SKAS Saker Aviation Services Inc (QB)

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, 2015.

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, $0.001 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 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 provider of aircraft maintenance services at the Garden City (Kansas) Regional Airport, as a consultant to the operator of a seaplane base in New York City, and prior to our divestiture, as a provider of aircraft maintenance services at the Bartlesville (Oklahoma) Municipal 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. (“CPA”) in March 2005 and our acquisition of Aircraft Services in October 2016 (see Note 8. Subsequent Events).

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.

The FBO segment of the general aviation industry is highly fragmented. According to the National Air Transportation Association (“NATA”), there are over 3,000 FBOs that serve customers at one or more of over 3,000 airport facilities across the country that have at least one paved 3,000-foot runway. The vast majority of these entities are single location operators. NATA characterizes companies with operations at three or more airports as “chains.” An operation with FBOs in at least two distinctive regions of the country is considered a “national” chain while an operation with FBOs in multiple locations within a single region is considered a “regional” chain.

As described in greater detail below in Liquidity and Capital Resources, upcoming reductions to the number of air tours emanating from the Heliport is expected to have a negative impact on our operations. The first and second stages of these reductions were initiated on June 1, 2016, and October 1, 2016, respectively.

REVENUE AND OPERATING RESULTS

Comparison of Continuing Operations for the Three and Nine Months Ended September 30, 2016 and September 30, 2015.

REVENUE

Revenue from continuing operations decreased by 18.8 percent to $3,840,000 for the three months ended September 30, 2016 as compared with corresponding prior-year period revenue of $4,730,000.

For the three months ended September 30, 2016, revenue from continuing operations associated with the sale of jet fuel, aviation gasoline and related items decreased by 19.6 percent to approximately $1,551,000 as compared to approximately $1,928,000 in the three months ended September 30, 2015. The decrease was largely attributable to a lower volume of gallons, primarily associated with fueling at our Heliport operation. This decrease was related to the initiation of the air tour reductions which took effect on June 1, 2016.

For the three months ended September 30, 2016, revenue from continuing operations associated with services and supply items decreased by 18.2 percent to approximately $2,273,000 as compared to approximately $2,778,000 in the three months ended September 30, 2015. The decrease was attributable to the same factor identified above.

For the three months ended September 30, 2016, all other revenue from continuing operations decreased by 28.0 percent to approximately $17,000 as compared to approximately $23,000 in the three months ended September 30, 2015. The decrease was largely attributable to a decrease in miscellaneous revenue generated by our Heliport compared to the same period last year.

Revenue from continuing operations decreased by 7.7 percent to $10,872,000 for the nine months ended September 30, 2016 as compared with corresponding prior-year period revenue of $11,775,000.

For the nine months ended September 30, 2016, revenue from continuing operations associated with the sale of jet fuel, aviation gasoline and related items decreased by 8.1 percent to approximately $4,330,000 as compared to approximately $4,710,000 in the nine months ended September 30, 2015. The decrease was largely attributable to a lower volume of gallons, primarily associated with fueling at our Heliport operation. This decrease was related to the initiation of the air tour reductions which took effect on June 1, 2016.

For the nine months ended September 30, 2016, revenue from continuing operations associated with services and supply items decreased by 6.6 percent to approximately $6,496,000 as compared to approximately $6,958,000 in the nine months ended September 30, 2015. The decrease was attributable to the same factor identified above.

For the nine months ended September 30, 2016, all other revenue from continuing operations decreased by 56.5 percent to approximately $47,000 as compared to approximately $107,000 in the nine months ended September 30, 2015. The decrease was largely attributable to a decrease in miscellaneous revenue generated by our Heliport compared to the same period last year.

GROSS PROFIT

Total gross profit from continuing operations decreased 6.3 percent to $2,320,000 in the three months ended September 30, 2016 as compared with the three months ended September 30, 2015. Gross margin increased to 60.4 percent in the three months ended September 30, 2016 as compared to 52.3 percent in the same period in the prior year. The decrease in gross profit is related to lower levels of gross profit in our fuel sales, as well as lower levels of activity at our Heliport operation in the three months ended September 30, 2016 as compared to the prior year. The increase in gross margin is related to reduced costs associated with providing services at our Heliport operation.

Total gross profit from continuing operations decreased 4.8 percent to $6,114,000 in the nine months ended September 30, 2016 as compared with the nine months ended September 30, 2015. Gross margin increased to 56.2 percent in the nine months ended September 30, 2016 as compared to 54.5 percent in the same period in the prior year. The decrease in gross profit and increase in gross margin are attributable to the same factors identified above.

OPERATING EXPENSE

Selling, General and Administrative

Total selling, general and administrative expenses, or SG&A, from continuing operations were approximately $1,747,000 in the three months ended September 30, 2016, representing a decrease of approximately $86,000 or 4.7 percent, as compared to the same period in 2015. Total selling, general and administrative expenses, or SG&A, from continuing operations were $4,744,000 in the nine months ended September 30, 2016, representing a decrease of approximately $148,000 or 3.0 percent, as compared to the same period in 2015.

