ITEM 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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Forward-looking Statements
This Annual Report on Form 10-K contains
“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods. These statements may include projections of revenue, provisions for doubtful accounts, income or loss, capital expenditures, repayment of debt, other financial items, statements regarding our plans and objectives for future operations, acquisitions, divestitures and other transactions, statements of future economic performance, statements of the assumptions underlying or relating to any of the foregoing statements and statements other than statements of historical fact.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncer
tainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by such forward-looking statements. We therefore caution you against relying on any of these forward-looking statements because they are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include our services and pricing, general economic conditions, our ability to raise additional capital, our ability to obtain the various approvals and permits for the acquisition and operation of FBOs and the other risk factors contained in Item 1A of this report.
Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
Overview
Our long-term strategy is to increase our sales through growth within our
aviation services operations. To do so, we may expand our geographic reach and product offering through strategic acquisitions and improved market penetration within the markets we serve. We expect that any future acquisitions or product offerings would be to complement and/or augment our current aviation services operations.
If we are able to grow our business as planned, we anticipate that our larger size would provide us with greater buying power from suppliers, resulting in lower costs.
We expect that lower costs would allow for a more aggressive pricing policy against some competition. More importantly, we believe that the higher level of customer service offered in our facilities will allow us to draw additional aircraft to our facilities and thus allow us to compete against other FBOs of varying sizes.
Summary Financial Information
The summary financial data set forth below is derived from and should be read in conjunction with the consolidated financial statements, including the notes thereto, filed as part of this report.
Consolidated Statement of Operations Data:
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Year Ended
December
31,
201
7
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Year Ended
December 31,
201
6
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(in thousands, except for share and per share data)
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Revenue
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$
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12,016
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$
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14,691
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Operating
Income, before income tax expense
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$
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1,062
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$
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1,767
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Income tax (expense)
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$
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584
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$
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887
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Net
Income
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$
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478
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$
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880
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Net income per share
– basic
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$
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0.01
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$
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0.03
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Net income per share
– diluted
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$
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0.01
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$
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0.03
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Weighted average number of shares
– basic
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33,262,961
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33,157,610
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Weighted average number of shares
– diluted
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34,130,624
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33,316,004
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Balance Sheet Data:
(in thousands)
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December 31,
201
7
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December 31,
201
6
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Working capital surplus
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$
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3,369
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$
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2,812
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Total assets
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$
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6,549
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$
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6,967
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Total liabilities
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$
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1,372
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$
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2,133
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Stockholders
’ equity
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$
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5,177
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$
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4,834
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Total liabilities and Stockholders
’ equity
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$
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6,549
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$
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6,967
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Management
’s Discussion and Analysis of Financial Condition and Results of Operations
Comparison of
Results
for
the Years Ended
December 31, 2017
and
December 31, 2016
.
REVENUE
Revenue
decreased by 18.2 percent to $12,016,031 for the twelve months ended December 31, 2017 as compared with corresponding prior-year period revenue of $14,690,654.
For the twelve months ended
December 31, 2017, revenue associated with services and supply items decreased by 16.9 percent to approximately $7,300,000 as compared to approximately $8,800,000 in the twelve months ended December 31, 2016. This decrease was related to the air tour reductions which were initiated on June 1, 2016 and reached the full 50% on January 1, 2017, as further described below in Liquidity and Capital Resources.
For the
twelve months ended December 31, 2017, revenue associated with the sale of jet fuel, aviation gasoline and related items decreased by 21.1 percent to approximately $4,500,000 as compared to approximately $5,700,000 in the twelve months ended December 31, 2016. The decrease was largely attributable to the reduction in air tours leading to lesser gallons sold and was also attributable to lower fuel costs, leading to lower average fuel prices. The cost of fuel in 2017 was less on average as compared to the cost of fuel in 2016. As our fuel pricing generally follows the cost of fuel, lower fuel costs translate to lesser revenue on comparable volume.
For the
twelve months ended December 31, 2017, all other revenue increased by 23.7 percent to approximately $150,000 as compared to approximately $121,000 in the twelve months ended December 31, 2016.
