株探米国株
英語
エドガーで原本を確認する
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

[Mark One]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

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: 001-41759

Surf Air Mobility Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

4522

36-5025592

(State or other jurisdiction of
incorporation or organization)

(Primary Standard Industrial
Classification Code Number)

(I.R.S. Employer
Identification Number)

12111 S. Crenshaw Blvd.

Hawthorne, CA 90250

(424) 332-5480

(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

Common stock, $0.0001 par value per share

SRFM

New York Stock Exchange

 

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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

 

Accelerated filer

Non-accelerated Filer

 

Smaller reporting company

Emerging Growth Company

 

 

 

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 ☐ No ☒

As of May 10, 2024, 83,035,258 shares of common stock, $0.0001 par value per share, were outstanding.

 

 

 

 

 

 

 

 

 


 

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:

the Company’s future ability to pay contractual obligations and liquidity, which will depend on operating performance, cash flow and ability to secure adequate financing;
the Company’s limited operating history and that the Company has not yet manufactured any fully-electric or hybrid-electric aircraft;
the powertrain technology the Company plans to develop does not yet exist and remains subject to approval by regulators;
the Company’s ability to maintain and strengthen the Company’s brand and its reputation as a regional airline;
any accidents or incidents involving aircraft including those involving fully-electric or hybrid-electric aircraft;
the Company’s ability to accurately forecast demand for products and manage product inventory in an effective and efficient manner;
the dependence on third-party partners and suppliers for the components and collaboration in the Company’s development of fully-electric and hybrid-electric powertrains, and any interruptions, disagreements or delays with those partners and suppliers;
the Company’s ability to execute business objectives and growth strategies successfully or sustain the Company’s growth;
risks from the integration of business acquisitions that could adversely affect the Company’s business, divert the attention of management, and dilute shareholder value;
increased costs as a result of operating as a public company, and the requirement that management devote substantial time to comply with the Company’s public company responsibilities and corporate governance practices;
the ability of the Company’s customers and potential customers to pay for the Company’s services;
the Company’s ability to obtain additional financing or access the capital markets to fund its ongoing operations on acceptable terms and conditions;
the outcome of any legal proceedings that might be instituted against the Company; and
changes in applicable laws or regulations, and the impact of the regulatory environment and complexities with compliance related to such environment.

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

 

 

 

Page

 

Special Note Regarding Forward Looking Information

 

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements

1

Unaudited Condensed Consolidated Balance Sheets

1

Unaudited Condensed Consolidated Statements of Operations

2

Unaudited Condensed Consolidated Statement of Changes in Redeemable Convertible Preferred Shares and Shareholders’ Deficit

3

Unaudited Condensed Consolidated Statements of Cash Flows

4

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

34

 

 

 

PART II.

OTHER INFORMATION

37

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 3.

Defaults Upon Senior Securities

37

Item 4.

Mine Safety Disclosures

37

Item 5.

Other Information

37

Item 6.

Exhibits

38

Signatures

39

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Surf Air Mobility Inc.

Unaudited Condensed Consolidated Balance Sheets

March 31, 2024 and December 31, 2023

(in thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,
2024

 

 

December 31,
2023

 

Assets:

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

1,278

 

 

$

1,720

 

Accounts receivable, net

 

 

4,710

 

 

 

4,965

 

Prepaid expenses and other current assets

 

 

10,725

 

 

 

11,051

 

Total current assets

 

 

16,713

 

 

 

17,736

 

Restricted cash

 

 

713

 

 

 

711

 

Property and equipment, net

 

 

46,706

 

 

 

45,991

 

Intangible assets, net

 

 

25,777

 

 

 

26,663

 

Operating lease right-of-use assets

 

 

12,263

 

 

 

12,818

 

Finance lease right-of-use assets

 

 

1,352

 

 

 

1,343

 

Other assets

 

 

5,262

 

 

 

5,727

 

Total assets

 

$

108,786

 

 

$

110,989

 

Liabilities and Shareholders’ Deficit:

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

20,575

 

 

$

18,854

 

Accrued expenses and other current liabilities

 

 

72,233

 

 

 

59,582

 

Deferred revenue

 

 

18,122

 

 

 

19,011

 

Current maturities of long-term debt

 

 

5,080

 

 

 

5,177

 

Operating lease liabilities, current

 

 

4,837

 

 

 

4,104

 

Finance lease liabilities, current

 

 

249

 

 

 

215

 

SAFE notes at fair value, current

 

 

14

 

 

 

25

 

Convertible notes at fair value, current

 

 

7,852

 

 

 

7,715

 

Due to related parties, current

 

 

36,508

 

 

 

25,431

 

Total current liabilities

 

 

165,470

 

 

 

140,114

 

Long-term debt, net of current maturities

 

 

19,985

 

 

 

20,617

 

Operating lease liabilities, long term

 

 

4,666

 

 

 

5,507

 

Finance lease liabilities, long term

 

 

1,143

 

 

 

1,137

 

Due to related parties, long term

 

 

1,288

 

 

 

1,673

 

Other long-term liabilities

 

 

22,535

 

 

 

19,426

 

Total liabilities

 

$

215,087

 

 

$

188,474

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

Shareholders’ equity (deficit):

 

 

 

 

 

 

Common shares, $0.0001 par value; 800,000,000 shares authorized as of both March 31, 2024 and December 31, 2023; 81,917,187 shares issued and outstanding as of March 31, 2024 and 76,150,437 shares issued and outstanding as of December 31, 2023

 

$

8

 

 

$

8

 

Additional paid-in capital

 

 

533,191

 

 

 

525,042

 

Accumulated deficit

 

 

(639,500

)

 

 

(602,535

)

Total shareholders’ deficit

 

$

(106,301

)

 

$

(77,485

)

Total liabilities and shareholders’ deficit

 

$

108,786

 

 

$

110,989

 

 

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 Months Ended March 31, 2024 and 2023

(in thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2024

 

 

2023

 

Revenue

 

$

30,624

 

 

$

5,507

 

Operating expenses:

 

 

 

 

 

 

Cost of revenue, exclusive of depreciation and amortization

 

 

28,489

 

 

 

6,650

 

Technology and development

 

 

7,009

 

 

 

812

 

Sales and marketing

 

 

3,009

 

 

 

1,394

 

General and administrative

 

 

24,609

 

 

 

8,441

 

Depreciation and amortization

 

 

1,978

 

 

 

258

 

Total operating expenses

 

 

65,094

 

 

 

17,555

 

Operating loss

 

$

(34,470

)

 

$

(12,048

)

Other income (expense):

 

 

 

 

 

 

Changes in fair value of financial instruments carried at fair value, net

 

$

(515

)

 

$

(8,096

)

Interest expense

 

 

(1,671

)

 

 

(171

)

Other expense

 

 

(355

)

 

 

(258

)

Total other income (expense), net

 

$

(2,541

)

 

$

(8,525

)

Loss before income taxes

 

 

(37,011

)

 

 

(20,573

)

Income tax benefit

 

 

46

 

 

 

 

Net loss

 

$

(36,965

)

 

$

(20,573

)

Net loss per share applicable to common shareholders, basic and diluted

 

$

(0.48

)

 

$

(1.46

)

Weighted-average number of common shares used in net loss per share applicable to common shareholders, basic and diluted

 

 

77,309,329

 

 

 

14,100,926

 

 

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 Months Ended March 31, 2024 and 2023

(in thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit)

 

 

Redeemable Convertible Preferred Shares

 

 

Class B-6s Convertible
Preferred Shares

 

 

Common Shares

 

 

 

 

 

 

 

 

 

 

 

Number of
Shares

 

 

Amount

 

 

Number of
Shares

 

 

Amount

 

 

Number of
Shares

 

 

Amount

 

 

Additional Paid-In Capital

 

 

Accumulated
Deficit

 

 

Total Shareholders' Deficit

 

Balance at December 31, 2022

 

 

229,144,283

 

 

$

130,667

 

 

 

71,478,742

 

 

$

3,414

 

 

 

12,487,438

 

 

$

1

 

 

$

126,335

 

 

$

(351,839

)

 

$

(222,089

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,145

 

 

 

 

 

 

1,145

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,573

)

 

 

(20,573

)

Balance at March 31, 2023

 

 

229,144,283

 

 

$

130,667

 

 

 

71,478,742

 

 

$

3,414

 

 

 

12,487,438

 

 

$

1

 

 

$

127,480

 

 

$

(372,412

)

 

$

(241,517

)

 

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit)

 

 

Redeemable Convertible Preferred Shares

 

 

Class B-6s Convertible
Preferred Shares

 

 

Common Shares

 

 

 

 

 

 

 

 

 

 

 

 

Number of
Shares

 

 

Amount

 

 

Number of
Shares

 

 

Amount

 

