Surf Air Mobility Inc 10-Q for FY2024 Q2
Surf Air Mobility Inc. (SRFM)
About this 10-Q
Surf Air Mobility Inc filed this 10-Q on August 14, 2024, covering the quarter ended June 30, 2024 (FY2024 Q2).
Headline figures
Quarter ended June 30, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $32.37M
- up 422.5% from $6.2M a year earlier
- Net loss
- $26.98M
- compared with a net loss of $44.52M a year earlier
- Diluted EPS
- -$0.33
- compared with -$3.14 a year earlier
+
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
[Mark One]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission File Number:
(Exact Name of Registrant as Specified in Its Charter)
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4522 |
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(State or other jurisdiction of |
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(Primary Standard Industrial |
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(I.R.S. Employer |
(
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging Growth Company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of August 9, 2024,
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. Statements regarding the Company’s future results of operations and financial position, business strategy and plans and objectives of management for future operations are forward-looking statements. Forward-looking statements may be identified by the use of words such as “estimate”, “plan”, “project”, “forecast”, “intend”, “will”, “expect”, “anticipate”, “believe”, “seek”, “target”, “designed to” or other similar expressions that predict or indicate future events or trends, although the absence of these words does not mean that a statement is not forward-looking. The Company cautions readers of this Quarterly Report on Form 10-Q that these forward-looking statements are subject to risks and uncertainties, most of which are difficult to predict and many of which are beyond the Company’s control, that could cause the actual results to differ materially from the expected results. These forward-looking statements include, but are not limited to, statements regarding estimates and forecasts of financial and performance metrics, projections of market opportunity and market share, potential benefits and the commercial attractiveness to its customers of the Company’s products and services and the dependence on third-party partnerships in the development of fully-electric and hybrid-electric powertrains, and the potential success of the Company’s marketing and expansion strategies. These statements are based on various assumptions, whether or not identified in this Quarterly Report on Form 10-Q, and on the current expectations of the Company’s management, and are not predictions of actual performance. These forward-looking statements are provided for illustrative purposes only and are not intended to serve as, and must not be relied upon, by any investor as a guarantee, an assurance, a prediction or a definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. These forward-looking statements are subject to a number of risks and uncertainties, including:
All forward-looking statements included herein attributable to the Company or any person acting on any party’s behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by
applicable laws and regulations, the Company undertakes no obligations to update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
TABLE OF CONTENTS
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Page |
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PART I. |
1 |
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Item 1. |
1 |
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1 |
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2 |
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3 |
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5 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
6 |
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
30 |
Item 3. |
40 |
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Item 4. |
40 |
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PART II. |
43 |
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Item 1. |
43 |
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Item 1A. |
43 |
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Item 2. |
44 |
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Item 3. |
44 |
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Item 4. |
44 |
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Item 5. |
44 |
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Item 6. |
45 |
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46 |
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i
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Surf Air Mobility Inc.
Unaudited Condensed Consolidated Balance Sheets
June 30, 2024 and December 31, 2023
(in thousands, except share and per share data)
(Unaudited)
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June 30, |
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December 31, |
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Assets: |
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Current assets: |
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Cash |
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$ |
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$ |
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Accounts receivable, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Restricted cash |
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Property and equipment, net |
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Intangible assets, net |
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Operating lease right-of-use assets |
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Finance lease right-of-use assets |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Shareholders’ Deficit: |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses and other current liabilities |
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Deferred revenue |
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Current maturities of long-term debt |
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Operating lease liabilities, current |
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Finance lease liabilities, current |
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SAFE notes at fair value, current |
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Convertible notes at fair value, current |
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Due to related parties, current |
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Total current liabilities |
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Long-term debt, net of current maturities |
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Operating lease liabilities, long term |
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Finance lease liabilities, long term |
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Due to related parties, long term |
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Other long-term liabilities |
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Total liabilities |
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$ |
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$ |
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Shareholders’ deficit: |
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Common shares, $ |
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$ |
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$ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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( |
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Total shareholders’ deficit |
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$ |
( |
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$ |
( |
) |
Total liabilities and shareholders’ deficit |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
Surf Air Mobility Inc.
Unaudited Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2024 and 2023
(in thousands, except share and per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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2024 |
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2023 |
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2024 |
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2023 |
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Revenue |
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$ |
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$ |
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$ |
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$ |
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Operating expenses: |
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Cost of revenue, exclusive of depreciation and amortization |
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Technology and development |
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Sales and marketing |
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General and administrative |
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Depreciation and amortization |
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Total operating expenses |
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Operating loss |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
Other income (expense): |
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Changes in fair value of financial instruments carried at fair value, net |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
Interest expense |
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( |
) |
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( |
) |
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( |
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( |
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Loss on extinguishment of debt |
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— |
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( |
) |
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— |
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( |
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Other income (expense) |
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( |
) |
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( |
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( |
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Total other income (expense), net |
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$ |
( |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
Loss before income taxes |
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( |
) |
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( |
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( |
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( |
) |
Income tax benefit |
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— |
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— |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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$ |
( |
) |
Net loss per share applicable to common shareholders, basic and diluted |
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$ |
( |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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Weighted-average number of common shares used in net loss per share applicable to common shareholders, basic and diluted |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Surf Air Mobility Inc.
Unaudited Condensed Consolidated Statement of Changes in Redeemable Convertible Preferred Shares and Shareholders’ Deficit
Three and Six Months Ended June 30, 2024 and 2023
(in thousands, except share data)
(Unaudited)
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Stockholders’ Equity (Deficit) |
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Redeemable Convertible Preferred Shares |
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Class B-6s Convertible |
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Common Shares |
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Number of |
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Amount |
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Number of |
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Amount |
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Number of |
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Amount |
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Additional Paid-In Capital |
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Accumulated |
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Total Shareholders' Deficit |
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Balance at March 31, 2024 |
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— |
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$ |
— |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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Issuance of common stock related to restricted shares |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock related to stock option exercises |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock under software license agreement |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock under marketing agreement |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common shares under Share Purchase Agreement |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balance at June 30, 2024 |
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— |
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$ |
— |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
|||
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Stockholders’ Equity (Deficit) |
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Redeemable Convertible Preferred Shares |
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Class B-6s Convertible |
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Common Shares |
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Number of |
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Amount |
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Number of |
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Amount |
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Number of |
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Amount |
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Additional Paid-In Capital |
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Accumulated |
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Total Stockholders' Deficit |
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Balance at March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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Issuance of Class B-6a redeemable convertible preferred shares |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Conversion of debt to Class B-6s convertible preferred shares |
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— |
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— |
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— |
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— |
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— |
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— |
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Conversion of related party promissory note to Class B-6s convertible preferred shares |
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— |
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— |
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— |
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— |
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— |
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Exercise of warrants |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of related party SAFEs |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Exercise of share options |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of Class B-6s to service providers |
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— |
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— |
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— |
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— |
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— |
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— |
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Share-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balance at June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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3
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Stockholders’ Equity (Deficit) |
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Redeemable Convertible Preferred Shares |
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Class B-6s Convertible |
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Common Shares |
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Number of |
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Amount |
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Number of |
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Amount |
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Number of |
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Amount |
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Additional Paid-In Capital |
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Accumulated |
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Total Shareholders' (Deficit)/Equity |
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Balance at December 31, 2023 |
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— |
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$ |
— |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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Issuance of common stock related to restricted shares |
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— |
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— |
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— |
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— |
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Issuance of common stock related to stock option exercises |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock under software license agreement |
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— |
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— |
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— |
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— |
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— |
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|
|
|
|
|
|
|
||||
Issuance of common stock under marketing agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||||
Issuance of common shares under Share Purchase Agreement |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance at June 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||||||
|
|
|
|
|
|
|
|
Stockholders’ Equity (Deficit) |
|
|||||||||||||||||||||||||||
|
|
Redeemable Convertible Preferred Shares |
|
|
Class B-6s Convertible |
|
|
Common Shares |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
|
Number of |
|
|
Amount |
|
|
Number of |
|
|
Amount |
|
|
Number of |
|
|
Amount |
|
|
Additional Paid-In Capital |
|
|
Accumulated |
|
|
Total Shareholders' Deficit |
|
|||||||||
Balance at December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||||||
Issuance of Class B-6a redeemable convertible preferred shares |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Conversion of debt to Class B-6s convertible preferred shares |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Conversion of related party promissory note to Class B-6s convertible preferred shares |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||||
Exercise of warrants |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance of related party SAFEs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Exercise of share options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Issuance of Class B-6s to service providers |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Share-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance at June 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Surf Air Mobility Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2024 and 2023
(in thousands)
(Unaudited)
|
|
Six Months Ended June 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Loss on extinguishment of debt |
|
|
— |
|
|
|
|
|
Gain on sale of fixed asset |
|
|
( |
) |
|
|
— |
|
Non-cash operating lease expense |
|
|
|
|
|
— |
|
|
Stock-based compensation expense |
|
|
|
|
|
|
||
Changes in fair value of financial instruments carried at fair value, net |
|
|
|
|
|
|
||
Amortization of debt discounts and debt issuance costs |
|
|
|
|
|
— |
|
|
Deferred income taxes |
|
|
( |
) |
|
|
— |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable, net |
|
|
|
|
|
|
||
Prepaid expenses and other current assets |
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
— |
|
|
Accounts payable |
|
|
|
|
|
|
||
Due to a related party |
|
|
|
|
|
— |
|
|
Accrued expenses and other current liabilities |
|
|
|
|
|
|
||
Deferred revenue |
|
|
( |
) |
|
|
|
|
Operating lease liabilities |
|
|
( |
) |
|
|
— |
|
Other liabilities |
|
|
( |
) |
|
|
— |
|
Cash flows used in operating activities |
|
$ |
( |
) |
|
$ |
( |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
||
Purchase of property and equipment |
|
|
( |
) |
|
|
( |
) |
Internal-use software development costs |
|
|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
$ |
( |
) |
|
$ |
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Payments of borrowings on convertible notes |
|
|
— |
|
|
|
( |
) |
Principal payments on long-term debt |
|
|
( |
) |
|
|
— |
|
Proceeds from borrowings of SAFE notes |
|
|
— |
|
|
|
|
|
Proceeds from advances under Share Purchase Agreement |
|
|
|
|
|
— |
|
|
Proceeds from collateralized borrowings, net of repayment |
|
|
( |
) |
|
|
— |
|
Proceeds from borrowings from related parties |
|
|
|
|
|
|
||
Proceeds from the issuance of Class B-6a redeemable convertible preferred shares |
|
|
— |
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
|
|
|
|
||
Payment of finance lease obligations |
|
|
( |
) |
|
|
— |
|
Net cash provided by financing activities |
|
$ |
|
|
$ |
|
||
Increase (decrease) in cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
|
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash at end of period |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Surf Air Mobility Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Description of Business
Organization
Surf Air Mobility Inc. (the “Company”), a Delaware corporation, is building a regional air mobility ecosystem that will aim to sustainably connect the world’s communities. The Company intends to accelerate the adoption of green flying by developing, together with its commercial partners, fully-electric and hybrid-electric powertrain technology to upgrade existing fleets, and by creating a financing and services infrastructure to enable this transition on an industry-wide level.
Surf Air Global Limited (“Surf Air”) is a British Virgin Islands holding company and was formed on August 15, 2016. Surf Air is a technology-enabled regional air travel network, offering daily scheduled flights and on-demand charter flights. Its customers consist of regional business and leisure travelers. Headquartered in Hawthorne, California, Surf Air commenced flight operations in June 2013.
Internal Reorganization
On July 21, 2023, SAGL Merger Sub Inc., a wholly-owned subsidiary of the Company, was merged with and into Surf Air, after which Surf Air became a wholly-owned subsidiary of the Company (the “Internal Reorganization”).
Pursuant to the Internal Reorganization, all ordinary shares of Surf Air outstanding as of immediately prior to the closing, were canceled in exchange for the right to receive shares of the Company’s common stock and all rights to receive ordinary shares of Surf Air (after giving effect to the conversions) were exchanged for shares of the Company’s common stock (or warrants, options or RSUs to acquire the Company’s common stock, as applicable) at a ratio of Surf Air shares to 1 share of the Company’s common stock. Such conversions, as they relate to the ordinary shares of Surf Air, and all rights to receive ordinary shares, have been reflected as of all periods presented herein.
On July 27, 2023, the Company’s common stock was listed for trading on the New York Stock Exchange (“NYSE”).
As the Internal Reorganization took place on July 21, 2023, the consolidated financial statements reflect the financial position, results of operations and cash flows of Surf Air, the predecessor to the Company, for all periods prior to July 21, 2023. Following the Internal Reorganization, the financial position, results of operations and cash flows are those of the Company.
