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Thursday, August 21, 2008 9:49:01 AM
Form 10-Q for U.S. HELICOPTER CORP
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19-Aug-2008
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Information included in this Form 10-Q may contain forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of these words or other variations on these words or comparable terminology.
This Form 10-Q contains forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans and (e) our anticipated needs for working capital. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in this Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Form 10-Q will in fact occur.
The following discussion and analysis should be read together with the financial statements and the accompanying notes thereto included elsewhere in this Form 10-Q.
GENERAL
We are a provider of scheduled and charter passenger helicopter services and are, at present, the only certificated United States based airline focused on scheduled helicopter flight service. Our operations currently center on scheduled flights connecting midtown and downtown Manhattan with Newark Liberty International Airport ("Newark") and John F. Kennedy International Airport ("Kennedy Airport"). We are currently the only operator offering regularly scheduled helicopter service in the New York market.
We believe the timing is favorable, particularly in light of traffic congestion problems affecting many of the nation's highways serving major metropolitan areas during peak traffic hours (especially direct and connecting routes to major airports where gridlock has become the norm), to introduce our new Metro-hop Airport Shuttle Service. Our MASS service will provide regular, scheduled passenger helicopter service between many of the nation's larger metropolitan airports and surrounding city-based heliports. On March 27, 2006, we commenced regularly scheduled flight operations between the Downtown Manhattan Heliport and Kennedy Airport. We estimate that there are annually over 29 million air passengers traveling in and out of Manhattan who could utilize a regularly scheduled helicopter service to access major airports, when it becomes available.
Our principal target market is the business traveler who, we believe, is willing to pay fares between $139 and $169. Individual travelers purchase tickets at the higher end of the price range. Large corporate travel management companies or corporations purchase volume sales, which are negotiated at a "per-ticket-price" at the lower end of the price range and are based upon large ticket commitments. Our regularly scheduled U.S. Helicopter flights between Manhattan and Newark and Kennedy Airports take approximately eight minutes and stand in contrast to paying $850 to $2,770 for the same flights offered by a charter helicopter service or paying fares from $75-$125 plus tolls and tips for 65-125 minutes of travel time (or longer) via taxi or limousine airport ride. While our service is available to the general public including corporate CEOs and affluent leisure travelers, we believe our service has the greatest appeal to the segment of the business traveler market (like managers, directors, etc.) that currently uses town car/executive car services, limos or taxi transportation, travels 2-3 times per month and recognizes the true time-saving value offered via helicopter. We believe our service is highly attractive (for personal reasons as well as business reasons) compared to ground-based travel when the helicopter connection is reasonably and moderately priced in the range that we offer.
During 2006, we introduced our MASS service in the Metro New York City market with service between Kennedy Airport and Newark Airport and the Downtown Manhattan Heliport. In February 2007 we expanded our service between Kennedy Airport and Newark Airport to the East 34th Street Heliport. In June 2006, we also commenced service between Sikorsky Memorial Airport in Stratford, Connecticut and the Downtown Manhattan Heliport. We intend to expand our service to LaGuardia International Airport and the West 30th Street Heliport in Manhattan during the next 12 months. Subsequently we intend to introduce our airport shuttle service in the metropolitan Washington DC, Chicago and Los Angeles markets, with further expansion into other major U.S. metro-markets. The number of passengers who originate or terminate their travel from within close proximity to one of these cities' heliports is estimated at over 200 million annually. In addition to our regularly scheduled flight services to and from New York City metropolitan-area airports from Manhattan, we also provide on-demand charter services and limited scheduled service between Manhattan and Sikorsky Memorial Airport (Stratford, Connecticut), and limited seasonal service between Manhattan and East Hampton Airport (East Hampton, New York) and Monmouth Executive Airport (Belmar, New Jersey).
Many of the same factors (population growth, economic expansion and airline deregulation), which drove the growth in air passenger travel during the years since 1975, are also responsible for the demand which currently exists for reliable, scheduled "Metro-hop" airport shuttle services. Even so, as traffic congestion intensified and systemic gridlock became the norm (while corporate charter helicopter usage expanded), the demand for scheduled helicopter services to and from airports to serve the general public, especially regular business travelers, has remained largely ignored and un-served in the United States.
We believe that there is significant unfulfilled demand for scheduled, "Metro-Hop" airport helicopter shuttle services in the U.S., especially in our initial target market of the New York City metropolitan area. This demand has been largely unfulfilled since the late 1970s, when New York Airways' scheduled helicopter service carried over 400,000 passengers annually. During this period the market size was approximately 35 million passengers as compared to today, where the market size has grown to over 96 million passengers.
Due to significant growth in many U.S. cities, the need for ground-based infrastructure servicing metropolitan areas, and roadways servicing major airports in particular, has outpaced capacity. Only so many subways, bus lines, and taxis can be added to service these high demand routes before each city runs out of space and capability. Adding more limousine and taxi services will not help the situation either because the bottleneck is in the infrastructure itself. U.S. Helicopter believes that the future of transportation for short distances into and out of these densely populated urban areas is by helicopter. By using the vertical take off and landing capabilities of the helicopter, passengers will be able to travel through the city and to local destinations without suffering through hours of gridlock. People will be able to quickly travel across town, to the local airport, or to a neighboring city in minutes instead of hours.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2007
REVENUES For the three months ended June 30, 2008, total revenues increased to $1,099,199. For the three months ended June 30, 2007, our total revenues were $883,202. The increase in total revenues is attributable to increased passenger counts in 2008 versus 2007 and a higher net fare.