 

Common of
Shares

 

 

Amount

 

 

Additional Paid-In Capital

 

 

Accumulated
Deficit

 

 

Total Shareholders' (Deficit)/Equity

 

Balance at December 31, 2023

 

 

 

 

$

 

 

 

 

 

$

 

 

 

76,150,437

 

 

$

8

 

 

$

525,042

 

 

$

(602,535

)

 

$

(77,485

)

Issuance of common stock related to restricted shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

311,052

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under software license agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,052,073

 

 

 

 

 

 

4,000

 

 

 

 

 

 

4,000

 

Issuance of common stock under marketing agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45,283

 

 

 

 

 

 

50

 

 

 

 

 

 

50

 

Issuance of common shares under Share Purchase Agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,358,342

 

 

 

 

 

 

1,456

 

 

 

 

 

 

1,456

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,643

 

 

 

 

 

 

2,643

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36,965

)

 

 

(36,965

)

Balance at March 31, 2024

 

 

 

 

$

 

 

 

 

 

$

 

 

 

81,917,187

 

 

$

8

 

 

$

533,191

 

 

$

(639,500

)

 

$

(106,301

)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


 

Surf Air Mobility Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2024 and 2023

(in thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(36,965

)

 

$

(20,573

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

1,978

 

 

 

258

 

Non-cash operating lease expense

 

 

1,368

 

 

 

 

Stock-based compensation expense

 

 

12,643

 

 

 

1,145

 

Changes in fair value of financial instruments carried at fair value, net

 

 

515

 

 

 

8,096

 

Amortization of debt discounts and debt issuance costs

 

 

47

 

 

 

 

Deferred income taxes

 

 

(46

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

255

 

 

 

(58

)

Prepaid expenses and other current assets

 

 

326

 

 

 

183

 

Other assets

 

 

465

 

 

 

 

Accounts payable

 

 

4,850

 

 

 

2,355

 

Due to a related party

 

 

1,131

 

 

 

 

Accrued expenses and other current liabilities

 

 

3,487

 

 

 

(811

)

Deferred revenue

 

 

(497

)

 

 

384

 

Operating lease liabilities

 

 

(1,355

)

 

 

 

Other liabilities

 

 

(1,012

)

 

 

 

Cash flows used in operating activities

 

$

(12,810

)

 

$

(9,021

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(715

)

 

 

(83

)

Internal-use software development costs

 

 

(28

)

 

 

(49

)

Net cash used in investing activities

 

$

(743

)

 

$

(132

)

Cash flows from financing activities:

 

 

 

 

 

 

Payments of borrowings on convertible notes

 

 

 

 

 

(20

)

Principal payments on long-term debt

 

 

(776

)

 

 

 

Proceeds from borrowings of SAFE notes

 

 

 

 

 

250

 

Proceeds from advances under Share Purchase Agreement

 

 

3,811

 

 

 

 

Proceeds from collateralized borrowings, net of repayment

 

 

138

 

 

 

 

Proceeds from borrowings from related parties

 

 

9,995

 

 

 

9,159

 

Payment of finance lease obligations

 

 

(55

)

 

 

 

Net cash provided by financing activities

 

$

13,113

 

 

$

9,389

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

(440

)

 

 

236

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

2,431

 

 

 

912

 

Cash, cash equivalents and restricted cash at end of period

 

$

1,991

 

 

$

1,148

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


 

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 22.4 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 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 July 21, 2023. Following the Internal Reorganization, the financial position, results of operations and cash flows are those of the Company.

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 were to receive 16,250,000 shares of the Company’s common stock, which was based on the aggregate merger consideration of $81.25 million at the $5.00 per share opening price on the first day of listing of the Company’s common stock. In total, 16,249,963 shares of Company common stock were issued to former Southern shareholders while the remaining amount was paid out in cash in lieu of fractional shares to those shareholders on a pro rata basis.

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 50 aircraft, including the Cessna Caravan, the Cessna Grand Caravan, the King Air Super 200, 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.

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.

5


 

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 March 31, 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 $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 $7.6 million is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheet as of March 31, 2024. 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 $2.0 million as of March 31, 2024. Additionally, Los Angeles County has imposed a tax lien on four of the Company’s aircraft due to the late filing of the Company’s 2022 property tax return. As of March 31, 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 March 31, 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 (see Note 8, Financing Arrangements). The SAFE-T note is subordinate to the Company’s Convertible Note Purchase Agreement (see Note 8, Financing Arrangements); 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 $0.5 million as of March 31, 2024.

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 March 31, 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 March 31, 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”) and $25.0 million through the share purchase agreement (“SPA”) with GEM Global Yield LLC SCS (“GEM”), and an entity affiliated with GEM that provides incremental financing (the “GEM Purchase”) in July 2023. As of March 31, 2024 the Company has not made any payments under this payment plan.

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 raise additional capital (or financing) to fund operating losses, refinance its current outstanding debt, maintain efficient aircraft utilization, primarily through the proper utilization of pilots and managing market shortages of maintenance personnel and critical aircraft components, sustain ongoing operations, attract and maintain customers, integrate, manage and grow recent acquisitions and new business initiatives, obtain and maintain relevant regulatory approvals, and 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 with PFG, $25.0 million through the GEM Purchase Agreement and $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). On August 2, 2023, the Company filed a Form S-1 registration statement with the U.S. Securities and Exchange Commission (the “SEC”), which was declared effective by the SEC on September 28 2023, 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.

6


 

On November 9, 2023, the Company filed a Form S-1 registration statement 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 estimates could be issued and sold to GEM for advances under the Share Purchase Agreement, plus the amount of shares the Company estimates could be sold to GEM for $50 million under the Share Purchase Agreement. As of March 31, 2024, the contractual terms allow the Company to make further advances of up to $90.0 million under the Share Purchase Agreement. 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 Share Purchase Agreement. As of March 31, 2024, GEM held 7.6% of the then fully-diluted shares of the Company. At March 31, 2024, the daily volume limitations under the Share Purchase Agreement restricted our ability to take additional draws under the Share Purchase Agreement to approximately 2.3 million shares per draw.

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, 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 three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024.

 

Except for the policies discussed below, there have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2024 from those disclosed in the notes to the Company’s consolidated financial statements for the year ended December 31, 2023.

 

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.

7


 

 

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 March 31, 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 allows the Company to borrow up to 90% 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 $5 million. The financing arrangement is uncommitted, and upon funding does not qualify for sale accounting as the Company does not relinquish control of the receivables based on, among other things, the nature and extent of the Company’s continuing involvement.

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 (see Note 19, Subsequent Events).

 

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 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.

8


 

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 July 27, 2023, the Company completed the acquisition of all issued and outstanding shares of Southern. The acquisition of Southern expands the Company’s regional airline network servicing U.S. cities across the Mid-Atlantic, Gulf South, Midwest, Rocky Mountains, West Coast, New England and Hawaii. Total consideration is comprised of $81.25 million of equity consideration, through the issuance of 16,250,000 shares of the Company’s common stock on close of the Southern Acquisition and $699 thousand of payments made by the Company to settle debt obligations of Southern, which were not assumed as part of the acquisition. As the transaction closed prior to the Company’s listing on the NYSE on July 27, 2023, the fair value of the common stock issued to Southern stockholders was based on the opening trading price of the Company’s common stock on July 27, 2023 of $5.00 per share.

Subsequent to the issuance of shares of the Company’s common stock as purchase consideration, the Company repurchased 403,667 shares from employees for $1.3 million in satisfaction of employee tax withholdings related to such issuance.

The Company allocated the purchase price to $27.1 million of identified intangible assets and $5.1 million of net liabilities, with the excess purchase price of $60.0 million recorded as goodwill.

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 $60.0 million was the result of comparing the fair value of the Southern reporting unit to its carrying value.

 

Note 4. Prepaids and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

March 31,
2024

 

 

December 31,
2023

 

Prepaid insurance

 

$

1,638

 

 

$

2,306

 

Prepaid software

 

 

2,518

 

 

 

2,647

 

Prepaid marketing

 

 

2,513

 

 

 

2,406

 

Engine reserves

 

 

1,583

 

 

 

1,150

 

Vendor operator prepayments

 

 

601

 

 

 

634

 

Prepaid fuel

 

 

282

 

 

 

301

 

Other

 

 

1,590

 

 

 

1,607

 

Total prepaid expenses and other current assets

 

$

10,725

 

 

$

11,051

 

 

9


 

Note 5. Property, Plant and Equipment, Net

Property and equipment, net, consists of the following (in thousands):

 

 

March 31,
2024

 

 

December 31,
2023

 

Aircraft, equipment and rotable spares

 

$

40,815

 

 

$

39,196

 

Equipment purchase deposits

 

 

5,000

 

 

 

5,000

 

Leasehold improvements

 

 

2,541

 

 

 

2,479

 

Office, vehicles and ground equipment

 

 

1,198

 

 

 

1,179

 

Internal-use software

 

 

535

 

 

 

508

 

Property and equipment, gross

 

 

50,089

 

 

 

48,362

 

Accumulated depreciation

 

 

(3,383

)

 

 

(2,371

)

Property and equipment, net

 

$

46,706

 

 

$

45,991

 

 

The Company recorded depreciation expense of $1.0 million and $108 thousand for the three months ended March 31, 2024 and 2023, respectively. Depreciation expense is recognized as a component of Depreciation and Amortization expense in the accompanying Condensed Consolidated Statement of Operations.