GROSS PROFIT
Total gross profit
decreased 20.9 percent to $6,404,450 in the twelve months ended December 31, 2017 as compared to $8,098,737 in the twelve months ended December 31, 2016. Gross margin was 53.3 percent for the twelve months ended December 31, 2017 as compared to 55.1 percent for the same period in 2016.
OPERATING EXPENSE
Selling, General and Administrative
Total selling, general and administrative
, or SG&A, expenses were $5,311,207 in the twelve months ended December 31, 2017, a decrease of approximately $993,000 or 15.7 percent, as compared to the same period in 2016.
SG&A associated with our FBO operations were approximately $
4,800,000 in the twelve months ended December 31, 2017, a decrease of approximately $1,021,000, or 17.5 percent, as compared to the twelve months ended December 31, 2016. SG&A associated with our FBO operations, as a percentage of revenue, was 40.1 percent for the twelve months ended December 31, 2017, as compared with 39.7 percent in the corresponding prior year period. The decreased operating expenses were largely attributable to decreased costs related to the lower levels of activity in our Heliport operations.
Corporate SG&A was approximately $
497,000 for the twelve months ended December 31, 2017, representing an increase of approximately $29,000 as compared with the corresponding prior year period. The majority of this increase was attributable to one-time expenses that are not expected to recur in future periods.
OPERATING INCOME
Operating
income for the year ended December 31, 2017 was $1,093,243 as compared to $1,794,726 in the year ended December 31, 2016. The decrease on a year-over-year basis was driven by lower levels of gross profit.
Depreciation and Amortization
Depreciation and amortization was approximately $
537,000 and $505,000 for the twelve months ended December 31, 2017 and 2016, respectively.
Interest Expense
Interest expense for the year ended
December 31, 2017 was $21,404, as compared to $27,296 in the same period in 2016.
Impairment of
Goodwill and
Other
Intangible
s
We had $750,000 of goodwill at December 31, 2017 and 2016.
We had $0 of intangible assets as of December 31, 2017 as compared to $35,000 at December 31, 2016. The sale of a charter certificate in 2017 accounting for the change.
Income Tax
Income tax expense for the twelve months ended December 31, 2017 was $584,000, as compared to $887,000 in the same period in 2016.
Net Income Per Share
Net
income for the twelve months ended December 31, 2017 was $477,628 as compared to net income of $880,430 in the twelve months ended December 31, 2016.
Basic
and diluted net income per share was $0.01 for the twelve months ended December 31, 2017 and $0.03 per share for the twelve months ended December 31, 2016.
Liquidity and Capital Resources
As of
December 31, 2017, we had cash of $1,724,504 and a working capital surplus of $3,368,610. We generated revenue of $12,016,031 and had net income of $477,628 for the twelve months ended December 31, 2017. For the twelve months ended December 31, 2017, cash flows included net cash provided by operating activities of $53,323, net cash used in investing activities of $7,158, and net cash used in financing activities of $513,718.
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 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 (3.486% as of December 31, 2017). An unused commitment fee had been applied at a rate of 1.5% on the unused portion of the PNC Acquisition Line and was charged for each fiscal quarter through the Conversion Date. As of December 31, 2017, there was $382,500 outstanding under the PNC Acquisition Line.
The PNC Working Capital
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, 2016, 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 had been repaid.
As disclosed in a Current Report on Form 8-K filed with the Securities and Exchange Commission
(the “SEC”) on March 21, 2018, we announced a financing agreement with Key Bank National Association. Please see
Subsequent Events
in the accompanying Financial Footnotes for further information.
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 program year gross receipts and 25% of gross receipts in excess of $5 million, or minimum annual guaranteed payments. During the twelve months ended December 31, 2017 and 2016, we incurred approximately $1,800,000 and $2,700,000, respectively, in concession fees which are recorded in the cost of revenue.
As disclosed in a Current Report on Form 8-K filed with the SEC on February 5, 2016,
we and the New York City Economic Development Corporation (the “NYCEDC”) announced new measures to reduce helicopter noise and impacts across New York City (the “Air Tour Agreement”).
