Saker Aviation Services, Inc. - Quarter Report: 2018 September (Form 10-Q)

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

$See notes to condensed consolidated financial statements.

SAKER AVIATION SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

SAKER AVIATION SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read together with the accompanying consolidated condensed financial statements and related notes in this report. This Item 2 contains forward-looking statements that involve risks and uncertainties. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date of this report. Actual results may differ materially from those expressed or implied in such forward-looking statements. Factors which could cause actual results to differ materially are discussed throughout this report and include, but are not limited to, those set forth at the end of this Item 2 under the heading "Cautionary Statement Regarding Forward Looking Statements." Additional factors are under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

The terms “we,” “us,” and “our” are used below to refer collectively to the Company and the subsidiaries through which our various businesses are conducted.

OVERVIEW

Saker Aviation Services, Inc. (“we”, “us”, “our”) is a Nevada corporation. Our common stock, $0.001 par value per share (the “common stock”), is publicly traded on the OTCQB Marketplace (“OTCQB”) under the symbol “SKAS”. Through our subsidiaries, we operate in the aviation services segment of the general aviation industry, in which we serve as the operator of a heliport, a fixed base operation (“FBO”), as a provider of aircraft maintenance, repair and overhaul (“MRO”) services, and as a consultant for a seaplane base that we do not own. FBOs provide ground-based services, such as fueling and aircraft storage for general aviation, commercial and military aircraft, and other miscellaneous services.

We were formed on January 17, 2003 as a proprietorship and were incorporated in Arizona on January 2, 2004. We became a public company as a result of a reverse merger transaction on August 20, 2004 with Shadows Bend Development, Inc., an inactive public Nevada corporation, and subsequently changed our name to FBO Air, Inc. On December 12, 2006, we changed our name to FirstFlight, Inc. On September 2, 2009, we changed our name to Saker Aviation Services, Inc.

Our business activities are carried out as the operator of the Downtown Manhattan (New York) Heliport, as an FBO and MRO at the Garden City (Kansas) Regional Airport, and as a consultant to the operator of a seaplane base in New York City.

The Garden City facility became part of our company as a result of our acquisition of the FBO assets of Central Plains Aviation, Inc. (“CPA”) in March 2005. Our Garden City facility began offering maintenance services in October 2016 as a result of our acquisition of Aircraft Services, Inc. (“Aircraft Services”).

Our business activities at the Downtown Manhattan (New York) Heliport facility (the “Heliport”) commenced as a result of the Company’s award of the Concession Agreement by the City of New York to operate the Heliport, which we assigned to our subsidiary, FirstFlight Heliports, LLC d/b/a Saker Aviation Services (“FFH”). See Note 2 to the condensed consolidated financial statements included in Item 1 of this report.

REVENUE AND OPERATING RESULTS

Comparison of Continuing Operations from the Three and Nine Months Ended September 30, 2018 and September 30, 2017.

REVENUE

Operating results for the three and nine months ended September 30, 2018 were negatively impacted by a fatal helicopter accident that occurred on March 11, 2018. While the accident was independent of our operation, one of our Heliport customers was the operator of the flight. That customer’s need to focus on the follow-up investigation, and the general market impact of the accident itself, has depressed year-over-year activity at our Heliport and, consequently, contributed to the results reported below.

Revenue from operations decreased by 6.8 percent to $3,280,445 for the three months ended September 30, 2018 as compared with corresponding prior-year period revenue of $3,518,712.

For the three months ended September 30, 2018, revenue from operations associated with the sale of jet fuel, aviation gasoline and related items increased by 9.4 percent to approximately $1,408,000 as compared to approximately $1,286,000 in the three months ended September 30, 2017.

For the three months ended September 30, 2018, revenue from operations associated with services and supply items decreased by 14.7 percent to approximately $1,852,000 as compared to approximately $2,170,000 in the three months ended September 30, 2017.

For the three months ended September 30, 2018, all other revenue from operations decreased by 67.3 percent to approximately $20,000 as compared to approximately $62,000 in the three months ended September 30, 2017. The decrease was largely attributable to a decrease in non-aeronautical revenue generated by our Heliport compared to the same period last year.

Revenue from operations decreased by 5.8 percent to $8,236,353 for the nine months ended September 30, 2018 as compared with corresponding prior-year period revenue of $8,743,913.

