser extent, professional services.



The Company is a supplier and partner to the air transportation industry. Many
of the Company's customers have been severely impacted by the COVID-19 outbreak
and the rapid decline in air travel. As a result, the Company experienced
downturns in its revenues in the latter part of fiscal year 2020 and continuing
into fiscal 2021.



Although the Company's revenue is primarily subscription based, during the
latter part of fiscal 2020, several customers requested, and the Company agreed
to, the suspension of certain services to those customers, or the provision of
services free of charge during a specific period of time. Additionally, one
customer requested extended terms of payment, which request the Company also
accepted. The Company believes that these decisions were in the best interests
of the Company as a partner to the aviation industry and will benefit the
Company in the longer term. The Company continues to believe that its products
and professional service engagements are critical to the efficient operation of
the air transportation market.



For the three months ended April 30, 2021, total revenues decreased by
$1,717,000, or 54%, to $1,462,000, as compared with $3,179,000 for the same
period in 2020. The decrease in total revenues was primarily due to a decrease
in subscription revenue of $1,736,000, or 56%, partially offset by an increase
in consulting revenue of $19,000 to $121,000, as compared with the same period
in the prior year.



For the six months ended April 30, 2021, total revenues decreased by $4,244,000,
or 57%, to $3,160,000, as compared with $7,404,000 for the same period in 2020.
The decrease in total revenues was primarily due to a decrease in both
subscription revenues of $4,095,000 and consulting revenues of $149,000, as
compared with the same period in the prior year.



The decreases in subscription revenues for the three and six months ended April
30, 2021
were primarily due to several expiring airline contracts that were not
renewed, offset in part by new contracts for subscription services closed during
fiscal year 2021 and net incremental revenue recognized during both periods in
fiscal year 2021 related to new contracts closed during fiscal year 2020, mainly
related to airports and business aviation.



As previously disclosed, the Company had engaged in discussions with two of its
customers about the possible renewal of certain contracts which had expired at
various times from January 31, 2020 through May 31, 2020. Certain parts of
these contracts had been renewed on a short-term interim basis. These contracts
were not further renewed, in full or in part, which resulted in the loss of
potential revenue generated from these contracts of $673,000 and $2,287,000 for
the three and six months ended April 30, 2021, as compared to the same periods
in fiscal 2020.



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Expenses




In response to the uncertainty surrounding the prospects of airlines and
airports and the travel industry as a result of the continuing global COVID-19
pandemic and the declines in revenue that the Company has experienced in fiscal
year 2020 continuing into the first half of fiscal 2021, partly as a result of
the pandemic, the Company reviewed its operating costs to more closely align
those costs with its outlook for the foreseeable future. The Company has taken
steps to reduce its operating costs going forward, which steps have included
terminating or furloughing certain positions and instituting a temporary pay
reduction plan beginning in the second quarter of 2020, suspending the use of
outside consultants where possible, rationalizing the PASSUR Network, and
reducing and/or eliminating other operating expenses that were not critical to
the short-term outlook of the Company. As a result, during both the three and
six months ended April 30, 2021, the Company experienced a reduced level of cash
operating costs when compared to the same period for the prior year. The
Company anticipates that the continuation of these programs into the latter
quarters of fiscal year 2021 will result in additional savings as compared with
the annualized run rate of expenses at the end of the first quarter of 2020.



The Company anticipates that further reductions in cash operating costs will be
achieved as a result of eligible personnel expenses being funded using the grant
proceeds received by the Company under the CARES Act Payroll Support Program.



There can be no assurances, however, that the Company may not have to further
reduce operating costs in the future. If the recovery of the air transportation
industry accelerates and revenue levels quickly return to pre-COVID-19 levels,
these levels of cost savings may not be practicable or sustainable to support
the operations necessary for the increased level of revenue.






