SAKER AVIATION SERVICES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/14/2019 | 09:47 pm

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.






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REVENUE AND OPERATING RESULTS




Comparison of Continuing Operations from the Three and Six Months Ended June 30,
2019
and June 30, 2018.






REVENUE




Operating results for the three and six months ended June 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 9.9 percent to $3,162,597 for the three months ended
June 30, 2019 as compared with corresponding prior-year period revenue of
$2,877,419.



For the three months ended June 30, 2019, revenue from operations associated
with the sale of jet fuel, aviation gasoline and related items increased by 17.1
percent to approximately $1,278,000 as compared to approximately $1,091,000 in
the three months ended June 30, 2018.



For the three months ended June 30, 2019, revenue from operations associated
with services and supply items increased by 6.2 percent to approximately
$1,853,000 as compared to approximately $1,744,000 in the three months ended
June 30, 2018.



For the three months ended June 30, 2019 all other revenue from operations
decreased by 24.1 percent to approximately $32,000 as compared to approximately
$42,000 in the three months ended June 30, 2019. The decrease was largely
attributable to a decrease in non-aeronautical revenue generated by our Heliport
compared to the same period last year.



Total revenue increased by 5.6 percent to $5,235,369 for the six months ended
June 30, 2019 as compared with corresponding prior-year period revenue of
$4,955,908.



For the six months ended June 30, 2019, revenue from operations associated with
the sale of jet fuel, aviation gasoline and related items increased by 11.2
percent to approximately $2,109,000 as compared to approximately $1,897,000 in
the six months ended June 30, 2018.



For the six months ended June 30, 2019, revenue from operations associated with
services and supply items increased by 1.0 percent to approximately $3,011,000
as compared to approximately $2,981,000 in the six months ended June 30, 2018.



For the six months ended June 30, 2019, all other revenue from operations
increased by 47.6 percent to approximately $115,000 as compared to approximately
$78,000 in the six months ended June 30, 2018. The increase was largely
attributable to an increase in non-aeronautical revenue generated by our
Heliport in the first quarter of 2019 as compared to last year.






GROSS PROFIT




Total gross profit from operations increased by 16.8 percent to $1,627,047 in
the three months ended June 30, 2019 as compared with the three months ended
June 30, 2018. Gross margin increased to 51.4 percent in the three months ended
June 30, 2019 as compared to 48.4 percent in the same period in the prior year.



Total gross profit from operations increased by 22.0 percent to $2,516,582 in
the six months ended June 30, 2019 as compared with the six months ended June
30, 2018
. Gross margin increased to 48.1 percent in the six months ended June
30, 2019
as compared to 41.6 percent in the same period in the prior year.






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OPERATING EXPENSE




Selling, General and Administrative



Total selling, general and administrative expenses, ("SG&A"), were $1,284,490 in
the three months ended June 30, 2019, representing an increase of approximately
$92,000 or 7.7 percent, as compared to the same period in 2018. Total SG&A
expenses were $2,116,446 in the six months ended June 30, 2019, an increase of
$19,966 or 1.0 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 $1,137,000 in the three months ended June 30, 2019, representing
an increase of approximately $44,000, or 4.0 percent, as compared to the three
months ended June 30, 2018. SG&A expense, as a percentage of revenue, was 35.9
percent for the three months ended June 30, 2019, as compared with 38.0 percent
in the corresponding prior year period.



SG&A expenses associated with our aviation services operations were
approximately $1,843,000 in the six months ended June 30, 2019, representing an
increase of approximately $14,000 or 0.8 percent, as compared to the six months
ended June 30, 2018. SG&A expense, as a percentage of revenue, was 35.2 percent
for the six months ended June 30, 2019, as compared with 36.9 percent in the
corresponding prior year period.



Corporate SG&A was approximately $148,000 for the three months ended June 30,
2019
, representing an increase of approximately $48,000 as compared with the
corresponding prior year period. Corporate SG&A was approximately $273,000 for
the six months ended June 30, 2019, representing an increase of approximately
$6,000 as compared with the corresponding prior year period.






