SURF AIR MOBILITY INC. quarterly report, Q3 FY2023

Surf Air Mobility Inc. — Form 10-Q Summary

Business Context and Reporting Period

This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the same periods in 2022. Surf Air operates scheduled and on-demand regional air services and is developing hybrid-electric and fully electric aircraft powertrain technology. On July 21, 2023, the company completed an internal reorganization, and on July 27, 2023, its common stock began trading on the NYSE under the symbol SRFM.

On July 27, 2023, Surf Air acquired Southern Airways Corporation for approximately $81.25 million of common stock plus $0.7 million of debt-settlement payments. Southern’s results are included from the acquisition date and contributed $15.3 million of revenue and $0.3 million of net income through September 30, 2023.

Financial Performance and Key Metrics

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Revenue	$22.0 million	$5.1 million	$33.7 million	$14.4 million
Scheduled revenue	$15.5 million	$1.0 million	$17.4 million	$3.5 million
On-demand revenue	$6.4 million	$4.1 million	$16.2 million	$10.9 million
Net loss	$(74.6) million	$(21.1) million	$(139.7) million	$(50.5) million
Adjusted EBITDA	$(13.9) million	$(9.7) million	$(30.9) million	$(22.7) million
Operating cash flow	Not separately provided for quarter	Not separately provided for quarter	$(45.1) million	$(22.4) million

Q3 revenue increased 332%; nine-month revenue increased 134%. The increase primarily reflects the Southern acquisition and higher on-demand activity.
Cost of revenue was $20.6 million in Q3 and $34.3 million for the nine months. Implied gross margin was approximately 6.2% in Q3 and negative 1.9% for the nine-month period.
Operating loss was $63.0 million in Q3 and $88.2 million for the nine months, implying operating margins of approximately negative 287% and negative 262%, respectively.
General and administrative expense rose to $55.6 million in Q3 and $73.4 million for the nine months, driven substantially by stock-based compensation, public-company costs, professional fees, and management compensation.
Fair-value changes in financial instruments produced expense of $10.9 million in Q3 and $49.4 million for the nine months. These are largely noncash but materially increased reported losses.
Net loss per share was $(1.36) in Q3 and $(5.03) for the nine months, compared with $(1.51) and $(3.85), respectively, in the prior-year periods.

Balance Sheet, Cash Flow, Debt, and Liquidity

Cash was $5.9 million at September 30, 2023, with restricted cash of $0.9 million, compared with cash of $6 thousand at December 31, 2022.
Total assets were $185.5 million, including $58.2 million of goodwill, $49.2 million of property and equipment, and $28.6 million of net intangible assets, primarily recognized in connection with the Southern acquisition.
Total liabilities were $157.2 million. Long-term debt, including current maturities, totaled $26.5 million; convertible notes at fair value totaled $7.5 million; and related-party obligations totaled approximately $15.9 million.
Current liabilities were $104.5 million versus current assets of $28.0 million, indicating a substantial working-capital deficit.
Cash used in operating activities was $45.1 million for the first nine months, while investing activities used $11.1 million. Financing activities provided $62.1 million.
Financing sources during the quarter included $8.0 million from a PFG convertible note, $25.0 million from GEM for common stock, and $4.5 million of advances under the GEM share purchase agreement. An additional $3.0 million of the initial GEM advance was received on October 3, 2023.
Management stated that these conditions, including recurring losses, negative operating cash flow, working-capital deficits, tax and debt defaults, and dependence on additional financing, raise substantial doubt about the company’s ability to continue as a going concern.

Material Changes Versus the Prior Comparable Period

The Southern acquisition materially expanded scheduled operations and added more than 50 aircraft to the combined network, but also increased aircraft, pilot, station, maintenance, lease, and administrative costs.
Scheduled flight hours, scheduled departures, and scheduled passengers increased sharply year over year, largely reflecting Southern’s operations. On-demand flights increased 118% in Q3 and 57% for the nine months.
Reported losses widened substantially because revenue growth was more than offset by operating expenses, public-listing costs, stock-based compensation, and fair-value losses on financial instruments.
Stock-based compensation was $35.4 million for the first nine months, including approximately $21.8 million related to accelerated vesting associated with the direct listing.
Most outstanding SAFE notes were settled through the issuance of 17.4 million common shares at a 35% discount to the $5.00 opening trading price. Convertible notes were also converted or otherwise reduced, leaving $7.5 million of convertible notes at fair value at quarter-end.
Common shares outstanding increased to approximately 73.5 million at September 30, 2023, from 12.5 million at December 31, 2022, reflecting conversions, acquisition consideration, financing transactions, and other equity issuances.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

The filing does not provide formal revenue, earnings, cash-flow, or delivery guidance. Management expects continued significant spending on software, network expansion, and hybrid-electric and fully electric powertrain development.
The company has a commitment to purchase up to 100 Cessna Grand Caravan aircraft, with an option for 50 additional aircraft. Expected aircraft supply commitments total approximately $320.0 million, and the company disclosed aggregate contractual commitments of approximately $462.3 million, including debt, leases, aircraft supply, data licensing, sales and marketing, and technology development obligations.
The company has paid $10.0 million in aircraft deposits, with deliveries expected to begin in the second quarter of 2024. The planned aircraft expansion and electrification program depend on additional financing.
Surf Air has defaulted on certain federal excise and property tax obligations. Federal excise taxes, including penalties and interest, totaled approximately $7.0 million; property tax liabilities totaled approximately $1.9 million. Los Angeles County had imposed a tax lien involving four aircraft.
The company also has approximately $5.0 million of past-due aircraft lease and maintenance obligations subject to a deferred payment plan. The filing states that no payments had been made under that plan as of September 30, 2023.
Operational risks include inefficient aircraft utilization, pilot underutilization, shortages of maintenance personnel and aircraft components, inflation in fuel and labor costs, regulatory approvals, customer demand, and integration of Southern.
The company disclosed material weaknesses in internal control over financial reporting, including deficiencies in staffing and expertise, period-end reporting, accounting for complex transactions, IT general controls, and controls over debt, leases, property and equipment, accounts payable, and accrued liabilities. Disclosure controls and procedures were not effective as of September 30, 2023.
Management is implementing remediation measures, including adding accounting personnel, formalizing controls, engaging a third party, and integrating Southern’s systems and processes.
A $3.2 million stock-based payment was made to Tuscan in connection with termination of a prior business combination agreement. The company also recorded a $3.6 million income tax benefit primarily related to the Southern acquisition.

Important Facts for Investors to Verify

Whether the company can obtain sufficient equity or debt financing to fund operating losses, scheduled debt maturities, aircraft deposits, and technology commitments.
The timing and dilution implications of additional GEM advances, including the potential issuance of up to 300 million registered common shares.
Progress in resolving federal excise tax and property tax defaults, related liens, and deferred aircraft lease obligations.
Whether Southern integration produces sustainable revenue and operating efficiencies rather than further increasing losses and cash requirements.
Actual aircraft utilization, maintenance staffing, component availability, flight reliability, and the company’s ability to improve margins.
Progress toward remediation of the disclosed material weaknesses and whether future filings require accounting corrections or revisions.
The commercial, technical, regulatory, and financing feasibility of the hybrid-electric and fully electric aircraft program, which has not yet resulted in manufactured aircraft or an established powertrain technology.