Southern Acquisition
On
Southern Airways Corporation is a Delaware corporation that was founded on April 5, 2013, and together with its wholly-owned subsidiaries Southern Airways Express, LLC, Southern Airways Pacific, LLC, Southern Airways Autos, LLC, and Multi-Aero Inc. is referred to hereafter collectively as “Southern.” Southern is a scheduled service commuter airline serving cities across the United States that is headquartered in Palm Beach, Florida and commenced flight operations in June 2013. It is a certified Part 135 operator which operates a fleet of over
Following the Southern Acquisition, the Company operates a combined regional airline network servicing U.S. cities across the Mid-Atlantic, Gulf South, Midwest, Rocky Mountains, West Coast, New England and Hawaii.
6
Liquidity and Going Concern
The Company has incurred losses from operations, negative cash flows from operating activities and has a working capital deficit. In addition, the Company is currently in default of certain excise and property taxes as well as certain debt obligations. These tax and debt obligations are classified as current liabilities on the Company’s Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023. As discussed in Note 12, Commitments and Contingencies, on May 15, 2018, the Company received a notice of a tax lien filing from the Internal Revenue Service (“IRS”) for unpaid federal excise taxes for the quarterly periods beginning October 2016 through September 2017 in the amount of $
In connection with past due rental and maintenance payments under certain aircraft leases totaling in aggregate approximately $
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
The airline industry and the Company’s operations are cyclical and highly competitive. The Company’s success is largely dependent on the ability to raise debt and equity capital, achieve a high level of aircraft and crew utilization, increase flight services and the number of passengers flown, and continue to expand into regions profitably throughout the United States.
The Company’s prospects and ongoing business activities are subject to the risks and uncertainties frequently encountered by companies in new and rapidly evolving markets. Risks and uncertainties that could materially and adversely affect the Company’s business, results of operations or financial condition include, but are not limited to, the ability to: (i) raise additional capital (or financing) to fund operating losses, (ii) refinance its current outstanding debt, (iii) maintain efficient aircraft utilization, primarily through the proper utilization of pilots and managing market shortages of maintenance personnel and critical aircraft components, (iv) sustain ongoing operations, (v) attract and maintain customers, (vi) integrate, manage and grow recent acquisitions and new business initiatives, (vii) obtain and maintain relevant regulatory approvals, and (viii) measure and manage risks inherent to the business model.
Prior to the year ended December 31, 2023, the Company has funded its operations and capital needs primarily through the net proceeds received from the issuance of various debt instruments, convertible securities, related party funding, and preferred and common share financing arrangements. During the year ended December 31, 2023, the Company received $
7
second amended and restated Share Purchase Agreement with GEM (see Note 9, Share Purchase Agreement and GEM Purchase). During the six months ended June 30, 2024, the Company received an additional $
The Company is currently implementing operational improvements and stringent operating expenses management to improve the profitability of its regional airline operations in the near term, with a longer-term focus on improvements to its on-demand airline operations. In parallel, the Company is advancing its technology initiatives, including its software technology platform and Caravan electrification programs. In addition, the Company continues to evaluate strategies to obtain additional funding for future operations. These strategies may include, but are not limited to, obtaining additional equity financing, issuing additional debt or entering into other financing arrangements, forming joint venture and other partnerships, and restructuring of operations to grow revenues and decrease expenses. There can be no assurance that the Company will be successful in achieving its strategic plans, that new financing will be available to the Company in a timely manner or on acceptable terms, if at all. If the Company is unable to raise sufficient financing when needed or events or circumstances occur such that the Company does not meet its strategic plans or, the Company will be required to take additional measures to conserve liquidity, which could include, but not necessarily limited to, reducing certain spending, altering or scaling back development plans, including plans to equip regional airline operations with fully-electric or hybrid-electric aircraft, or reducing funding of capital expenditures, which would have a material adverse effect on the Company’s financial position, results of operations, cash flows, and ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Note 2. Summary of Significant Accounting Policies
Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the SEC for interim financial information. Accordingly, the interim financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2023 and the related notes, as included in the Company’s Form 10-K filed on March 29, 2024. The information herein reflects all material adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results for the period presented. The results for the six months ended June 30, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024.
Except to the extent discussed below, there have been no material changes to the Company’s significant accounting policies during the six months ended June 30, 2024 from those disclosed in the notes to the Company’s consolidated financial statements for the year ended December 31, 2023.
8
Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements include the assets, liabilities, and operating results of the Company. All intercompany balances and transactions have been eliminated in consolidation.
Business Combination
The Company is required to use the acquisition method of accounting for business combinations. The acquisition method of accounting requires the Company to allocate the purchase consideration to the assets acquired and liabilities assumed from the acquiree based on their respective fair values as of the Acquisition Date. The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future revenue growth and margins, and discount rates. Fair value estimates are based on the assumptions that management believes a market participant would use in pricing the asset or liability. These estimates are inherently uncertain and, therefore, actual results may differ from the estimates made. As a result, during the measurement period of up to one year from the Acquisition Date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of the purchase price of an acquisition, whichever comes first, any subsequent adjustments are recorded in the Consolidated Statements of Operations.
Accounts Receivable, Net
Accounts receivable primarily consist of amounts due from the U.S. DOT in relation to certain air routes served by the Company under the EAS program, amounts due from airline and non-airline business partners, and pending transactions with credit card processors. Receivables from the U.S. DOT and our business partners are typically settled within 30 days. All accounts receivable are reported net of an allowance for credit losses, which was not material as of June 30, 2024, and December 31, 2023. The Company has considered past and future financial and qualitative factors, including aging, payment history and other credit monitoring indicators, when establishing the allowance for credit losses.
Collateralized Borrowings
The Company has a revolving accounts receivable financing arrangement that currently allows the Company to borrow a designated percentage of eligible accounts receivable due from the U.S. DOT, in relation to certain air routes served by the Company under the EAS program, up to a maximum unsettled amount of $
Accordingly, the accounts receivable remain on the Company’s balance sheet until paid by the customer and cash proceeds from the financing arrangement are recorded as collateralized borrowing in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets, with attributable interest expense recognized over the life of the related transactions. Interest expense and contractual fees associated with the collateralized borrowings are included in interest expense and other expense, net, respectively, in the accompanying Condensed Consolidated Statements of Operations.
During April 2024, the Company received notice from the counterparty to its accounts receivable financing arrangement that such arrangement would be terminated as of May 20, 2024. Additionally, the borrowing capacity under the arrangement was reduced to
Restricted Stock Unit Awards
The grant date fair value of restricted stock units (“RSUs”) is estimated based on the fair value of the Company’s common stock on the date of grant. Prior to the Company’s direct listing in July 2023, RSUs granted by the Company vested upon the satisfaction of both service-based vesting conditions and liquidity event-related performance vesting conditions. The liquidity event-related performance vesting conditions were achieved upon the consummation of the Company's direct listing. Stock-based compensation related to such awards was recorded in full, as of the date of the Company’s direct listing. Since the Company’s direct listing in July 2023, the Company has only granted RSUs that vest upon the satisfaction of a service-based vesting condition and the compensation expense for these RSUs is recognized on a straight-line basis over the requisite service period.
The Company has granted founder performance-based restricted stock units (“Founder PRSUs”) that contain a market condition in the form of future stock price targets. The grant date fair value of the Founder PRSUs was determined using a Monte Carlo simulation model and the Company estimates the derived service period of the Founder PRSUs. The grant date fair value of Founder PRSUs containing a market condition is recorded as stock-based compensation over the derived service period. If the stock price goals are met sooner than the derived service period, any unrecognized compensation expenses related to the Founder PRSUs will be expensed during
9
the period in which the stock price targets are achieved. Provided that each founder continues to be employed by the Company, stock-based compensation expense is recognized over the derived service period, regardless of whether the stock price goals are achieved.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. 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 condensed consolidated financial statements, and the reported amounts of income and expense during the reporting period.
On an ongoing basis, the Company evaluates its estimates using historical experience and other factors including the current economic and regulatory environment as well as management’s judgment. Items subject to such estimates and assumptions include: revenue recognition and related allowances, valuation allowance on deferred tax assets, certain accrued liabilities, useful lives and recoverability of long-lived assets, fair value of assets acquired and liabilities assumed in acquisitions, legal contingencies, assumptions underlying convertible notes and convertible securities carried at fair value and stock-based compensation. These estimates may change as new events occur and additional information is obtained and such changes are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates, and any such differences may be material to the Company’s condensed consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. The updated standard is effective for fiscal periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact that the updated standard will have on our consolidated financial statements and financial statement disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its financial statements.
Note 3. Business Combination
On
Subsequent to the issuance of shares of the Company’s common stock as purchase consideration, the Company repurchased
The Company allocated the purchase price to $
During the fourth quarter of 2023, the Company recorded an impairment of the goodwill initially recorded due to the identification of impairment indicators, such as additional delays of aircraft maintenance due to the unavailability of parts, which resulted in a higher cancellation rate of scheduled flights. These delays have continued into 2024. Additionally, the Company incurred higher cash requirements than expected to fund the operations of the Southern reporting unit during the fourth quarter of 2023, primarily due to higher maintenance costs. Further, unplanned delays in aircraft deliveries under the Textron aircraft supply agreement, including December 2023 cancellations of both firm deliveries and additional purchase options, have delayed re-fleeting efforts. The resulting goodwill impairment charge of $
10
Note 4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
June 30, |
|
|
December 31, |
|
||
Prepaid insurance |
|
$ |
|
|
$ |
|
||
Prepaid software |
|
|
|
|
|
|
||
Prepaid marketing |
|
|
|
|
|
|
||
Engine reserves |
|
|
|
|
|
|
||
Vendor operator prepayments |
|
|
|
|
|
|
||
Prepaid fuel |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total prepaid expenses and other current assets |
|
$ |
|
|
$ |
|
||
Note 5. Property, Plant and Equipment, Net
Property and equipment, net, consists of the following (in thousands):
|
|
June 30, |
|
|
December 31, |
|
||
Aircraft, equipment and rotable spares |
|
$ |
|
|
$ |
|
||
Equipment purchase deposits |
|
|
|
|
|
|
||
Leasehold improvements |
|
|
|
|
|
|
||
Office, vehicles and ground equipment |
|
|
|
|
|
|
||
Internal-use software |
|
|
|
|
|
|
||
Property and equipment, gross |
|
|
|
|
|
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Property and equipment, net |
|
$ |
|
|
$ |
|
||
The Company recorded depreciation expense of $
For the three and six months ended June 30, 2024 and the three and six months ended June 30, 2023, any gain or loss on disposal of property and equipment was not material.
Note 6. Intangible Assets, Net
Intangibles assets, net, consists of the following (in thousands):
|
|
June 30, |
|
|
December 31, |
|
||
EAS contracts |
|
$ |
|
|
$ |
|
||
Tradenames and trademarks |
|
|
|
|
|
|
||
Software |
|
|
|
|
|
|
||
Other intangibles |
|
|
|
|
|
|
||
Intangible assets, gross |
|
|
|
|
|
|
||
Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
Intangible assets, net |
|
$ |
|
|
$ |
|
||
The Company recorded amortization expense of $
11
2024 and 2023, respectively. Amortization expense is recognized as a component of Depreciation and Amortization expense in the accompanying Condensed Consolidated Statement of Operations.
Expected future amortization as of June 30, 2024 is as follows (in thousands):
|
|
Amount |
|
|
Remainder of 2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
Note 7. Accrued Expenses and Other Current Liabilities
A
|
|
June 30, |
|
|
December 31, |
|
||
Accrued compensation and benefits |
|
$ |
|
|
$ |
|
||
Accrued professional services |
|
|
|
|
|
|
||
Excise and franchise taxes payable |
|
|
|
|
|
|
||
Collateralized borrowings |
|
|
|
|
|
|
||
Software license fee payable |
|
|
|
|
|
|
||
Aircraft contract termination payable |
|
|
|
|
|
|
||
Accrued Monarch legal settlement |
|
|
|
|
|
|
||
Insurance premium liability |
|
|
— |
|
|
|
|
|
Accrued major maintenance |
|
|
|
|
|
|
||
Interest and commitment fee payable |
|
|
|
|
|
|
||
Statutory penalties |
|
|
|
|
|
|
||
Other accrued liabilities |
|
|
|
|
|
|
||
Total accrued expenses and other current liabilities |
|
$ |
|
|
$ |
|
||
Collateralized Borrowings
The Company has a revolving accounts receivable financing arrangement that currently allows the Company to borrow a designated percentage of eligible accounts receivable, as defined in the agreement, up to a maximum unsettled amount of $
For the three months ended June 30, 2024, the Company borrowed a total of $
For the six months ended June 30, 2024, the Company borrowed a total of $
As of June 30, 2024, and December 31, 2023, the outstanding amount due under this facility amounted to $
12
Note 8. Financing Arrangements
The Company’s total debt due to unrelated parties consist of the following (in thousands):
|
|
June 30, |
|
|
December 31, |
|
||
Note payable to a financing company, fixed interest rate of |
|
$ |
|
|
$ |
|
||
Note payable to bank, fixed interest rate of |
|
|
|
|
|
|
||
Note payable to a financing company, fixed interest rate of |
|
|
|
|
|
|
||
Notes payable to Clarus Capital, fixed interest rate of |
|
|
|
|
|
|
||
Notes payable to Skywest, fixed interest rates of |
|
|
|
|
|
|
||
Note payable to Tecnam, fixed interest rate of |
|
|
|
|
|
|
||
Long-term debt, gross |
|
|
|
|
|
|
||
Current maturities of long-term debt |
|
|
( |
) |
|
|
( |
) |
Long-term debt, net of current maturities |
|
$ |
|
|
$ |
|
||
Future maturities of total debt as of June 30, 2024 are as follows (in thousands):
|
|
Amount |
|
|
Remainder of 2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
The Company is subject to customary affirmative covenants and negative covenants on all of the above notes payable. As of June 30, 2024, the Company was in compliance with all covenants in the loan agreements.