For the three months ended March 31, 2024 and the three months ended March 31, 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):

 

 

March 31,
2024

 

 

December 31,
2023

 

EAS contracts

 

$

25,770

 

 

$

25,770

 

Tradenames and trademarks

 

 

8,340

 

 

 

8,340

 

Software

 

 

3,122

 

 

 

3,122

 

Other intangibles

 

 

242

 

 

 

242

 

Intangible assets, gross

 

 

37,474

 

 

 

37,474

 

Accumulated amortization

 

 

(11,697

)

 

 

(10,811

)

Intangible assets, net

 

$

25,777

 

 

$

26,663

 

 

The Company recorded amortization expense of $886 thousand and $149 thousand for the three months ended March 31, 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 March 31, 2024 is as follows (in thousands):

 

 

Amount

 

Remainder of 2024

 

$

2,659

 

2025

 

 

3,051

 

2026

 

 

2,915

 

2027

 

 

2,764

 

2028

 

 

2,577

 

Thereafter

 

 

11,811

 

Total

 

$

25,777

 

 

10


 

 

Note 7. Accrued Expenses and Other Current Liabilities

 

As of March 31, 2024 and December 31, 2023, accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

March 31,
2024

 

 

December 31,
2023

 

Accrued compensation and benefits

 

$

38,950

 

 

$

26,751

 

Accrued professional services

 

 

10,752

 

 

 

11,473

 

Excise and property taxes payable

 

 

7,756

 

 

 

7,672

 

Collateralized borrowings

 

 

3,115

 

 

 

2,977

 

Software payable

 

 

3,125

 

 

 

2,000

 

Aircraft contract termination payable

 

 

958

 

 

 

1,454

 

Accrued Monarch legal settlement

 

 

1,314

 

 

 

1,314

 

Insurance premium liability

 

 

493

 

 

 

1,131

 

Accrued major maintenance

 

 

1,072

 

 

 

980

 

Interest and commitment fee payable

 

 

230

 

 

 

190

 

Statutory penalties

 

 

772

 

 

 

520

 

Other accrued liabilities

 

 

3,696

 

 

 

3,120

 

Total accrued expenses and other current liabilities

 

$

72,233

 

 

$

59,582

 

Collateralized Borrowings

The Company has a revolving accounts receivable financing arrangement that allows the Company to borrow up to 90% of eligible accounts receivable, as defined, up to a maximum unsettled amount of $5 million. The agreement is secured by a first security interest in all assets of Southern Airways Express, a subsidiary of Southern, and automatically renews annually on its original terms (see Note 19, Subsequent Events). The related interest rate is the prime rate plus 1% per annum. Additionally, the Company pays certain ancillary fees associated with each borrowing that vary depending on the borrowed amount and duration, which is generally no more than 45 days.

For the three months ended March 31, 2024, the Company borrowed a total of $10.7 million under this financing facility, of which $7.3 million was settled through the transfer of pledged receivables. Interest expense incurred on these borrowings for the three months ended March 31, 2024 amounted to $132 thousand, and is included in interest expense in the accompanying Condensed Consolidated Statements of Operations.

As of March 31, 2024, and December 31, 2023, the outstanding amount due under this facility amounted to $3.1 million and $3.0 million, respectively. As of March 31, 2024, and December 31, 2023, the Company was in compliance with all covenants.

Note 8. Financing Arrangements

The Company’s total debt due to unrelated parties consist of the following (in thousands):

 

 

March 31,
2024

 

 

December 31,
2023

 

Note payable to a financing company, fixed interest rate of 7.60%, due November 2024

 

$

188

 

 

$

257

 

Note payable to bank, fixed interest rate of 4.65%, due November 2025

 

 

13

 

 

 

15

 

Note payable to a financing company, fixed interest rate of 5.49%, due December 2026

 

 

169

 

 

 

184

 

Notes payable to Clarus Capital, fixed interest rate of 8.66%, due April, June and September 2027

 

 

16,125

 

 

 

16,476

 

Notes payable to Skywest, fixed interest rates of 4% and 9%, due April 2028 and November 2024, respectively

 

 

5,422

 

 

 

5,656

 

Note payable to Tecnam, fixed interest rate of 6.75%, due July and August 2032

 

 

3,148

 

 

 

3,206

 

Long-term debt, gross

 

 

25,065

 

 

 

25,794

 

Current maturities of long-term debt

 

 

(5,080

)

 

 

(5,177

)

Long-term debt, net of current maturities

 

$

19,985

 

 

$

20,617

 

 

11


 

 

Future maturities of total debt as of March 31, 2024 are as follows (in thousands):

 

 

Amount

 

Remainder of 2024

 

$

4,446

 

2025

 

 

2,612

 

2026

 

 

2,819

 

2027

 

 

12,828

 

2028

 

 

685

 

Thereafter

 

 

1,675

 

Total

 

$

25,065

 

 

The Company is subject to customary affirmative covenants and negative covenants on all of the above notes payable. As of March 31, 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 $8.0 million (the “PFG Investment”). The note bears interest at a rate of 9.75% and matures on December 31, 2024. All unpaid principal and interest balances may be converted into shares of the Company’s common stock, at the option of the holder, at a price equal to 120% of the initial listing price of the Company’s common stock.

On July 27, 2023, the Company received $8.0 million in funding, following satisfaction of all conditions precedent outlined under the Convertible Note Purchase Agreement. Based on the $5.00 per share opening price on the first day of listing of the Company’s common stock, the principal of the Convertible Note Purchase Agreement would be convertible into 1,333,333 shares of the Company’s common stock.

Fair value of convertible notes (in thousands):

 

 

Fair Value at

 

 

 

March 31, 2024

 

 

December 31, 2023

 

Convertible Note Purchase Agreement

 

 

7,852

 

 

 

7,715

 

Total

 

$

7,852

 

 

$

7,715

 

The Company is subject to customary affirmative covenants and negative covenants with respect to the Convertible Note Purchase Agreement. These covenants are in the form of minimum liquidity requirements the Company must maintain. The Company has received a waiver from PFG regarding the maintenance of minimum cash requirement of $10 million. The waiver effectively waives the requirement through the maturity date of December 31, 2024. As of March 31, 2024, the Company was in compliance with all other covenants under the Convertible Note Purchase Agreement.

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 March 31, 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 $0.5 million as of December 31, 2023 and March 31. 2024. Subsequent changes in the fair value of the SAFE-T notes are recorded in earnings as part of changes in fair value of financial instruments carried at fair value, net within the Condensed Consolidated Statements of Operations.

12


 

Fair value of SAFE-T note (in thousands):

 

 

Fair Value at

 

 

 

March 31, 2024

 

 

December 31, 2023

 

SAFE-T

 

 

14

 

 

 

25

 

Total

 

$

14

 

 

$

25

 

Less: SAFE notes at fair value, current

 

 

(14

)

 

 

(25

)

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 $200.0 million, and in return the Company agreed to pay a total commitment fee of $4.0 million (the “Commitment Fee”) payable in installments at the time of each purchase of shares of the Company’s common stock or no later than one year from the anniversary of a public listing transaction and issued a forward contract for GEM to purchase 0.75% of the Company’s fully-diluted shares of common stock outstanding upon completion of a public listing transaction at an exercise price of $0.01 per share.