PAYROLL EXPENSES Payroll expenses decreased to $676,229 for the three months ended June 30, 2008 from $1,010,513 for the three months ended June 30, 2007. The decrease in payroll expense is due to a slightly smaller number of employees and reimbursement of certain payroll expenses by third parties.
PROFESSIONAL FEES For the three months ended June 30, 2008, we incurred professional fees totaling $468,371, compared to $594,150 for the three months ended June 30, 2007. These fees are comprised of legal fees for general matters, accounting and audit fees, other consulting fees, transfer agent fees, registered agent fees, security fees and Board of Directors fees.
EQUIPMENT EXPENSES Equipment lease expenses decreased to $473,917 for the three months ended June 30, 2008 from $478,215 for the three months ended June 30, 2007.
ADVERTISING EXPENSES Advertising expenses decreased to $33,432 for the three months ended June 30, 2008 from $66,468 for the three months ended June 30, 2007.
OPERATING LOSS We reported an operating loss of $(2,107,333) for the three months ended June 30, 2008 compared to an operating loss of $(2,808,311) for the three months ended June 30, 2007. The decrease in operating loss is due to higher revenue levels and a decrease in expenses as described above.
NET LOSS We reported a net loss of $(3,208,038) for the three months ended June 30, 2008 compared to a net loss of $(3,449,050) for the three months ended June 30, 2007. The decrease in loss is due to lower expense levels and an increase in revenue as we expanded our operation. Net loss was negatively impacted by higher other income and (expenses) of $(1,085,889) for the three months ended June 30, 2008 compared to other income/(expenses) of $(640,739) for the three months ended June 30, 2007. The difference in other income expense is due to higher interest expense, a gain from derivative liability calculation in the second quarter of 2008, a significantly higher amortization of debt discount in the second quarter of 2008 and a lower amortization of deferred financing costs.
NET LOSS PER COMMON SHARE Basic and diluted net loss per common share was $(.07) for the three months ended June 30, 2008 compared to a $(.10) loss for the three months ended June 30, 2007.
SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2007
REVENUES For the six months ended June 30, 2008, total revenues increased to $1,909,525. For the six months ended June 30, 2007, our total revenues were $1,179,928. The increase in total revenues is attributable to increased passenger counts in 2008 versus 2007 and a higher net fare.
PAYROLL EXPENSES Payroll expenses decreased to $1,540,366 for the six months ended June 30, 2008 from $1,985,533 for the six months ended June 30, 2007. The decrease in payroll expense is due to a slightly smaller number of employees and reimbursement of certain payroll expenses by third parties.
PROFESSIONAL FEES For the six months ended June 30, 2008, we incurred professional fees totaling $819,748, compared to $977,507 for the six months ended June 30, 2007. These fees are comprised of legal fees for general matters, accounting and audit fees, other consulting fees, transfer agent fees, registered agent fees, security fees and Board of Directors fees.
EQUIPMENT EXPENSES Equipment lease expenses decreased to $941,620 for the six months ended June 30, 2008 from $952,988 for the six months ended June 30, 2007.
ADVERTISING EXPENSES Advertising expenses decreased to $68,455 for the six months ended June 30, 2008 from $359,386 for the six months ended June 30, 2007.
OPERATING LOSS We reported an operating loss of $(4,257,782) for the six months ended June 30, 2008 compared to an operating loss of $(6,182,555) for the six months ended June 30, 2007. The decrease in operating loss is due to higher revenue levels and a decrease in expenses as described above.
NET LOSS We reported a net loss of $(5,751,273) for the six months ended June 30, 2008 compared to a net loss of $(7,308,469) for the six months ended June 30, 2007. The decrease in loss is due to lower expense levels and an increase in revenue as we expanded our operation. Net loss was negatively impacted by higher other income and (expenses) of $(1,493,491) for the six months ended June 30, 2008 compared to other income/(expenses) of $(1,125,914) for the six months ended June 30, 2007. The difference in other income expense is due to higher interest expense, a gain from derivative liability calculation in the first six months of 2008, a higher amortization of debt discount in the first six months of 2008 and a lower amortization of deferred financing costs.
NET LOSS PER COMMON SHARE Basic and diluted net loss per common share was $(.13) for the six months ended June 30, 2008 compared to a $(.21) loss for the six months ended June 30, 2007.
Results of the second quarter are not necessarily indicative of the results for the full year of 2008. Certain of our operations (particularly charter flights and certain seasonal services) will have the effect of increasing our total revenue during the second and third quarters.
LIQUIDITY AND FINANCIAL CONDITION
GENERAL
At June 30, 2008, cash and cash equivalents were $203,719. Total liabilities at June 30, 2008 were $16,049,464, consisting of current liabilities in the aggregate amount of $12,001,353 and long-term liabilities in the amount of $4,048,111. At June 30, 2008, assets included $65,028 in prepaid expenses, $756,114 in furniture and equipment, net of depreciation; $199,996 in debt issuance costs, net of amortization; and other assets of $1,099,631. As of June 30, 2008, our working capital deficit was $(10,697,978) as compared to $(3,313,797) at June 30, 2007. We expect to incur additional operating losses as we continue our commercialization efforts.
Our debt before discount at June 30, 2008 and December 31, 2007 were as follows:
JUNE 30, 2008 DECEMBER 31, 2007
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Short-term notes $ 7,994,838 $ 844,838
Short-term bridge loans 700,000 --
Long Term Convertible notes 2,750,000 8,650,000
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Total $ 11,444,838 $ 9,494,838
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For more detailed information on long-term liabilities, see Note 7 to our financial statements contained herein.