For the nine months ended September 30, 2018, revenue from operations associated with the sale of jet fuel, aviation gasoline and related items decreased by 1.1 percent to approximately $3,305,000 as compared to approximately $3,341,000 in the nine months ended September 30, 2017.

For the nine months ended September 30, 2018, revenue from operations associated with services and supply items decreased by 8.5 percent to approximately $4,832,000 as compared to approximately $5,283,000 in the nine months ended September 30, 2017.

For the nine months ended September 30, 2018, all other revenue from operations decreased by 17.7 percent to approximately $98,000 as compared to approximately $119,000 in the nine months ended September 30, 2017. The decrease was largely attributable to a decrease in non-aeronautical revenue generated by our Heliport compared to the same period last year.

GROSS PROFIT

Total gross profit from operations decreased 20.8 percent to $1,581,941 in the three months ended September 30, 2018 as compared with the three months ended September 30, 2017. Gross margin decreased to 48.2 percent in the three months ended September 30, 2018 as compared to 56.8 percent in the same period in the prior year. The decrease in gross profit is related to lower levels of activity at our Heliport operation in the three months ended September 30, 2018 as compared to the prior year. The decrease in gross margin is related to lower levels of revenue from services and supplies, which generally carry a higher overall gross margin, in the three months ended September 30, 2018 as compared to the same period in the prior year.

Total gross profit from operations decreased 21.9 percent to $3,645,545 in the nine months ended September 30, 2018 as compared with the nine months ended September 30, 2017. Gross margin decreased to 44.3 percent in the nine months ended September 30, 2018 as compared to 53.4 percent in the same period in the prior year. The decreases in gross profit and gross margin are due to the same reasons that are described above.

OPERATING EXPENSE

Selling, General and Administrative

Total selling, general and administrative expenses, or SG&A, were approximately $1,265,000 in the three months ended September 30, 2018, representing a decrease of approximately $267,000 or 17.5 percent, as compared to the same period in the prior year. Total SG&A expenses were approximately $3,362,000 in the nine months ended September 30, 2018, representing a decrease of approximately $557,000 or 14.2 percent, as compared to the same period in the prior year.

Operational SG&A expenses associated with our aviation services operations were approximately $1,164,000 in the three months ended September 30, 2018, representing a decrease of approximately $251,000 or 17.8 percent, as compared to the three months ended September 30, 2017. Operational SG&A, as a percentage of revenue, was 35.5 percent for the three months ended September 30, 2018, as compared with 40.2 percent in the corresponding prior year period. The decreased operating expenses were largely attributable to reduced costs related to the lower levels of activity in our Heliport operations.

Operational SG&A expenses were approximately $2,993,000 in the nine months ended September 30, 2018, representing a decrease of approximately $539,000 or 15.3 percent, as compared to the nine months ended September 30, 2017. Operational SG&A, as a percentage of revenue, was 36.3 percent for the nine months ended September 30, 2018, as compared with 40.4 percent in the corresponding prior year period. The decreased operating expenses were largely attributable to reduced costs related to the lower levels of activity in our Heliport operations.

Corporate SG&A expense were approximately $101,000 for the three months ended September 30, 2018, representing a decrease of approximately $16,000 as compared with the corresponding prior year period. Corporate SG&A was approximately $368,000 for the nine months ended September 30, 2018, representing a decrease of approximately $17,000 as compared with the corresponding prior year period.

OPERATING INCOME

Operating income from operations for the three and nine months ended September 30, 2018 was $316,211 and $283,336, respectively, as compared to operating income of $464,123 and $749,563, in the three and nine months ended September 30, 2017, respectively. The decrease on a year-over-year basis was driven by lower levels of gross profit, which was partially offset by lower SG&A expenses.

Depreciation and Amortization

Depreciation and amortization was approximately $407,000 and $395,000 for the nine months ended September 30, 2018 and 2017, respectively.

Interest Expense (Income)

Interest expense for the nine months ended September 30, 2018 was approximately $13,000 as compared to $17,000 in the same period in the prior year.

Interest income for the nine months ended September 30, 2018 was approximately $33,000 as compared to $0 in the same period in the prior year.