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 $400.0 million (the “Aggregate Limit”) and increase the Commitment Fee to GEM to 4,000,000 shares of the Company’s common stock. Pursuant to the amended and restated SPA, and subject to the satisfaction of certain conditions, the Company, will have the right from time to time at its option to direct GEM to purchase up to the Aggregate Limit of shares of the Company’s common stock over the term of the amended and restated SPA. Upon its public listing, the Company may request GEM to provide advances under the SPA in an aggregate amount of up to $100.0 million, provided that individual advances are not to exceed $25.0 million each, with the first advance not to exceed $7.5 million. Each advance will reduce the amount that the Company can request for future purchases under the SPA. On September 29, 2023, the Company received its first advance under the SPA in the amount of $4.5 million, on a total request of $7.5 million, with the remaining $3.0 million being received on October 3, 2023. Concurrent with the receipt of funds, the Company issued 4,000,000 shares of its common stock to GEM in full satisfaction of the commitment fee. The Company has deposited 18,000,000 shares of common stock into an escrow account as of March 31, 2024, as required under the SPA, which is intended to be at least two times the number of shares contemplated to settle the advance upon the close of the pricing period for the advance. The number of shares to be transferred to GEM will be based on an average of the volume-weighted average trading price of the Company’s common stock over a period of fifteen trading days following the receipt of an advance, subject to a fifteen day extension in certain circumstances. This average price will be subject to a contractual discount of 10%. Additionally, contractual provisions within the SPA provide that in no event may GEM receive a share issuance, from a draw under the SPA, that would raise their share ownership percentage above 10% of the Company. This provision may impact the Company’s ability to request additional purchases under the SPA.

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 0.75% of the Company’s fully-diluted shares of common stock outstanding to a fixed 1,300,000 shares of the Company’s common stock. The amendments to the SPA also modified certain registration requirements whereby the Company was obligated to file a re-sale registration statement within 5 business days of the Company’s public listing. On July 27, 2023, concurrent with the Company’s direct listing, the Company issued 1,300,000 shares of the Company’s common stock to GEM in full satisfaction of this provision. Pursuant to GEM’s associated registration rights, the Company filed a re-sale registration statement, covering the 1,300,000 shares, on August 2, 2023, which was declared effective by the SEC on September 28, 2023.

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 March 31, 2024 and December 31, 2023, the fair value of the GEM commitment was $14.1 million and $11.3 million, respectively. Changes in fair value were recorded in Changes in fair value of financial instruments carried at fair value, net on the Condensed Consolidated Statements of Operations.

 

13


 

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 1,000,000 shares of the Company’s common stock for cash consideration of $25.0 million upon the successful public listing of the Company’s shares. Under the terms of the agreement, the Company is obligated to file a re-sale registration statement, covering the 1,000,000 shares issued, within 5 business days of the Company’s public listing. On July 27, 2023, concurrent with the Company’s direct listing, the Company received the $25.0 million cash consideration contemplated in the purchase agreement, in exchange for the issuance of 1,000,000 shares of the Company’s common stock. Pursuant to the associated registration rights, the Company filed a re-sale registration statement, covering the 1,000,000 shares, on August 2, 2023, which was declared effective by the SEC on September 28, 2023.

 

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 $35,200,000 (the “Mandatory Convertible Security”), which shall be convertible into a maximum of 8,000,000 shares of the Company’s common stock, par value $0.0001 per share (the “Common Shares”), subject to adjustment as described in the MCSPA. The transaction contemplated by the MCSPA is expected to close following the waiver or satisfaction of all closing conditions, which is currently expected to occur by the end of the second quarter of 2024 (the “Closing Date”).

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 $35,200,000 less the product of (a) the number of Common Shares sold by GEM prior to the Closing Date, if any, and (b) the aggregate sale price per share for any such Common Shares; provided, however, that the sale price of any such Common Share that exceeds $4.45 will be deemed to be $4.45.

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) $4.45 (the “Fixed Conversion Price”) and (b) the average of the five lowest volume-weighted average prices per share for the Common Shares trading on the NYSE during the thirty trading days immediately preceding the Maturity Date (the “Floating Conversion Price”).

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 8,000,000 Common Shares at any time prior to the Maturity Date, any par amount of the Mandatory Convertible Security remains outstanding, the Company will have the option to (x) increase the maximum number of Common Shares into which the Security may convert, with such increase to be at the Company’s sole discretion, (y) pay to GEM an amount in cash equal to 115% of the remaining outstanding par amount or (z) increase the remaining outstanding par amount by 15% of the amount outstanding immediately after issuance of the 8,000,000 Common Shares. GEM may not convert any portion of the Mandatory Convertible Security into Common Shares to the extent that GEM (together with its affiliates and any other parties whose holdings would be aggregated with those of GEM for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended) would beneficially own more than 4.99% of the Common Shares outstanding after such conversion; provided, however, that GEM may increase or decrease such maximum limitation percentage to not more than 9.99% upon 61 days’ notice to the Company.

The Company may, at its option, redeem the Mandatory Convertible Security, in whole or in part, in cash at a price equal to 115% of the outstanding par amount to be redeemed.

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 6,300,000 Common Shares previously purchased by GEM less any Common Shares sold by GEM between March 1, 2024 and the Closing Date. In addition, the Company’s ability to take both regular drawdowns of up to $300 million and advance drawdowns of up to $100 million pursuant to the Company’s Share Purchase Agreement with GEM and GEM Yield Bahamas Limited, provides the Company with the option from time to time to direct GEM to purchase a specified number of Common Shares for an aggregate purchase price of up to $400 million, will be restored to full capacity, subject to any drawdowns prior to the Closing Date.

14


 

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 Securities and Exchange Commission for the resale by GEM of at least 8,000,000 Common Shares less any Common Shares sold by GEM before the Closing Date.

 

 

 

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 March 31, 2024 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Convertible notes at fair value

 

$

 

 

$

 

 

$

7,852

 

 

$

7,852

 

SAFE notes at fair value

 

 

 

 

 

 

 

 

14

 

 

 

14

 

GEM derivative liability

 

 

 

 

 

 

 

 

14,111

 

 

 

14,111

 

Total financial liabilities

 

$

 

 

$

 

 

$

21,977

 

 

$

21,977

 

 

 

 

Fair Value Measurements at December 31, 2023 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Convertible notes at fair value

 

$

 

 

$

 

 

$

7,715

 

 

$

7,715

 

SAFE notes at fair value

 

 

 

 

 

 

 

 

25

 

 

 

25

 

GEM derivative liability

 

 

 

 

 

 

 

 

11,333

 

 

 

11,333

 

Total financial liabilities

 

$

 

 

$

 

 

$

19,073

 

 

$

19,073

 

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

 

$

7,715

 

 

$

25

 

 

$

11,333

 

Advances received on share purchase agreement

 

 

 

 

 

 

 

 

2,500

 

Borrowings on convertible notes

 

 

34

 

 

 

 

 

 

 

Change in fair value

 

 

103

 

 

 

(11

)

 

 

278

 

Balance at March 31, 2024

 

$

7,852

 

 

$

14

 

 

$

14,111

 

 

Long-Term Debt

The carrying amounts and fair values of the Company’s long-term debt obligations were as follows:

 

 

As of March 31, 2024

 

 

As of December 31, 2023

 

 

 

Carrying Amount

 

Fair Value

 

 

Carrying Amount

 

Fair Value

 

Long-term debt, including current maturities

 

$

25,065

 

$

25,178

 

 

$

25,794

 

$

26,036

 

Term notes payable to related parties

 

$

28,605

 

$

28,517

 

 

$

18,610

 

$

18,541

 

 

15


 

 

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 no convertible preferred share warrants issued in the three months ended March 31, 2024. The convertible preferred share warrants issued and outstanding as of March 31, 2023 were 805,823 shares of Class B-2 preferred warrants; 410,123 shares of Class B-3 preferred warrants; and 1,493,015 shares of Class B-4 preferred warrants. On July 21, 2023, as a condition of the Internal Reorganization, all preferred share warrants were converted into 120,935 warrants for the purchase of the Company’s common stock at a ratio of 22.4 Surf Air preferred warrants to 1 warrant for the purchase of the Company’s common stock. The exercise price for all warrants is $38.23 per share.

 

Warrants to purchase shares of convertible preferred stock were classified as Other long-term liabilities on the Condensed Consolidated Balance Sheets, as of March 31, 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 two agreements with Palantir Technologies Inc. to license a suite of software for the term of seven years commencing on the effective date. The agreements identify two phases where Palantir provides services to customize the software: an Initial Term from May 18, 2021 through June 30, 2023 with a cost of $11.0 million and an Enterprise Term from July 1, 2023 to May 7, 2028 with a cost of $39.0 million, for a total cost of $50.0 million. As of March 31, 2024 and December 31, 2023, the Company capitalized $2.6 million and $2.5 million, respectively, related to the software that Palantir has provided to the Company. During the three months ended March 31, 2024, the Company settled $4.0 million in outstanding payables to Palantir through the issuance of 4,052,073 shares of the Company's common stock.


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 are only effective as of the first trading date of shares of the Company’s common stock on a national securities exchange (“TAI Effective Date”). The agreements became effective as of the Company’s direct listing on July 27, 2023.

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”). 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 $60.0 million over a multi-year period, with an initial $12.5 million in deposits being made as of December 31, 2023 and remaining payments under the initial license fee of $12.5 million coming due in 2024. The $12.5 million of deposits made as of March 31, 2024 were recorded to technology and development expenses within the Company’s consolidated statements of operations during the fourth quarter of 2023.