FINANCING TRANSACTIONS
Since inception, we have incurred substantial operating losses. As of June 30, 2008, we had an accumulated deficit of $(34,128,637). We did not receive any revenues from inception until the start of operations on March 27, 2006. Our operations have been financed primarily through the private placement of our debt and equity securities and the cash exercise of outstanding warrants. The terms of these debt and equity financings are set forth below.
JULY 2008 CONVERTIBLE NOTE FINANCING
On July 15, 2008, we closed on a $1,500,000 bridge loan financing pursuant to a Note Purchase Agreement dated July 3, 2008 with one investor (the "July 2008 Investor"), pursuant to which we issued a total of $1,500,000 in principal amount of convertible notes (the "July 2008 Note"). The July 2008 Note is repayable on the earlier of (a) the first closing of a private placement of our debt or equity securities to institutional investors in an institutional capital raise (the "Institutional Private Placement") or (b) December 31, 2008. To secure repayment of the July 2008 Note, certain third parties agreed to pledge a total of 375,000 shares of common stock (the "July 2008 Collateral") of an unrelated, privately held third party corporation pursuant to the terms and provisions of a Pledge and Escrow Agreement.
The July 2008 Note bears interest at the rate of 15% per annum based on a 360-day year, of which 60 days' worth of interest, equal to $37,500, was prepaid on the closing of the July 2008 Note. As additional consideration, we paid the July 2008 Investor upon the closing of the July 2008 Note an origination fee of five percent (5%) of the amount of the loan, equal to $75,000. We received net proceeds of approximately $585,000 after deducting prepaid interest and fees and expenses of the offering, and after repayment of certain debt and other obligations owed by us. We plan to use the remaining net proceeds received in this financing for working capital.
The July 2008 Note, together with accrued but unpaid interest, is convertible at the option of the July 2008 Investor, into shares of our common stock at a price equal to the lower of (a) the conversion price for convertible debt issued in the first closing of the Institutional Private Placement or (b) $0.20 per share. The shares issuable upon conversion of the July 2008 Note are entitled to piggyback registration rights.
In connection with the July 2008 Note financing, we agreed to issue to the July 2008 Investor warrants to purchase up to 3,000,000 shares of our common stock, which have an exercise price of $0.20 per share and a term of five years from the date of issuance. The shares of common stock issuable upon exercise of such warrant are entitled to piggyback registration rights.
Certain members of our management agreed to transfer 525,000 shares of U.S. Helicopter common stock to the July 2008 Investor as an inducement to purchase the July 2008 Note. Such shares are also entitled to piggyback registration rights. In addition, certain members of our management have agreed to transfer a total of 1,225,000 shares of U.S. Helicopter common stock to the pledgors and certain third parties as an inducement to the pledgors to pledge the July 2008 Collateral, in consideration of an existing lender's agreement to forbear from exercising its rights under its outstanding note agreement, and other consideration.
Commissions paid by us in connection with this transaction consisted of an 8% placement fee to certain third parties. In addition, we agreed to pay to the pledgors fees totaling $195,000 as an inducement to pledge the July 2008 Collateral securing the repayment of the July 2008 Note.
MAY 2008 NOTE FINANCING
On May 30, 2008, we closed on a $250,000 convertible bridge loan financing with an existing bridge lender in accordance with a Convertible Note Purchase Agreement, pursuant to which we issued a total of $250,000 in principal amount of convertible notes (the "May 2008 Notes"). Such notes accrue interest at the rate of 15% per annum and are repayable on or before the earlier of the earlier of (a) the next closing of a private placement of our debt or equity securities, or (b) 60 days after the date of the loan. We repaid this loan in full with proceeds received in the July 2008 Note financing as described above.
MARCH 2008 CONVERTIBLE DEBENTURE FINANCING
We received gross proceeds totaling $1,250,000 from YA Global Investments, L.P., formerly known as Cornell Capital Partners, L.P. ("YA") pursuant to a Securities Purchase Agreement dated March 31, 2008 (the "March 2008 SPA"). Pursuant to the March 2008 SPA, we issued convertible debentures in the principal amount of $1,250,000 (the "March 2008 Debenture"). The March 2008 Debenture bears interest at a rate of 18% per annum and is convertible into shares of our common stock at the option of YA any time up to maturity at a conversion price equal to the lesser of $0.30 or 80% of the lowest closing bid price of our common stock during the 15 trading days immediately preceding the conversion date. The March 2008 Debenture is repayable as of the earlier of September 30, 2008 or (b) on the closing date of the next equity financing completed by us resulting in not less than $5.0 million in gross proceeds. We used approximately $613,000 of the proceeds received in connection with the March 2008 Debenture to repay all amounts due and owing under a debenture issued to YA on March 14, 2008. We used the remaining proceeds received in this financing for working capital.
Pursuant to the March 2008 SPA, we also issued warrants to YA to purchase a total of 2,783,333 shares of our common stock with an exercise price of $0.01 per share. The warrants are exercisable for a period of five years after issuance.
We entered into an amended security agreement with YA pursuant to which we continued the security interest of YA in all our assets which we granted in connection with debentures issued by us to YA in August 2004.
We have agreed to include the shares of common stock issuable upon conversion of the debentures and upon exercise of the warrants issued in this transaction in the event we determine to file a registration statement other than on Form S-4 or Form S-8 and YA elects to include the shares issuable upon conversion of the debentures and upon exercise of the warrants in such registration statement.
