Business Context and Reporting Period
Surf Air Mobility, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. The financial statements primarily reflect Surf Air Global Limited, the predecessor business, before the July 2023 internal reorganization and Southern Airways acquisition.
Surf Air operates scheduled and on-demand regional air travel services, primarily using small turboprop aircraft and third-party Part 135 operators. Management is also developing hybrid-electric and fully electric powertrain technology with commercial partners.
On July 21, 2023, Surf Air became a wholly owned subsidiary of Surf Air Mobility, Inc. The company’s common stock began trading on the New York Stock Exchange on July 27, 2023.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 |
|---|---|---|---|---|
| Revenue | $6.2 million | $4.5 million | $11.7 million | $9.3 million |
| Operating loss | $(13.2) million | $(13.1) million | $(25.2) million | $(24.3) million |
| Net loss | $(44.5) million | $(18.8) million | $(65.1) million | $(29.4) million |
| Net loss per share | $(3.14) | $(1.40) | $(4.60) | $(2.30) |
| Adjusted EBITDA | $(7.8) million | $(3.1) million | $(17.4) million | $(7.1) million |
| Cash used in operating activities | Not separately provided | Not separately provided | $(20.6) million | $(15.5) million |
Revenue grew 38% year over year in the second quarter and 26% for the first six months. On-demand revenue increased 57% in the quarter and 44% year to date, while scheduled revenue declined 13% and 24%, respectively.
Approximate margins were negative: second-quarter gross margin was $(0.9) million, or approximately negative 14%, and six-month gross margin was $(2.0) million, or approximately negative 17%. Operating margins were approximately negative 212% for the quarter and negative 215% for the six-month period. Net margins were approximately negative 719% and negative 556%, respectively.
Financial Position, Debt and Liquidity
- Cash was $2.3 million at June 30, 2023, with restricted cash of $0.9 million.
- Total assets were $14.8 million, compared with total liabilities of $160.4 million.
- Current assets were $10.1 million versus current liabilities of $131.8 million, implying a working capital deficit of approximately $121.7 million.
- Shareholders’ deficit was $279.3 million, compared with $222.1 million at December 31, 2022.
- Convertible notes at fair value totaled $35.1 million and SAFE notes at fair value totaled $56.8 million at June 30, 2023. The company also reported a GEM derivative liability of $11.4 million.
- Financing activities provided $23.2 million during the first six months, primarily from related-party borrowings of $16.5 million, SAFE note proceeds of $3.7 million and preferred-share proceeds of $3.0 million.
- The company had approximately $6.6 million of federal excise tax liabilities and approximately $2.1 million of property tax liabilities, including penalties and interest. A Los Angeles County tax lien affected four aircraft.
Management stated that substantial doubt exists regarding the company’s ability to continue as a going concern. The company depends on additional debt or equity financing, increased membership and passenger demand, and improved operating performance.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $1.7 million in the quarter and $2.4 million for the six-month period, driven by higher on-demand activity and pricing.
- On-demand flights increased to 533 in the quarter from 403 and to 987 for the six months from 796.
- Scheduled revenue declined because of a lower membership subscription base, despite scheduled flight hours increasing 74% in the quarter.
- Cost of revenue increased 19% in the quarter and 22% year to date, broadly outpacing revenue growth.
- Sales and marketing expense increased 70% in the quarter and 47% year to date, reflecting efforts to expand on-demand services and promote the public listing.
- Fair-value losses on financial instruments increased substantially, reaching $30.4 million in the quarter and $38.5 million year to date, compared with $9.4 million and $10.3 million in the respective 2022 periods.
- Net loss more than doubled year to date, primarily because of higher fair-value losses, higher operating costs and the absence of the prior-year gain on debt extinguishment.
- Operating cash burn increased to $20.6 million from $15.5 million for the comparable six-month period.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects continued investment in software, hybrid-electric and fully electric powertrain development, public-company infrastructure and network expansion. Management also expects development expenses to increase if additional GEM financing becomes available.
- Subsequent to quarter-end, the company received $8.0 million under a PFG convertible note and $25.0 million from the GEM purchase agreement.
- On July 27, 2023, Southern Airways became a wholly owned subsidiary in exchange for approximately 16.25 million SAM shares, valued at $81.25 million based on a $5.00 opening price.
- SAFE notes with approximately $56.4 million of outstanding principal were settled with 17.4 million SAM shares.
- The company issued 1.3 million shares to GEM under its commitment arrangement and received $25.0 million for an additional 1.0 million shares.
- The Textron agreements became effective upon listing and contemplate $60.0 million of licensing fees, including $25.0 million due in the third quarter of 2023, plus $40.0 million of potential exclusivity fees.
- The aircraft purchase agreement contemplates purchases of 100 Cessna Caravan aircraft costing more than $300 million, with an option for 50 additional aircraft costing more than $150 million.
- Previously unrecognized executive stock-based compensation of $21.8 million was expected to be recognized in the third quarter of 2023.
- The company’s financial instruments are primarily Level 3 fair-value measurements using significant unobservable assumptions, creating potential earnings volatility.
- Key risks include insufficient liquidity, defaults on taxes and debt, dependence on related-party financing, declining membership, airline and fuel-cost volatility, regulatory approvals, third-party operators and suppliers, execution of electric aircraft technology, acquisition integration and the ability to obtain required financing.
Investor Verification Priorities
- Verify post-listing cash balances, financing proceeds, share issuances and the terms and dilution effects of the PFG, GEM and SAFE transactions.
- Assess the company’s ability to fund near-term obligations given the approximately $121.7 million working capital deficit and going-concern uncertainty.
- Review the status and resolution terms of federal and property tax defaults, aircraft tax liens and other debt defaults.
- Reconcile the substantial Level 3 fair-value losses and confirm the valuation assumptions for SAFE notes, convertible notes and derivative liabilities.
- Monitor scheduled membership trends, on-demand growth, route profitability and whether revenue growth can exceed cost growth.
- Evaluate the financial commitments and milestones under the Textron and Jetstream arrangements, including aircraft purchases, licensing fees and minimum usage obligations.
- Account for the $21.8 million expected third-quarter stock-based compensation charge and other public-company transaction costs.
- Review remediation of the material weaknesses in disclosure controls and internal control over financial reporting, which management determined were not effective at June 30, 2023.