16


 

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 $40.0 million, with certain amounts deferred such that the aggregate fee is payable over four years commencing on the earlier of the year after the Company obtains an STC for the SAM System on the Cessna Grand Caravan or the 5th anniversary of the TAI Effective Date. The Company’s obligation to pay exclusivity fees in any year may be offset, in whole or in part, based on the achievement of certain sales milestones of SAM Aircraft and Cessna Grand Caravans subsequently converted to a SAM System.

Under the aircraft purchase agreement, the Company may purchase from TAI 90 specifically configured Cessna Caravans at prevailing market rates whereby the aggregate purchase price could be approximately $297.0 million, with an option to purchase an additional 38 specifically configured Cessna Caravans having an aggregate purchase price in excess of $125.4 million, over the course of 7 years. The final price to be paid by the Company will be dependent upon a number of factors, including the final specifications of such aircraft and any price escalations. During the fourth quarter of 2023 the Company and TAI agreed to apply a previous deposit under the aircraft purchase agreement to amounts due under the engineering and services agreement. As of March 31, 2024, the Company has made deposits of $5 million under this agreement.

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 $450.0 million, including a $120.0 million total minimum usage obligation by the Company. The agreement may be terminated: (i) upon a termination notice by either party in the event that a material adverse change in the business of the other party is not resolved within 30 days of such notice; and (ii) as mutually agreed in writing by the parties. No transactions have been executed under this agreement as of March 31, 2024.

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 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 March 31, 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 $1.0 million, pre-judgment interest of $0.2 million, attorneys’ fees of $0.06 million and court costs of approximately $0.003 million. Since then, Monarch Air has been conducting post-judgment discovery.

17


 

The full settlement had been accrued within Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets by the Company as of March 31, 2024 and December 31, 2023.

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 March 31, 2024.

FAA Matters

On February 23, 2024, the FAA notified the Company that it was seeking a proposed civil penalty of $0.3 million against the Company for alleged non-compliance with respect to certain regulatory requirements relating to flight officer certifications and required competence checks for flights flown during the fourth quarter of 2022. The Company is currently assessing its statutory rights to appeal the imposed penalty. As of March 31, 2024, the Company has recorded $0.3 million as an accrued expense on the condensed consolidated balance sheet.

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 is subject to a civil penalty not to exceed $14,950 per flight. During the three months ended March 31, 2024, the Company recorded an additional $0.3 million as a component of cost of revenue. As of March 31, 2024, the Company has recorded $0.5 million as an accrued expense on the condensed consolidated balance sheet.

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 $1.9 million, including penalties and interest as of the date of the notice. The Company agreed to a payment plan (“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, is recorded in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets and is in the amount of $7.6 million as of both March 31, 2024 and December 31, 2023.

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 $2.0 million and $1.9 million as of March 31, 2024 and December 31, 2023, respectively.

18


 

Note 13. Disaggregated Revenue

 

The disaggregated revenue for the three months ended March 31, 2024 and 2023 were as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Scheduled

 

$

22,979

 

 

$

831

 

On-Demand

 

 

7,645

 

 

 

4,676

 

Total revenue

 

$

30,624

 

 

$

5,507

 

 

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 March 31, 2024, and December 31, 2023 in the amount of $3.1 million and $2.2 million, respectively.

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Deferred revenue, beginning of period

 

$

21,726

 

 

$

9,568

 

Revenue deferred

 

 

17,240

 

 

 

5,891

 

Revenue recognized

 

 

(17,736

)

 

 

(5,507

)

Deferred revenue, end of period

 

$

21,230

 

 

$

9,952

 

 

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.

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 two tranches of bonus pools to be allocated, based on participation units, which vest, contingent upon each employee’s continued employment by the Company and the achievement of certain revenue targets. Payments of awards which might become due under the Incentive Bonus Plan, may be made in cash or common stock, at the Company’s option. Any shares of common stock issued in payment of amounts due under the Incentive Bonus Plan will be charged against the share limit of the 2023 Plan. In addition, any shares which might be issued under the Incentive Bonus Plan are excluded from the Company’s common stock issued and outstanding until the satisfaction of these vesting conditions and are not considered a participating security for purposes of calculating net loss per share attributable to common stockholders. Due to current expectations of revenue targets being achieved, the Company has recorded $10.0 million of stock based compensation expense related to the Incentive Bonus Plan during the three months ended March 31, 2024. As of March 31, 2024, a total of $26.7 million has been accrued under the Incentive Bonus Plan. Such amounts are included as a portion of Accrued expenses and other current liabilities within the Company’s Consolidated Balance Sheet.

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 2016 Plan, and subsequent to its direct listing, may grant similar awards under the 2023 Plan.

19


 

A summary of share option activity for the three months ended March 31, 2024 is set forth below:

 

 

 

Number
of Share Options
Outstanding

 

 

Weighted Average Contractual Term (in years)

 

 

Aggregate Intrinsic Value (in thousands)

 

 

Weighted
Average
Exercise Price Per Share

 

Outstanding at December 31, 2023

 

 

1,606,159

 

 

 

8.00

 

 

$

687

 

 

$

4.12

 

Granted

 

 

1,800,000

 

 

 

10.00

 

 

 

 

 

 

1.32

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Canceled

 

 

(1,623

)

 

 

 

 

 

 

 

 

3.37

 

Outstanding at March 31, 2024

 

 

3,404,536

 

 

 

9.00

 

 

 

201

 

 

 

2.64

 

Exercisable at March 31, 2024

 

 

1,265,059

 

 

 

8.00

 

 

 

166

 

 

 

4.02

 

As of March 31, 2024, unrecognized compensation expense related to the unvested portion of the Company’s share options was approximately $3.7 million with a weighted-average remaining vesting period of approximately 1.24 years.

The assumptions used to estimate the fair value of share options granted during the three months ended March 31, 2024 and 2023 and were as follows:

 

 

 

For the Three Months Ended March 31,

 

 

 

2024

 

Risk-free interest rate

 

3.97-4.11%

 

Expected term (in years)

 

3.5 - 4.5

 

Dividend yield

 

 

 

Expected volatility

 

58.57% - 59.07%

 

Restricted Stock Units

During the three months ended March 31, 2024, the Company issued 416,000 RSUs under the 2023 Plan to employees and non-employee consultants, which vest upon the satisfaction of certain service periods. The fair value of these RSUs was determined based on the Company’s stock price the business day immediately preceding the grant date. The service period of these RSUs is satisfied over a range of grant date vesting to 2 years.

A summary of RSU activity for the three months ended March 31, 2024 is set forth below:

 

 

 

Number of RSUs

 

 

Weighted
Average
Grant Date Fair Value per RSU

 

Unvested RSUs at December 31, 2023

 

 

773,063

 

 

$

2.94

 

Granted

 

 

416,000

 

 

 

1.32

 

Vested/shares issued

 

 

(311,052

)

 

 

1.26

 

Forfeited, cancelled, or expired

 

 

 

 

 

 

Unvested RSUs at March 31, 2024

 

 

878,011

 

 

$

2.76

 

 

20


 

Restricted Share Purchase Agreement

A summary of RSPA activity for the three months ended March 31, 2024 is set forth below:

 

 

 

Number
of RSPA

 

 

Weighted
Average
Grant Date Fair Value per RSPA

 

Unvested RSPAs at December 31, 2023

 

 

422,641

 

 

$

4.15

 

Granted

 

 

 

 

 

 

Vested

 

 

(42,404

)

 

 

4.15

 

Forfeited

 

 

 

 

 

 

Unvested RSPAs at March 31, 2024

 

 

380,237

 

 

 

4.15

 

 

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 five years from the grant date. The grant date fair value is based on the terms of the promissory note, since the promissory notes creates the option value. The related expense is recorded over the service vesting terms of the RSPA.

As of March 31, 2024, the unrecognized compensation expense related to the unvested portion of the Company’s RSPAs was $1.6 million, which is expected to be recognized over a weighted average period of 2.3 years.