Fees and expenses paid in connection with this transaction included a monitoring fee of $78,750 to Yorkville Advisors, LLC. We also paid structuring fees to Yorkville Advisors, LLC in the amount of $25,000.
As a condition to closing the March 2008 Debenture transaction, YA and certain of our bridge lenders (the "Bridge Lenders") were required to enter into a Subordination Agreement providing that payment by us of the bridge loans made by the Bridge Lenders in the aggregate amount of $350,000 shall be subordinate to our repayment of a total of $6,250,000 of indebtedness owed to YA.
As an additional condition to closing the March 2008 Debenture transaction, our five most senior executive officers (collectively, "Management") agreed to continue pre-existing reductions of their salaries by 20% until such time as we repaid a total of $6,250,000 from proceeds to be received by us in an institutional private placement (the "YA Repayment"). After we make such repayments, Management's salaries may be reinstated in full, and all unpaid salary amounts may be issued to Management in the form of shares of our common stock at a price equal to the greater of the volume weighted average price of our common stock as quoted by Bloomberg, LP on the day prior to the YA Repayment or $0.50 per share. Each Management member has the option, however, to receive payment of such unpaid salary in cash to the extent of such Management member's contribution to the Common Stock Purchase once the total indebtedness owed by us to YA is reduced by $6.25 million or more.
MARCH 2008 AMENDMENT OF PRIOR YA DEBENTURES AND WARRANTS
On March 31, 2008, we amended the terms of three secured convertible debentures previously issued to YA on March 31, 2006 (in the remaining principal amount of $5.9 million), November 3, 2006 (in the principal amount of $2.75 million) and March 30, 2007 (in the remaining principal amount of $844,836) (collectively, the "Prior Debentures"). The Prior Debentures contained conversion prices equal to the lesser of $0.50 per share or 95% of the lowest daily volume weighted average price of our common stock for the 30 days prior to the notice of exercise ("Fair Market Value"), and provided for an adjustment in the conversion price in the event that we completed a financing whereby the price per share of our common stock (or its equivalent on an as-converted basis) was less than the conversion price of the Prior Debentures. As required by the terms of the Prior Debentures and in light of prior financings completed by us, we amended the terms of the Prior Debentures to provide for a conversion price equal to the lesser of $0.30 per share or 95% of the Fair Market Value of our common stock.
In addition, on March 31, 2008, we amended certain warrants previously issued to YA in connection with certain convertible debenture financings to purchase up to an aggregate of 9,452,774 shares of our common stock (the "Prior Warrants"). The Prior Warrants contained an exercise price of $0.50 per share. The Prior Warrants provided for an adjustment in the exercise price and the number of shares issuable under the Prior Warrants in the event that we completed a financing whereby the price per share of our common stock (or its equivalent on an as-converted basis) was less than the exercise price of the applicable Prior Warrant. In light of prior financings completed by us and in accordance with the terms of the Prior Warrants, we amended the Prior Warrants to provide for an exercise price of $0.30 per share.
MARCH 2008 $1,250,000 WARRANT FINANCING
On March 31, 2008, we received gross proceeds totaling $1,250,000 from Kuwait Holding, KSC ("KH") pursuant to a Securities Purchase Agreement dated March 25, 2008 (the "KH SPA"). Pursuant to the KH SPA, we issued two warrants to purchase an aggregate of 6,950,000 shares of our common stock, which have an exercise price of $0.01 per share and a term of five years from the date of issuance (the "KH Warrants"). KH also received piggyback registration rights in connection with the shares of common stock issuable upon exercise of the KH Warrants.
We did not pay any commissions on this transaction.
MARCH 2008 DEBENTURE FINANCING
On March 14, 2008, we entered into a Securities Purchase Agreement (the "March 14, 2008 SPA") with YA pursuant to which we issued secured debentures in the principal amount of $608,000 (the "March Debenture"). The March Debenture was repaid in full with proceeds received by us in connection with the March 2008 Debenture.
In connection with the March Debenture, we entered into an amended security agreement with YA pursuant to which we continued the security interest of YA in all our assets which we granted in connection with debentures issued by us to YA in August 2004.
Commissions to YA in connection with this transaction included monitoring, structuring and legal fees in the total amount of $30,000.
FEBRUARY 2008 BRIDGE LOAN FINANCINGS
On February 21, 2008, we closed on a $300,000 bridge loan financing pursuant to a Convertible Note Purchase Agreement dated February 20, 2008 with one investor, pursuant to which we issued a total of $300,000 in principal amount of convertible notes (the "Notes"). Such notes accrue interest at the rate of 10% per annum and are convertible, together with accrued interest, at the option of the holder into shares of our common stock at a conversion price equal to $0.25 per share. Such notes are repayable on or before the earlier of the date of the next financing completed by us other than a bridge loan financing, or the one year anniversary of the closing date of such notes.
On February 11, 2008, we entered into Convertible Note Purchase Agreements with two investors, pursuant to which we issued a total of $50,000 in principal amount of convertible notes. In connection with these financings, we also issued to such investors warrants to purchase an aggregate of 30,000 shares of our common stock as an inducement to enter into the transactions. Such warrants contain an exercise price of $0.50 per share and are exercisable for a period of five years. The notes accrue interest at the rate of 15% per annum and are convertible, together with accrued and unpaid interest, at the option of the holders into shares of our common stock at a conversion price equal to $0.25 per share. Such notes are repayable on or before the earlier of the date of the next financing completed by us other than a bridge loan financing, or the six month anniversary of the closing date of the Notes.