Cost of Revenues




For the three months ended April 30, 2021, cost of revenues decreased
$1,856,000, or 77%, to $565,000, as compared to $2,421,000 in the same period in
fiscal year 2020. For the six months ended April 30, 2021, cost of revenues
decreased $3,572,000, or 76%, to $1,135,000, as compared with the same period in
fiscal year 2020. The decreases in cost of revenues during both the three and
six month periods ended April 30, 2021 were primarily attributable to lower
compensation, professional services, consulting, data communications costs and
depreciation and amortization expenses, offset in part by a decrease in
capitalized software development costs as a result of the Company not incurring
any capitalized software costs during the three and six months ended April 30,
2021
. In response to the uncertainty surrounding the prospects of airlines and
airports and the travel industry given the global COVID-19 pandemic, during the
second quarter of fiscal year 2020, the Company undertook a review of its
operating costs to more closely align those costs with its forecast for revenue.



The Company continued to realize cost savings and benefits during the three and
six months ended April 30, 2021 from the cost reduction programs instituted
prior to receiving CARES Act financing. For the three and six months ended April
30, 2021
, the Company was able to use CARES Act financing for eligible payroll
costs to offset a portion of its costs of revenues by $472,000 and $883,000,
respectively. The Company has complied with all the provisions and requirements
under the CARES Act up through and including the period ended April 30, 2021.



Going forward, the Company anticipates lower levels of capitalized software
costs. In addition, as a result of the PASSUR Network decommissioning process
commenced during the second quarter of fiscal 2020 and the resulting write off
of certain PASSUR Network assets and capitalized software development costs, the
Company anticipates that amortization expenses associated with these assets will
continue to decrease in the future.






Research and Development




For the three months ended April 30, 2021, research and development expenses
decreased $50,000, or 48%, to $53,000, as compared to $103,000 for the same
period in fiscal year 2020. For the six months ended April 30, 2021, research
and development expenses decreased $115,000, or 53%, to $101,000, as compared to
$216,000 for the same period in fiscal year 2020. The decreases in research and
development expenses during the three and six month periods ended April 30, 2021
were primarily attributable to a decrease in personnel-related costs, as
compared to the same periods during the prior year. This was a result of the
reductions in force, furloughs and temporary reductions in salaries instituted
during fiscal 2020, prior to receiving CARES Act financing. For the three and
six months ended April 30, 2021, the Company was able to use CARES Act financing
for eligible payroll costs to offset a portion of its research and development
expenses by $30,000 and $64,000, respectively. The Company has complied with
all the provisions and requirements under the CARES Act up through and including
the period ended April 30, 2021.



The Company's research and development efforts include activities associated
with new product development, as well as the enhancement and improvement of the
Company's existing software and information products. The Company anticipates
that it will continue to invest in its software portfolio to develop, maintain,
and support existing and newly developed applications for its customers.



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Selling, General, and Administrative



For the three months ended April 30, 2021, selling, general, and administrative
expenses decreased $1,656,000, or 72%, to $636,000, as compared to $2,292,000
for the same period in fiscal year 2020. For the six months ended April 30,
2021
, selling, general and administrative expenses decreased $3,146,000, or 71%,
to $1,315,000, as compared to $4,461,000 for the same period in fiscal year
2020. The decreases in selling, general, and administrative expenses for the
three and six months ended April 30, 2021 were primarily due to decreases in
compensation costs, as a result of the reductions in force, furloughs and salary
reduction programs previously instituted prior to receiving CARES Act financing,
in response to the COVID-19 outbreak, coupled with lower travel and consulting
expenses, as compared to the same periods in fiscal year 2020. Also, as part of
the review of its operating costs described above, during fiscal 2020, the
Company exited three leased facilities and terminated the related lease
agreements, resulting in reductions to its facilities costs of approximately
$146,000, or $292,000 on an annualized basis. For the three and six months
ended April 30, 2021, the Company was able to use CARES Act financing for
eligible payroll costs to offset a portion of its selling, general and
administrative expenses by $670,000 and $1,241,000, respectively. The Company
has complied with all the provisions and requirements under the CARES Act up
through and including the period ended April 30, 2021.






