Saker Aviation Services, Inc. - Quarter Report: 2020 March (Form 10-Q)

SAKER AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

SAKER AVIATION SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

See accompanying 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 condensed consolidated 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, 2019.

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. 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 (“FFH”).

              Since December 2019, COVID-19 has spread to many countries and the World Health Organization has declared COVID-19 a pandemic. Federal, state, and local governments have implemented certain travel restrictions, “stay-at-home” orders, and social distancing initiatives which have negatively impacted our operations. As a result of the ongoing COVID-19 pandemic, as of March 17, 2020, all sightseeing tour operations at the Downtown Manhattan Heliport ceased due to a drop in demand. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the COVID-19 pandemic and related travel advisories and restrictions and the impact of the COVID-19 pandemic on overall demand for air travel, all of which are highly uncertain and cannot be predicted. Based on the impact that the COVID-19 pandemic has already had on our business, we expect to experience a decrease in revenue for the fiscal year ending December 31, 2020 relative to prior year periods.

REVENUE AND OPERATING RESULTS

Comparison of Continuing Operations from the Three Months Ended March 31, 2020 and March 31, 2019.

REVENUE

             Operating results for the three month period ended March 31, 2020 were negatively impacted by the ongoing COVID-19 pandemic. The COVID-19 pandemic has depressed year-over-year activity at our Heliport and, consequently, the results reported below.

Revenue from operations decreased by 19.3 percent to $1,673,755 for the three months ended March 31, 2020 as compared with corresponding prior-year period revenue of $2,072,772.

For the three months ended March 31, 2020, revenue from operations associated with the sale of jet fuel, aviation gasoline and related items decreased by 2.9 percent to approximately $807,000 as compared to approximately $830,000 in the three months ended March 31, 2019. This decrease was largely attributable to the lower volume of gallons of aviation gasoline sold at our New York location.

For the three months ended March 31, 2020, revenue from operations associated with services and supply items decreased by 26.4 percent to approximately $853,000 as compared to approximately $1,158,000 in the three months ended March 31, 2019. This decrease was largely attributable to a lower demand for services at our New York location due to the COVID-19 pandemic.

For the three months ended March 31, 2020 all other revenue from operations decreased by 83.1 percent to approximately $14,000 as compared to approximately $83,000 in the three months ended March 31, 2019. This decrease was largely attributable to a decrease in non-aeronautical revenue generated at our New York location compared to the same period last year.

GROSS PROFIT

             Total gross profit from operations decreased by 33.4 percent to $592,090 in the three months ended March 31, 2020 as compared with the three months ended March 31, 2019. Gross profit was negatively impacted by the items previously discussed. Gross margin decreased to 35.4 percent in the three months ended March 31, 2020 as compared to 42.9 percent in the same period in the prior year.

OPERATING EXPENSE

Selling, General and Administrative

             Total selling, general and administrative expenses, (“SG&A”), from operations were $693,577 in the three months ended March 31, 2020, representing a decrease of approximately $138,000 or 16.6 percent, as compared to the same period in 2019.

SG&A from operations associated with our aviation services operations were approximately $576,000 in the three months ended March 31, 2020, representing a decrease of approximately $130,000, or 18.4percent, as compared to the three months ended March 31, 2019. SG&A from operations associated with our FBO operations, as a percentage of revenue, was 34.4 percent for the three months ended March 31, 2020, as compared with 34.1 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 from operations was approximately $117,000 for the three months ended March 31, 2020, representing a decrease of approximately $8,000 as compared with the corresponding prior year period.

OPERATING (LOSS) INCOME

Operating loss from operations for the three months ended March 31, 2020 was $(101,487) as compared to operating income of $57,579 in the three months ended March 31, 2019. The decrease in operating income on a year-over-year basis was driven by the factors described above.

Depreciation and Amortization

Depreciation and amortization was approximately $33,000 and $22,000 for the three months ended March 31, 2020 and 2019, respectively.

Interest Income and Expense

Interest income for the three months ended March 31, 2020 was approximately $7,000 as compared to approximately $8,000 in the same period in 2019. Interest expense for the three months ended March 31, 2020 was approximately $1,000 as compared to approximately $3,000 in the same period in 2019.

Income Tax

Income tax expense for the three months ended March 31, 2020 was $0 as compared to $11,000 during the same period in 2019. The decrease is attributable to a net loss in the three months ended March 31, 2020 as compared to net income in the same period in 2019.