OCTOBER 2007 PRIVATE PLACEMENT
On October 17, 2007, we received gross proceeds of $6,600,000 in a private placement transaction with International Financial Advisors, K.S.C.C. ("IFA") pursuant to a Securities Purchase Agreement dated October 15, 2007 (the "IFA SPA") and entered into on October 17, 2007. In accordance with the terms of the . . .
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19-Aug-2008
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Information included in this Form 10-Q may contain forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of these words or other variations on these words or comparable terminology.
This Form 10-Q contains forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans and (e) our anticipated needs for working capital. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in this Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Form 10-Q will in fact occur.
The following discussion and analysis should be read together with the financial statements and the accompanying notes thereto included elsewhere in this Form 10-Q.
GENERAL
We are a provider of scheduled and charter passenger helicopter services and are, at present, the only certificated United States based airline focused on scheduled helicopter flight service. Our operations currently center on scheduled flights connecting midtown and downtown Manhattan with Newark Liberty International Airport ("Newark") and John F. Kennedy International Airport ("Kennedy Airport"). We are currently the only operator offering regularly scheduled helicopter service in the New York market.
We believe the timing is favorable, particularly in light of traffic congestion problems affecting many of the nation's highways serving major metropolitan areas during peak traffic hours (especially direct and connecting routes to major airports where gridlock has become the norm), to introduce our new Metro-hop Airport Shuttle Service. Our MASS service will provide regular, scheduled passenger helicopter service between many of the nation's larger metropolitan airports and surrounding city-based heliports. On March 27, 2006, we commenced regularly scheduled flight operations between the Downtown Manhattan Heliport and Kennedy Airport. We estimate that there are annually over 29 million air passengers traveling in and out of Manhattan who could utilize a regularly scheduled helicopter service to access major airports, when it becomes available.
Our principal target market is the business traveler who, we believe, is willing to pay fares between $139 and $169. Individual travelers purchase tickets at the higher end of the price range. Large corporate travel management companies or corporations purchase volume sales, which are negotiated at a "per-ticket-price" at the lower end of the price range and are based upon large ticket commitments. Our regularly scheduled U.S. Helicopter flights between Manhattan and Newark and Kennedy Airports take approximately eight minutes and stand in contrast to paying $850 to $2,770 for the same flights offered by a charter helicopter service or paying fares from $75-$125 plus tolls and tips for 65-125 minutes of travel time (or longer) via taxi or limousine airport ride. While our service is available to the general public including corporate CEOs and affluent leisure travelers, we believe our service has the greatest appeal to the segment of the business traveler market (like managers, directors, etc.) that currently uses town car/executive car services, limos or taxi transportation, travels 2-3 times per month and recognizes the true time-saving value offered via helicopter. We believe our service is highly attractive (for personal reasons as well as business reasons) compared to ground-based travel when the helicopter connection is reasonably and moderately priced in the range that we offer.
During 2006, we introduced our MASS service in the Metro New York City market with service between Kennedy Airport and Newark Airport and the Downtown Manhattan Heliport. In February 2007 we expanded our service between Kennedy Airport and Newark Airport to the East 34th Street Heliport. In June 2006, we also commenced service between Sikorsky Memorial Airport in Stratford, Connecticut and the Downtown Manhattan Heliport. We intend to expand our service to LaGuardia International Airport and the West 30th Street Heliport in Manhattan during the next 12 months. Subsequently we intend to introduce our airport shuttle service in the metropolitan Washington DC, Chicago and Los Angeles markets, with further expansion into other major U.S. metro-markets. The number of passengers who originate or terminate their travel from within close proximity to one of these cities' heliports is estimated at over 200 million annually. In addition to our regularly scheduled flight services to and from New York City metropolitan-area airports from Manhattan, we also provide on-demand charter services and limited scheduled service between Manhattan and Sikorsky Memorial Airport (Stratford, Connecticut), and limited seasonal service between Manhattan and East Hampton Airport (East Hampton, New York) and Monmouth Executive Airport (Belmar, New Jersey).
Many of the same factors (population growth, economic expansion and airline deregulation), which drove the growth in air passenger travel during the years since 1975, are also responsible for the demand which currently exists for reliable, scheduled "Metro-hop" airport shuttle services. Even so, as traffic congestion intensified and systemic gridlock became the norm (while corporate charter helicopter usage expanded), the demand for scheduled helicopter services to and from airports to serve the general public, especially regular business travelers, has remained largely ignored and un-served in the United States.
We believe that there is significant unfulfilled demand for scheduled, "Metro-Hop" airport helicopter shuttle services in the U.S., especially in our initial target market of the New York City metropolitan area. This demand has been largely unfulfilled since the late 1970s, when New York Airways' scheduled helicopter service carried over 400,000 passengers annually. During this period the market size was approximately 35 million passengers as compared to today, where the market size has grown to over 96 million passengers.
Due to significant growth in many U.S. cities, the need for ground-based infrastructure servicing metropolitan areas, and roadways servicing major airports in particular, has outpaced capacity. Only so many subways, bus lines, and taxis can be added to service these high demand routes before each city runs out of space and capability. Adding more limousine and taxi services will not help the situation either because the bottleneck is in the infrastructure itself. U.S. Helicopter believes that the future of transportation for short distances into and out of these densely populated urban areas is by helicopter. By using the vertical take off and landing capabilities of the helicopter, passengers will be able to travel through the city and to local destinations without suffering through hours of gridlock. People will be able to quickly travel across town, to the local airport, or to a neighboring city in minutes instead of hours.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2007
REVENUES For the three months ended June 30, 2008, total revenues increased to $1,099,199. For the three months ended June 30, 2007, our total revenues were $883,202. The increase in total revenues is attributable to increased passenger counts in 2008 versus 2007 and a higher net fare.
