Saker Aviation Services, Inc. - Quarter Report: 2019 September (Form 10-Q)

SAKER AVIATION SERVICES, INC. AND SUBSIDIARIES

Form 10-Q

September 30, 2019

Index

See notes to condensed consolidated financial statements.

SAKER AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See notes to condensed consolidated financial statements

SAKER AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)

See notes to condensed consolidated financial statements.

SAKER AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See notes to condensed consolidated financial statements.

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 unaudited 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, 2018.

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

OVERVIEW

Saker Aviation Services, Inc. (“we”, “us”, or “our”) is a Nevada corporation. Our common stock, $0.03 par value per share (the “common stock”), is quoted 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”), a provider of aircraft maintenance and repair services (“MRO”), 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, and as an FBO and MRO at the Garden City (Kansas) Regional Airport.

The Garden City facility became part of our company as a result of our acquisition of the FBO assets of Central Plains Aviation, Inc. in March 2005 and of Aircraft Services, Inc. in October 2016.

Our business activities at the Downtown Manhattan (New York) Heliport facility (the “Heliport”) commenced in November 2008 when we were awarded 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.

REVENUE AND OPERATING RESULTS

Comparison of Continuing Operations from the Three and Nine Months Ended September30, 2019 and September 30, 2018.

REVENUE

Operating results for the three and nine months ended September 30, 2019 increased on a year-over-year basis largely due to the diminished impact of a fatal helicopter accident independent of our operations that occurred on March 11, 2018, as previously reported.

Total revenue increased by 3.1 percent to $3,383,514 for the three months ended September 30, 2019 as compared with corresponding prior-year period revenue of $3,280,445.

For the three months ended September 30, 2019, revenue from operations associated with the sale of jet fuel, aviation gasoline and related items increased by 5.4 percent to approximately $1,484,000 as compared to approximately $1,408,000 in the three months ended September 30, 2018. The increase was largely attributable to an increase in number of gallons sold at our Heliport location.

For the three months ended September 30, 2019, revenue from operations associated with services and supply items increased by 0.1 percent to approximately $1,854,000 as compared to approximately $1,852,000 in the three months ended September 30, 2018.

For the three months ended September 30, 2019, all other revenue from operations increased by 124.1 percent to approximately $45,000 as compared to approximately $20,000 in the three months ended September 30, 2019. The increase was largely attributable to an increase in non-aeronautical revenue generated by our Heliport compared to the same period last year.

Total revenue increased by 4.6 percent to $8,618,883 for the nine months ended September 30, 2019 as compared with corresponding prior-year period revenue of $8,236,353.

For the nine months ended September 30, 2019, revenue from operations associated with the sale of jet fuel, aviation gasoline and related items increased by 8.7 percent to approximately $3,592,000 as compared to approximately $3,305,000 in the nine months ended September 30, 2018. The increase was largely attributable to an increase in number of gallons sold at our Heliport.

For the nine months ended September 30, 2019, revenue from operations associated with services and supply items increased by 0.7 percent to approximately $4,866,000 as compared to approximately $4,833,000 in the nine months ended September 30, 2018.

For the nine months ended September 30, 2019, all other revenue from operations increased by 63.4 percent to approximately $161,000 as compared to approximately $98,000 in the nine months ended September 30, 2018. The increase was largely attributable to an increase in non-aeronautical revenue generated by our Heliport compared to the same period last year.

GROSS PROFIT

Total gross profit from operations increased by 7.7 percent to $1,703,576 in the three months ended September 30, 2019 as compared with the three months ended September 30, 2018. Gross margin increased to 50.3 percent in the three months ended September 30, 2019 as compared to 48.2 percent in the same period in the prior year.

Total gross profit from operations increased by 15.8 percent to $4,220,158 in the nine months ended September 30, 2019 as compared with the nine months ended September 30, 2018. Gross margin increased to 49.0 percent in the nine months ended September 30, 2019 as compared to 44.3 percent in the same period in the prior year.