Net (Loss) Income Per Share

Net (loss) income was $(96,140) and $52,336 for the three months ended March 31, 2020 and 2019, respectively.

Basic and diluted net (loss) income per share for the three month periods ended March 31, 2020 and 2019 was $(0.09) and $0.05, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2020, we had cash of $3,143,675 and a working capital surplus of $3,868,871. We generated revenue for the three months ended March 31, 2020 of $1,673,755 and had a net loss of $(96,140). For the three months ended March 31, 2020, cash flows included net cash used in operating activities of $310,882, net cash used in investing activities of $4,912, and net cash used in financing activities of $138,022.

As disclosed in a Current Report on Form 8-K filed on March 21, 2018 with the SEC, on March 15, 2018 the Company 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 disbursed pursuant to a multiple draw demand note dated as of the agreement date, where the Company could, at the discretion of the Bank, borrow up to an aggregate amount of $2,500,000, to be used for the Company’s acquisition of one or more business entities. Until the Change of Terms Agreement, as defined below, the Company was 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 would have become due and payable. All loans under the Key Bank Acquisition Note would have, after the Conversion Date, accrued 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, and as subsequently amended, the Company entered into a new loan agreement with the Bank (as so amended, the “Change of Terms Agreement”) which modified the original terms of the Key Bank Acquisition Note. Under the Change of Terms Agreement, the Company may continue to, at the discretion of the Bank, borrow up to an aggregate amount of $2,500,000 through June 30, 2020 (the “Maturity Date”), to be used for the Company’s acquisition of one or more business entities. 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 March 31, 2020, there were no amounts due under the Change of Terms Agreement.

Proceeds from the Key Bank Revolver Note, at the discretion of the Bank, provide for the Company 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%. The Company is required to make monthly payments of interest on any outstanding principal under the Key Bank Revolver Note and is required to pay the entire balance, including principal and all accrued and unpaid interest and fees, upon demand by the Bank. As of March 31, 2020, 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 March 31, 2020, all amounts outstanding under the Key Bank Term Note have been repaid.

The Company is 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, the Company 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 three months ended March 31, 2020 and 2019, we incurred approximately $254,000 and $337,000 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, the Company 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, the Company may not allow its tenant operators to conduct tourist flights from the Downtown Manhattan Heliport on Sundays beginning April 1, 2016. The Company was 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, the Company was 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 the Company is 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 the Company’s 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 a prior officer and director of the Company.  The Company incurred management fees with Empire Aviation of approximately $86,000 and $248,000 during the three months ended March 31, 2020 and 2019, respectively, which is recorded in administrative expenses. The Company 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.  The former officer and director is also an active participant with HJTC, which is managed by the prior officer and director’s grandson. One of our Directors, Sam Goldstein, serves as deputy director of HJTC.  

On April 20, 2018, the Company’s 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, the Company’s subsidiary may purchase the vehicle for $1.00.

On January 15, 2019, the Company was issued an unsecured note by one of its customers at the Heliport. The note schedules payments of approximately $276,000 in receivables payable by such customer, had 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 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, the Company entered into a stock purchase agreement, dated June 30, 2015, by and between the Company and Warren A. Peck, pursuant to which Mr. Peck purchased all of the capital stock of the Company’s wholly-owned subsidiary, Phoenix Rising Aviation, Inc. The details of the agreement are described in such Current Report as well as in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on April 11, 2016. The Company received $100,000 due under this agreement in September 2017 and an additional payment of $100,000 in September 2018. In 2019, the Company accepted the title to a Falcon 10 aircraft owned by Mr. Peck as satisfaction in full of the remainder of the $270,000 stock purchase price. The Company intends to sell the aircraft and has classified it as “Held For Sale” on the Company’s Consolidated Balance Sheets as of March 31, 2020.

As described throughout this Quarterly Report on Form 10-Q, on March 17, 2020, all sightseeing tour operations at the Downtown Manhattan Heliport have ceased due to the drop in demand as a result of the COVID-19 pandemic. To mitigate the loss of revenue due to the temporary suspension in operations, we may need additional financing to continue operations through the issuance of equity or debt and any such financing will be dependent on general market conditions, which itself is subject to the effects of the COVID-19 pandemic. Although we have access to the Key Bank Revolver Note described above, we can make no assurance that that the Key Bank Revolver Note will be sufficient to fund our operations. Additionally, certain restrictions in the Key Bank Revolver Note may prohibit us from obtaining more attractive financing.