PAYROLL EXPENSES Payroll expenses decreased to $676,229 for the three months ended June 30, 2008 from $1,010,513 for the three months ended June 30, 2007. The decrease in payroll expense is due to a slightly smaller number of employees and reimbursement of certain payroll expenses by third parties.
PROFESSIONAL FEES For the three months ended June 30, 2008, we incurred professional fees totaling $468,371, compared to $594,150 for the three months ended June 30, 2007. These fees are comprised of legal fees for general matters, accounting and audit fees, other consulting fees, transfer agent fees, registered agent fees, security fees and Board of Directors fees.
EQUIPMENT EXPENSES Equipment lease expenses decreased to $473,917 for the three months ended June 30, 2008 from $478,215 for the three months ended June 30, 2007.
ADVERTISING EXPENSES Advertising expenses decreased to $33,432 for the three months ended June 30, 2008 from $66,468 for the three months ended June 30, 2007.
OPERATING LOSS We reported an operating loss of $(2,107,333) for the three months ended June 30, 2008 compared to an operating loss of $(2,808,311) for the three months ended June 30, 2007. The decrease in operating loss is due to higher revenue levels and a decrease in expenses as described above.
NET LOSS We reported a net loss of $(3,208,038) for the three months ended June 30, 2008 compared to a net loss of $(3,449,050) for the three months ended June 30, 2007. The decrease in loss is due to lower expense levels and an increase in revenue as we expanded our operation. Net loss was negatively impacted by higher other income and (expenses) of $(1,085,889) for the three months ended June 30, 2008 compared to other income/(expenses) of $(640,739) for the three months ended June 30, 2007. The difference in other income expense is due to higher interest expense, a gain from derivative liability calculation in the second quarter of 2008, a significantly higher amortization of debt discount in the second quarter of 2008 and a lower amortization of deferred financing costs.
NET LOSS PER COMMON SHARE Basic and diluted net loss per common share was $(.07) for the three months ended June 30, 2008 compared to a $(.10) loss for the three months ended June 30, 2007.
SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2007
REVENUES For the six months ended June 30, 2008, total revenues increased to $1,909,525. For the six months ended June 30, 2007, our total revenues were $1,179,928. The increase in total revenues is attributable to increased passenger counts in 2008 versus 2007 and a higher net fare.
PAYROLL EXPENSES Payroll expenses decreased to $1,540,366 for the six months ended June 30, 2008 from $1,985,533 for the six months ended June 30, 2007. The decrease in payroll expense is due to a slightly smaller number of employees and reimbursement of certain payroll expenses by third parties.
PROFESSIONAL FEES For the six months ended June 30, 2008, we incurred professional fees totaling $819,748, compared to $977,507 for the six months ended June 30, 2007. These fees are comprised of legal fees for general matters, accounting and audit fees, other consulting fees, transfer agent fees, registered agent fees, security fees and Board of Directors fees.
EQUIPMENT EXPENSES Equipment lease expenses decreased to $941,620 for the six months ended June 30, 2008 from $952,988 for the six months ended June 30, 2007.
ADVERTISING EXPENSES Advertising expenses decreased to $68,455 for the six months ended June 30, 2008 from $359,386 for the six months ended June 30, 2007.
OPERATING LOSS We reported an operating loss of $(4,257,782) for the six months ended June 30, 2008 compared to an operating loss of $(6,182,555) for the six months ended June 30, 2007. The decrease in operating loss is due to higher revenue levels and a decrease in expenses as described above.
NET LOSS We reported a net loss of $(5,751,273) for the six months ended June 30, 2008 compared to a net loss of $(7,308,469) for the six months ended June 30, 2007. The decrease in loss is due to lower expense levels and an increase in revenue as we expanded our operation. Net loss was negatively impacted by higher other income and (expenses) of $(1,493,491) for the six months ended June 30, 2008 compared to other income/(expenses) of $(1,125,914) for the six months ended June 30, 2007. The difference in other income expense is due to higher interest expense, a gain from derivative liability calculation in the first six months of 2008, a higher amortization of debt discount in the first six months of 2008 and a lower amortization of deferred financing costs.
NET LOSS PER COMMON SHARE Basic and diluted net loss per common share was $(.13) for the six months ended June 30, 2008 compared to a $(.21) loss for the six months ended June 30, 2007.
Results of the second quarter are not necessarily indicative of the results for the full year of 2008. Certain of our operations (particularly charter flights and certain seasonal services) will have the effect of increasing our total revenue during the second and third quarters.
LIQUIDITY AND FINANCIAL CONDITION
GENERAL
At June 30, 2008, cash and cash equivalents were $203,719. Total liabilities at June 30, 2008 were $16,049,464, consisting of current liabilities in the aggregate amount of $12,001,353 and long-term liabilities in the amount of $4,048,111. At June 30, 2008, assets included $65,028 in prepaid expenses, $756,114 in furniture and equipment, net of depreciation; $199,996 in debt issuance costs, net of amortization; and other assets of $1,099,631. As of June 30, 2008, our working capital deficit was $(10,697,978) as compared to $(3,313,797) at June 30, 2007. We expect to incur additional operating losses as we continue our commercialization efforts.
Our debt before discount at June 30, 2008 and December 31, 2007 were as follows:
JUNE 30, 2008 DECEMBER 31, 2007
------------- -----------------
Short-term notes $ 7,994,838 $ 844,838
Short-term bridge loans 700,000 --
Long Term Convertible notes 2,750,000 8,650,000
------------- -------------
Total $ 11,444,838 $ 9,494,838
============= =============
For more detailed information on long-term liabilities, see Note 7 to our financial statements contained herein.