Fair Value of Convertible Instruments
The Company has elected the fair value option for the convertible notes, which requires them to be remeasured to fair value each reporting period with changes in fair value recorded in changes in fair value of financial instruments carried at fair value, net, on the Condensed Consolidated Statements of Operations, except for change in fair value that results from a change in the instrument specific credit risk which is presented separately within other comprehensive income. The fair value estimate includes significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.
On June 21, 2023, the Company entered into a convertible note purchase agreement (the “Convertible Note Purchase Agreement”) with Partners for Growth V, L.P. (“PFG”) for a senior unsecured convertible promissory note for an aggregate principal amount of $
On July 27, 2023, the Company received $
Fair value of convertible notes (in thousands):
|
|
Fair Value at |
|
|||||
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Convertible Note Purchase Agreement |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
13
Fair Value of SAFE Notes
The Company’s SAFE-T note is carried at fair value, with fair value determined using Level 3 inputs. The Company determined that the SAFE-T instruments should be classified as liabilities based on evaluating the characteristics of the instruments, which contained both debt and equity-like features. The SAFE-T instrument matured in July 2019. As of June 30, 2024 and December 31, 2023, the Company was in default of the SAFE-T note, but the holder has elected not to effect an equity conversion of the instrument. The SAFE-T note is subordinate to the Company’s Convertible Note Purchase Agreement; therefore, the Company cannot pay the outstanding balance prior to paying amounts due under the Convertible Note Purchase Agreement. The SAFE-T note had an outstanding principal amount of $
Fair value of SAFE-T note (in thousands):
|
|
Fair Value at |
|
|||||
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
SAFE-T |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Less: SAFE notes at fair value, current |
|
|
( |
) |
|
|
( |
) |
SAFE notes at fair value, long term |
|
$ |
— |
|
|
$ |
— |
|
Note 9. Share Purchase Agreement and GEM Purchase
Share Purchase Agreement
During 2020, the Company entered into the SPA with GEM and an entity affiliated with GEM to provide incremental financing in the event the Company completed a business combination transaction with a special purpose acquisition company (“SPAC”), IPO, or direct listing. Pursuant to the SPA, GEM is required to purchase shares of the Company’s common stock at a discount to the volume weighted average trading price up to a maximum aggregate purchase price of $
On May 17, 2022, February 8, 2023, and September 18, 2023, the SPA was amended to increase the maximum aggregate shares of the Company’s common stock that may be required to be purchased by GEM to $
14
On June 15, 2023, July 21, 2023, and July 24, 2023, the SPA was further amended to modify the number of shares of the Company’s common stock to be issued to GEM at the time of a public listing transaction of the Company from an amount equal to
The Company has accounted for the shares issuance contracts under the SPA, as amended, as derivative financial instruments which are recorded at fair value within Other long-term liabilities on the Condensed Consolidated Balance Sheets. As of June 30, 2024 and December 31, 2023, the fair value of the GEM commitment was $
GEM Purchase
On June 15, 2023, and amended on July 21, 2023, and July 24, 2023, the Company and GEM entered into the SPA whereby GEM would purchase
GEM Mandatory Convertible Security
On March 1, 2024, Company entered into a mandatory convertible security purchase agreement (the “MCSPA”) with GEM. Pursuant to the MCSPA, the Company has agreed to issue and sell to GEM, and GEM has agreed to purchase from the Company, a mandatory convertible security with a par amount of up to $
The par amount of the Mandatory Convertible Security will be determined at the close of the trading day immediately prior to the Closing Date and will be equal to $
The Mandatory Convertible Security will mature on the fifth anniversary of the Closing Date (the “Maturity Date”), unless earlier converted or redeemed. On the Maturity Date, the Company will pay to GEM, at the Company’s option, cash or Common Shares in an amount equal to the then outstanding par amount of the Mandatory Convertible Security divided by the lesser of (a) $
Prior to the Maturity Date, GEM will have the option to convert any portion of the Mandatory Convertible Security into Common Shares at a conversion rate equal to the portion of the par amount to be converted into Common Shares divided by the lesser of (a) the Fixed Conversion Price and (b) the Floating Conversion Price. If, following the conversion by GEM of any portion of the Mandatory Convertible Security into
The Company may, at its option, redeem the Mandatory Convertible Security, in whole or in part, in cash at a price equal to
15
Pursuant to the terms of the MCSPA, GEM has agreed that, beginning March 1, 2024 and for so long as any Common Shares are beneficially owned by GEM (together with its affiliates and any entity managed by GEM, the “GEM Entities”), the GEM Entities will limit the daily volume of sales of Common Shares then beneficially owned by the GEM Entities to no more than 1/10th of the daily trading volume of Common Shares on the NYSE on the trading day immediately preceding the applicable date of such sales. The MCSPA also contains customary representations, warranties and agreements by the Company and GEM, customary conditions to closing, indemnification obligations, registration rights and termination provisions.
As consideration for GEM’s purchase of the Mandatory Convertible Security, GEM will deliver to the Company
The issuance and sale of the Mandatory Convertible Security will be exempt from the registration requirements of the Securities Act of 1933, as amended, in accordance with Section 4(a)(2) thereof. The Company has agreed to file a registration statement with the SEC for the resale by GEM of at least
Note 10. Fair Value Measurements
The fair values of the convertible notes, SAFE instruments, preferred stock warrant liabilities, and derivative liability were based on the estimated values of the notes, SAFE instruments, warrants, and derivatives upon conversion including adjustments to the conversion rates, which were probability weighted associated with certain events, such as a sale of the Company or the Company becoming a public company. The estimated fair values of these financial liabilities were determined utilizing the Probability-Weighted Expected Return Method and is considered a Level 3 fair value measurement.
Assets and liabilities are classified in the hierarchy based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
The following tables summarize the Company’s financial liabilities that are measured at fair value on a recurring basis in the condensed consolidated financial statements (in thousands):
|
|
Fair Value Measurements at June 30, 2024 Using: |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Convertible notes at fair value |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
SAFE notes at fair value |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
GEM derivative liability |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Total financial liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
|
|
Fair Value Measurements at December 31, 2023 Using: |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Convertible notes at fair value |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
SAFE notes at fair value |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
GEM derivative liability |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Total financial liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
16
The following table provides a reconciliation of activity and changes in fair value for the Company’s convertible loans and redeemable convertible preferred stock warrant liability using inputs classified as Level 3 (in thousands):
|
|
Convertible Notes at Fair Value |
|
|
SAFE Notes |
|
|
GEM Derivative Liability |
|
|||
Balance at December 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Advances received on share purchase agreement |
|
|
— |
|
|
|
— |
|
|
|
|
|
Borrowings on convertible notes |
|
|
|
|
|
— |
|
|
|
— |
|
|
Change in fair value |
|
|
|
|
|
( |
) |
|
|
|
||
Balance at June 30, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Long-Term Debt
The carrying amounts and fair values of the Company’s long-term debt obligations were as follows:
|
|
As of June 30, 2024 |
|
|
As of December 31, 2023 |
|
||||||||
|
|
Carrying Amount |
|
Fair Value |
|
|
Carrying Amount |
|
Fair Value |
|
||||
Long-term debt, including current maturities |
|
$ |
|
$ |
|
|
$ |
|
$ |
|
||||
Term notes payable to related parties |
|
$ |
|
$ |
|
|
$ |
|
$ |
|
||||
In assessing the fair value of the Company’s long-term debt, including current maturities, the Company primarily uses an estimation of discounted future cash flows of the debt at rates currently applicable to the Company for similar debt instruments of comparable maturities and comparable collateral requirements.
Note 11. Warrants
Preferred Share Warrants
Convertible Preferred Share Warrant Liability
There were
Warrants to purchase shares of convertible preferred stock were classified as Other long-term liabilities on the Condensed Consolidated Balance Sheets, as of June 30, 2023, and were subject to remeasurement to fair value at each balance sheet date with changes in fair value recorded in Changes in fair value of financial instruments carried at fair value through the date of the Internal Reorganization. As all converted warrants are for the purchase of common stock, and not preferred interests, the liability as of the date of the Internal Reorganization was reclassified to additional paid-in capital.
Note 12. Commitments and Contingencies
Software License Agreements
On May 18, 2021, the Company executed
17
Licensing, Exclusivity and Aircraft Purchase Arrangements
Textron Agreement
On September 15, 2022, the Company entered into agreements with Textron Aviation Inc. and one of its affiliates (collectively, “TAI”), for engineering services and licensing, sales and marketing, and aircraft purchases, which became effective as of the Company’s direct listing on July 27, 2023 (“TAI Effective Date”).
The engineering services and licensing agreement provides, among other things, that TAI will provide the Company with certain services in furtherance of development of an electrified powertrain technology (the “SAM System”). The engineering agreement requires payment by the Company as such services are provided by TAI. Under this agreement, the Company agrees to meet certain development milestones by specified dates, including issuance of a supplemental type certificate by the Federal Aviation Administration (“FAA”). Should the Company fail to meet certain development milestones, TAI has the right to terminate the collaboration agreement.
The licensing agreement grants the Company a nonexclusive license to certain technical information and intellectual property for the purpose of developing an electrified propulsion system for the Cessna Caravan aircraft, and to assist in obtaining Supplemental Type Certificates (“STC”) from the FAA, including any foreign validation by any other aviation authority, for electrified propulsion upfits/retrofits of the Cessna Caravan aircraft. The licensing agreement provides for payment by the Company of license fees aggregating $
Under the sales and marketing agreement, the parties agreed to develop marketing, promotional and sales strategies for the specifically configured Cessna Grand Caravans and further agreed to: (a) include Cessna Grand Caravans fitted with the SAM System (the “SAM Aircraft”) in sales and marketing materials (print and digital) distributed to authorized dealers, (b) prominently display the SAM Aircraft on their respective websites and social media, (c) include representatives of the Company and TAI at trade show booths, (d) market the SAM Aircraft and conversions to SAM Aircraft to all owners of pre-owned Cessna Grand Caravans, and (e) not advertise or offer any third-party-developed electrified variants of the Cessna Grand Caravan. Certain technologies for aircraft propulsion are specifically carved out from TAI’s agreement to exclusively promote the SAM System for Cessna Grand Caravans. The sales and marketing agreement provides for payment by the Company of exclusivity fees aggregating $
Under the aircraft purchase agreement, the Company may purchase from TAI
Jetstream Agreement
On October 10, 2022, the Company and Jetstream Aviation Capital, LLC (“Jetstream”) entered into an agreement (the “Jetstream Agreement”) that provides for a sale and/or assignment of purchase rights of aircraft from the Company to Jetstream and the leaseback of such aircraft from Jetstream to the Company within a maximum aggregate purchase amount of $
Guarantees
The Company indemnifies its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer or director’s lifetime. The maximum potential future
18
amount the Company could be required to pay under these indemnification agreements is unlimited. The Company believes its insurance would cover any liability that may arise from the acts of its officers and directors and as of June 30, 2024 the Company is not aware of any pending claims or liabilities.
The Company enters into indemnification provisions under agreements with other parties in the ordinary course of business, typically with business partners, contractors, customers, landlords and investors. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of its activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions sometimes include indemnifications relating to representations the Company has made with regards to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential future amount the Company could be required to pay under these indemnification provisions is unlimited.
Legal Contingencies
In 2017, the Company acquired Rise U.S. Holdings, LLC (“Rise”). Prior to the close of the acquisition, Rise Alpha, LLC and Rise Management, LLC (both of which are wholly-owned subsidiaries of Rise and hereinafter referred to as the “Rise Parties”), were served with a petition for judgment by Menagerie Enterprises, Inc. (“Monarch Air”), relating to breach of contract for failure to pay Monarch Air pursuant to the terms and conditions of a flight services agreement with Monarch Air, which occurred prior to the Company’s acquisition of Rise. The Rise Parties filed numerous counterclaims against Monarch Air, including fraud, breach of contract and breach of fiduciary duty. Rise, a subsidiary of the Company, was named as a party in the lawsuit. During 2018 and 2019, certain summary judgments were granted in favor of Monarch Air.