Income Tax

               Income tax expense for both the three and nine months ended September 30, 2018 was $102,454 as compared to $227,100 and $414,241 for the three and nine months ended September 30, 2017, respectively. The decrease is attributable to a decrease in net income in the three and nine months ended September 30, 2018 as compared to net income in the same period in 2017.  

Net Income Per Share

Net income was $200,199 and $308,231for the nine months ended September 30, 2018 and 2017, respectively.

Basic and diluted net income per share for both the nine month periods ended September 30, 2018 and 2017 was $0.01.

LIQUIDITY AND CAPITAL RESOURCES

             As of September 30, 2018, we had cash and cash equivalents of $2,783,773 and a working capital surplus of $3,781,883. For the nine months ended September 30, 2018, we generated revenue from operations of $8,236,353 and had net income of $200,199. For the nine months ended September 30, 2018, cash flows included net cash provided by operating activities of $753,851, net cash provided by investing activities of $620,320, and net cash used in financing activities of $314,902.

             On May 17, 2013, we entered into a loan agreement with PNC Bank (the “PNC Loan Agreement”). The PNC Loan Agreement contained three components: (i) a $2,500,000 non-revolving acquisition line of credit (the “PNC Acquisition Line”); (ii) a $1,150,000 working capital line (the “PNC Working Capital Line”); and (iii) a $280,920 term loan (the “PNC Term Loan”). As of September 30, 2018, all amounts due under the PNC Loan Agreement, the PNC Acquisition Line, and the PNC Term Loan have been repaid.

            As disclosed in a Current Report on Form 8-K filed on March 21, 2018 with the Securities and Exchange Commission (the “SEC”), on March 15, 2018 we entered into a loan agreement (the “Loan Agreement”) with Key Bank National Association (the “Bank”). The Loan Agreement contains three components: (i) a $2,500,000 acquisition line of credit (the “Key Bank Acquisition Note”); (ii) a $1,000,000 revolving line of credit (the “Key Bank Revolver Note”); and (iii) a $338,481 term loan (the “Key Bank Term Loan”).

             Proceeds of the Key Bank Acquisition Note are to be dispersed pursuant to a multiple draw demand note dated as of the agreement date, where we may, at the discretion of the Bank, borrow up to an aggregate amount of $2,500,000, to be used for our acquisition of one or more business entities. We are required to make consecutive monthly payments of interest, calculated at a rate per annum equal to one-day LIBOR (adjusted daily) plus 2.75%, on any outstanding principal under the Key Bank Acquisition Note from the date of its issuance through September 15, 2018 (the “Conversion Date”).

             At any time through and including the Conversion Date, at the Bank’s discretion, the Company had the opportunity to request that any loan made under the Key Bank Acquisition Note be converted into a term loan to be repaid in full, including accrued interest, by consecutive monthly payments over a 48 month amortization period beginning after the Conversion Date. For any loan that was not converted into a term loan on or before the Conversion Date, the Company would have been required to begin making monthly payments of principal and interest after the Conversion Date, over a 48 month amortization period, after which the remaining unpaid principal and accrued interest shall become due and payable. All loans under the Key Bank Acquisition Note shall, after the Conversion Date, accrue interest at a rate per annum equal to the Bank’s four year cost of funds rate plus 2.5%. As of September 30, 2018, there were no amounts due under the Key Bank Acquisition Note and no amounts had been converted to a term loan.

             Proceeds from the Key Bank Revolver Note, at the discretion of the Bank, provide for us to borrow up to $1,000,000 for working capital and general corporate purposes. This revolving line of credit is a demand note with no stated maturity date. Borrowings under the Key Bank Revolver Note will bear interest at a rate per annum equal to one-day LIBOR (adjusted daily) plus 2.75%. We are required to make monthly payments of interest on any outstanding principal under the Key Bank Revolver Note and are required to pay the entire balance, including principal and all accrued and unpaid interest and fees, upon demand by the Bank. As of September 30, 2018, there were no amounts due under the Key Bank Revolver Note.

            Proceeds from the Key Bank Term Note were utilized to retire amounts previously outstanding under the PNC Term Loan. Interest on outstanding principal accrues at a fixed rate of 4.85% per annum and is to be paid in equal consecutive monthly installments of $7,772 over a 48 month period. The Company has the right to prepay principal amounts due under the Key Bank Term Note early without penalty. As of September 30, 2018, $193,342 was outstanding under the Key Bank Term Note.