Impairment Charges




Certain of PASSUR's services have traditionally relied on our proprietary
network of sensors for aircraft surveillance. During the second quarter of 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 could be powered by a
combination of FAA data plus commercial ADS-B aggregator feeds and other data
feeds available to the Company, which would provide a more cost-effective
solution and allow the Company 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 during the second quarter
of fiscal 2020. As a result, the Company wrote off net assets applicable to the
PASSUR Network systems of approximately $3,565,000, and lease assets applicable
to these PASSUR locations of approximately $175,000 during the second quarter of
fiscal 2020, which amounts were included in the impairment charge for the three
and six months ended April 30, 2020. The write-off amount included PASSUR
System and SMLAT System assets as well as inventory of finished and spare parts.



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 data feed costs, will decrease materially in the
future.



Additionally, during the second quarter of 2020, given the impact of the current
COVID-19 environment on customers, there was a sufficient amount of uncertainty
surrounding the ability of customers to continue to perform their contracts with
the Company and the Company's ability to generate revenue from such contracts.



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 revenue amount was less than the net carrying value of the
software development asset, we noted an impairment. As a result of this
exercise, the Company wrote off previously capitalized software development
costs totaling approximately $6,134,000 during the second quarter of fiscal 2020
due to impairment, given the impact of the current COVID-19 environment on the
aviation industry and its customers, which amount was included in the impairment
charge for the three and six months ended April 30, 2020.



As a result of the industry changes in response to the COVID-19 pandemic, the
corresponding review conducted by the Company during the second quarter of 2020
and the resultant write-offs, the Company anticipates that its level of
capitalized software development, along with related amortization of such costs,
will decrease materially in the future.



The total amount of these charges and write-offs are included as an impairment
charge for the three and six months ended April 30, 2020 in the amount of
$9,874,000.



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Income/(Loss) from Operations




For the three months ended April 30, 2021, income from operations increased
$1,845,000 to $207,000, as compared with a loss from operations of $1,638,000
during the same period in fiscal year 2020, exclusive of the impairment charges
of $9,874,000. Including the impairment charges, the loss from operations for
the three months ended April 30, 2020 was $11,512,000. For the six months ended
April 30, 2021, income from operations increased $2,589,000 to $609,000, as
compared with a loss from operations of $1,980,000 during the same period in
fiscal year 2020, exclusive of the impairment charges of $9,874,000. Including
the impairment charges, the loss from operations for the six months ended April
30, 2020
was $11,854,000. The improvements in operating income were primarily
due to decreases in compensation expenses, development consultant expenses,
travel expenses, depreciation and amortization costs, and other expenses as a
result of the cost-saving initiatives described above, as compared to the same
periods in fiscal year 2020. For the three and six months ended April 30, 2021,
the Company was able to use CARES Act financing for eligible payroll costs to
offset a portion of its total eligible payroll costs by $1,172,000 and
$2,188,000, respectively. Additionally, the Company incurred lease abandonment
charges of $248,000 for the three and six months ended April 30, 2020.



Partially offsetting these decreases was a decrease in capitalized software
development costs, resulting from the Company not incurring any capitalized
software costs during the three and six months ended April 30, 2021, coupled
with the decrease in revenue noted above.



For the last twelve months, Company revenue was $7,285,000, earnings before
interest, depreciation and amortization expense was $2,194,000, income from
operations was $1,126,000 and net income was $94,000. During this time period,
the Company did not capitalize any software development or PASSUR Network costs,
and utilized $3,319,000 in PSP grants to offset eligible compensation costs.



Interest Expense - Related Party



Interest expense - related party increased $39,000, or 18% for the three months
ended April 30, 2021, and increased $95,000, or 22% for the six months ended
April 30, 2021, as compared to the same periods in fiscal year 2020, due to the
higher principal balance outstanding on the note during fiscal year 2021.