OPERATING EXPENSE

Selling, General and Administrative

Total selling, general and administrative expenses, (“SG&A”), were $1,284,521 in the three months ended September 30, 2019, representing an increase of approximately $19,000 or 1.5 percent, as compared to the same period in 2018. Total SG&A expenses were $3,400,967 in the nine months ended September 30, 2019, an increase of approximately $39,000 or 1.2 percent, as compared to the same period in 2018. The increased operating expenses relating to our aviation services operations were largely attributable to increased costs related to the higher levels of activity in our Heliport operations.

SG&A expenses associated with our aviation services operations were approximately $1,187,000 in the three months ended September 30, 2019, representing an increase of approximately $23,000, or 1.9 percent, as compared to the three months ended September 30, 2018. SG&A expense, as a percentage of revenue, was 35.1 percent for the three months ended September 30, 2019, as compared with 35.5 percent in the corresponding prior year period.

SG&A expenses associated with our aviation services operations were approximately $3,030,000 in the nine months ended September 30, 2019, representing an increase of approximately $37,000 or 1.2 percent, as compared to the nine months ended September 30, 2018. SG&A expense, as a percentage of revenue, was 35.2 percent for the nine months ended September 30, 2019, as compared with 36.3 percent in the corresponding prior year period.

Corporate SG&A was approximately $98,000 for the three months ended September 30, 2019, representing a decrease of approximately $4,000 as compared with the corresponding prior year period. Corporate SG&A was approximately $371,000 for the nine months ended September 30, 2019, representing an increase of approximately $2,000 as compared with the corresponding prior year period.

OPERATING INCOME

Operating income from operations for the three and nine months ended September 30, 2019 was $419,055 and $819,191, respectively, compared to operating income of $316,211 and $283,336 in the three and nine months ended September 30, 2018, respectively. The increase in operating income on a year-over-year basis was driven by the factors described above.                  

Depreciation and Amortization

Depreciation and amortization was approximately $81,000 and $408,000 for the nine months ended September 30, 2019 and 2018, respectively. The decrease in depreciation was attributable to the Company’s leasehold improvements becoming fully depreciated at the end of 2018.

Interest Income and Expense

Interest income for the nine months ended September 30, 2019 was approximately $21,000 as compared to approximately $33,000 in the same period in 2018. The decrease in interest income was mainly attributable to the issuance of a note receivable from one of our customers at the Heliport in 2018, which was fully paid as of December 31, 2018. Interest expense for the nine months ended September 30, 2019 was approximately $7,000 as compared to $13,000 in the same period in 2018. The decrease in interest expense was mainly attributable to the Company’s 2019 repayment of bank loans that originated in March 2018.

Income Tax

Income tax expense for the three and nine months ended September 30, 2019 was approximately $147,000 and $278,000, respectively, as compared to $102,000 for both periods in 2018. The increase in income tax expense for each corresponding year-over-year period is the result of increased net income in 2019 compared to 2018.

Net Income Per Share

Net income was $556,407 and $200,199 for the nine months ended September 30, 2019 and 2018, respectively, and $227,882 and $214,111 for the three months ended September 30, 2019 and 2018, respectively. The increases in net income were primarily due to the factors described above.

Basic and diluted net income per share for the nine month period ended September 30, 2019 was $0.55 and $0.54, respectively, as compared to basic and diluted net income per share of $0.19 each for the same period in 2018. Basic and diluted net income per share for the three month period ended September 30, 2019 was $0.28 and $0.27, respectively, as compared to basic and diluted net income per share of $0.21 each for the same period in 2018.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2019, we had cash and cash equivalents of $3,501,530 and a working capital surplus of $3,725,645. We generated revenue of $8,618,883 and had net income before taxes of $833,961 for the nine months ended September 30, 2019. For the nine months ended September 30, 2019, cash flows included net cash provided by operating activities of $882,236, net cash used in investing activities of $81,649, and net cash used in financing activities of $137,706.

As disclosed in a Current Report on Form 8-K filed on March 21, 2018 with the Securities and Exchange Commission (“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 Note”).