             We are party to a Concession Agreement, dated as of November 1, 2008, with the City of New York for the operation of the Downtown Manhattan Heliport (the “Concession Agreement”). Pursuant to the terms of the Concession Agreement, we must pay the greater of 18% of the first $5,000,000 in any program year based on cash collected (“Gross Receipts”) and 25% of Gross Receipts in excess of $5,000,000, or minimum annual guaranteed payments. During the nine months ended September 30, 2018 and 2017, we incurred approximately $1,350,000 and $1,285,000, respectively, in concession fees which are recorded in the cost of revenue.

             As disclosed in a Current Report on Form 8-K filed with the SEC on February 5, 2016, we and the New York City Economic Development Corporation (the “NYCEDC”) announced new measures to reduce helicopter noise and impacts across New York City (the “Air Tour Agreement”).

            Under the Air Tour Agreement, filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2015, we may not allow our tenant operators to conduct tourist flights from the Downtown Manhattan Heliport on Sundays beginning April 1, 2016. We were also required to ensure that its tenant operators reduce the total allowable number of tourist flights from 2015 levels by 20 percent beginning June 1, 2016, by 40 percent beginning October 1, 2016 and by 50 percent beginning January 1, 2017. Additionally, beginning on June 1, 2016, we are required to provide monthly written reports to the NYCEDC and the New York City Council detailing the number of tourist flights conducted out of the Downtown Manhattan Heliport compared to 2015 levels, as well as information on any tour flight that flies over land and/or strays from agreed upon routes.

            The Air Tour Agreement also extended the Concession Agreement for 30 months, resulting in a new expiration date of April 30, 2021. The City of New York has two one year options to further extend the Concession Agreement. The Agreement also provides that the minimum annual guarantee payments we are required to pay to the City of New York under the Concession Agreement be reduced by 50%, effective January 1, 2017.

            These reductions have negatively impacted our business and financial results as well as those of its management company at the Heliport, Empire Aviation which, as previously disclosed, is owned by the children of Alvin Trenk, our former Chief Executive Officer and a former member of our Board of Directors.  We incurred management fees with Empire Aviation of approximately $1,230,000 and $1,780,000 during the nine months ended September 30, 2018 and 2017, respectively, which is recorded in administrative expenses.  We and Empire Aviation have also contributed to the Helicopter Tourism and Jobs Council (“HTJC”), an association that lobbies on behalf of the helicopter air tour industry, and which had engaged in discussions with the Mayor’s office.  Mr. Trenk is also an active participant with HJTC, which is managed by his grandson. 

             On February 6, 2018, we were issued a note by one of its customers at the Heliport. The note scheduled approximately $750,000 in receivables payable by such customer, had a maturity date of October 31, 2018, and carried a 7.5 % rate of interest. As of September 30, 2018, approximately $50,000 in principal plus accrued interest was due under the note. On October 31, 2018, the customer paid the remainder of all amounts due under the note. During the second quarter of 2018, Alvin Trenk, our former Chief Executive Officer and a former member of our Board of Directors, acquired controlling interest in this customer.

            On April 20, 2018, our Kansas subsidiary entered into a purchase lease with Commerce Bank for a refueling truck (the “Truck Lease”). The Truck Lease commenced on May 1, 2018 and continues for 60 months at an interest rate of LIBOR plus 416 basis points. At the end of the Truck Lease, our subsidiary may purchase the vehicle for $1.00.

             On October 3, 2016, we purchased all of the capital stock of Aircraft Services, Inc. (“Aircraft Services”), an aircraft maintenance services firm located in Garden City, Kansas. Under the terms of the transaction, we made a $150,000 cash payment at closing, a $75,000 installment payment in 2017, and the final installment payment of $75,000 in 2018. The closing cash payment and 2017 and 2018 installment payments were all funded with internal resources. Our purchase of Aircraft Services’ capital stock is discussed in greater detail in a Current Report on Form 8-K filed with the SEC on October 7, 2016 and filed as an Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 2016.