Under the Air Tour Agreement, filed as an exhibit to
our Annual Report on Form 10-K for the year ended December 31, 2015, we may not allow our tenant operators to conduct tourist flights from the Downtown Manhattan Heliport on Sundays beginning April 1, 2016. We were also required to ensure the 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
our Concession Agreement with the City of New York for 30 months, resulting in a new expiration date of April 30, 2021. The City of New York has two one year options to further extend the Concession Agreement. The Agreement also provides that the minimum annual guarantee payments we are required to pay to the City of New York under the Concession Agreement be reduced by 50%, effective January 1, 2017.
These
reductions have negatively impacted our business and financial results as well as those of our management company at the Heliport, Empire Aviation which, as previously disclosed, is owned by the children of Alvin Trenk, our Chief Executive Officer and a member of our Board of Directors. We incurred management fees with Empire Aviation of approximately $2,500,000 and $3,500,000 during the twelve months ended December 31, 2017 and 2016, respectively, which is recorded in administrative expenses. We and Empire Aviation have also contributed to the Helicopter Tourism and Jobs Council (“HTJC”), an association that lobbies on behalf of the helicopter air tour industry, and which had engaged in discussions with the Mayor’s office. Mr. Trenk is also an active participant with HJTC, which is managed by his grandson.
On February 6, 2018, we were issued a Note by one of our customers at the Heliport. The Note schedules approximately $731,000 otherwise due in receivables from the customer, has a maturity date of October 31, 2018, and carries a 7.5 percent rate of interest. The amount due under the Note remains in accounts receivable.
On October 3, 2016,
we purchased all of the capital stock of Aircraft Services, Inc. (“Aircraft Services”), an aircraft maintenance services firm located in Garden City, Kansas. Under the terms of the transaction, we made a $150,000 cash payment at closing, a $75,000 installment payment in 2017, and will make an additional installment payment of $75,000 in 2018. The closing cash payment and 2017 installment payment were both funded with internal resources. Our purchase of Aircraft Services’ capital stock is discussed in greater detail in a Current Report on Form 8-K filed with the SEC on October 7, 2016 and filed as an Exhibit to our Quarterly Report on Form 10-Q for the period ended September 30, 2016.
As disclosed in a Current Report on Form 8-K filed with the SEC on July 6, 2015, we entered into a stock purchase agreement, dated June 30, 2015, by and between us and Warren A. Peck, pursuant to which Mr. Peck purchased all of the capital stock of our wholly-owned subsidiary. The details of the agreement are described in such Current Report as well as in our Annual Report on Form 10-K, which was filed with the SEC on April 11, 2016. In September 2017, we received $100,000 due under this agreement and a final payment of $100,000 is expected to be made in September 2018.
Our anticipated capital expenditures in 201
8 are approximately $50,000 - $100,000.
During the twelve months ended December 31, 2017, we had a net decrease in cash of $467,553. Our sources and uses of funds during this period were as follows:
Cash from Operating Activities
For the year ended December 31, 2017, net cash provided by operating activities was $53,323. This amount included an increase in operating cash related to net income of $477,628 and additions for the following items: (i) depreciation, $536,598; (ii) loss of sale of charter certificate, $10,000; (iii) stock-based compensation expense, $33,997; (iv) deposits, $50,534; and (v) customer deposits, $271. The increase in cash provided by operating activities in 2017 was offset by the following items: (i) accounts receivable, trade, $364,257; (ii) inventories, $50,024; (iii) prepaid expenses and other current assets, $94,105; (iv) deferred income taxes, $131,000; (v) accounts payable, $347,217; and (vi) accrued expenses, $69,102. For the year ended December 31, 2016, net cash provided by operating activities was $2,244,551. This amount included an increase in operating cash related to net income of $880,430 and additions for the following items: (i) depreciation, $505,390; (ii) stock-based compensation expense, $33,997; (iii) accounts receivable, trade, $1,046,548; (iv) inventories, $26,405; (v) deposits, $53,046; (vi) accounts payable, $159,495; and (vii) customer deposits, $315. The increase in cash provided by operating activities in 2016 was offset by the following items: (i) prepaid expenses and other current assets, $83,101; (ii) deferred income taxes, $150,000; and (iii) accrued expenses, $227,974.
