SURF AIR MOBILITY INC. quarterly report, Q1 FY2024

Surf Air Mobility Inc. — Q1 2024 Form 10-Q Summary

Business context and reporting period

Surf Air Mobility Inc. reported unaudited consolidated results for the three months ended March 31, 2024. The company operates a regional airline network offering scheduled and on-demand charter flights and is developing fully electric and hybrid-electric powertrain technology. Results include Southern Airways, acquired on July 27, 2023; therefore, the prior-year comparison is not fully comparable.

The company reported 83,035,258 common shares outstanding as of May 10, 2024. Its stock trades on the NYSE under ticker SRFM.

Financial and operating metrics

Metric	Q1 2024	Q1 2023	Change
Revenue	$30.6 million	$5.5 million	+456%
Operating loss	$(34.5) million	$(12.0) million	Loss increased $22.4 million
Net loss	$(37.0) million	$(20.6) million	Loss increased $16.4 million
Net loss per share	$(0.48)	$(1.46)	Improved due primarily to higher share count
Cash flow from operations	$(12.8) million	$(9.0) million	Outflow increased $3.8 million
Cash flow from investing	$(0.7) million	$(0.1) million	Outflow increased $0.6 million
Cash flow from financing	$13.1 million	$9.4 million	Inflow increased $3.7 million

Revenue consisted of $23.0 million of scheduled revenue and $7.6 million of on-demand revenue. Scheduled revenue was primarily added by Southern Airways, including $11.9 million of Essential Air Service revenue and $9.3 million of passenger revenue. On-demand revenue increased 63% year over year to $7.6 million.

Cost of revenue was $28.5 million, implying an approximate 7.0% gross margin before depreciation and amortization. Total operating expenses were $65.1 million. Approximate operating and net margins were negative 112.6% and negative 120.7%, respectively. Results included $12.6 million of stock-based compensation, including $10.0 million related to the Southern management incentive bonus plan.

At March 31, 2024, cash was $1.3 million and restricted cash was $0.7 million. Current assets were $16.7 million versus current liabilities of $165.5 million, producing an approximate working-capital deficit of $148.8 million. Total assets were $108.8 million, total liabilities were $215.1 million, and shareholders’ deficit was $106.3 million.

Unrelated-party long-term debt, including current maturities, was $25.1 million. Related-party term notes were $28.6 million, convertible notes at fair value were $7.9 million, and collateralized borrowings were $3.1 million. The company also had $14 thousand of SAFE notes at fair value. The company was in compliance with stated covenants on its long-term debt and accounts receivable financing facility as of March 31, 2024.

Material changes versus the prior comparable period

Revenue increased substantially because Q1 2024 included a full quarter of Southern Airways operations, while Q1 2023 did not include the acquisition.
Operating costs increased faster than revenue. Cost of revenue rose 328%, technology and development expense rose 763%, sales and marketing rose 116%, and general and administrative expense rose 192%.
Operating loss increased to $34.5 million from $12.0 million, and net loss increased to $37.0 million from $20.6 million.
Interest expense increased to $1.7 million from $0.2 million, partly because of additional related-party term loans.
Fair-value losses on financial instruments declined to $0.5 million from $8.1 million, partially offsetting higher operating and interest expenses.
Scheduled flight hours increased to 16,817 from 722 and scheduled passengers increased to 87,723 from 1,631, principally reflecting Southern’s inclusion. On-demand flights increased to 906 from 422.
Common shares outstanding increased to 81.9 million at March 31, 2024 from 76.2 million at December 31, 2023. Shares were issued for software licensing, marketing, services, restricted share vesting, and under the GEM share purchase arrangements.

Guidance, outlook, risks, contingencies, and unusual items

The filing does not provide formal financial guidance. Management expects continued spending on electrification technology, the digital platform, fleet expansion, and network development. The company expects aircraft expansion to require substantial capital, including planned purchases of 90 Cessna Grand Caravan aircraft plus options for 38 additional aircraft. It had made $5.0 million of aircraft deposits as of March 31, 2024.

Management identified substantial doubt about the company’s ability to continue as a going concern. The company has recurring operating losses, negative operating cash flow, a significant working-capital deficit, defaults on certain tax and debt obligations, and continuing dependence on additional financing. Management stated that failure to obtain financing could require spending reductions, scaled-back development plans, or reduced capital expenditures.

Federal excise tax liabilities, including penalties and interest, totaled $7.6 million; the company had defaulted on an IRS installment plan.
Property tax liabilities, including penalties and interest, were approximately $2.0 million. Los Angeles County had imposed a tax lien on four aircraft, with approximately $1.2 million accrued for the related unpaid amounts.
The SAFE-T note had matured in 2019 and remained in default, with $0.5 million of principal outstanding.
Approximately $5.0 million of past-due aircraft lease and maintenance payments were subject to a payment plan. The company had not made payments under that plan as of March 31, 2024.
The company entered into a March 1, 2024 agreement for a mandatory convertible security with GEM with a par amount of up to $35.2 million and conversion into up to 8.0 million shares, subject to conditions and adjustments. Closing was expected by the end of Q2 2024, but the filing does not establish that it had closed by March 31.
The company’s accounts receivable financing facility was scheduled for termination on May 20, 2024 unless extended, and borrowing capacity had been reduced. The company was seeking replacement financing.
On April 28, 2024, related-party term notes were extended to May 15, 2024, and the principal amount of one note was increased to $25.0 million.
The FAA proposed a $0.3 million civil penalty related to flight officer certification and competence-check requirements. The company also accrued approximately $0.5 million for alleged maintenance-interval violations in Hawaii.
The company reported material weaknesses in internal control over financial reporting, including weaknesses involving staffing and expertise, unusual transactions, period-end reporting, information technology controls, and accounting for Southern-related balances and transactions. Disclosure controls and procedures were determined to be ineffective as of March 31, 2024.
Operational performance was affected by inefficient aircraft utilization, pilot underutilization, shortages of maintenance personnel and aircraft components, inflation in fuel and labor costs, and delays in aircraft deliveries and maintenance.

Most important facts for investors to verify

Whether the company secured sufficient financing after quarter-end to address its going-concern uncertainty and near-term maturities.
Whether the GEM mandatory convertible security closed, the amount funded, and the resulting potential dilution.
The status of the GEM share purchase facility, daily trading-volume limitations, and the company’s ability to access remaining capacity.
Whether the accounts receivable financing facility was extended or replaced after May 20, 2024.
The status of federal and property tax defaults, aircraft tax liens, FAA matters, and related payment plans.
Progress in remediating the material weaknesses and whether future filings require material adjustments or revisions.
Whether Southern’s maintenance, staffing, aircraft-utilization, and flight-cancellation issues improve sufficiently to support positive operating cash flow.
The timing, funding requirements, regulatory approvals, and commercial feasibility of the planned electric and hybrid-electric aircraft programs.