FINANCING TRANSACTIONS
Since inception, we have incurred substantial operating losses. As of June 30, 2008, we had an accumulated deficit of $(34,128,637). We did not receive any revenues from inception until the start of operations on March 27, 2006. Our operations have been financed primarily through the private placement of our debt and equity securities and the cash exercise of outstanding warrants. The terms of these debt and equity financings are set forth below.
JULY 2008 CONVERTIBLE NOTE FINANCING
On July 15, 2008, we closed on a $1,500,000 bridge loan financing pursuant to a Note Purchase Agreement dated July 3, 2008 with one investor (the "July 2008 Investor"), pursuant to which we issued a total of $1,500,000 in principal amount of convertible notes (the "July 2008 Note"). The July 2008 Note is repayable on the earlier of (a) the first closing of a private placement of our debt or equity securities to institutional investors in an institutional capital raise (the "Institutional Private Placement") or (b) December 31, 2008. To secure repayment of the July 2008 Note, certain third parties agreed to pledge a total of 375,000 shares of common stock (the "July 2008 Collateral") of an unrelated, privately held third party corporation pursuant to the terms and provisions of a Pledge and Escrow Agreement.
The July 2008 Note bears interest at the rate of 15% per annum based on a 360-day year, of which 60 days' worth of interest, equal to $37,500, was prepaid on the closing of the July 2008 Note. As additional consideration, we paid the July 2008 Investor upon the closing of the July 2008 Note an origination fee of five percent (5%) of the amount of the loan, equal to $75,000. We received net proceeds of approximately $585,000 after deducting prepaid interest and fees and expenses of the offering, and after repayment of certain debt and other obligations owed by us. We plan to use the remaining net proceeds received in this financing for working capital.
The July 2008 Note, together with accrued but unpaid interest, is convertible at the option of the July 2008 Investor, into shares of our common stock at a price equal to the lower of (a) the conversion price for convertible debt issued in the first closing of the Institutional Private Placement or (b) $0.20 per share. The shares issuable upon conversion of the July 2008 Note are entitled to piggyback registration rights.
In connection with the July 2008 Note financing, we agreed to issue to the July 2008 Investor warrants to purchase up to 3,000,000 shares of our common stock, which have an exercise price of $0.20 per share and a term of five years from the date of issuance. The shares of common stock issuable upon exercise of such warrant are entitled to piggyback registration rights.
Certain members of our management agreed to transfer 525,000 shares of U.S. Helicopter common stock to the July 2008 Investor as an inducement to purchase the July 2008 Note. Such shares are also entitled to piggyback registration rights. In addition, certain members of our management have agreed to transfer a total of 1,225,000 shares of U.S. Helicopter common stock to the pledgors and certain third parties as an inducement to the pledgors to pledge the July 2008 Collateral, in consideration of an existing lender's agreement to forbear from exercising its rights under its outstanding note agreement, and other consideration.
Commissions paid by us in connection with this transaction consisted of an 8% placement fee to certain third parties. In addition, we agreed to pay to the pledgors fees totaling $195,000 as an inducement to pledge the July 2008 Collateral securing the repayment of the July 2008 Note.
MAY 2008 NOTE FINANCING
On May 30, 2008, we closed on a $250,000 convertible bridge loan financing with an existing bridge lender in accordance with a Convertible Note Purchase Agreement, pursuant to which we issued a total of $250,000 in principal amount of convertible notes (the "May 2008 Notes"). Such notes accrue interest at the rate of 15% per annum and are repayable on or before the earlier of the earlier of (a) the next closing of a private placement of our debt or equity securities, or (b) 60 days after the date of the loan. We repaid this loan in full with proceeds received in the July 2008 Note financing as described above.
MARCH 2008 CONVERTIBLE DEBENTURE FINANCING
We received gross proceeds totaling $1,250,000 from YA Global Investments, L.P., formerly known as Cornell Capital Partners, L.P. ("YA") pursuant to a Securities Purchase Agreement dated March 31, 2008 (the "March 2008 SPA"). Pursuant to the March 2008 SPA, we issued convertible debentures in the principal amount of $1,250,000 (the "March 2008 Debenture"). The March 2008 Debenture bears interest at a rate of 18% per annum and is convertible into shares of our common stock at the option of YA any time up to maturity at a conversion price equal to the lesser of $0.30 or 80% of the lowest closing bid price of our common stock during the 15 trading days immediately preceding the conversion date. The March 2008 Debenture is repayable as of the earlier of September 30, 2008 or (b) on the closing date of the next equity financing completed by us resulting in not less than $5.0 million in gross proceeds. We used approximately $613,000 of the proceeds received in connection with the March 2008 Debenture to repay all amounts due and owing under a debenture issued to YA on March 14, 2008. We used the remaining proceeds received in this financing for working capital.
Pursuant to the March 2008 SPA, we also issued warrants to YA to purchase a total of 2,783,333 shares of our common stock with an exercise price of $0.01 per share. The warrants are exercisable for a period of five years after issuance.
We entered into an amended security agreement with YA pursuant to which we continued the security interest of YA in all our assets which we granted in connection with debentures issued by us to YA in August 2004.
We have agreed to include the shares of common stock issuable upon conversion of the debentures and upon exercise of the warrants issued in this transaction in the event we determine to file a registration statement other than on Form S-4 or Form S-8 and YA elects to include the shares issuable upon conversion of the debentures and upon exercise of the warrants in such registration statement.