Net Income/(Loss)




Net loss was $51,000, or $0.01 per diluted share, for the three months ended
April 30, 2021, as compared to a net loss of $11,731,000, or $1.52 per diluted
share, for the same period in 2020, inclusive of the impairment charge of
$9,874,000. Net income was $85,000, or $0.01 per diluted share, for the six
months ended April 30, 2021, as compared to a net loss of $12,314,000, or $1.60
per diluted share, for the six months ended April 30, 2020, inclusive of the
impairment charge of $9,874,000. The improvement in net income/(loss) for the
three and six months ended April 30, 2021 compared with the same periods in the
prior fiscal year was the result of the cost containment and cost reduction
programs put in place during the latter part of fiscal 2020 as described above,
offset in part by a decline in revenue.



Liquidity and Capital Resources



The Company's current liabilities, excluding deferred revenue and certain CARES
Act grant proceeds accounted for as accrued liabilities, exceeded its current
assets by $168,000 as of April 30, 2021.



The note payable to a related party, G.S. Beckwith Gilbert, the Company's
Non-Executive Chairman of the Board and significant shareholder, with a maturity
of November 1, 2022, was $10,692,000 at April 30, 2021, which amount included
additional loans made by Mr. Gilbert in fiscal 2020 of $1,435,000, bringing the
principal balance owed to $9,585,000, plus capitalized accrued and unpaid
interest of $1,107,000. The capitalized interest included $200,000 incurred
during the fourth quarter of fiscal 2019 and all the fiscal 2020 interest of
$907,000. The Company has paid the interest due for the six month period ended
April 30, 2021 in the amount of $524,000. During the six months ended April 30,
2021
, Mr. Gilbert did not loan the Company any additional funds. The Company's
stockholders' equity had a deficit of $11,159,000 at April 30, 2021. The Company
achieved net income of $85,000 for the six months ended April 30, 2021.



As of October 31, 2020, the total amount owed by the Company under a promissory
note issued by the Company to Mr. Gilbert on January 27, 2020 (the "Sixth
Gilbert Note") was $10,692,000, consisting of a principal of $9,585,000 and
unpaid interest of $1,107,000. The maturity date under the Sixth Gilbert Note
was November 1, 2021, and the annual interest rate was 9 ¾%, with annual
interest payments required to be made on October 31st of each year. The note
payable was secured by the Company's assets.



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On January 29, 2021, the Company and Mr. Gilbert entered into a Seventh Debt
Extension Agreement effective January 29, 2021, pursuant to which the Company
cancelled the Sixth Gilbert Note and issued Mr. Gilbert a new promissory note
(the "Seventh Gilbert Note") in the amount of $10,692,000, consisting of a
principal of $9,585,000 and unpaid interest of $1,107,000 accrued under the
Sixth Gilbert Note through October 31, 2020. Under the terms of the Seventh
Gilbert Note, the Company agreed to pay the unpaid interest of $1,107,000
accrued under the Sixth Gilbert Note and included in the Seventh Gilbert Note
(as described above) at the time and on the terms set forth in the Seventh
Gilbert Note. Under the terms of the Seventh Gilbert Note, the maturity date of
the loan was extended to November 1, 2022, and the annual interest rate remained
at 9 ¾%, with annual interest payments required to be made on October 31st of
each year (although any accrued interest can be paid before such time without
penalty). The note payable is secured by the Company's assets. The amendments to
the Sixth Gilbert Note were determined to be a modification of the debt
instrument and no gain or loss was recorded as a result of the transactions.



Management is addressing the Company's working capital deficiency by
aggressively marketing the Company's 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 the
continued development of its existing suite of software products and
professional services, which address the wide array of needs of the aviation
industry, will continue to lead to increased growth in the Company's
customer-base and subscription-based revenues. However, there are no assurances
that such growth will be achieved.