Performance-Based Restricted Stock Units

A summary of PRSU activity for the three months ended March 31, 2024 is set forth below:

 

 

Number
of PRSUs

 

 

Weighted
Average
Grant Date Fair Value per PRSU

 

PRSUs at December 31, 2023

 

 

3,000,000

 

 

$

2.11

 

Granted

 

 

 

 

 

 

Shares issued

 

 

 

 

 

 

Forfeited, cancelled, or expired

 

 

 

 

 

 

PRSUs at March 31, 2024

 

 

3,000,000

 

 

$

2.11

 

The following table represents the various price targets 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

 

$

5.00

 

 

 

50,000

 

 

10.00

 

 

 

2,875,000

 

 

15.00

 

 

 

75,000

 

A summary of stock-based compensation expense recognized for the three months ended March 31, 2024 and 2023 is as follows (in thousands):

 

 

For The Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Stock Options

 

$

955

 

 

$

962

 

RSUs

 

 

742

 

 

 

 

RSPAs

 

 

178

 

 

 

183

 

PRSUs

 

 

768

 

 

 

 

Management Incentive Bonus Plan

 

 

10,000

 

 

 

 

Total Stock Based Compensation

 

$

12,643

 

 

$

1,145

 

 

21


 

Note 15. Income Taxes

The Company’s provision for income taxes for the three months ended March 31, 2024 and 2023, was a benefit of $46 thousand and $0, respectively, on pre-tax losses of $37.0 million and $20.6 million, respectively. This resulted in an effective tax rate of 0.1% and 0.0%, for the respective periods. The Company’s effective tax rate for both periods was lower than the federal statutory rate of 21% primarily due to the Company’s full U.S. federal and state valuation allowance.

 

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 March 31, 2024. In general, tax years 2011 and forward remain open to audit for U.S. federal and state income tax purposes.


 

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 28,332,454 convertible preferred shares, which were simultaneously cancelled and converted into 1,264,834 shares of the Company's common stock. (see Note 8, Financing Arrangements).

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 $15.0 million were converted per the conditional conversion agreement dated June 27, 2023 into 103,385,325 convertible preferred shares, which were simultaneously cancelled and converted into 4,615,384 shares of the Company's common stock. (see Note 8, Financing Arrangements).

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 $6.9 million. On July 21, 2023, in connection with the Internal Reorganization, the SAFE was converted per the conditional conversion agreement dated June 27, 2023 into 47,770,712 convertible preferred shares, which were simultaneously cancelled and converted into 2,132,608 shares of the Company's common stock. (see Note 8, Financing Arrangements).

 

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. As of March 31, 2024 and December 31, 2023, the term notes outstanding are as follows (in thousands):

 

 

 

March 31, 2024

 

 

December 31, 2023

 

Term notes with LamVen, a related party

 

$

28,605

 

 

$

18,610

 

Total

 

$

28,605

 

 

$

18,610

 

The LamVen notes with aggregate principal amounts of $4.5 million and $1.0 million, an effective date of November 30, 2022 and January 18, 2023, respectively, and bearing an interest rate of 8.25% per annum, remained outstanding as of March 31, 2023. Both term notes were exchanged for cash and scheduled to mature on the earlier of December 31, 2023 or the date on which the note is otherwise accelerated as provided for in the agreement. Interest for the notes are payable in full at maturity or upon acceleration by prepayment. On December 29, 2023, the term notes were amended to extend the maturity date to January 15, 2024. On January 26, 2024, the term notes were amended to extend the maturity date to February 9, 2024, with an effective date of January 15, 2024. On April 28, 2024, the term notes were further amended to extend the maturity date to May 15, 2024, with an effective date of April 15, 2024 (see Note 19, Subsequent Events).

On May 22, 2023, the Company entered into an additional term note agreement in exchange for $4.6 million in cash from LamVen a related party of the Company. The note is scheduled to mature on the earlier of December 31, 2023 or the date on which the note is otherwise accelerated as provided for in the agreement. Interest is due upon maturity at a rate of 10.0% per annum until the note is paid in full at maturity or upon acceleration by prepayment. On December 29, 2023, the term notes were amended to extend the maturity date to January 15, 2024. On January 26, 2024, the term notes were amended to extend the maturity date to February 9, 2024, with an effective date of January 15, 2024. On April 28, 2024, the term notes were further amended to extend the maturity date to May 15, 2024, with an effective date of April 15, 2024. (see Note 19, Subsequent Events).

22


 

On June 15, 2023, the Company entered into a $5.0 million note agreement with LamVen, a related party of the Company. The note is scheduled to mature on the earlier of December 31, 2023 or the date on which the note is otherwise accelerated as provided for in the agreement. Interest is due upon maturity at a rate of 10.0% per annum until the note is paid in full at maturity or upon acceleration by prepayment. On December 29, 2023, the note was amended to extend the maturity date to January 15, 2024 and to increase the principal amount of the note to $10.0 million. The Company received $8.5 million in cash as of December 31, 2023. On January 26, 2024, the note was further amended to extend the maturity date to February 9, 2024 and the principal amount increased to $15.0 million, effective as of January 15, 2024. The Company received $18.4 million as of March 31, 2024. Subsequent to March 31, 2024, the Company received an additional $3.1 million under this note agreement, for an aggregate total of $21.6 million cash received under the note since inception. On April 28, 2024, the note was further amended to extend the maturity date to May 15, 2024 and the principal amount increased to $25.0 million, effective as of April 15, 2024. (see Note 19, Subsequent Events).

On June 15, 2023, the LamVen term note dated April 1, 2023 for $3.5 million, including principal and interest, was converted, via a payoff letter, into the LamJam SAFE note (see Note 8, Financing Arrangements).

On June 15, 2023, the term notes with LamJam, an entity affiliated with a co-founder of the Company, in the amount of $5.3 million principal and interest were converted into 9,932,241 Class B-6s convertible preferred shares.

The outstanding notes at carrying values and accrued interests are recorded within Due to related parties on the Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023.

Other Transactions

As of March 31, 2024, the Company continues to lease four aircraft from Park Lane, a related party, for a monthly lease payment of $25 thousand per aircraft. The Company recorded $300 thousand in lease expense during the three months ended March 31, 2024. On February 1, 2024, the lease term for the four aircraft was extended to a 12- month term starting February 1, 2023 and expiring January 31, 2025. All other terms of the agreements remain the same.

JA Flight Services and BAJ Flight Services

As of March 31, 2024, the Company leased a total of three aircraft from JA Flight Services (“JAFS”) and one aircraft from BAJ Flight Services (“BAJFS”) under short-term operating leases. JAFS is 50% owned by Bruce A. Jacobs (“BAJ”), an employee and shareholder of the Company, and BAJFS is 100% owned by BAJ.

The Company recorded approximately $373 thousand in combined lease and engine reserve expense attributable to JAFS and BAJFS during the three months ended March 31, 2024. Accounts payable of $394 thousand owed to JAFS and BAJFS as of March 31, 2024, is included in Due to Related Parties, current on the Condensed Consolidated Balance Sheet.

Schuman Aviation

As of March 31, 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 60-month terms, fixed monthly lease payments and are all eligible for extension at the end of the lease term. All the leases are also subject to monthly engine, propeller and other reserve payment requirements, based on actual flight activity incurred on the subject aircraft engine.

The Company recorded approximately $386 thousand in combined lease and engine reserve expense attributable to Schuman for the three months ended March 31, 2024. As of March 31, 2024, the Company owed approximately $239 thousand to Schuman, which is included in Due to Related Parties, current on the Condensed Consolidated Balance Sheet.

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 10 years. Remaining amounts due under this agreement represent the final two annual installment payments, of $100 thousand each, which will be paid over the next two years.

23


 

Note 17. Supplemental Cash Flows

Supplemental Cash Flow information for the three months ended March 31, 2024 and 2023 (in thousands):

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Supplemental cash flow information

 

 

 

 

 

 

Cash paid for interest

 

$

349

 

 

$

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

Common stock issued under software license agreement

 

$

4,000

 

 

$

 

Capitalized interest on convertible notes

 

$

34

 

 

$

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

$

1,160

 

 

$

 

Right-of-use obtained in exchange for new finance lease liabilities

 

$

95

 

 

$

 

Overhaul accrual in accrued expenses and other current liabilities

 

$

98

 

 

$

 

Purchases of property and equipment included in accounts payable

 

$

880

 

 

$

 

 

 

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 22.4 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):

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Net loss

 

$

(36,965

)

 

$

(20,573

)

Weighted-average number of common shares used in net loss per share applicable to common shareholders, basic and diluted

 

 

77,309,329

 

 

 

14,100,926

 

Net loss per share applicable to common shareholders, basic and diluted

 

$

(0.48

)

 

$

(1.46

)

 

24


 

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 March 31,

 

 

 

2024

 

 

2023

 

Excluded securities:

 

 

 

 

 

 

Options to purchase common shares

 

 

3,404,536

 

 

 

1,726,783

 

Restricted stock units

 

 

3,878,011

 

 

 

220,424

 

Unvested RSPAs

 

 

380,237

 

 

 

3,099,188

 

Convertible notes (as converted to common shares)

 

 

1,333,333

 

 

 

1,530,624

 

Preferred stock (as converted to common shares)

 

 

 

 

 

13,420,589

 

Total common shares equivalents

 

 

8,996,117

 

 

 

19,997,608

 

 

 

Note 19. Subsequent Events

 

Collateralized Borrowings

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 80% of eligible accounts receivable. The Company has been provided with the option to extend the arrangement beyond May 20, 2024 through the payment of a $100,000 non-refundable, fully earned, and irrevocable extension fee. In the event the Company elects to extend the arrangement, the borrowing capacity under the arrangement will be reduced by an additional 10% on the 20th of each subsequent month. The Company is currently seeking a replacement accounts receivable financing arrangement.

