Business Context and Reporting Period
Company: Surf Air Mobility Inc. (SRFM)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2024
Business Overview: Surf Air is a regional air mobility ecosystem provider offering scheduled and on-demand air travel. The company is developing fully-electric and hybrid-electric powertrain technology to upgrade existing fleets. Following the July 2023 acquisition of Southern Airways Corporation, the company operates a combined network across the U.S. The company is classified as an emerging growth company and a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2024 | Nine Months Ended Sept 30, 2024 | Sept 30, 2024 Balance Sheet |
|---|---|---|---|
| Revenue | $28.4 million | $91.4 million | N/A |
| Net Loss | $(12.2) million | $(76.2) million | N/A |
| Operating Loss | $(8.6) million | $(68.4) million | N/A |
| Cash and Restricted Cash | N/A | N/A | $1.1 million |
| Total Assets | N/A | N/A | $97.9 million |
| Total Liabilities | N/A | N/A | $233.5 million |
| Shareholders' Deficit | N/A | N/A | $(135.6) million |
| Working Capital | N/A | N/A | $(118.9) million |
Note: Revenue growth is primarily driven by the inclusion of Southern Airways operations for a full quarter in 2024 compared to a partial quarter in 2023.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 29% ($6.4 million) for the three months ended September 30, 2024, compared to the same period in 2023. Scheduled revenue rose 43% due to increased passenger volume and departures following the Southern acquisition.
- Expense Reduction: General and Administrative (G&A) expenses decreased 99% ($55.2 million) quarter-over-quarter, primarily due to a $37.9 million reduction in stock-based compensation and a $15.3 million reduction in transaction-related expenses from the 2023 direct listing.
- Net Loss Improvement: Net loss decreased 84% ($62.4 million) for the three months ended September 30, 2024, compared to the prior year period, driven by revenue growth and significant expense reductions.
- Debt and Liabilities: Total liabilities increased to $233.5 million from $188.5 million at year-end 2023. This includes a significant increase in "Due to related parties" (long-term) from $1.7 million to $49.0 million.
Outlook, Risks, and Contingencies
Liquidity and Going Concern
The filing explicitly states that the company has incurred losses, negative operating cash flows, and a working capital deficit. These factors raise substantial doubt about the company's ability to continue as a going concern. The financial statements do not include adjustments that might result from the outcome of this uncertainty.
Defaults and Tax Liabilities
- Tax Defaults: The company is in default of federal excise taxes ($7.7 million liability) and property taxes ($1.8 million liability). An IRS tax lien exists, and Los Angeles County has imposed a lien on four leased aircraft.
- Debt Defaults: The company is in default of a SAFE-T note (matured July 2019) and is in arrears on contractual interest payments under a Convertible Note Purchase Agreement with PFG, triggering a default interest rate of 15.75%.
- Lease Arrears: Approximately $5.0 million in past-due rental and maintenance payments under aircraft leases are deferred under a payment plan contingent on future capital contributions.
Subsequent Events (November 2024)
Following the period end, the company secured new financing to address liquidity:
- Credit Agreement: Entered into a 4-year agreement borrowing $44.5 million in term loans, backstopped by a letter of credit from HSBC arranged by a related party.
- LamVen Note: Issued a $50.0 million secured convertible promissory note to refinance existing related party notes.
- PFG Amendment: Amended the PFG Convertible Note to extend maturity to December 31, 2028.
Internal Controls
Management concluded that disclosure controls and procedures were not effective as of September 30, 2024, due to material weaknesses in the control environment, IT general controls, and accounting for complex transactions.
Investor Verification Checklist
- Going Concern Status: Verify the sufficiency of the November 2024 financing ($44.5M + $50M) to cover the $118.9M working capital deficit and ongoing operational losses.
- Tax Resolution: Monitor the status of the IRS Offer-in-Compromise (OIC) and the resolution of the Los Angeles County tax lien on aircraft assets.
- NYSE Listing Compliance: Confirm the company has cured the listing requirement violation mentioned in the filing, as failure to do so could restrict access to the GEM Share Purchase Agreement.
- Related Party Dependence: Assess the terms and risks associated with the significant increase in related party debt (LamVen) and the backstop arrangement for the new credit facility.
- Internal Control Remediation: Review progress on remediation plans for material weaknesses in financial reporting and IT controls.