The Company has evaluated its financial position as of April 30, 2021, including
operating income of $609,000 for the six months ended April 30, 2021 a working
capital deficit of $168,000 (excluding deferred revenues and certain CARES Act
grant proceeds accounted for as accrued liabilities) and shareholders deficit of
$11,159,000 as of April 30, 2021, and has requested and received a commitment
from Mr. Gilbert, dated June 11, 2021, that if the Company, at any time, is
unable to meet its obligations through June 12, 2022, Mr. 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 CARES Act was enacted in March 2020 and provides economic support for, among
others, businesses in the airline industry. The Company has received grants
under the CARES Act, totaling approximately $6,498,000, as described in more
detail below.



1.The Company has been granted government funds of approximately $3.0 million
pursuant to the PSP1 for Air Carriers and Contractors under the CARES Act.



Pursuant to the Payroll Support Program Agreement entered into by the Company
with the U.S. Department of the Treasury, the Company was required to, among
other things, refrain from conducting involuntary employee layoffs or furloughs
and reducing employee rates of pay or benefits through September 30, 2020, and
is required to refrain from paying dividends or engaging in share repurchases
through September 30, 2021. The Company is also required to limit certain
executive compensation through March 24, 2022, maintain certain internal
controls and records relating to the CARES Act funds and comply with certain
reporting requirements. The Company believes that it has operated in compliance
with all the provisions and requirements under the CARES Act up through and
including the period ended April 30, 2021 and fully intends to continue to
comply with all such provisions and requirements. Consequently, the Company has
accounted for the advanced funds as grants not requiring repayment and
recognized such amounts in income as qualifying salaries, wages and benefits
have been incurred. During the six months ended April 30, 2021, the Company
reduced its compensation expense by $2,188,000, as a portion of the CARES Act
grant proceeds received by the Company was used to fund eligible payroll costs.



If the Company does not comply with the provisions of the CARES Act and the
Payroll Support Program Agreement, the Company may be required to repay the
government funds and also be subject to other remedies.



2.On February 12, 2021, the Company received an additional "top off"
disbursement of $875,000 under PSP1, subject to the terms and conditions
described above.



3.On March 5, 2021, the Company entered into a Payroll Support Program Extension
Agreement (PSP2) with the U.S. Department of the Treasury for an award the
Company received under the CARES Act Payroll Support Program. The total amount
awarded to the Company under PSP2 was approximately $1,310,000. The relief
payments under PSP2 were received in two installments of approximately $655,000
on March 8, 2021 and April



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26, 2021, respectively. As with the original grant under the Payroll Support
Program, PSP2 proceeds are to be used exclusively for the continuation of
payment of certain employee wages, salaries, and benefits. The relief payments
are conditioned on the Company's agreement to, among other things, refrain from
conducting involuntary employee layoffs or furloughs through the later of March
31, 2021
, or the date on which the Company has expended all of the payroll
support. Other conditions include prohibitions on share repurchases and
dividends through March 31, 2022, and certain limitations on executive
compensation.



4.On April 16, 2021, the Company entered into a Payroll Support Program 3
Agreement ("PSP3") with the U.S. Department of the Treasury for an award the
Company will receive under the American Rescue Plan Act of 2021. The total
amount awarded to the Company under PSP3 was approximately $1,310,000. The
first installment, in the amount of approximately $655,000, was received by the
Company on April 29, 2021. The second installment of approximately $655,000 was
received by the Company on May 27, 2021. The Company does not anticipate any
additional stimulus grant payments under the Payroll Support Programs. However,
there may be a possible additional final payment made subsequently, based on any
adjustments by the U.S. Department of the Treasury, to the initial expected
total payment. As with the original grants under PSP1 and PSP2, proceeds under
PSP3 are to be used exclusively for the continuation of payment of certain
employee wages, salaries, and benefits. The relief payments are conditioned on
the Company's agreement to, among other things, refrain from conducting
involuntary employee layoffs or furloughs through the later of September 30,
2021
, or the date on which the Company has expended all of the payroll support
under PSP3. Other conditions include prohibitions on share repurchases and
dividends through September 30, 2022, and certain limitations on executive
compensation.