OPERATING INCOME (LOSS)




Operating income from operations for the three months and six months ended June
30, 2019
was $342,557 and $400,136, respectively, compared to operating income
(loss) of $200,958 and ($32,875) in the three and six months ended June 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 $48,000 and $286,000 for the six
months ended June 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 six months ended June 30, 2019 was approximately $14,000
as compared to approximately $26,000 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 six months ended June 30, 2019 was
approximately $5,000 as compared to $7,000 in the same period in 2018.



Income Tax



Income tax expense for the three and six months ended June 30, 2019 was $120,000
and $131,000, respectively, as compared to $0 during each of the same periods in
2018.






Net Income (Loss) Per Share


Net income (loss) was $278,525 and ($13,912) for the six months ended June 30,
2019
and 2018, respectively.






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Basic and diluted net income (loss) per share for the six month periods ended
June 30, 2019 and 2018 was $0.27 and ($0.01), respectively.



LIQUIDITY AND CAPITAL RESOURCES



As of June 30, 2019, we had cash and cash equivalents of $3,041,897 and a
working capital surplus of $4,023,571. We generated revenue of $5,235,369 and
had net income before taxes of $409,525 for the six months ended June 30, 2019.
For the six months ended June 30, 2019, cash flows included net cash provided by
operating activities of $360,818, net cash used in investing activities of
$29,650, and net cash used in financing activities of $127,920.



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, we 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, we may continue to, at
the discretion of the Bank, borrow up to an aggregate amount of $2,500,000
through September 1, 2019 (the "Maturity Date"), to be used for our acquisition
of one or more business entities. The Change of Terms Agreement requires us 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 June 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 June 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 June 30, 2019, all
amounts outstanding under the Key Bank Term Note have been repaid.






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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 six months ended
June 30, 2019 and 2018, we incurred approximately $760,000 and $903,000 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 $910,000 and
$628,000 during the six months ended June 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, we were 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. It is our anticipation 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.






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During the six months ended June 30, 2019, we had a net increase in cash of
$203,248. Our sources and uses of funds during this period were as follows:



Cash from Operating Activities



For the six months ended June 30, 2019, net cash provided by operating
activities was $360,818. This amount included an increase in operating cash
related to net income of $278,525 and additions for the following items: (i)
depreciation and amortization, $48,171; (ii) stock based compensation, $16,998;
(iii) prepaid expenses and other current assets, $204,427; (iv) customer
deposits, $2,444; and (v) accounts payable, $24,652. These increases in
operating activities were offset by decreases for the following items: (i)
accounts receivable, trade; $179,305; (ii) inventories, $22,833; and (iii)
accrued expenses, $12,261.



For the six months ended June 30, 2018, net cash provided by operating
activities was $510,804. This amount included a decrease in operating cash
related to net loss of $13,912 and additions for the following items: (i)
depreciation and amortization, $285,877; (ii) stock based compensation, $16,998;
(iii) accounts receivable, trade, $361,744; (iv) inventories, $10,878; and (v)
deposits, $26,523. These increases in operating activities were offset by
decreases in (i) prepaid expenses and other current assets, $72,020; (ii)
accounts payable, $99,635; and (iii) accrued expenses, $5,649.



Cash from Investing Activities



For the six months ended June 30, 2019, net cash of $29,650 was used in
investing activities for the purchase of property and equipment of $62,260
offset by payment of notes receivable of $32,610. For the six months ended June
30, 2018
, net cash of $147,384 was provided by the payment of notes receivable
of $325,000 offset by the purchase of property and equipment of $177,616.



Cash from Financing Activities



For the six months ended June 30, 2019, net cash of $127,920 was used in
financing activities for the repayment of right of use leases payable of $9,656
and repayment of notes payable of $118,264. For the six months ended June 30,
2018
, net cash used in financing activities was $153,687. This amount included
$175,774 for the repurchase and cancellation of common stock and $112,913 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.






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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:






? our ability to secure the additional debt or equity financing, if required, to
execute our business plan;




? our ability to identify, negotiate and complete the acquisition of targeted
operators and/or other businesses, consistent with our business plan;




? existing or new competitors consolidating operators ahead of us; and




? our ability to attract new personnel or retain existing personnel, which would
adversely affect implementation of our overall business strategy.





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.

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