During the three months ended March 31, 2020, we had a net decrease in cash of $453,816. Our sources and uses of funds during this period were as follows:

Cash from Operating Activities

For the three months ended March 31, 2020, net cash used in operating activities was $310,882. This amount included a decrease in operating cash related to net loss of $96,140 and additions for the following items: (i) depreciation and amortization, $32,807; (ii) stock based compensation, $18,651; (iii) accounts receivable, trade, $125,874; (iv) inventories, $19,854; (v) prepaid expenses and other current assets, $98,058; and (vi) customer deposits, $426. These increases in operating activities were offset by decreases for the following items: (i) accounts payable; $370,021; and (ii) accrued expenses, $140,391.

For the three months ended March 31, 2019, net cash provided by operating activities was $243,051. This amount included an increase in operating cash related to net income of $52,336 and additions for the following items: (i) depreciation and amortization, $21,818; (ii) stock based compensation, $8,500; (iii) accounts receivable, trade, $30,614; (iv) prepaid expenses and other current assets, $112,487; (v) customer deposits, $1,861; (vi) accounts payable, $20,281; and (vii) accrued expenses, $14,881. These increases in operating activities were offset by a decrease in inventories of $19,727.

Cash from Investing Activities

For the three months ended March 31, 2020, net cash of $4,912 was used in investing activities for the purchase of property and equipment. For the three months ended March 31, 2019, net cash of $42,128 was used in investing activities for the purchase of property and equipment.

Cash from Financing Activities

For the three months ended March 31, 2020, net cash of $138,022 was used in financing activities for the payment of accrued dividends of $127,968 and repayment of right of use leases payable of $10,054. For the three months ended March 31, 2019, net cash used in financing activities was $88,375 for the repayment of right of use leases payable of $6,147 and repayment of notes payable of $82,228.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Recently Adopted 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. The adoption of ASU No. 2016-02 did not have a material impact on the Company’s financial statements.

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, 2019 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 1A - Risk Factors

Except as stated below, there have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

We will need additional financing to expand our business.

Certain potential aviation services firms which we may seek to acquire in the future may accept shares of our common stock or other securities as payment by us for the acquisition. However, we believe that most will likely prefer cash payments, whether paid at the closing or in post-closing installment payments. There can be no assurance that our operations will generate sufficient cash flow to meet these acquisition obligations, particularly with the uncertainty related to the duration of the COVID-19 pandemic. Accordingly, we anticipate the need to seek additional equity or debt financing to meet any cash requirements for acquisitions. Any such financing will be dependent on general market conditions and the stock market’s evaluation of our performance and potential. With the significant economic and market volatility caused by the COVID-19 pandemic, we can give no assurance that we will obtain such equity or debt financing and, even if we do, that the terms would be satisfactory to us.

The COVID-19 pandemic will have a material adverse impact on the Company's business, operating results and financial condition, and has already resulted in the temporary suspension of our customer’s operations at the Downtown Manhattan Heliport.

The COVID-19 pandemic and its impact on travel demand, travel behavior, or travel restrictions will have a material adverse impact on our business, financial condition and operating results. The pandemic has resulted in increased government restrictions and regulation, including quarantines of our personnel, and future regulations may create an inability to access our facilities, which would adversely affect our operations.

Since December 2019, COVID-19 has spread to many countries and the World Health Organization has declared COVID-19 a pandemic. Federal, state, and local governments have implemented certain travel restrictions, “stay-at-home” orders, and social distancing initiatives which have negatively impacted our operations. As a result of the ongoing COVID-19 pandemic, as of March 17, 2020 all sightseeing tour operations at the Downtown Manhattan Heliport ceased due to a drop in demand. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the COVID-19 pandemic and related travel advisories and restrictions and the impact of the COVID-19 pandemic on overall demand for air travel, all of which are highly uncertain and cannot be predicted. Based on the impact that the COVID-19 pandemic has already had on our business, we expect to experience a decrease in revenue for the fiscal year ending December 31, 2020 relative to prior year periods.

We expect our business, results of operations and financial condition to be adversely affected by the COVID-19 pandemic.

The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption. Although the full extent to which the coronavirus pandemic impacts our business, operations and financial results is uncertain and will depend on numerous evolving factors that we may not be able to accurately predict, we expect our results for the fiscal year ending December 31, 2020 to be adversely affected. Factors that will determine the full extent to which the COVID-19 pandemic impacts our business include, but are not limited to:

Item 6 - Exhibits

* Filed herewith

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.