Net cash used in operating activities was $2,157,000 for the six months ended
April 30, 2021, and consisted of net income of $85,000, which includes the use
of federal stimulus credits of ($2,188,000), depreciation and amortization
expense of $362,000, stock-based compensation expense of $114,000, adjustments
to operating lease assets and liabilities, net, of ($63,000), an increase in
deferred revenue of $18,000, a decrease in accounts receivable of $47,000
(including changes in doubtful accounts provisions), and a decrease in accounts
payable and accrued expenses of ($384,000). The balance consisted of changes to
prepaids and other assets of ($147,000). For the six months ended April 30,
2021
, the Company received $2,839,000 in federal stimulus grants under three
Payroll Support Program Agreements discussed above.



The Company actively monitors the costs associated with supporting the business,
and continually seeks to identify and reduce any unnecessary costs as part of
its cost reduction initiatives, while strategically reinvesting back into the
business as part of its long-term plans. As described above, during fiscal 2020,
the Company took aggressive steps to reduce its cost structure, including, but
not limited to, reductions in force, furloughs and salary reduction plans. The
Company will continue to monitor costs in relation to its revenue and will take
further actions as necessary consistent with the requirements of the CARES Act
financing. The Company believes that it has the ability to reduce operating
costs further if, at any time, such adjustments would be necessary to align the
Company's financial condition, liquidity, and capital resources with the
uncertain outlook of the COVID-19 pandemic. However, if the recovery of the air
transportation industry accelerates and revenue levels quickly return to
pre-COVID-19 levels, the levels of cost savings already taken or which may be
taken by the Company may not be practical or sustainable to support the
operations necessary for the increased level of revenue. Additionally, the
aviation market has been impacted by budgetary constraints, airline bankruptcies
and consolidations, current economic conditions, the continued war on terrorism,
and fluctuations in fuel costs. The aviation market is extensively regulated by
government agencies, particularly the FAA 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 customers 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.



Despite the continuing downturn in the air transportation industry due to the
COVID-19 pandemic, interest by potential customers in the Company's information
and decision support software products and its professional services remains
strong. As a result, the Company believes that future revenues will increase on
an annualized basis. However, there are no guarantees that such annualized
future revenue increases will occur. If revenues do not increase and the
Company's cost-structure is not adjusted accordingly, losses may occur. The
extent of such profits or losses will be dependent on sales volume achieved and
the Company's ability to optimize its cost structures.



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Off-Balance Sheet Arrangements






None.




Critical Accounting Policies and Estimates



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 GAAP. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, 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,
2020
. 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, 2020, as such policies affect
its reported financial results. The actual impact of these factors may differ
under different assumptions or conditions.






Revenue Recognition




The Company recognizes revenue in accordance with Topic 606. The Company
accounts for a customer contract when both parties have approved the contract
and are committed to perform their respective obligations, each party's rights
can be identified, payment terms can be identified, the contract has commercial
substance, and it is probable the Company will collect substantially all of the
consideration to which it is entitled.



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:



·Identification of the contract, or contracts, with a customer;



·Identification of the performance obligations in the contract;



·Determination of transaction price;



·Allocation of transaction price to performance obligations in the contract;
and



·Recognition of revenue when, or as, the Company satisfies a performance
obligation.



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



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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 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 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 service.






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.






Leases




During the first quarter of fiscal year 2020, the Company adopted Topic 842
using the modified retrospective transition approach permitted under the new
standard for leases that existed at November 1, 2019 and, accordingly, the prior
comparative periods were not restated. Under this method, the Company was
required to assess the remaining future payments of existing leases as of
November 1, 2019. Additionally, as of the date of adoption, the Company elected
the package of practical expedients that did not require the Company to assess
whether expired or existing contracts contain leases as defined in Topic 842,
did not require reassessment of the lease classification (i.e., operating lease
vs. finance lease) for expired or existing leases, and did not require a change
to the accounting for previously capitalized initial direct costs.