SG&A associated with continuing operations of our aviation services operations were approximately $1,618,000 in the three months ended September 30, 2016, representing a decrease of approximately $160,000 or 9.0 percent, as compared to the three months ended September 30, 2015. SG&A associated with our continuing FBO operations, as a percentage of revenue, was 42.1 percent for the three months ended September 30, 2016, as compared with 37.6 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.

SG&A associated with continuing operations of our aviation services operations were approximately $4,382,000 in the nine months ended September 30, 2016, representing a decrease of approximately $274,000 or 5.9 percent, as compared to the nine months ended September 30, 2015. SG&A associated with our continuing FBO operations, as a percentage of revenue, was 40.3 percent for the nine months ended September 30, 2016, as compared with 39.5 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 was approximately $130,000 for the three months ended September 30, 2016, representing an increase of approximately $75,000 as compared with the corresponding prior year period. Corporate SG&A was approximately $362,000 for the nine months ended September 30, 2016, representing an increase of approximately $126,000 as compared with the corresponding prior year period.

OPERATING INCOME

Operating income from continuing operations for the three and nine months ended September 30, 2016 was $572,329 and $1,369,758, respectively, as compared to operating income of $641,636 and $1,528,381, in the three and nine months ended September 30, 2015. The decrease on a year-over-year basis was driven by lower levels of gross profit offset by lower SG&A expenses.

Depreciation and Amortization

Depreciation and amortization was approximately $369,211 and $639,146 for the nine months ended September 30, 2016 and 2015, respectively.

Interest Expense

Interest expense for the nine months ended September 30, 2016 was approximately $21,506 as compared to approximately $16,730 in the same period in 2015.

Income Tax

Income tax expense for the three and nine months ended September 30, 2016 was $285,500 and $681,000, respectively, as compared to approximately $352,000 and $808,000, respectively, for the same periods in 2015. The decrease is attributable to lower pre-tax income in the nine months ended September 30, 2016 as compared to the same period in 2015.

Net Income Per Share

Net income was $667,252 and $395,846 for the nine months ended September 30, 2016 and 2015, respectively. The increase in net income is an outcome of the factors described above.

Basic and diluted net income per share for the nine month periods ended September 30, 2016 and 2015 was $0.02 and $0.01, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2016, we had cash and cash equivalents of $2,084,576 and a working capital surplus of $2,815,460. For the nine months ended September 30, 2016, we generated revenue from continuing operations of $10,872,366 and had net income from continuing operations before taxes of $1,348,252. For the nine months ended September 30, 2016, cash flows included net cash provided by operating activities of $1,915,570, net cash used in investing activities of $40,781, and net cash used in financing activities of $204,874.

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”).

Proceeds of the PNC Acquisition Line were able to be dispersed, based on parameters defined in the PNC Loan Agreement, until May 17, 2014 (the “Conversion Date”). As of the Conversion Date, there was $1,350,000 outstanding under the PNC Acquisition Line. The payment terms provided that 30 days following the Conversion Date, and continuing on the same day of each month thereafter, we are required to make equal payments of principal over a 60 month period. Interest on the outstanding principal continues to accrue at a rate equal to one-month LIBOR plus 275 basis points (3.26% as of September 30, 2016). As of September 30, 2016, there was $720,000 outstanding under the PNC Acquisition Line.

The PNC Working Capital Line was to have been dispersed for working capital and general corporate purposes. Interest on outstanding principal accrued at a rate equal to daily LIBOR plus 250 basis points. The PNC Working Capital Line expired on December 31, 2015, with $0 outstanding.

The PNC Term Loan was utilized to retire our previously outstanding miscellaneous debt of the same amount. Interest on outstanding principal accrued at a rate equal to one-month LIBOR plus 275 basis points and principal and interest payments were to be made over a thirty-four month period. At December 31, 2015, all amounts under the PNC Term loan 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 program year gross receipts and 25% of gross receipts in excess of $5 million or minimum annual guaranteed payments. The Company paid the City of New York $1,200,000 in the first year of the term and minimum payments were scheduled to increase to approximately $1,700,000 in the final year of Concession Agreement which, in accordance with an Amendment to the Concession Agreement dated July 13, 2016 (the “Amendment”) between the Company and the New York City Economic Development Corporation (“NYCEDC”), expires on April 30, 2021. In addition to the extension of the base term, pursuant to the Amendment the City of New York has two one year options to further extend the Concession Agreement. The Amendment also calls for certain reductions in air tour activity at the Heliport as well as reductions to the Company’s minimum annual guaranteed payments, which are described in greater detail in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (the “SEC”) on April 11, 2016. During the nine months ended September 30, 2016 and 2015, the Company incurred approximately $1,900,000 and $2,100,000, respectively, in concession fees which are recorded in the cost of revenue. The Amendment was included as an exhibit to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2016,

The air tour reductions discussed in the Amendment are expected to negatively impact the Company’s business and financial results as well as those of the Company’s management company Empire Aviation which, as previously disclosed, is owned by the children of Alvin Trenk, the Company’s CEO and a member of its Board of Directors.  The Company incurred management fees with Empire Aviation of approximately $2,706,000 and $2,711,000 during the nine months ended September 30, 2016 and 2015, 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 City of New York Mayor’s office in connection with the Amendment.  Mr. Trenk is also an active participant with HJTC, which is managed by his grandson.