On November 8, 2021, the Rise Parties entered into a final judgment in respect of litigation to finally resolve all claims raised by Monarch Air and the Rise Parties agreed to pay actual damages of $
The Company is also a party to various other claims and matters of litigation incidental to the normal course of its business, none of which were considered to have a potential material impact as of June 30, 2024.
FAA Matters
Our operations are highly regulated by several U.S. government agencies, including the U.S. DOT, the FAA and the Transportation Security Administration. Requirements imposed by these regulators (and others) may restrict the ways we may conduct our business, as well as the operations of our third-party aircraft operator customers. Failure to comply with such requirements may result in fines and other enforcement actions by the regulators.
On February 23, 2024, the FAA notified the Company that it was seeking a proposed civil penalty of $
On October 17, 2023, the Company received a letter of intent from the FAA regarding an investigation into the Company’s Hawaii operations, whereby the Company is alleged to have operated flights beyond their required maintenance intervals during the fourth quarter of 2023. Each violation was subject to a civil penalty not to exceed $
Tax Commitment
On May 15, 2018, the Company received notice of a tax lien filing from the IRS for unpaid federal excise taxes for the quarterly periods beginning October 2016 through September 2017 in the amount of $
19
During 2018, the Company defaulted on its property tax obligations in various California counties in relation to fixed assets, plane usage and aircraft leases. The Company’s total outstanding property tax liability including penalties and interest is $
20
Note 13. Disaggregated Revenue
The disaggregated revenue for the three and six months ended June 30, 2024 and 2023 were as follows (in thousands):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Scheduled |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
On-Demand |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The long-term performance obligations for contractually committed revenues, all of which is related to charter revenue, is recorded in Other long-term liabilities as of June 30, 2024, and December 31, 2023 in the amount of $
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Deferred revenue, beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenue deferred |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenue recognized |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Deferred revenue, end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The Company records deferred revenue (contract liabilities) when the Company receives customer payments in advance of the performance obligations being satisfied on the Company’s contracts. The Company generally collects payments from customers in advance of services being provided. The Company recognizes deferred revenue as revenue when it meets the applicable revenue recognition criteria, which is usually either over the contract term, or when services have been provided. Accordingly, deferred revenue is classified within Current liabilities in the accompanying Condensed Consolidated Balance Sheets. For the six months ended June 30, 2024, $
Note 14. Stock-Based Compensation
Management Incentive Bonus Plan
In conjunction with the Southern Acquisition, the Company adopted the Southern Management Incentive Bonus Plan (the “Incentive Bonus Plan”). The Incentive Bonus Plan provides select employees, consultants and service providers of the Company who were direct or indirect shareholders of Southern an incentive to contribute fully to the Company’s business achievement goals and success. The Incentive Bonus Plan provides for
Stock Options
Prior to the Company’s direct listing, the Company granted stock options to its employees, as well as nonemployees (including directors and others who provide substantial services to the Company) under the Company’s 2016 Equity Incentive Plan, and subsequent to its direct listing, may grant similar awards under the 2023 Plan.
During the six months ended June 30, 2024, the Company granted
21
A summary of stock option activity for the six months ended June 30, 2024 is set forth below:
|
|
Number of Stock Options Outstanding |
|
|
Weighted Average Contractual Term (in years) |
|
|
Aggregate Intrinsic Value (in thousands) |
|
|
Weighted |
|
||||
Outstanding at December 31, 2023 |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercised |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Canceled |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
Outstanding at June 30, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercisable at June 30, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
As of June 30, 2024, unrecognized compensation expense related to the unvested portion of the Company’s share options was approximately $
The assumptions used to estimate the fair value of share options granted during the six months ended June 30, 2024 and 2023 and were as follows:
|
|
For The Six Months Ended June 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Risk-free interest rate |
|
|
|
|
||||
Expected term (in years) |
|
|
|
|
|
|||
Dividend yield |
|
|
|
|
|
|
||
Expected volatility |
|
|
|
|
||||
Warrants
During the six months ended June 30, 2024, the Company issued
A summary of warrant activity for the six months ended June 30, 2024 is set forth below:
|
|
Number of Warrants Outstanding |
|
|
Weighted Average Contractual Term (in years) |
|
|
Aggregate Intrinsic Value (in thousands) |
|
|
Weighted |
|
||||
Outstanding at December 31, 2023 |
|
|
|
|
|
— |
|
|
$ |
— |
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Canceled |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Outstanding at June 30, 2024 |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Exercisable at June 30, 2024 |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
As of June 30, 2024, unrecognized compensation expense related to the unvested portion of the Company’s common stock warrants was approximately $
22
The assumptions used to estimate the fair value of warrants granted during the six months ended June 30, 2024 and 2023 and were as follows:
|
|
For The Six Months Ended June 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Risk-free interest rate |
|
|
|
|
— |
|
||
Expected term (in years) |
|
|
|
|
— |
|
||
Dividend yield |
|
|
|
|
|
— |
|
|
Expected volatility |
|
|
|
|
— |
|
||
Restricted Stock Units
During the six months ended June 30, 2024, the Company issued
A summary of RSU activity for the six months ended June 30, 2024 is set forth below:
|
|
Number of RSUs |
|
|
Weighted |
|
||
Unvested RSUs at December 31, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested/shares issued |
|
|
( |
) |
|
|
|
|
Forfeited, cancelled, or expired |
|
|
— |
|
|
|
— |
|
Unvested RSUs at June 30, 2024 |
|
|
|
|
$ |
|
||
Restricted Share Purchase Agreement
A summary of RSPA activity for the six months ended June 30, 2024 is set forth below:
|
|
Number of RSPAs |
|
|
Weighted |
|
||
Unvested RSPAs at December 31, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
— |
|
|
|
— |
|
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
— |
|
|
|
— |
|
Unvested RSPAs at June 30, 2024 |
|
|
|
|
|
|
||
Some RSPAs were issued for cash while others were issued for promissory notes. The executed promissory note creates an option for the RSPA holder, since they will repay the loan when the fair value of the common stock is greater than the amount of the note. The promissory note contains prepayment features and therefore can be repaid at any time. The maturity date of the RSPA’s is
As of June 30, 2024, the unrecognized compensation expense related to the unvested portion of the Company’s RSPAs was $
23
Performance-Based Restricted Stock Units
A summary of performance-based restricted stock units (“PRSU”) activity for the six months ended June 30, 2024 is set forth below:
|
|
Number of PRSUs |
|
|
Weighted |
|
||
PRSUs at December 31, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
— |
|
|
|
— |
|
Shares issued |
|
|
— |
|
|
|
— |
|
Forfeited, cancelled, or expired |
|
|
— |
|
|
|
— |
|
PRSUs at June 30, 2024 |
|
|
|
|
$ |
|
||
The following table represents the various price targets of the Company’s common stock included in the PRSU awards and the number of PRSUs that will vest upon achievement of such price targets:
Company Price Target |
|
|
Number of PRSUs Eligible to Vest |
|
||
$ |
|
|
|
|
||
|
|
|
|
|
||
|
|
|
|
|
||
A summary of stock-based compensation expense recognized for the three and six months ended June 30, 2024 and 2023 is as follows (in thousands):
|
|
Three months ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Stock Options |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
RSUs |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
RSPAs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
PRSUs |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Warrants |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Management Incentive Bonus Plan |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Other |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Total Stock Based Compensation |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Note 15. Income Taxes
The Company’s provision for income taxes for the three months ended June 30, 2024 and 2023, was a benefit of $
The Company is subject to income tax examinations by the U.S. federal and state tax authorities. There were no ongoing income tax examinations as of June 30, 2024. In general, tax years 2011 and forward remain open to audit for U.S. federal and state income tax purposes.
24
Note 16. Related Party Balances and Transactions
Convertible Notes at Fair Value
On July 21, 2023, in connection with the Internal Reorganization, the 2017 Note was converted per the conditional conversion agreement dated June 27, 2023. The outstanding principal and interest converted into
SAFE Notes at Fair Value
On July 21, 2023, in connection with the Internal Reorganization, the SAFE notes issued to LamVen and Park Lane, entities affiliated with a co-founder of the Company, with aggregate principal amount of $
On June 15, 2023, the Company issued a SAFE note to LamJam, an entity affiliated with a co-founder of the company, with aggregate principal amount of $
Term Notes
The Company entered into term note agreements with LamVen, a related party, and recorded the notes in Due to related parties at carrying value on the Condensed Consolidated Balance Sheets.
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Term notes with LamVen, a related party |
|
$ |
|
|
$ |
|
||
Total |
|
$ |
|
|
$ |
|
||
The LamVen notes with aggregate principal amounts of $
On May 22, 2023, the Company entered into an additional term note agreement in exchange for $
On June 15, 2023, the Company entered into a $
25
On June 15, 2023, the LamVen term note dated April 1, 2023 for $
On June 15, 2023, the term notes with LamJam, an entity affiliated with a co-founder of the Company, in the amount of $
The outstanding notes at carrying values and accrued interests are recorded within Due to related parties on the Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023.
Other Transactions
As of June 30, 2024, the Company continues to lease
JA Flight Services and BAJ Flight Services
As of June 30, 2024, the Company leased a total of
The Company recorded approximately $
Schuman Aviation
As of June 30, 2024, the Company leased six aircraft from Schuman Aviation Ltd. (“Schuman”), an entity which is owned by an employee and shareholder of the Company. All leases consist of
The Company recorded approximately $
Additionally, the Company has an existing agreement with Schuman, whereby Schuman agreed not to fly any of its Makani Kai airline routes servicing the Hawaiian Island commuter airspace for a period of
26
Note 17. Supplemental Cash Flows
Supplemental cash flow information for the six months ended June 30, 2024 and 2023 (in thousands):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Supplemental cash flow information |
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
|
|
$ |
— |
|
|
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
||
Common stock issued under software license agreement |
|
$ |
|
|
$ |
— |
|
|
Issuance of SAFE notes |
|
$ |
— |
|
|
$ |
|
|
Issuance of Class B-6s convertible preferred shares in exchange for outstanding payables |
|
$ |
— |
|
|
$ |
|
|
Issuances of Class B-6a redeemable convertible preferred shares in exchange for outstanding payable |
|
$ |
— |
|
|
$ |
|
|
Exercise of ordinary warrants |
|
$ |
— |
|
|
$ |
|
|
Capitalized interest on convertible notes |
|
$ |
|
|
$ |
— |
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
$ |
|
|
$ |
— |
|
|
Right-of-use obtained in exchange for new finance lease liabilities |
|
$ |
|
|
$ |
— |
|
|
Purchases of property and equipment included in accounts payable |
|
$ |
|
|
$ |
|
||
Note 18. Net Loss per Share Applicable to Common Shareholders, Basic and Diluted
The Company calculates basic and diluted net loss per share attributable to common shareholders using the two-class method required for companies with participating securities. The Company considers preferred stock to be participating securities as the holders are entitled to receive dividends on a pari passu basis in the event that a dividend is paid on common shares. As outlined in “Internal Reorganization” in Note 1, Description of Business, the effects of conversions at a ratio of Surf Air shares to 1 share of the Company’s common stock, have been applied to outstanding common shares and rights to receive common shares for all periods presented in calculating earnings per share and for presentation within the Condensed Consolidated Statement of Changes in Redeemable Convertible Preferred Shares and Shareholders’ Deficit.
The following table sets forth the computation of net loss per common share (in thousands, except share data and per share amounts):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Weighted-average number of common shares used in net loss per share applicable to common shareholders, basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss per share applicable to common shareholders, basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
27
The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Excluded securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Options to purchase common shares |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Warrants to purchase common shares |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Unvested RSPAs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Convertible notes (as converted to common shares) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Preferred stock (as converted to common shares) |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Total common shares equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Note 19. Subsequent Events
Term Notes Maturity Extension
On July 31, 2024, the LamVen term notes originally dated November 30, 2022, January 18, 2023, May 22, 2023, and June 15, 2023 were further amended to extend the maturity date to
Share Purchase Agreement
In August 2024, the Company settled $
GEM Mandatory Convertible Security
On August 7, 2024, the Company completed the closing of the private placement. At the closing, the Company issued a mandatory convertible security with a par amount of $
The Company has filed a registration statement, as amended from time to time, with the SEC for the resale by GEM of up to
Collateralized Borrowings
On August 9, 2024, the Company entered into a new revolving accounts receivable financing arrangement that will allow the Company to borrow a designated percentage of eligible accounts receivable, as defined, up to a maximum unsettled amount of $
Palantir Joint Venture
28
On August 9, 2024, the Company entered into a joint venture agreement (the “JV Agreement”) with Palantir. Pursuant to the JV Agreement, the Company will establish Surf Air Technologies LLC, a subsidiary of the Company (“Surf Air Technologies”), to develop, market, sell, maintain, and support an artificial intelligence-powered software platform for the advanced air mobility industry, which will be powered by Palantir, to provide operators of all types of aircraft, amongst other software products and solutions, with systems for the management of planes, airline operations, and customer facing applications (the “Software Platform”).
