Surf Air Mobility Inc. 2023 Form 10-K Summary
Business context and reporting period
Surf Air Mobility Inc. filed its Form 10-K for the fiscal year ended December 31, 2023. The company operates a regional air mobility platform offering scheduled and on-demand flights and is developing fully electric and hybrid-electric powertrains for existing aircraft.
The July 27, 2023 acquisition of Southern Airways added a nationwide regional airline network, including Essential Air Service routes. Southern’s results are included from the acquisition date, so year-over-year comparisons are not fully comparable. The company served approximately 176,131 scheduled passengers across 41 cities with approximately 31,476 scheduled departures during 2023.
Financial performance and key metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $60.5 million | $20.3 million | 198% |
| Scheduled revenue | $39.4 million | $4.3 million | 811% |
| On-demand revenue | $21.1 million | $16.0 million | 32% |
| Operating loss | $(196.8) million | $(50.9) million | Loss increased $145.9 million |
| Net loss | $(250.7) million | $(74.4) million | Loss increased $176.3 million |
| Net loss per share | $(6.35) | $(5.51) | Worsened |
| Cash used in operating activities | $(64.4) million | $(28.0) million | Outflow increased $36.3 million |
| Cash used in investing activities | $(7.1) million | $(0.3) million | Outflow increased $6.8 million |
| Cash provided by financing activities | $73.0 million | $27.7 million | Increased $45.3 million |
Reported gross margin was approximately negative 2.3%, operating margin was approximately negative 325%, and net margin was approximately negative 414%. Cost of revenue exceeded revenue by $1.4 million before depreciation and amortization.
At December 31, 2023, cash was $1.7 million, restricted cash was $0.7 million, total current assets were $17.7 million, and total current liabilities were $140.1 million. Shareholders’ deficit was $77.5 million. Long-term debt, including current maturities, was $25.8 million, and related-party term notes totaled $18.6 million. The filing also reports $7.7 million of convertible notes at fair value and $11.3 million of GEM derivative liability.
Contractual commitments totaled approximately $436.1 million, including $292.0 million of aircraft supply commitments, $40.0 million of sales and marketing commitments, $31.0 million of technology development commitments, $25.8 million of long-term debt, and $14.4 million of operating lease payments.
Material changes versus the prior comparable period
- Revenue increased primarily because Southern contributed $36.7 million of revenue from the acquisition date through year-end, including $19.2 million of Essential Air Service revenue and $14.9 million of passenger revenue.
- Excluding Southern, scheduled revenue declined approximately 12%, primarily due to a reduction in the membership subscription base.
- Operating expenses increased to $257.3 million from $71.2 million. Major drivers included Southern’s operating costs, higher corporate and public-company expenses, technology development, and stock-based compensation.
- Technology and development expense rose to $20.9 million, including a $12.5 million Textron data-license fee, $4.0 million of Palantir-related amortization, and $1.0 million of AeroTEC research and development expense.
- General and administrative expense increased to $100.7 million, including $35.8 million of incremental stock-based compensation and $11.4 million of additional professional fees associated with the public listing.
- The company recorded a $60.0 million goodwill impairment in the fourth quarter related to Southern. The impairment followed maintenance delays, higher cancellations and cash requirements, delayed aircraft deliveries, and a decline in the company’s market capitalization. No goodwill remained at year-end.
- Scheduled flight hours increased to 34,388 from 2,524, scheduled passengers increased to 176,131 from 7,131, and scheduled departures increased to 31,476 from 2,002; these increases largely reflect the Southern acquisition.
- Fuel expense increased to $7.2 million from $1.2 million. The company does not hedge fuel costs and generally does not fix labor costs through long-term agreements.
Guidance, outlook, risks and unusual items
Management expects continued losses, negative cash flow and significant spending on fleet expansion, software, and electric and hybrid-electric powertrain development. The company targets FAA certification of its first fully electric Caravan powertrain in early 2027 and the hybrid-electric version thereafter, but these milestones remain subject to development, supply-chain and regulatory risks.
The company states that substantial doubt exists about its ability to continue as a going concern. It has a working capital deficit, negative operating cash flow, defaults involving certain tax and other obligations, and requires additional financing to fund operations and execute its business plan. The audited financial statements include no adjustments for the potential outcome of this uncertainty.
- Federal excise tax liabilities, including penalties and interest, were approximately $7.6 million at year-end. Property tax liabilities were approximately $1.9 million, including a $1.2 million Los Angeles County tax lien involving four aircraft.
- Approximately $5.0 million of past-due aircraft lease and maintenance amounts were subject to a payment plan. Repayment obligations may be triggered by specified capital contributions.
- The company had access to a GEM share purchase facility with potential aggregate capacity of up to $400 million, subject to conditions, volume limitations, ownership restrictions and market availability. The filing does not assure that the company can access the full amount.
- On March 1, 2024, the company entered into an agreement with GEM for a mandatory convertible security with a par amount of up to $35.2 million and conversion into up to 8.0 million common shares, subject to closing conditions and other adjustments.
- On January 19, 2024, a Southern aircraft made an emergency landing after reporting a loss of power following takeoff. No injuries were reported, and FAA and NTSB investigations were ongoing at the filing date.
- The FAA proposed a $0.3 million civil penalty related to alleged flight officer certification and competence-check compliance and investigated alleged operation of Hawaii flights beyond required maintenance intervals. The company accrued approximately $0.2 million for the latter matter.
- Management identified material weaknesses in internal control over financial reporting, including weaknesses involving the control environment, complex transactions, period-end reporting, IT general controls, and accounting for Southern’s integrated operations. Disclosure controls were not effective as of December 31, 2023.
- Essential Air Service revenue was $19.2 million, approximately 32% of total revenue, creating material dependence on government funding, route awards and renewals.
Most important facts for investors to verify
- Available liquidity, near-term cash burn, and the company’s ability to raise financing before obligations mature.
- Status and enforceability of the GEM facility, the March 2024 mandatory convertible security, and the potential dilution from future equity issuance.
- Current status of tax liens, aircraft lease arrears, related-party debt and other defaults.
- Southern’s operating performance, maintenance backlog, cancellation rates, aircraft utilization and progress on delayed aircraft deliveries.
- FAA and NTSB findings related to the January 2024 emergency landing and the status of FAA regulatory matters.
- Progress in remediating material weaknesses and the risk of future financial statement errors or restatements.
- Actual progress, funding requirements and certification probability for the planned electric and hybrid-electric powertrains.
- Dependence on Essential Air Service revenue, fuel prices, pilots, maintenance personnel, third-party operators and strategic partners.
- Potential dilution from outstanding options, restricted stock units, performance awards, GEM securities and other convertible or equity-linked instruments.