             As disclosed in a Current Report on Form 8-K filed with the SEC on July 6, 2015, we entered into a stock purchase agreement, dated June 30, 2015, by and between us and Warren A. Peck, pursuant to which Mr. Peck purchased all of the capital stock of our wholly-owned subsidiary. The details of the agreement are described in such Current Report as well as in our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on April 11, 2016. We received $100,000 due under this agreement in September 2017 and an additional payment of $100,000 in September 2018.

             During the nine months ended September 30, 2018, we had a net increase in cash of $1,059,269. Our sources and uses of funds during this period were as follows:

Cash from Operating Activities

      For the nine months ended September 30, 2018, net cash provided by operating activities was $753,851. This amount included an increase in operating cash related to net income of $200,199 and additions for the following items: (i) depreciation and amortization, $407,654; (ii) stock based compensation, $25,496; (iii) accounts receivable, trade, $236,069; (iv) prepaid expenses and other current assets, $16,238; and (v) deposits, $39,784. These increases in operating activities were offset by decreases in (i) inventories, $58,622; (ii) accounts payable, $111,371; and (iii) accrued expenses, $1,596.

          For the nine months ended September 30, 2017, net cash provided by operating activities was $11,975. This amount included an increase in operating cash related to net income of $308,231 and additions for the following items: (i) depreciation and amortization, $395,017; (ii) loss on sale of charter certificate, $10,000; (iii) stock based compensation, $25,496 ; and (iv) deposits, $37,543. These increases in operating activities were offset by decreases in the following (i) accounts receivable, trade, $210,821; (ii) inventories, $49,378; (iii) prepaid expenses and other current assets, $175,118; (iv) accounts payable, $261,395; and (v) accrued expenses, $67,600.

Cash from Investing Activities

       For the nine months ended September 30, 2018, net cash provided by investing activities was $620,320. This amount included the repayment of notes receivable of $800,000 offset by the purchase of property and equipment of $179,680. For the nine months ended September 30, 2017, net cash provided by investing activities was $42,624. This amount included $100,000 provided by the payment of notes receivable and $25,000 of proceeds from the sale of the Company’s charter certificate, offset by a decrease in operating cash used for the purchase of property and equipment of $82,376.

Cash from Financing Activities

       For the nine months ended September 30, 2018, net cash used in financing activities was $314,904. This amount included $175,813 for the repurchase and cancellation of common stock and $274,089 for the repayment of notes payable, offset by the issuance of notes payable of $135,000. For the nine months ended September 30, 2017, net cash used in financing activities was $277,500 for the payment of notes payable.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Recent Accounting Pronouncements

       In May 2014, the Financial Accounting Standards Board (the” FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. ASU 2014-09 also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. These judgments and estimates include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers” (“ASU 2015-14”), which delays the effective date of ASU 2014-09 by one year. ASU 2014-09, as amended by ASU 2015-14, ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Consideration (Reporting Revenue Gross versus Net); ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients and ASU 2016-20 Technical Corrections and Improvements to Topic 606.

       In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”), which requires an entity to recognize assets and liabilities on the balance sheet for the rights and obligations created by leased assets and provide additional disclosures. ASU 2016-02 is effective for us beginning January 1, 2019, and, at that time, we will adopt the new standard using a modified retrospective approach. We are currently evaluating the impact that the adoption of ASU 2016-02 may have on our consolidated financial statements and disclosures.

CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS

Statements contained in this report may contain information that includes or is based upon "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent management's current judgment and assumptions, and can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are frequently accompanied by the use of such words as "anticipates," "plans," "believes," "expects," "projects," "intends," and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, including, but not limited to, those relating to:

Any one of these or other risks, uncertainties, other factors, or any inaccurate assumptions made by the Company may cause actual results to be materially different from those described herein or elsewhere by us. Undue reliance should not be placed on any such forward-looking statements, which speak only as of the date they were made. Certain of these risks, uncertainties, and other factors are described in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2017 and in other filings we make with the SEC. Subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above and elsewhere in our reports filed with the SEC. We expressly disclaim any intent or obligation to update any forward-looking statements, except as may be required by law.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures

              Management, including our President (principal financial officer) and our Chief Executive Officer (principal executive officer), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon, and as of the date of that evaluation, our President and Chief Executive Officer concluded that our disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports filed and submitted by us under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported as and when required, and (ii) is accumulated and communicated to our management, including our President and Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

             There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 6.  Exhibits

* Filed herewith

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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