Term Notes Maturity Extension

On April 28, 2024, the 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 May 15, 2024, with an effective date of April 15, 2024. Additionally, the principal amount of the June 15, 2023 term note agreement was increased to $25.0 million.

 


 

25


 

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.”

26


 

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 King Air Super 200, the Saab 340, the Pilatus PC-12, the Tecnam Traveller, and the Citation Bravo. Southern provides both seasonal and full-year scheduled passenger air transportation service in the Mid-Atlantic and Gulf regions, Rockies and West Coast, Far Pacific, 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 March 31, 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 first 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 the first 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 during the first 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.

27


 

Key Operating Measures

In addition to the data presented in our 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.

 

 

Three Months Ended March 31,

 

 

Change

 

 

 

2024

 

 

2023

 

 

Increase/
Decrease

 

 

%

 

Scheduled Flight Hours(1)

 

 

16,817

 

 

 

722

 

 

 

16,095

 

 

NM

 

On-Demand Flights(2)

 

 

906

 

 

 

422

 

 

 

484

 

 

 

115

%

Scheduled Passengers(3)

 

 

87,723

 

 

 

1,631

 

 

 

86,092

 

 

NM

 

Headcount(4)

 

 

815

 

 

 

84

 

 

 

731

 

 

 

870

%

Scheduled Departures(5)

 

 

16,529

 

 

 

554

 

 

 

15,975

 

 

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 March 31, 2024 and 2023

The following table sets forth our condensed consolidated statements of operations data for the three months ended March 31, 2024 and 2023 (in thousands, except percentages):

 

 

 

Three Months Ended March 31,

 

 

Change

 

 

 

2024

 

 

2023

 

 

$

 

 

%

 

Revenue

 

$

30,624

 

 

$

5,507

 

 

$

25,117

 

 

 

456

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue, exclusive of depreciation and amortization

 

 

28,489

 

 

 

6,650

 

 

 

21,839

 

 

 

328

%

Technology and development

 

 

7,009

 

 

 

812

 

 

 

6,197

 

 

 

763

%

Sales and marketing

 

 

3,009

 

 

 

1,394

 

 

 

1,615

 

 

 

116

%

General and administrative

 

 

24,609

 

 

 

8,441

 

 

 

16,168

 

 

 

192

%

Depreciation and amortization

 

 

1,978

 

 

 

258

 

 

 

1,720

 

 

 

667

%

Total operating expenses

 

 

65,094

 

 

 

17,555

 

 

 

47,539

 

 

 

271

%

Operating loss

 

 

(34,470

)

 

 

(12,048

)

 

 

(22,422

)

 

 

(186

)%

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value of financial instruments carried at fair value, net

 

 

(515

)

 

 

(8,096

)

 

 

7,581

 

 

 

(94

)%

Interest expense

 

 

(1,671

)

 

 

(171

)

 

 

(1,500

)

 

 

(877

)%

Other expense

 

 

(355

)

 

 

(258

)

 

 

(97

)

 

 

(38

)%

Total other income (expense), net

 

 

(2,541

)

 

 

(8,525

)

 

 

5,984

 

 

 

(70

)%

Loss before income taxes

 

 

(37,011

)

 

 

(20,573

)

 

 

(16,438

)

 

 

(80

)%

Income tax expense (benefit)

 

 

46

 

 

 

 

 

 

46

 

 

 

%

Net loss

 

$

(36,965

)

 

$

(20,573

)

 

$

(16,392

)

 

 

(80

)%

 

28


 

Revenue

Revenue increased by $25.1 million, 456%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase in revenue was attributable to the following changes in on-demand and scheduled revenues (in thousands, except percentages):

 

 

Three Months Ended March 31,

 

 

Change

 

 

 

2024

 

 

2023

 

 

$

 

 

%

 

Scheduled

 

$

22,979

 

 

$

831

 

 

$

22,148

 

 

N/M

 

On-Demand

 

 

7,645

 

 

 

4,676

 

 

 

2,969

 

 

 

63

%

Total revenue

 

$

30,624

 

 

$

5,507

 

 

$

25,117

 

 

 

456

%

 

 

 

 

 

 

 

 

 

 

 

 

 

NM - Percentage change is not meaningful

 

Scheduled revenue increased $22.1 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The scheduled service, absent the impacts of the acquisition of Southern, remained flat period over period.

Of the increase in scheduled revenue, $22.0 million was related to the Southern Acquisition, primarily related to EAS revenue of $11.9 million, passenger revenue of $9.3 million, and other revenue of $0.8 million in the first quarter of 2024 after the acquisition of Southern.

On-demand revenue increased by $3.0 million, or 63%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The Company conducted 906 on-demand flights during the three months ended March 31, 2024, and absent the impact of the acquisition of Southern, the Company conducted 630 on-demand charter flights during the first quarter of 2024 compared to 422 on-demand charter flights during the first 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 first quarter of 2024 compared to the first 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 March 31, 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 $21.8 million, or 328%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. Of the total 906 on-demand charter flights, and absent the impact of the acquisition of Southern, the Company serviced 630 on-demand charter flights in the three months ended March 31, 2024, an increase from 422 for the three months ended March 31, 2023, resulting in a $2.0 million increase, or 9%, in cost of revenue associated with the Company’s on-demand charter flights. Of the total 16,187 scheduled flight hours, and absent the impact of the acquisition of Southern, the Company flew 660 flight hours in the three months ended March 31, 2024, a decrease from 722 for the three months ended March 31, 2023, resulting in a $0.2 million decrease, or -1% of the total.

With the Southern Acquisition, cost of revenue increased by $19.8 million, or 92%, during the three months ended March 31, 2024 primarily due to aircraft expenses of $11.2 million, pilot expenses of $4.7 million, customer care expenses of $2.6 million, station expenses of $0.8 million, reservation system cost of $0.4 million, and passenger re-accommodation expenses of $0.1 million.

Technology and Development

Technology and development expenses increased by $6.2 million, or 763%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase was driven primarily by the amortization of the Textron data license of $3.1 million, the amortization of software expenses related to work with Palantir for $2.0 million, and increases in software platform and electrification development expenses for $0.7 million and $0.5 million, respectively.

29


 

Sales and Marketing

Sales and marketing expenses increased by $1.6 million, or 116%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to an increase in brand awareness and strategic digital marketing expenses of $0.6 million. Additionally, there was a $0.7 million increase due to management compensation and management incentive plans.

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 $16.2 million, or 192%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase in general and administrative expense is driven primarily by the recognition of an additional $11.3 million in stock-based compensation expense, an increase in management incentive plans of $1.8 million, and $0.4 million increase in professional advisory fees. These increases were offset by a decrease in audit and tax related professional fees of $1.8 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 $1.7 million, or 667%, for the three months ended March 31, 2024, compared to the three months ended March 31, 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 $6.0 million, or -70%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. There are two primary drivers for the increase in net income/(expense).

In the first quarter of 2023 there was a decrease of $8.1 million in fair value of financial debt instruments, including SAFE notes and certain convertible notes. In the first quarter of 2024 there was a decrease of $0.5 million in fair value of financial debt instruments, including SAFE notes and certain convertible notes which resulted in a $7.6 million decrease in expense period over period.

There was an increase in interest expense of $0.6 million period over period, due to additional related party term loans.

With the Southern Acquisition, other expenses increased by $0.8 million primarily attributable to interest expense associated with the debt instruments acquired from Southern.

Net Loss

The increase in net loss of $16.4 million from the existing business for the three months ended March 31, 2023 compared to the three months ended March 31, 2024, was primarily attributable to an increase in general and administrative expenses of $11.8 million, an increase in technology and development of $6.2 million, an increase in sales and marketing of $1.3 million, and an increase in cost of revenue of $2.0 million. These increases in expenses were offset by a decrease in other expenses of $6.8 million (including changes in fair market value of financial instruments, interest expense, and other expense), and an increase in revenue of $2.2 million.

With the Southern Acquisition net loss increased by $3.8 million primarily attributable to cost of revenue of $20.1 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 $23.2 million in revenue.