The JV Agreement provides that the Company will assign certain agreements regarding subscription access to certain of Palantir’s proprietary commercial software platforms (the “Palantir Platforms”) to Surf Air Technologies. The Company has agreed to contribute the software and intellectual property the Company has developed relating to the Software Platform; the data and know-how from its operations on an ongoing basis to support the development, maintenance, support, and operation of the Software Platform; and the employees and contractors directly involved in developing the Software Platform. Palantir has agreed to contribute a service contract to provide implementation engineering services in support of Surf Air Technologies’ use of the Palantir Platforms, which may include its interface to Software Platform. Surf Air Technologies will also be capitalized by outside third-party investors sourced by the Company and Palantir, with an initial target raise of not less than $
The closing of the JV Agreement is anticipated to occur no later than September 30, 2024 and is subject to certain customary conditions, including the following: establishment of Surf Air Technologies as a Delaware limited liability company, signing of Surf Air Technologies’ operating agreement, contributions by each party to Surf Air Technologies, the securing and funding of outside capital, receipt of internal approvals by the Company and Palantir, and confirmation of sufficient evidence regarding Surf Air Technologies’ ability to meet ongoing financial obligations.
Under the JV Agreement, the Company is entitled to designate four of the five members of the board of directors of Surf Air Technologies and Palantir is entitled to designate one board member. The JV Agreement also provides that the Company will be primarily responsible for oversight of Surf Air Technologies and shall designate the Chair of the board of directors, the legal representative, and the General Manager of Surf Air Technologies.
The JV Agreement also provides that the Company and Palantir have certain rights in connection with Surf Air Technologies, including pre-emptive rights if Surf Air Technologies proposes to increase its registered capital, a right of first refusal to purchase equity in Surf Air Technologies that the other party may propose to transfer to a third party, the Company’s right to buy out Palantir’s stake in Surf Air Technologies, Palantir’s right to exchange shares in the Company for equity in Surf Air Technologies, and the right to purchase all of the other party’s equity in the event of bankruptcy of the other party.
Stock Split
On August 8, 2024, the Company’s board of directors approved an amendment to the Company’s Certificate of Incorporation effecting a
Options, and other like kind awards, to purchase the Company’s common stock will be adjusted in accordance with their terms to reflect the reverse stock split.
29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis reflects the historical results of operations and financial position of Surf Air Mobility Inc., and its consolidated subsidiaries. Prior to the Internal Reorganization (as defined below) on July 21, 2023, these results were comprised of the operations of Surf Air Global, Limited., the predecessor to Surf Air Mobility Inc. References in this section to the “Company”, “we” or “our” refer to Surf Air Mobility Inc, and its consolidated subsidiaries, including Southern Airways Corporation. Unless otherwise indicated, all dollar amounts are set forth in thousands, except share and per share data.
The following discussion and analysis is intended to help the reader understand the Company’s results of operations and financial condition. This discussion and analysis is provided as a supplement to, and should be read in conjunction with, the information included in Item 1. Financial Statements in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to the Company’s plans and strategy for its business, includes forward-looking statements that involve risks and uncertainties. The Company’s actual results may differ materially from management’s expectations as a result of various factors, including but not limited to those discussed in the sections entitled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” included within the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the U.S. Securities and Exchange Commission (“SEC”) on March 29, 2024.
Overview of the Business
Surf Air Mobility Inc. (the “Company”), a Delaware corporation, is building a regional air mobility ecosystem that will aim to sustainably connect communities. The Company intends to accelerate the adoption of green flying by developing, together with its commercial partners, fully-electric and hybrid-electric powertrain technology to upgrade existing fleets, and by creating a financing and services infrastructure to enable this transition on an industry-wide level.
Surf Air Global Limited (“Surf Air”) is a British Virgin Islands holding company and was formed on August 15, 2016. Surf Air is a technology-enabled regional air travel network, offering daily scheduled flights and on-demand charter flights. Its customers consist of regional business and leisure travelers. Headquartered in Hawthorne, California, Surf Air commenced flight operations in June 2013.
Internal Reorganization
On July 21, 2023, SAGL Merger Sub Inc., a wholly-owned subsidiary of the Company, was merged with and into Surf Air, after which Surf Air became a wholly-owned subsidiary of the Company (the “Internal Reorganization”).
Pursuant to the Internal Reorganization, all ordinary shares of Surf Air outstanding as of immediately prior to the closing, were canceled in exchange for the right to receive shares of the Company’s common stock and all rights to receive ordinary shares of Surf Air (after giving effect to the conversions) were exchanged for shares of the Company’s common stock (or warrants, options or RSUs to acquire the Company’s common stock, as applicable) at a ratio of 22.4 Surf Air ordinary shares to 1 share of the Company’s common stock. Such conversions, as they relate to the ordinary shares of Surf Air, and all rights to receive ordinary shares, have been reflected as of all periods presented herein.
On July 27, 2023, the Company’s common stock was listed for trading on the New York Stock Exchange (“NYSE”).
As the Internal Reorganization did not take effect until the quarter ended September 30, 2023, the historical financial statements presented in this Quarterly Report on Form 10-Q reflect the financial position, results of operations and cash flows of Surf Air, the predecessor to the Company, for all periods prior to the date of the Internal Reorganization.
Southern Acquisition
On July 27, 2023 (the “Acquisition Date”), immediately prior to the Company’s listing on the NYSE and after the consummation of the Internal Reorganization, the Company effected the acquisition of all equity interests of Southern Airways Corporation (“Southern”), whereby a wholly-owned subsidiary of the Company merged with and into Southern, after which Southern became a wholly-owned subsidiary of the Company (the “Southern Acquisition”). Pursuant to the Southern Acquisition, Southern stockholders received 16,250,000 shares of the Company’s common stock.
Southern, a Delaware corporation founded on April 5, 2013, and its wholly owned subsidiaries Southern Airways Express, LLC, Southern Airways Pacific, Southern Airways Autos, LLC, and Multi-Aero Inc. are collectively referred to hereafter as “Southern.”
30
Southern is a scheduled service commuter airline serving cities across the United States that is headquartered in Palm Beach, Florida and commenced flight operations in June 2013. It is a certified Part 135 operator which operates a fleet of over 50 aircraft, including the Cessna Caravan, the Cessna Grand Caravan, the Saab 340, the Pilatus PC-12, and the Tecnam Traveller. Southern provides both seasonal and full-year scheduled passenger air transportation service in the Mid-Atlantic and Gulf regions, Rockies and West Coast, and Hawaii, with select routes subsidized by the United States Department of Transportation (“U.S. DOT”) under the Essential Air Service (“EAS”) program.
The Southern Acquisition resulted in a combined regional airline network servicing U.S. cities across the Mid-Atlantic, Gulf South, Midwest, Rocky Mountains, West Coast, New England and Hawaii.
The results of operations of Southern are included in the Company’s condensed consolidated financial statements from the date of acquisition, July 27, 2023, through June 30, 2024. For historical financial information of Southern, prior to the Acquisition Date, refer to the sections entitled “Unaudited Condensed Consolidated Financial Statements for Southern Airways Corporation” and “Audited Financial Statements for Southern Airways Corporation as of December 31, 2022 and 2021 and for the Years Ended December 31, 2022 and 2021” in the Company’s Registration Statement on Form S-1 filed with the SEC on November 9, 2023 (the “Registration Statement”), as well as the Form 8-K/A filed August 29, 2023.
Operating Environment
The Company is developing fully-electric and hybrid-electric powertrain technologies with its commercial partners to electrify existing fleets and new aircraft. Additionally, the Company has been incurring expenses to support the development of the technology of its digital platform with the aim of enabling the regional air-mobility market to operate at scale and to enhance the user’s ability to make informed decisions based on multiple first and third party data sources as well as connected aircraft. As a result, the Company expects to incur significant costs in the future to support the development of this technology.
Beginning in early 2020, the effects and potential effects of the global COVID-19 pandemic, including, but not limited to, its impact on general economic conditions, trade and financing markets, changes in customer behavior with regard to air mobility services, and continuity in business operations created significant uncertainty for the Company. The Company has seen some recovery in on-demand flights through the second quarter of 2024, however the Company’s business has been and will continue to be affected by many changing economic and other conditions beyond the Company’s control, including global events that affect travel behavior. The spread of COVID-19 also disrupted the manufacturing, delivery and overall supply chain of aircraft manufacturers and suppliers and has led to a global decrease in aircraft sales in markets around the world. The Company has experienced inflationary pressures, which have materially increased the Company’s costs for aircraft fuel, wages and benefits and other goods and services critical to its operations during 2023 and through the second quarter of 2024 and believes perceived recessionary risks may impact results for the remainder of 2024. For example, perceived recessionary risks may cause companies and individuals to reduce travel for either professional or personal reasons, and drive higher prices in the supply chain the Company relies upon. In addition, the Company incurred greater than expected losses and negative cash flows from operating activities through the second quarter of 2024 due to inefficient aircraft utilization, primarily caused by an underutilization of pilots and a shortage of maintenance personnel and critical aircraft components, which, in aggregate, have challenged the Company’s ability to serve its customers as desired and, in turn, cover expenses.
As such, the extent to which global events and market inflationary impacts will affect our financial condition, liquidity and future results of operations is uncertain. Given the uncertainty regarding the length of these factors, the Company cannot reasonably estimate their impact on its future results of operations, cash flows or financial condition. The Company continues to actively monitor its financial condition, liquidity, operations, suppliers, industry and workforce. As the Company does not currently, and does not intend in the foreseeable future to, enter into any transactions to hedge fuel costs, or otherwise fix labor costs, the Company will continue to be fully exposed to fluctuations in prices of material operating costs.
31
Key Operating Measures
In addition to the data presented in our condensed consolidated financial statements, we use the following key operating measures commonly used throughout the air transport industry to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions. The following table summarizes key operating measures for each period presented below, which are unaudited.