The adoption of this standard impacted the Company's consolidated balance sheet
due to the recognition of ROU assets and associated lease liabilities related to
operating leases as compared to the previous accounting. The accounting for
finance leases under Topic 842 is consistent with the prior accounting for
capital leases. The impact of the adoption of this standard on the Company's
consolidated statement of earnings and consolidated statement of cash flows was
not material.



Per the guidance of Topic 842, a contract is, or contains, a lease if the
contract conveys the right to control the use of an identified asset. The
Company recognizes a lease liability and a related ROU asset at the commencement
date for leases on its consolidated balance sheet, excluding short-term leases
as noted below. The lease liability is equal to the present value of unpaid
lease payments over the remaining lease term. The Company's lease term at the
commencement date may reflect



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options to extend or terminate the lease when it is reasonably certain that such
options will be exercised. To determine the present value of the lease
liability, the Company uses an incremental borrowing rate, which is defined as
the rate of interest that the Company would have to pay to borrow (on a
collateralized basis over a similar term) an amount equal to the lease payments
in similar economic environments. The ROU asset is based on the corresponding
lease liability adjusted for certain costs such as initial direct costs, prepaid
lease payments and lease incentives received. Both operating and finance lease
ROU assets are reviewed for impairment, consistent with other long-lived assets,
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. After a ROU asset is impaired, any remaining balance of
the ROU asset is amortized on a straight-line basis over the shorter of the
remaining lease term or the estimated useful life.



After the lease commencement date, the Company evaluates lease modifications, if
any, that could result in a change in the accounting for leases. For a lease
modification, an evaluation is performed to determine if it should be treated as
either a separate lease or a change in the accounting of an existing lease. In
addition, significant changes in events or circumstances within the Company's
control are assessed to determine whether a change in the accounting for leases
is required.



Certain of the Company's leases provide for variable lease payments for the
right to use an underlying asset that vary due to changes in facts and
circumstances occurring after the commencement date, other than the passage of
time. Variable lease payments that are dependent on an index or rate (e.g.,
Consumer Price Index) are included in the initial measurement of the lease
liability, the initial measurement of the ROU asset, and the lease
classification test based on the index or rate as of the commencement date. Any
changes from the commencement date estimation of the index- and rate-based
variable payments are expensed as incurred in the period of the change. Variable
lease payments that are not known at the commencement date and are determinable
based on the performance or use of the underlying asset, are not included in the
initial measurement of the lease liability or the ROU asset, but instead are
expensed as incurred. The Company's variable lease payments primarily include
common area maintenance and real estate taxes.



Upon the adoption of Topic 842, the Company made the following accounting policy
elections:



·Certain of the Company's contracts contain lease components as well as
non-lease components. Unless an accounting policy is elected to the contrary,
the contract consideration must be allocated to the separate lease and non-lease
components in accordance with Topic 842. For purposes of allocating contract
consideration, the Company elected not to separate the lease components from
non-lease components for all asset classes. This was applied to all existing
leases as of November 1, 2019 and will be applied to new leases on an on-going
basis.



·The Company elected not to apply the measurement and recognition requirements
of Topic 842 to short-term leases (i.e., leases with a term of 12 months or
less). Accordingly, short-term leases will not be recorded as ROU assets or
lease liabilities on the Company's consolidated balance sheets, and the related
lease payments will be recognized in net earnings on a straight-line basis over
the lease term.



As a result of the adoption of Topic 842, the Company recognized operating lease
ROU assets and liabilities of $1,497,000 and $1,620,000, respectively, as of
November 1, 2019. The Company does not have any finance lease ROU assets and
liabilities.



The Company has operating leases primarily for offices and PASSUR and SMLAT
systems, with remaining terms of approximately 4 months to 4.25 years. Some of
the Company's lease contracts include options to extend the leases for up to
five years, while others include options to terminate the leases within 1 year.



The Company does not have any finance leases or leases that have not yet
commenced as of April 30, 2021.

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