30


 

Cash Flow Analysis

The following table presents a summary of our cash flows (in thousands):

 

 

Three Months Ended March 31,

 

 

Change

 

 

 

2024

 

 

2023

 

 

$

 

 

%

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

(12,810

)

 

$

(9,021

)

 

$

(3,789

)

 

 

(42

)%

Investing activities

 

 

(743

)

 

 

(132

)

 

 

(611

)

 

 

(463

)%

Financing activities

 

 

13,113

 

 

 

9,389

 

 

 

3,724

 

 

 

40

%

Net change in cash and cash equivalents

 

$

(440

)

 

$

236

 

 

$

(676

)

 

 

(286

)%

Cash Flow from Operating Activities

For the three months ended March 31, 2024, net cash used in operating activities was $12.8 million, driven by a net loss of $36.9 million. These operating outflows were partially offset by non-cash stock-based compensation expenses of $12.6 million, increases in accounts payable and accrued expenses of $8.3 million, and increases in depreciation and amortization expense of $2.0 million.

For the three months ended March 31, 2023, net cash used in operating activities was $9.0 million, primarily driven by a net loss of $20.6 million. This was partially offset by $1.1 million in non-cash stock-based compensation expenses, $8.1 million in changes in fair value of financial instruments, and increases in accounts payable of $2.3 million.

Net cash used in operating activities increased period over period by $3.8 million, driven by a $16.4 million increase in net loss. These were partially offset by an increase of $11.5 million in non-cash stock-based compensation expenses and increases of $1.5 million in accounts payable and other liabilities.

Cash Flow from Investing Activities

For the three months ended March 31, 2024, net cash used in investing activities was $0.7 million, an increase of $0.6 million compared to the three months ended March 31, 2023, driven by an increase of $0.5 million of property and equipment costs.

Cash Flow from Financing Activities

For the three months ended March 31, 2024, net cash provided by financing activities was $13.1 million from proceeds from borrowings due to related parties of $10.0 million, and proceeds from the GEM stock purchase agreement of $3.8 million, offset by $0.8 million due to payments on long-term debt.

For the three months ended March 31, 2023, net cash provided by financing activities was $9.4 million, primarily from proceeds from borrowings due to related parties of $9.2 million.

Net cash provided by financing activities increased period over period by $3.7 million, primarily driven by proceeds from the GEM stock purchase agreement of $3.8 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 March 31, 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 $7.6 million is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheet as of March 31, 2024. 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 $2.0 million as of March 31, 2024. Additionally, Los Angeles County has imposed a tax lien on four of the Company’s aircraft due to the late filing of the Company’s 2022 property tax return. As of March 31, 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.

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The Company is in the process of remediating the late filing and payment of the property taxes due to Los Angeles County. As of March 31, 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. The SAFE-T note had an outstanding principal amount of $0.5 million as of March 31, 2024. (See Note 8, Financing Arrangements within Item 1. Financial Statements in this Quarterly Report on Form 10-Q).

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 March 31, 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 March 31, 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”) and $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”) in July 2023. As of March 31, 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 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 raise additional capital (or financing) to fund operating losses, refinance its current outstanding debt, maintain efficient aircraft utilization, primarily through the proper utilization of pilots and managing market shortages of maintenance personnel and critical aircraft components, sustain ongoing operations, attract and maintain customers, integrate, manage and grow recent acquisitions and new business initiatives, obtain and maintain relevant regulatory approvals, and 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 $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). On August 2, 2023, the Company filed a Form S-1 registration statement with the SEC, which was declared effective by the SEC on September 28 2023, 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 in the GEM purchase, 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. On November 9, 2023, the Company filed a Form S-1 registration statement 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 estimates could be issued and sold to GEM for advances under the Share Purchase Agreement, plus the amount of shares the Company estimates could be sold to GEM for $50 million under the Share Purchase Agreement. As of March 31, 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 March 31, 2024, GEM held 7.6% of the then fully-diluted shares of the Company. At March 31, 2024, the daily volume limitations under the SPA restricted our ability to take additional draws under the Share Purchase Agreement to approximately 2.3 million shares per draw.

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, 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 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.

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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 three months ended March 31, 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 38 Cessna Grand Caravan aircraft, with expected delivery taken over the next five years. As of March 31, 2024, the Company has made deposits of $5.0 million for aircraft that are scheduled to be delivered starting in Q3 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 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.

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, in 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.

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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 March 31, 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 March 31, 2024, due to presence of the material weaknesses in internal control over financial reporting described below.

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 March 31, 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:

We did not design and maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we lacked a sufficient complement of resources with (i) an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately, and (ii) an appropriate level of knowledge and experience to establish effective processes and controls. Additionally, the lack of a sufficient complement of resources resulted in an inability to consistently establish appropriate authorities and responsibilities in pursuit of our financial reporting objectives, as demonstrated by, among other things, insufficient segregation of duties in our finance and accounting functions.
We did not design and maintain effective controls in response to the risks of material misstatement. Specifically, changes to existing controls or the implementation of new controls have not been sufficient to respond to changes to the risks of material misstatement to financial reporting.

 

These material weaknesses contributed to the following additional material weaknesses:

 

We did not design and maintain effective controls related to the identification of and accounting for certain non-routine, unusual or complex transactions, including the proper application of U.S. GAAP of such transactions. Specifically, we did not design and maintain effective controls to timely identify and account for capitalizable costs, revenue, stock-based compensation, and debt and equity financing transactions.
We did not design and maintain effective controls related to the period-end financial reporting process, including designing and maintaining formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures. Additionally, we did not design and maintain effective controls over the preparation and review of account reconciliations and journal entries, including maintaining appropriate segregation of duties.
We did not design and maintain effective information technology (“IT”) general controls for information systems that are relevant to the preparation of our financial statements. Specifically, we did not design and maintain: (i) program change management controls to ensure that program and data changes are identified, tested, authorized, and implemented appropriately; (ii) user access controls to ensure appropriate segregation of duties and to adequately restrict user and privileged access to appropriate personnel; (iii) computer operations controls to ensure that processing and transfer of data, and data backups and recovery are monitored; and (iv) program development controls to ensure that new software development is tested, authorized and implemented appropriately.

34


 

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:

 

We did not design and maintain effective controls to achieve complete, accurate and timely accounting for debt, deferred liabilities, leases, property and equipment, redeemable convertible preferred shares, accounts payable, and accrued liabilities. This material weakness did not result in adjustments to our consolidated financial statements. However, this material weakness could result in a misstatement of the aforementioned 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, 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 March 31, 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.

35


 

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.

36


 

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

 

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

In January 2024, we issued an aggregate of 45,283 shares of Common Stock to one accredited investor for in-kind services worth $50,000.

 

In February 2024, we issued an aggregate of 1,851,852 shares of Common Stock to one accredited investor for in-kind services worth $2,000,000.

 

In March 2024, we issued an aggregate of 1,755,156 shares of Common Stock to one accredited investor for in-kind services worth $2,000,000.

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 March 31, 2024, none of our directors or officers (as defined in Section 16 of the Exchange Act), adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any “non-Rule 10b5-1 trading arrangement” (as defined in Item 408(c) of Regulation S-K of the Exchange Act).

37


 

ITEM 6–EXHIBITS

The following documents are filed as exhibits to this Report:

 

Exhibit

Number

Description of Document

 

 

 

3.1

 

Amended and Restated Certificate of Incorporation of Surf Air Mobility Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K, filed with the SEC on March 29, 2024)

 

 

 

3.2

 

Amended and Restated Bylaws of Surf Air Mobility Inc.. (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K, filed with the SEC on March 29, 2024)

 

 

 

10.1

 

Security Purchase Agreement, dated March 1, 2024, between Surf Air Mobility, Inc. and GEM Global Yield LLC SCS (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the SEC on March 6, 2024.

 

 

 

31.1*

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification of Principal Financial and Accounting Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1*§

 

Certification of Principal Executive Officer and Principal Financial and Accounting Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

Inline XBRL Instance Document

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents

 

 

 

104

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.

38


 

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.

 

Surf Air Mobility Inc.

(Registrant)

 

 

Date: May 15, 2024

/s/ Stan Little

Stan Little

Chief Executive Officer

(Principal Executive Officer)

 

Date: May 15, 2024

/s/ Oliver Reeves

Oliver Reeves

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

39


EX-31.1 2 srfm-ex31_1.htm EX-31.1 EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Stan Little, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Surf Air Mobility Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
[Omitted];
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: May 15, 2024

/s/ Stan Little

 

Stan Little

 

Chief Executive Officer

 

(Principal Executive Officer)

 


EX-31.2 3 srfm-ex31_2.htm EX-31.2 EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Oliver Reeves, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Surf Air Mobility Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
[Omitted];
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: May 15, 2024

/s/ Oliver Reeves

 

Oliver Reeves

 

Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 


EX-32.1 4 srfm-ex32_1.htm EX-32.1 EX-32.1

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 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 March 31, 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/ Stan Little

Stan Little, Chief Executive Officer

May 15, 2024

 

 

 

 

/s/ Oliver Reeves

Oliver Reeves, Chief Financial Officer

May 15, 2024