|
|
Six Months Ended June 30, |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
Increase/ |
|
|
% |
|
||||
Scheduled Flight Hours(1) |
|
|
34,409 |
|
|
|
1,648 |
|
|
|
32,760 |
|
|
NM |
|
|
On-Demand Flights(2) |
|
|
1,902 |
|
|
|
953 |
|
|
|
949 |
|
|
|
100 |
% |
Scheduled Passengers(3) |
|
|
179,461 |
|
|
|
3,869 |
|
|
|
175,592 |
|
|
NM |
|
|
Headcount(4) |
|
|
786 |
|
|
|
88 |
|
|
|
698 |
|
|
|
793 |
% |
Scheduled Departures(5) |
|
|
34,586 |
|
|
|
1,274 |
|
|
|
33,312 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
NM - Percentage change is not meaningful |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
(1)Scheduled Flight Hours represent actual flight time from takeoff through landing that were flown in the period and excludes departures for maintenance or repositioning events. This metric only measures flight hours for flights that generated scheduled revenue and does not include flight hours for flights that generated on-demand revenue. |
|
|||||||||||||||
(2)On-Demand Flights represent the number of flights that generate on-demand revenue taken by customers on the Company's aircraft or third-party operated aircraft during the period. |
|
|||||||||||||||
(3)Scheduled Passengers represent the number of passengers flown during the period for scheduled service. |
|
|||||||||||||||
(4)Headcount represents all full-time and part-time employees at the end of the period. |
|
|||||||||||||||
(5)Scheduled Departures represent the number of takeoffs in the period, agnostic of operator and excludes departures for maintenance or repositioning events. This metric only measures takeoffs that generated scheduled revenue and does not include takeoffs that generated on-demand revenue. |
|
|||||||||||||||
Results of Operations
Results of the Company’s Operations for the Three Months Ended June, 2024 and 2023
The following table sets forth our condensed consolidated statements of operations data for the three months ended June 30, 2024 and 2023 (in thousands, except percentages):
|
|
Three months ended June 30, |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
Revenue |
|
$ |
32,366 |
|
|
$ |
6,195 |
|
|
$ |
26,171 |
|
|
|
422 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of revenue, exclusive of depreciation and amortization |
|
|
27,729 |
|
|
|
7,049 |
|
|
|
20,680 |
|
|
|
293 |
% |
Technology and development |
|
|
5,658 |
|
|
|
816 |
|
|
|
4,842 |
|
|
|
593 |
% |
Sales and marketing |
|
|
2,578 |
|
|
|
1,927 |
|
|
|
651 |
|
|
|
34 |
% |
General and administrative |
|
|
19,596 |
|
|
|
9,296 |
|
|
|
10,300 |
|
|
|
111 |
% |
Depreciation and amortization |
|
|
2,062 |
|
|
|
261 |
|
|
|
1,801 |
|
|
|
690 |
% |
Total operating expenses |
|
|
57,623 |
|
|
|
19,349 |
|
|
|
38,274 |
|
|
|
198 |
% |
Operating loss |
|
|
(25,257 |
) |
|
|
(13,154 |
) |
|
|
(12,103 |
) |
|
|
(92 |
)% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Changes in fair value of financial instruments carried at fair value, net |
|
|
(154 |
) |
|
|
(30,404 |
) |
|
|
30,250 |
|
|
|
(99 |
)% |
Interest expense |
|
|
(1,911 |
) |
|
|
(525 |
) |
|
|
(1,386 |
) |
|
|
(264 |
)% |
Gain (loss) on extinguishment of debt |
|
— |
|
|
|
(389 |
) |
|
|
|
|
|
|
|||
Other expense |
|
|
304 |
|
|
|
(48 |
) |
|
|
352 |
|
|
|
(733 |
)% |
Total other income (expense), net |
|
|
(1,761 |
) |
|
|
(31,366 |
) |
|
|
29,605 |
|
|
|
(94 |
)% |
Loss before income taxes |
|
|
(27,018 |
) |
|
|
(44,520 |
) |
|
|
17,502 |
|
|
|
(39 |
)% |
Income tax expense (benefit) |
|
|
35 |
|
|
|
— |
|
|
|
35 |
|
|
|
— |
% |
Net loss |
|
$ |
(26,983 |
) |
|
$ |
(44,520 |
) |
|
$ |
17,537 |
|
|
|
(39 |
)% |
32
Revenue
Revenue increased by $26.2 million, 422%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. The increase in revenue was attributable to the following changes in scheduled and on-demand revenues (in thousands, except percentages):
|
|
For the three months ended June 30, |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
Scheduled |
|
$ |
24,242 |
|
|
$ |
1,048 |
|
|
$ |
23,194 |
|
|
|
2,213 |
% |
On-Demand |
|
|
8,124 |
|
|
|
5,147 |
|
|
|
2,977 |
|
|
|
58 |
% |
Total revenue |
|
$ |
32,366 |
|
|
$ |
6,195 |
|
|
$ |
26,171 |
|
|
|
422 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|||||||||||||||
Scheduled revenue increased $23.2 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. Scheduled revenue, absent the impacts of the acquisition of Southern, decreased by roughly $0.3 million, primarily due to a decrease in membership subscription revenue, from a lower overall membership usage. Of the increase in scheduled revenue, $23.5 million was related to the Southern Acquisition, primarily related to EAS revenue of $13.3 million, passenger revenue of $9.4 million, and other revenue of $0.8 million in the second quarter of 2024 after the acquisition of Southern.
On-Demand revenue increased by $3.0 million, or 58%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. The Company conducted 996 on-demand flights during the three months ended June 30, 2024, and absent the impact of the acquisition of Southern, the Company conducted 692 on-demand charter flights during the second quarter of 2024 compared to 531 on-demand charter flights during the second quarter of 2023. The increase in on-demand charter flights was driven by increases in marketing efforts for our on-demand product and service strategy growth. Price per trip increased during the second quarter of 2024 compared to the second quarter of 2023, primarily driven by a shift in customer preference to more expensive aircraft to service charter trips in 2024. These variables accounted for roughly $2.1 million, or 69% of the total on-demand revenue increase period over period. With the Southern Acquisition, on-demand revenue increased $0.9 million, or 31%, during the three months ended June 30, 2024, primarily from Hawaii based operations focusing on providing route services for construction crews, school events, and leisure travel.
Operating Expenses
Cost of Revenue, exclusive of depreciation and amortization
Cost of revenue increased by $20.7 million, or 293%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. Of the total 996 on-demand charter flights, and absent the impact of the acquisition of Southern, the Company serviced 692 on-demand charter flights in the three months ended June 30, 2024, an increase from 531 for the three months ended June 30, 2023, resulting in a $2.1 million increase, or 10%, in cost of revenue associated with the Company’s on-demand charter flights. Of the total 17,591 scheduled flight hours, and absent the impact of the acquisition of Southern, the Company flew 413 flight hours in the three months ended June 30, 2024, a decrease from 926 for the three months ended June 30, 2023, resulting in a $0.3 million decrease, or -2% of the total.
With the Southern Acquisition, cost of revenue increased by $18.9 million, or 92%, during the three months ended June 30, 2024 primarily due to aircraft expenses of $10.5 million, pilot expenses of $4.9 million, customer care expenses of $2.4 million, station expenses of $0.8 million, and passenger re-accommodation expenses of $0.2 million.
Technology and Development
Technology and development expenses increased by $4.8 million, or 593%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. The increase was driven primarily by amounts accrued pertaining to the Textron data license of $3.1 million, and software expenses related to work with Palantir for $2.0 million. These increases were partially offset by a decrease in labor and labor related expenses for the technology team of $0.3 million due to a decrease in headcount.
Sales and Marketing
Sales and marketing expenses increased by $0.7 million, or 34%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to an increase in management compensation and management incentive plan expenses of
33
$0.8 million. Sales and marketing expenses were partially offset by a decrease in brand awareness and digital marketing expenses, incurred during the lead up to the Company’s direct listing, of $0.4 million.
With the Southern Acquisition, sales and marketing expenses increased by $0.3 million primarily attributable to marketing for scheduled revenue.
General and Administrative
General and administrative expenses increased by $10.3 million, or 111%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. The increase in general and administrative expense is driven primarily by the recognition of an additional $5.7 million in stock-based compensation expense, and management incentive plan expenses of $2.3 million. This was partially offset by a decrease in legal fees of $1.9 million.
With the Southern Acquisition, general and administrative expenses increased by $4.2 million primarily attributable to labor expenses, professional fees, insurance, utilities, rent and travel.
Depreciation and Amortization
With the Southern Acquisition, depreciation and amortization expenses increased by $1.8 million, or 690%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. This was primarily due to depreciation of engines and aircraft acquired from Southern, as well as amortization of intangibles acquired in the Southern Acquisition.
Other Income/(Expense)
Other expense, net decreased by $29.6 million, or -94%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. There are two primary drivers for the increase in net income/(expense).
In the second quarter of 2023 there was an increase of $30.4 million in fair value of financial debt instruments, including SAFE notes and certain convertible notes. In the second quarter of 2024 there was a decrease of $0.2 million in fair value of financial debt instruments, including SAFE notes and certain convertible notes which resulted in a $30.2 million decrease in expense period over period.
With the Southern Acquisition, other expenses increased by $0.6 million primarily attributable to interest expense associated with the debt instruments acquired from Southern.
Net Loss
The decrease in net loss of $17.5 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2024, was primarily attributable to an increase in general and administrative expenses of $6.1 million, an increase in technology and development of $4.8 million, an increase in sales and marketing of $0.4 million, and an increase in cost of revenue of $1.8 million. These increases in expenses were offset by a decrease in other expenses of $30.2 million (including changes in fair market value of financial instruments, interest expense, and other expense), and an increase in revenue of $1.8 million.
The Southern Acquisition increased net loss by $1.2 million primarily attributable to cost of revenue of $18.9 million, general and administrative expenses of $4.2 million, depreciation and amortization of $1.7 million, interest expense of $0.8 million, and marketing expenses of $0.3 million. These increases in expenses were offset by an increase of $24.5 million in revenue.
34
Results of Operations
Results of the Company’s Operations for the Six Months Ended June, 2024 and 2023
The following table sets forth our condensed consolidated statements of operations data for the six months ended June 30, 2024 and 2023 (in thousands, except percentages):
|
|
Six Months Ended June 30, |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
Revenue |
|
$ |
62,990 |
|
|
$ |
11,702 |
|
|
$ |
51,288 |
|
|
|
438 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of revenue, exclusive of depreciation and amortization |
|
|
56,218 |
|
|
|
13,699 |
|
|
|
42,519 |
|
|
|
310 |
% |
Technology and development |
|
|
12,667 |
|
|
|
1,629 |
|
|
|
11,038 |
|
|
|
678 |
% |
Sales and marketing |
|
|
5,587 |
|
|
|
3,321 |
|
|
|
2,266 |
|
|
|
68 |
% |
General and administrative |
|
|
44,205 |
|
|
|
17,736 |
|
|
|
26,469 |
|
|
|
149 |
% |
Depreciation and amortization |
|
|
4,040 |
|
|
|
519 |
|
|
|
3,521 |
|
|
|
678 |
% |
Total operating expenses |
|
|
122,717 |
|
|
|
36,904 |
|
|
|
85,813 |
|
|
|
233 |
% |
Operating loss |
|
|
(59,727 |
) |
|
|
(25,202 |
) |
|
|
(34,525 |
) |
|
|
(137 |
)% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Changes in fair value of financial instruments carried at fair value, net |
|
|
(669 |
) |
|
|
(38,500 |
) |
|
|
37,831 |
|
|
|
(98 |
)% |
Interest expense |
|
|
(3,582 |
) |
|
|
(697 |
) |
|
|
(2,885 |
) |
|
|
(414 |
)% |
Gain (loss) on extinguishment of debt |
|
|
— |
|
|
|
(389 |
) |
|
|
389 |
|
|
|
(100 |
)% |
Other expense |
|
|
(51 |
) |
|
|
(305 |
) |
|
|
254 |
|
|
|
(83 |
)% |
Total other income (expense), net |
|
|
(4,302 |
) |
|
|
(39,891 |
) |
|
|
35,589 |
|
|
|
(89 |
)% |
Loss before income taxes |
|
|
(64,029 |
) |
|
|
(65,093 |
) |
|
|
1,064 |
|
|
|
(2 |
)% |
Income tax expense (benefit) |
|
|
81 |
|
|
|
— |
|
|
|
81 |
|
|
|
— |
% |
Net loss |
|
$ |
(63,948 |
) |
|
$ |
(65,093 |
) |
|
$ |
1,145 |
|
|
|
(2 |
)% |
Revenue
Revenue increased by $51.3 million, 438%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The increase in revenue was attributable to the following changes in scheduled and on-demand revenues (in thousands, except percentages):
|
|
Six Months Ended June 30, |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
Scheduled |
|
$ |
47,223 |
|
|
$ |
1,880 |
|
|
$ |
45,343 |
|
|
|
2,412 |
% |
On-Demand |
|
|
15,767 |
|
|
|
9,822 |
|
|
|
5,945 |
|
|
|
61 |
% |
Total revenue |
|
$ |
62,990 |
|
|
$ |
11,702 |
|
|
$ |
51,288 |
|
|
|
438 |
% |
Scheduled revenue increased $45.3 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. Scheduled revenue, absent the impacts of the acquisition of Southern, decreased by roughly $0.2 million primarily due to a decrease in membership subscription revenue, from a lower overall membership usage. Of the increase in scheduled revenue, $45.5 million was related to the Southern Acquisition, primarily related to EAS revenue of $25.2 million, passenger revenue of $18.7 million, and other revenue of $1.6 million in the second quarter of 2024 after the acquisition of Southern. On-Demand revenue increased by $5.9 million, or 61%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The Company conducted 1,902 on-demand flights during the six months ended June 30, 2024, and absent the impact of the acquisition of Southern, the Company conducted 1,322 on-demand charter flights during the first half of 2024 compared to 953 on-demand charter flights during the first half of 2023. The increase in on-demand charter flights was driven by increases in marketing efforts for our on-demand product. Price per trip increased slightly during the first half of 2024 compared to the first half of 2023, primarily driven by a shift in customer preference to more expensive aircraft to service charter trips in 2024, accounting for roughly $4.1 million, or 68% of the total on-demand revenue increase period over period.
With the Southern Acquisition, on-demand revenue increased $1.8 million, or 31%, during the six months ended June 30, 2024, primarily from Hawaii based operations focusing on providing charter services for construction crews, school events, and leisure travel.
35
Operating Expenses
Cost of Revenue, exclusive of depreciation and amortization
Cost of revenue increased by $42.5 million, or 310%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. Of the total 1,902 on-demand charter flights, and absent the impact of the acquisition of Southern, the Company serviced 1,322 on-demand charter flights in the six months ended June 30, 2024, an increase from 953 for the six months ended June 30, 2023, resulting in a $4.3 million increase, or 10%, in cost of revenue associated with the Company’s on-demand charter flights. Of the total 34,409 scheduled flight hours, and absent the impact of the acquisition of Southern, the Company flew 1,073 flight hours in the six months ended June 30, 2024, a decrease from 1,648 for the six months ended June 30, 2023, resulting in a $0.3 million decrease, or 1% of the total.