Cash from Investing Activities
For the year ended December 31, 2017, net cash used in investing activities was $7,158. This amount included purchase of property and equipment of $132,158; offset by payment of notes receivable of $100,000 and proceeds of $25,000 from the sale of a charter certificate. For the year ended December 31, 2016, net cash used in investing activities was $194,781. This amount included the purchase of ASI assets for $150,000 and the purchase of property and equipment of $74,781; offset by payment of notes receivable of $30,000.
Cash from Financing Activities
For the year ended December 31, 2017, net cash used in financing activities was $513,718 of which $345,000 was attributable to the repayment of notes payable and $168,718 to the repurchase and cancellation of common stock. For the year ended December 31, 2016, net cash used in financing activities was $272,374 attributable to the repayment of notes payable.
Off-Balance Sheet Arrangements
We have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
Critical
Accounting
Estimates
Discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the amounts reported in the consolidated financial statements and the accompanying notes. We evaluate our estimates on an ongoing basis, including those estimates related to product returns, product and content development expenses, bad debts, inventories, intangible assets, income taxes, contingencies and litigation. We base our estimates on experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The critical accounting policies which we believe affect our more significant judgments and estimates used in the preparation of our consolidated financial statements are provided as follows:
Accounts Receivable
, Trade
The Company extends credit to large and mid-size companies for products and services. The Company has concentrations of credit risk in that 92.3% of the balance of its accounts receivable at December 31, 2017 is made up of only four customers. At December 31, 2017, accounts receivable from the Company’s four largest accounts amounted to approximately $804,263 (43.7%), $515,962 (28.1%), $253,740 (13.8%), and $122,449 (6.7%), respectively. In addition, these four customers represented approximately 69.3% of our revenue in 2017. At December 31, 2016, accounts receivable from the Company’s four largest accounts amounted to approximately $554,436 (37.6%), $426,898 (29.0%), $196,993 (13.4%), and $136,470 (9.3 %), respectively. In addition, four customers represented approximately $11,033,000 (75.1%) of revenue in 2016. The Company has in place a security deposit in connection with each of these receivables. Accounts receivable are carried at their estimated collectible amounts. Accounts receivable are periodically evaluated for collectability and the allowance for doubtful accounts is adjusted accordingly. We determine collectability based on our management experience and knowledge of the customers.
Goodwill and Intangible Assets
Goodwill and intangibles that are deemed to have indefinite lives are not amortized but, instead, are to be reviewed at each reporting period for impairment. We assessed potential impairment of goodwill using qualitative factors by considering various factors including macroeconomic conditions, industry and market conditions, cost factors, a sustained share price or market capitalization decrease and any reporting unit specific events. We performed an analysis of our goodwill and intangible assets at December 31, 2017 and 2016. In 2016 we recorded additional goodwill relating to our Garden City operation’s acquisition of Aircraft Services.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between their financial statement carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
D
eferred tax assets are subject to a valuation allowance because it is more likely than not that certain of the deferred tax assets will not be realized in future periods. We file income tax returns in the United States (federal) and in various state and local jurisdictions. In most instances, we are no longer subject to federal, state and local income tax examinations by tax authorities for years prior to 2014.
Stock Based Compensation
Stock-based compensation expense for all share-based payment awards are based on the
estimated grant-date fair value. We recognize these compensation costs over the requisite service period of the award, which is generally the option vesting term.
Option valuation models require the input of highly subjective assumptions, including the expected life of the option. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the” FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. ASU 2014-09 also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. These judgments and estimates include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers” (“ASU 2015-14”), which delays the effective date of ASU 2014-09 by one year. ASU 2014-09, as amended by ASU 2015-14, is effective for us beginning January 1, 2018, and, at that time, we may adopt the new standard under the full retrospective approach or the modified retrospective approach. We are currently evaluating the method of adoption and the impact the adoption of ASU 2014-09 will have on our consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”), which requires an entity to recognize assets and liabilities on the balance sheet for the rights and obligations created by leased assets and provide additional disclosures. ASU 2016-02 is effective for us beginning January 1, 2019, and, at that time, we will adopt the new standard using a modified retrospective approach. We are currently evaluating the impact that the adoption of ASU 2016-02 may have on our consolidated financial statements and disclosures.