Proceeds of the Key Bank Acquisition Note were to be dispersed pursuant to a multiple draw demand note dated as of the agreement date, where we could, 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 would have been 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, we 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, we 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 would become due and payable. All loans under the Key Bank Acquisition Note would, 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 the Conversion Date, there were no amounts due under the Key Bank Acquisition Note and no amounts had been converted to a term loan.

On October 11, 2018, the Company entered into a new loan agreement with the Bank (the “Change of Terms Agreement”) which modified the original terms of the Key Bank Acquisition Note. Under the Change of Terms Agreement, the Company could continue to, at the discretion of the Bank, borrow up to an aggregate amount of $2,500,000 through September 1, 2019, to be used for the Company’s acquisition of one or more business entities. The Bank subsequently extended the agreement to June 30, 2020 (the “Maturity Date”). The Change of Terms Agreement requires the Company to make consecutive monthly payments of interest on any outstanding principal calculated at a rate per annum equal to 4.25%. The entire principal balance, plus all accrued interest, is due in full on the Maturity Date. As of September 30, 2019, there are no amounts due under the Change of Terms Agreement.

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, 2019, 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 a $280,920 term loan from PNC Bank. As of September 30, 2019, all amounts outstanding under the Key Bank Term Note have been repaid.

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, 2019 and 2018, we incurred approximately $1,190,000 and $1,350,000 in concession fees, respectively, 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 our 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 were 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 Air Tour 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 our 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 its Board of Directors.  We incurred management fees with Empire Aviation of approximately $1,600,000 and $1,230,000 during the nine months ended September 30, 2019 and 2018, 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. One of our Directors, Sam Goldstein, serves as deputy director of HJTC.  

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, ours subsidiary may purchase the vehicle for $1.00.

On January 15, 2019, the Company was issued a note by one of its customers at the Heliport. The note schedules payments of approximately $276,000 in receivables payable by such customer, has a maturity date of October 31, 2019, as amended, and carries a 7.5% rate of interest. The note payments were to be made in six monthly installments beginning May 31, 2019. The customer’s payments on the note have not met the installment plan and the Company was working on changes to the note when the customer filed for Chapter 11 Bankruptcy. The Company intends to continue to pursue remaining amounts due under the note and it is the Company’s expectation that the note will be fulfilled.

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, Phoenix Rising Aviation, Inc. 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. We accepted as down payment for the stock purchase the title to a Falcon 10 aircraft owned by Mr. Peck. The aircraft was subsequently sold but that sale did not close. The Company repossessed the aircraft and is in the process of re-marketing the sale. $270,000 of the Notes Receivable on the balance sheet is attributable to this transaction and the Company expects will be recouped through the sale.

During the nine months ended September 30, 2019, we had a net increase in cash of $662,881. Our sources and uses of funds during this period were as follows:

Cash from Operating Activities

For the nine months ended September 30, 2019, net cash provided by operating activities was $882,236. This amount included an increase in operating cash related to net income of $556,407 and additions for the following items: (i) depreciation and amortization, $80,572; (ii) stock based compensation, $25,498; (iii) prepaid expenses and other current assets, $402,984; (iv) customer deposits, $3,032; and (v) accounts payable, $25,371. These increases in operating activities were offset by decreases for the following items: (i) accounts receivable, trade; $148,034; (ii) inventories, $34,098; and (iii) accrued expenses, $29,496.

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.

Cash from Investing Activities

For the nine months ended September 30, 2019, net cash of $81,649 was used in investing activities for the purchase of property and equipment of $168,857 offset by payment of notes receivable of $87,208. 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.

Cash from Financing Activities

For the nine months ended September 30, 2019, net cash of $137,706 was used in financing activities for the repayment of right of use leases payable of $25,589 and repayment of notes payable of $112,117. For the nine months ended September 30, 2018, net cash used in financing activities was $314,902. 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Recent Accounting Pronouncements

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 became effective for us on January 1, 2019 and we have adopted the new standard using a modified retrospective approach.

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, 2018 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, Chief Executive Officer and our principal financial 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, Chief Executive Officer and principal financial 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, Chief Executive Officer and principal financial 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

+ Indicates a management contract or compensatory plan, contract or arrangement.

SIGNATURES

Pursuant to the requirements 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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