With the Southern Acquisition, cost of revenue increased by $39.0 million, or 91%, during the six months ended June 30, 2024 primarily due to aircraft expenses of $21.6 million, pilot expenses of $9.6 million, customer care expenses of $5.0 million, station expenses of $1.6 million, and reservation system cost of $0.9 million, and passenger re-accommodation expenses of $0.3 million.
Technology and Development
Technology and development expenses increased by $11.0 million, or 678%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The increase was driven primarily by amounts accrued pertaining to the Textron data license of $6.3 million, expenses related to work with Palantir for $4.1 million, and increases in software platform and electrification development expenses for $1.0 million. These increases were partially offset by a decrease in labor and labor related expenses for the technology team of $0.4 million due to a decrease in headcount.
Sales and Marketing
Sales and marketing expenses increased by $2.3 million, or 68%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to an increase in brand awareness and strategic digital marketing expenses of $0.3 million. Additionally, there was a $1.5 million increase due to management compensation and management incentive plan expenses.
With the Southern Acquisition, sales and marketing expenses increased by $0.5 million primarily attributable to marketing for scheduled revenue.
General and Administrative
General and administrative expenses increased by $26.5 million, or 149%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The increase in general and administrative expense is driven primarily by the recognition of an additional $17.2 million in stock-based compensation expense, and an increase in management compensation and management incentive plan expenses of $4.0 million. Partially offset by a decrease in legal fees of $2.9 million as a result of lower associated costs from the lead-up to the Company’s direct listing in July 2023.
With the Southern Acquisition, general and administrative expenses increased by $8.3 million primarily attributable to labor expenses, professional fees, insurance, utilities, rent and travel.
Depreciation and Amortization
With the Southern Acquisition, depreciation and amortization expenses increased by $3.5 million, or 678%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. This was primarily due to depreciation of engines and aircraft acquired from Southern, as well as amortization of intangibles acquired in the Southern Acquisition.
Other Income/(Expense)
Other expense, net decreased by $35.6 million, or -89%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. There are two primary drivers for the increase in net income/(expense).
Through the first half of 2023 there was a decrease of $38.5 million in fair value of financial debt instruments, including SAFE notes and certain convertible notes. Through the first half of 2024 there was a decrease of $0.7 million in fair value of financial debt
36
instruments, including SAFE notes and certain convertible notes which resulted in a $37.8 million decrease in expense period over period.
There was an increase in interest expense of $1.3 million period over period, due to additional related party term loans.
With the Southern Acquisition, other expenses increased by $1.4 million primarily attributable to interest expense associated with the debt instruments acquired from Southern.
Net Loss
The decrease in net loss of $1.1 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2024, was primarily attributable to an increase in general and administrative expenses of $18.1 million, an increase in technology and development of $11.0 million, an increase in sales and marketing of $1.8 million, an increase in interest expense on related party loans of $1.3 million, and an increase in cost of revenue of $3.8 million. These increases in expenses were offset by a decrease in other expenses of $37.8 million (including changes in fair market value of financial instruments, interest expense, and other expense), and an increase in revenue of $3.9 million.
The Southern Acquisition increased net loss by $4.9 million primarily attributable to cost of revenue of $39.0 million, general and administrative expenses of $8.3 million, depreciation and amortization of $3.4 million, interest expense of $1.6 million, and marketing expenses of $0.5 million. These increases in expenses were offset by an increase of $47.3 million in revenue.
Cash Flow Analysis
The following table presents a summary of our cash flows (in thousands):
|
|
Six Months Ended June 30, |
|
|
Change |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
||||
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating activities |
|
$ |
(18,432 |
) |
|
$ |
(20,622 |
) |
|
$ |
2,190 |
|
|
|
(11 |
)% |
Investing activities |
|
|
(2,621 |
) |
|
|
(300 |
) |
|
|
(2,321 |
) |
|
|
(774 |
)% |
Financing activities |
|
|
20,696 |
|
|
|
23,186 |
|
|
|
(2,490 |
) |
|
|
(11 |
)% |
Net change in cash and cash equivalents |
|
$ |
(357 |
) |
|
$ |
2,264 |
|
|
$ |
(2,621 |
) |
|
|
(116 |
)% |
Cash Flow from Operating Activities
For the six months ended June 30, 2024, net cash used in operating activities was $18.4 million, driven by a net loss of $63.9 million. These operating outflows were partially offset by non-cash stock-based compensation expenses of $20.0 million, increases in accounts payable, amounts due to related parties and accrued expenses of $20.9 million, and increases in depreciation and amortization expense of $4.0 million.
For the six months ended June 30, 2023, net cash used in operating activities was $20.6 million, primarily driven by a net loss of $65.1 million. This was partially offset by $2.8 million in non-cash stock-based compensation expenses, $38.5 million in changes in fair value of financial instruments, and increases in accounts payable, accrued expenses, and deferred revenue of $2.0 million, in aggregate.
Net cash used in operating activities decreased period over period by $2.2 million, driven by a $1.1 million decrease in net loss and a $0.5 million decrease in prepaid expenses and other assets.
Cash Flow from Investing Activities
For the six months ended June 30, 2024, net cash used in investing activities was $2.6 million, an increase of $2.3 million compared to the six months ended June 30, 2023, driven by an increase of $1.2 million of property and equipment costs and a $1.1 million increase in capitalized software development costs.
Cash Flow from Financing Activities
For the six months ended June 30, 2024, net cash provided by financing activities was $20.7 million due to proceeds from borrowings from related parties of $19.5 million, and proceeds from the GEM stock purchase agreement of $3.8 million, partially offset by $1.5 million in principal payments on long-term debt.
37
For the six months ended June 30, 2023, net cash provided by financing activities was $23.2 million, primarily due to proceeds from borrowings from related parties of $16.5 million, proceeds from the issuance of SAFE instruments of $3.7 million, and proceeds from the issuance of preferred shares of $3.0 million.
Net cash provided by financing activities decreased period over period by $2.5 million, primarily driven by principal payments on long term debt of $1.5 million.
Liquidity and Capital Resources
The Company has incurred losses from operations, negative cash flows from operating activities and has a working capital deficit. In addition, the Company is currently in default of certain excise and property taxes as well as certain debt obligations. These tax and debt obligations are classified as current liabilities on the Company’s Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023. On May 15, 2018, the Company received a notice of a tax lien filing from the Internal Revenue Service (“IRS”) for unpaid federal excise taxes for the quarterly periods beginning October 2016 through September 2017 in the amount of $1.9 million, including penalties and interest as of the date of the notice. The Company agreed to a payment plan (the “Installment Plan”) whereby the IRS would take no further action and remove such liens at the time such amounts have been paid. In 2019, the Company defaulted on the Installment Plan. Defaulting on the Installment Plan can result in the IRS nullifying such plan, placing the Company in default and taking collection action against the Company for any unpaid balance. The Company’s total outstanding federal excise tax liability including accrued penalties and interest of $7.9 million is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheet as of June 30, 2024. During June 2024, the Company submitted a formal offer-in-compromise (“OIC”) to the IRS, seeking to resolve all consolidated excise tax liabilities. Under the terms of the OIC, all collection actions against the Company, in relation to these matters, will be abated and the Company will be making monthly payments of $34 thousand on historical excise tax liabilities while the IRS is considering the OIC. The Company has also defaulted on its property tax obligations in various California counties in relation to fixed assets, plane usage and aircraft leases. The Company’s total outstanding property tax liability including penalties and interest is approximately $1.7 million as of June 30, 2024. The Company received a net credit of $0.3 million as a result of the property tax audit, which concluded in June 2024. Additionally, Los Angeles County has imposed a tax lien on four of the Company’s leased aircraft due to the late filing of the Company’s 2022 property tax return. As of June 30, 2024, the amount of property tax, interest and penalties accrued related to the Los Angeles County tax lien for all unpaid tax years was approximately $1.2 million. The Company is in the process of remediating the late filing and payment of the property taxes due to Los Angeles County. As of June 30, 2024, the Company was also in default of the Simple Agreements for Future Equity with Token allocation (“SAFE-T”) note, where the note matured in July 2019. The SAFE-T note is subordinate to the Company’s Convertible Note Purchase Agreement; therefore, the Company cannot pay the outstanding balance prior to paying amounts due under the Convertible Note Purchase Agreement (as defined below). The SAFE-T note had an outstanding principal amount of $0.5 million as of June 30, 2024 (see Note 8, Financing Arrangements ).
In connection with past due rental and maintenance payments under certain aircraft leases totaling in aggregate approximately $5.0 million, which is accrued for at June 30, 2024 and December 31, 2023, the Company entered into a payment plan pursuant to which all payments of the past due amounts are deferred until such time as the Company receives at least $30.0 million in aggregate funds in connection with any capital contribution, at which time it is required to repay $1.0 million of such past due payments, with the eventual full repayment of the remaining amounts being required upon the receipt of at least $50.0 million in capital contributions. As of June 30, 2024, the Company has classified $1.0 million as a current liability as potentially triggered by capital contributions received as follows: the funds received by the Company of $8.0 million under a convertible note purchase agreement with Partners for Growth V, L.P. (“PFG”), $25.0 million through the share purchase agreement with GEM Global Yield LLC SCS (“GEM”), and an entity affiliated with GEM that provides incremental financing (the “GEM Purchase”), and $14 million in cumulative funding through advances and share draws under the Share Purchase Agreement with GEM. As of June 30, 2024 the Company has not made any payments under this payment plan.
The airline industry and the Company’s operations are cyclical and highly competitive. The Company’s success is largely dependent on the ability to raise debt and equity capital, achieve a high level of aircraft and crew utilization, increase flight services and the number of passengers flown, and continue to profitably expand into regions throughout the United States.
The Company’s prospects and ongoing business activities are subject to the risks and uncertainties frequently encountered by companies in new and rapidly evolving markets. Risks and uncertainties that could materially and adversely affect the Company’s business, results of operations or financial condition include, but are not limited to, the ability to: (i) raise additional capital (or financing) to fund operating losses, (ii) refinance its current outstanding debt, (iii) maintain efficient aircraft utilization, primarily through the proper utilization of pilots and managing market shortages of maintenance personnel and critical aircraft components, (iv) sustain ongoing operations, (v) attract and maintain customers, (vi) integrate, manage and grow recent acquisitions and new business initiatives, (vii) obtain and maintain relevant regulatory approvals, and (viii) measure and manage risks inherent to the business model.
Prior to the year ended December 31, 2023, the Company has funded its operations and capital needs primarily through the net proceeds received from the issuance of various debt instruments, convertible securities, related party funding, and preferred and common share financing arrangements. During the year ended December 31, 2023, the Company received $8 million under a convertible note purchase agreement (the “Convertible Note Purchase Agreement”) with PFG, $25.0 million through the GEM Purchase Agreement and
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$10.2 million in advances under the second amended and restated Share Purchase Agreement with GEM (see Note 9, Share Purchase Agreement and GEM Purchase). The Company had previously filed a Form S-1 registration statement (File No. 333-274573) with the U.S. Securities and Exchange Commission (the “SEC”), registering up to 25 million shares of the Company’s common stock, which represents 1,000,000 shares of the Company’s common stock issued to GEM under the GEM Purchase Agreement, 1,300,000 shares of the Company’s common stock issued to GEM in connection with the initial issuance to GEM under the Share Purchase Agreement, 4,000,000 shares of the Company’s common stock issued to GEM in satisfaction of the commitment fee under the Share Purchase Agreement, and up to 18,700,000 shares of the Company’s common stock to be issued to GEM in connection with the Share Purchase Agreement. Additionally, the Company had previously filed a Form S-1 registration statement (File No. 333-275434) with the SEC, registering up to 300.0 million shares of the Company’s common stock, which represents the balance of the full amount of shares of common stock that the Company estimated could be issued and sold to GEM for advances under the Share Purchase Agreement, plus the amount of shares the Company estimated could be sold to GEM for $50 million under the Share Purchase Agreement, (collectively, the “Prior Registration Statements”). In connection with the GEM Mandatory Convertible Security (see Note 9, Share Purchase Agreement and GEM Purchase), the Company deregistered all of the shares registered but unsold under the Prior Registration Statements on June 4, 2024. The combined 325,000,000 shares contemplated under the Prior Registration Statements have been included in a Form S-1 Registration Statement (File No. 333-279929), which was declared effective by the SEC on August 7, 2024. As of June 30, 2024, the contractual terms allow the Company to make further advances of up to $90.0 million under the Share Purchase Agreement with GEM. Additionally, the Company has the ability to draw an additional $296.0 million, subject to daily volume limitations and GEM’s requirement to hold less than 10% of the fully-diluted shares of the Company, with shares obtained in the satisfaction of draws under the SPA. As of June 30, 2024, GEM held 4.5% of the then fully-diluted shares of the Company. At June 30, 2024, the daily volume limitations under the SPA restricted our ability to take additional draws under the Share Purchase Agreement to approximately 5.7 million shares per draw. Additionally, the availability of the Share Purchase Agreement is contingent on the Company’s common stock being listed on a national exchange. As of June 30, 2024, the Company is attempting to resolve two listing requirement violations with the NYSE. While not currently subject to de-listing, the Company’s inability to cure these listing requirement violations would impact its continued ability to raise capital through the Share Purchase Agreement.