The Company entered into a Stock Purchase Agreement, dated June 30, 2015, by and between the Company and Warren A. Peck (the “Stock Agreement”). The details of the Stock Agreement are included in a Current Report filed with the SEC July 6, 2015 as well as in the Company’s Annual Report on Form 10-K filed with the SEC on April 11, 2016.

On September 30, 2015, we and Mr. Peck executed a Closing Cash Agreement (“the “Closing Agreement”), which was filed with our Quarterly Report on Form 10-Q for the period ended September 30, 2015. The Closing Agreement provided for Mr. Peck to assign over to the Company title to an aircraft in order to defer the $250,000 cash consideration due at closing. As further described in the Closing Agreement, we were to receive the $250,000 closing cash payment, plus other identified costs, when the aircraft was subsequently sold. On June 13, 2016, the Company entered into an agreement (the “Sale Agreement”) with an unrelated third party to acquire the aircraft subject to the Closing Agreement. Under the terms of the Sale Agreement, we received a down-payment of $30,000, which was credited against the $250,000 cash consideration owed by Mr. Peck. In addition, beginning in October 2016, the Company will receive monthly payments of at least $28,000 to satisfy the remainder of the $250,000 cash consideration and $50,000 of the Note owed by Mr. Peck. The $220,000 remaining balance of closing cash consideration, plus receivables associated with the Note, are reflected as a Note Receivable as of September 30, 2016.

During the nine months ended September 30, 2016, we had a net increase in cash of $1,669,915. Our sources and uses of funds during this period were as follows:

Cash from Operating Activities

For the nine months ended September 30, 2016, net cash provided by operating activities was $1,915,570. This amount included an increase in operating cash related to net income of $667,252 and additions for the following items: (i) depreciation and amortization, $369,211; (ii) stock based compensation, $25,496; (iii) accounts receivable, trade, $932,788; (iv) deposits $39,785; (v) accounts payable, $406,905; and (vi) customer deposits, $238. These increases in operating activities were offset by a decrease in (i) inventories, $8,147; (ii) prepaid expenses, $254,380; and (iii) accrued expenses, $263,578.

For the nine months ended September 30, 2015, net cash provided by operating activities was $1,365,933. This amount included an increase in operating cash related to net income of $395,846 and additions for the following items: (i) depreciation and amortization, $639,146; (ii) stock based compensation, $25,496; (iii) trade inventories, $209,875; (iv) deposits, $13,261; (v) deferred income taxes of $55,000; (vi) accounts payable of $358,656; and (vii) accrued expenses of $797,900 . These increases in operating activities were offset by the following decreases: (i) accounts receivable, $519,795; (ii) prepaid expenses and other current assets, $602,700; and (iii) customer deposits of $6,752.

Cash from Investing Activities

For the nine months ended September 30, 2016, net cash used in investing activities was $40,781. This amount included $30,000 provided by the payment of notes receivable offset by amounts used in the purchase of property and equipment of $70,781. For the nine months ended September 30, 2015, net cash used in investing activities was $549,950. This amount included issuances of note receivable of $500,000 and $49,950 used for the purchase of property and equipment.

Cash from Financing Activities

For the nine months ended September 30, 2016, net cash used in financing activities was $204,874 for the repayment of notes payable. For the nine months ended September 30, 2015, net cash used in financing activities was $629,726. This amount included the repayment of notes payable of $279,726 and repayment of the line of credit of $350,000.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Recent Accounting Pronouncements

In April 2014, the FASB issued Accounting Standards Update No. 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360) – Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (ASU 2014-08) which requires entities to change the criteria for reporting discontinued operations and enhance convergence of the FASB’s and International Accounting Standard Board’s (IASB) reporting requirements for discontinued operations so as not to be overly complex or difficult to apply to stakeholders. Only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on the entity’s operations and financial results will be reported as discontinued operations in the financial statements. ASU 2014-08 is effective for fiscal years beginning on or after December 15, 2014 and interim periods thereafter. ASU 2014-08 will be effective for the Company’s financial statements for fiscal years beginning January 1, 2015. Based on the Company’s evaluation of ASU 2014-08, the adoption of this statement on January 1, 2015 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 replaced 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, 2015 and in other filings we make with the Securities and Exchange Commission. 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 Securities and Exchange Commission. We expressly disclaim any intent or obligation to update any forward-looking statements, except as may be required by law.