The Company is currently implementing operational improvements and stringent operating expenses management to improve the profitability of its regional airline operations in the near term, with a longer-term focus on improvements to its on-demand airline operations. In parallel, the Company is advancing its technology initiatives, including its software technology platform and Caravan electrification programs. In addition, the Company continues to evaluate strategies to obtain additional funding for future operations. These strategies may include, but are not limited to, obtaining additional equity financing, issuing additional debt or entering into other financing arrangements, forming joint ventures and other partnerships, and restructuring of operations to grow revenues and decrease expenses. There can be no assurance that the Company will be successful in achieving its strategic plans or that new financing will be available to the Company in a timely manner or on acceptable terms, if at all. If the Company is unable to raise sufficient financing when needed or events or circumstances occur such that the Company does not meet its strategic plans, the Company will be required to take additional measures to conserve liquidity, which could include, but are not necessarily limited to, reducing certain spending, altering or scaling back development plans, including plans to equip regional airline operations with fully-electric or hybrid-electric aircraft, or reducing funding of capital expenditures, which would have a material adverse effect on the Company’s financial position, results of operations, cash flows, and ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. The Company's condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
The Company’s capital expenditures during the six months ended June 30, 2024 were limited to payments made for aircraft parts, engines, immaterial purchases and internally developed software. Upon the Company’s ability to utilize the SPA or obtain alternative funding, the Company intends to invest significantly in expansion of its network footprint and in development of electrified powertrain technology and its commercial platform. Expansion of the network will require acquisition of aircraft over the next five years with an expected cost of approximately $1.2 billion. The Company has placed an order with TAI for 90 Cessna Grand Caravan aircraft with an option for an additional 26 Cessna Grand Caravan aircraft, with expected delivery taken over the next five years. As of June 30, 2024, the Company has made deposits of $5.0 million for aircraft that are scheduled to be delivered starting in the third quarter of 2024. The Company intends to finance these aircraft through Jetstream Aviation Capital, with which the Company currently has a sale-leaseback financing arrangement of up to $450 million, and additional debt and/or leasing facilities that it intends to obtain. See the section entitled “Risk Factors — Risks Related to SAM’s Financial Position and Capital Requirements — SAM has no operating history. Surf Air and Southern’s past financial results may not be a reliable indicator of SAM’s future success” included within the Company’s Form 10-K filed on March 29, 2024. The Company has engaged AeroTEC to develop hybrid-electric and fully electric STCs for the Cessna Grand Caravan in partnership with TAI. A portion of these costs are expected to be funded through the SPA.
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Commitments
The Company has entered into various contractual arrangements related to the build-out of the Company’s air service fleet, the development of its proprietary hybrid and electric aircraft technology, and the build out of its aircraft as a service platform. These arrangements include commitments for payments pursuant to licensing agreements, which routinely contain provisions for guarantees or minimum expenditures during the terms of the contracts. The Company also enters into long-term debt arrangements that include periodic interest and principal payments. Additionally, the Company routinely enters into noncancelable lease agreements for aircraft and operating locations, which contain minimum rental payments.
The timing and nature of these commitments are expected to have an impact on our liquidity and capital requirements in future periods. Refer to the Notes to the accompanying condensed consolidated financial statements included in Part I, Item 1 for additional information relating to our long-term debt, operating and finance leases, related party term notes, and commitments.
Critical Accounting Policies and Estimates
The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of revenue and expenses during the reporting period. Our most significant estimates and judgments involve difficult, subjective, or complex judgments made by management. Actual results may differ from these estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. We had no significant changes to our critical accounting estimates as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
JOBS Act
The Company currently qualifies as an “emerging growth company” under the JOBS Act. Accordingly, the Company has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. The Company’s utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of operating our business, we are exposed to market risks. Market risk represents the risk of loss that may impact our financial position or results of operations due to adverse changes in financial market prices and rates. Our principal market risks have related to interest rates and aircraft fuel. Refer to the information included in the section entitled “Risk Factors” in the Company’s registration statement as well as the section entitled in “Item 1A Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act), that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure. It should be noted that, because of inherent limitations, our disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met.
As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2024. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of June 30, 2024, due to presence of the material weaknesses in internal control over financial reporting described below.
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Notwithstanding the pending remediation efforts described below, based on additional analysis and other post-closing procedures performed, our management believes that the financial statements included in this report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Material Weaknesses in Internal Control Over Financial Reporting
As of June 30, 2024, material weaknesses existed in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses are as follows:
These material weaknesses contributed to the following additional material weaknesses:
These material weaknesses resulted in audit adjustments to substantially all of our accounts, which were recorded prior to the issuance of the consolidated financial statements as of December 31, 2021 and 2020 and for the years then-ended, and as of June 30, 2022 and 2021 and for the six-month periods then ended. Subsequently, these material weaknesses also resulted in audit adjustments to revenue, deferred revenue, accrued expenses, additional paid-in capital and stock-based compensation expense to the consolidated financial statements as of December 31, 2022 and 2023 and for the years then-ended. These material weaknesses also resulted in misstatements to prepaid expenses and other current assets and sales and marketing to the consolidated financial statements as of and for the quarter ended September 30, 2023. Additionally, these material weaknesses could result in a misstatement of substantially all of our accounts or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Additionally, with the closing of the Southern Acquisition, and the continued integration of associated operations and processes into those of the Company, the following material weakness in internal control over financial reporting has also been identified, after considering alignment with previous material weaknesses identified and outlined above:
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Additionally, prior to our acquisition of Southern, Southern reported multiple material weaknesses related to control environment, risks of material misstatement, period-end financial reporting and IT general controls in our Form S-1 filed on September 19, 2023. Those material weaknesses resulted in audit adjustments to substantially all of Southern’s accounts, which were recorded prior to the issuance of the consolidated financial statements of Southern as of December 31, 2022, 2021 and 2020 and for the years then-ended. Subsequently, those material weaknesses also resulted in a revision to the previously issued consolidated financial statements of Southern as of December 31, 2022 and 2021 and for the years then-ended, and the interim periods ended June 30, 2022 and 2021, to correct for errors in revenues and deferred revenues. Also, in connection with the preparation of Southern’s financial statements for the interim period ended March 31, 2023, Southern identified an error related to the accounting for prepaid passenger ticket deposits. Southern’s management determined that this error was the result of the previously reported material weaknesses. This error was corrected in Southern’s financial statements as of December 31, 2022 and 2021 and for the years then-ended and the interim periods ended June 30, 2022 and 2021 as a revision to previously issued financial statements.
Remediation Plans to Address Material Weaknesses
To date, we have developed a plan to address the material weaknesses identified above. This remediation plan consists primarily of: (i) adding key personnel to strengthen the Company’s financial reporting processes, (ii) improving our internal controls around financial systems and processes, (iii) formalizing internal controls related to the identification of and accounting for certain non-routine, unusual or complex transactions, including the proper application of U.S. GAAP to such transactions, (iv) engaging a third party to assist in identifying risks of material misstatement and designing and implementing controls to address the identified risks of material misstatement, and (v) designing and operating computer operations, program and system development, and user access and change management controls. We intend to take additional steps to remediate the deficiencies identified above and further evolve our internal controls and processes.
Changes in Internal Control over Financial Reporting
There were no significant changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We are currently in the process of integrating Southern’s operations, control processes and information systems into our systems and control environment.
Inherent Limitation on the Effectiveness of Internal Control over Financial Reporting and Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected or preventable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Other than as set out in Item 1 “Financial Statements - Note 12 - Commitments and Contingencies - Legal Contingencies,” we are not currently party to any legal proceedings, the outcome of which, if determined adversely, we believe would individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations.
ITEM 1A. RISK FACTORS
During the three months ended June 30, 2024, the following risk factor has been identified in addition to those already disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023:
Risks Related to Ownership of Our Common Stock
We may fail to qualify for continued listing on the NYSE, which could make it more difficult for our stockholders to sell their shares.
Our Common Stock is listed on the NYSE under the symbol “SRFM.” We are required to satisfy the continued listing requirements of the NYSE to maintain such listing, including, among other things, the maintenance of a certain market capitalization and average closing price of our Common Stock.
On April 2, 2024, we received formal notice from the NYSE indicating that we were not in compliance with Section 802.01C of the NYSE Listed Company Manual because the average closing price of our Common Stock was less than $1.00 over a consecutive 30 trading-day period. We subsequently notified the NYSE of our intent to regain compliance with the requirements of Section 802.01C. We are able to regain compliance at any time within the six-month period following receipt of the notice if, on the last trading day of any calendar month during this cure period (or the last trading day of this cure period), we have a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the prior 30 trading-day period. If we do not regain compliance with Section 802.01C within such cure period, the NYSE may commence delisting proceedings.
Additionally, on May 20, 2024, we received formal notice from the NYSE indicating that we were no longer in compliance with Section 802.01B of the NYSE Listed Company Manual because our average total market capitalization over a consecutive 30 trading-day period was less than $50 million and, at the same time, our stockholders’ equity was less than $50 million. We subsequently submitted a plan within 45 days of the notice advising the NYSE of definitive action we have taken or will take to be in compliance with Section 802.01B within 18 months of receipt of the notice. If our plan is not accepted, we would be subject to delisting proceedings. If the NYSE accepts our plan, our Common Stock will continue to be listed and traded on the NYSE during the 18-month cure period, subject to our compliance with the plan and other continued listing standards. The NYSE will review us on a quarterly basis to confirm compliance with the plan. If we fail to comply with the plan or do not meet the continued listing standards at the end of the 18-month cure period, we will be subject to the prompt initiation of NYSE suspension and delisting procedures.
There can be no assurance that we will be able to regain compliance with the NYSE’s continued listing requirements. If our stock price does not increase and if our market capitalization does not meet the minimum standards, we may not be able to meet the standards for continued listing on the NYSE within the compliance period. In the event that we do not regain compliance with the NYSE continued listing standards, we could face significant material adverse consequences, including:
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In May 2024, we issued an aggregate of 137,729 shares of Common Stock to one accredited investor for in-kind services worth $137,500 in a transaction exempt from registration under Section 4(a)(2) of the 1933 Act (or Rule 506(b) of Regulation D promulgated thereunder) as a transaction by an issuer not involving a public offering.
In June 2024, we issued an aggregate of 4,856,727 shares of Common Stock to one accredited investor for in-kind services worth $2,000,000 in a transaction exempt from registration under Section 4(a)(2) of the 1933 Act (or Rule 506(b) of Regulation D promulgated thereunder) as a transaction by an issuer not involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a) None.
(b) Not applicable.
(c) Rule 10b5-1 Trading Plans or Other Preplanned Trading Arrangements
During the three months ended June 30, 2024, none of our directors or officers (as defined in Section 16 of the Exchange Act),
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Item 6 – Exhibits
The following documents are filed as exhibits to this Report:
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Description of Document |
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31.2* |
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32.1*§ |
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101.INS |
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Inline XBRL Instance Document |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document). |
* File herewith.
§ This certification is deemed not filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act whether made before or after the date hereof, regardless of any general incorporation language in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Surf Air Mobility Inc. (Registrant) |
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Date: August 14, 2024 |
/s/ Deanna White |
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Deanna White Interim Chief Executive Officer (Principal Executive Officer) |
Date: August 14, 2024 |
/s/ Oliver Reeves |
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Oliver Reeves Chief Financial Officer (Principal Financial and Accounting Officer) |
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Exhibit 31.1
CERTIFICATIONS
I, Deanna White, certify that:
Date: August 14, 2024 |
/s/ Deanna White |
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Deanna White |
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Interim Chief Executive Officer |
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(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, Oliver Reeves, certify that:
Date: August 14, 2024 |
/s/ Oliver Reeves |
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Oliver Reeves |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
Exhibit 32.1
WRITTEN STATEMENT
PURSUANT TO 18 U.S.C. 1350
Solely for the purposes of complying with 18 U.S.C. 1350, I, the undersigned Interim Chief Executive Officer and Principal Financial and Accounting Officer of Surf Air Mobility Inc. (the “Company”) hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2024 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Deanna White |
Deanna White, Interim Chief Executive Officer |
August 14, 2024 |
/s/ Oliver Reeves |
Oliver Reeves, Chief Financial Officer |
August 14, 2024 |