Fees and expenses paid in connection with this transaction included a monitoring fee of $78,750 to Yorkville Advisors, LLC. We also paid structuring fees to Yorkville Advisors, LLC in the amount of $25,000.
As a condition to closing the March 2008 Debenture transaction, YA and certain of our bridge lenders (the "Bridge Lenders") were required to enter into a Subordination Agreement providing that payment by us of the bridge loans made by the Bridge Lenders in the aggregate amount of $350,000 shall be subordinate to our repayment of a total of $6,250,000 of indebtedness owed to YA.
As an additional condition to closing the March 2008 Debenture transaction, our five most senior executive officers (collectively, "Management") agreed to continue pre-existing reductions of their salaries by 20% until such time as we repaid a total of $6,250,000 from proceeds to be received by us in an institutional private placement (the "YA Repayment"). After we make such repayments, Management's salaries may be reinstated in full, and all unpaid salary amounts may be issued to Management in the form of shares of our common stock at a price equal to the greater of the volume weighted average price of our common stock as quoted by Bloomberg, LP on the day prior to the YA Repayment or $0.50 per share. Each Management member has the option, however, to receive payment of such unpaid salary in cash to the extent of such Management member's contribution to the Common Stock Purchase once the total indebtedness owed by us to YA is reduced by $6.25 million or more.
MARCH 2008 AMENDMENT OF PRIOR YA DEBENTURES AND WARRANTS
On March 31, 2008, we amended the terms of three secured convertible debentures previously issued to YA on March 31, 2006 (in the remaining principal amount of $5.9 million), November 3, 2006 (in the principal amount of $2.75 million) and March 30, 2007 (in the remaining principal amount of $844,836) (collectively, the "Prior Debentures"). The Prior Debentures contained conversion prices equal to the lesser of $0.50 per share or 95% of the lowest daily volume weighted average price of our common stock for the 30 days prior to the notice of exercise ("Fair Market Value"), and provided for an adjustment in the conversion price in the event that we completed a financing whereby the price per share of our common stock (or its equivalent on an as-converted basis) was less than the conversion price of the Prior Debentures. As required by the terms of the Prior Debentures and in light of prior financings completed by us, we amended the terms of the Prior Debentures to provide for a conversion price equal to the lesser of $0.30 per share or 95% of the Fair Market Value of our common stock.
In addition, on March 31, 2008, we amended certain warrants previously issued to YA in connection with certain convertible debenture financings to purchase up to an aggregate of 9,452,774 shares of our common stock (the "Prior Warrants"). The Prior Warrants contained an exercise price of $0.50 per share. The Prior Warrants provided for an adjustment in the exercise price and the number of shares issuable under the Prior Warrants in the event that we completed a financing whereby the price per share of our common stock (or its equivalent on an as-converted basis) was less than the exercise price of the applicable Prior Warrant. In light of prior financings completed by us and in accordance with the terms of the Prior Warrants, we amended the Prior Warrants to provide for an exercise price of $0.30 per share.
MARCH 2008 $1,250,000 WARRANT FINANCING
On March 31, 2008, we received gross proceeds totaling $1,250,000 from Kuwait Holding, KSC ("KH") pursuant to a Securities Purchase Agreement dated March 25, 2008 (the "KH SPA"). Pursuant to the KH SPA, we issued two warrants to purchase an aggregate of 6,950,000 shares of our common stock, which have an exercise price of $0.01 per share and a term of five years from the date of issuance (the "KH Warrants"). KH also received piggyback registration rights in connection with the shares of common stock issuable upon exercise of the KH Warrants.
We did not pay any commissions on this transaction.
MARCH 2008 DEBENTURE FINANCING
On March 14, 2008, we entered into a Securities Purchase Agreement (the "March 14, 2008 SPA") with YA pursuant to which we issued secured debentures in the principal amount of $608,000 (the "March Debenture"). The March Debenture was repaid in full with proceeds received by us in connection with the March 2008 Debenture.
In connection with the March Debenture, we entered into an amended security agreement with YA pursuant to which we continued the security interest of YA in all our assets which we granted in connection with debentures issued by us to YA in August 2004.
Commissions to YA in connection with this transaction included monitoring, structuring and legal fees in the total amount of $30,000.
FEBRUARY 2008 BRIDGE LOAN FINANCINGS
On February 21, 2008, we closed on a $300,000 bridge loan financing pursuant to a Convertible Note Purchase Agreement dated February 20, 2008 with one investor, pursuant to which we issued a total of $300,000 in principal amount of convertible notes (the "Notes"). Such notes accrue interest at the rate of 10% per annum and are convertible, together with accrued interest, at the option of the holder into shares of our common stock at a conversion price equal to $0.25 per share. Such notes are repayable on or before the earlier of the date of the next financing completed by us other than a bridge loan financing, or the one year anniversary of the closing date of such notes.
On February 11, 2008, we entered into Convertible Note Purchase Agreements with two investors, pursuant to which we issued a total of $50,000 in principal amount of convertible notes. In connection with these financings, we also issued to such investors warrants to purchase an aggregate of 30,000 shares of our common stock as an inducement to enter into the transactions. Such warrants contain an exercise price of $0.50 per share and are exercisable for a period of five years. The notes accrue interest at the rate of 15% per annum and are convertible, together with accrued and unpaid interest, at the option of the holders into shares of our common stock at a conversion price equal to $0.25 per share. Such notes are repayable on or before the earlier of the date of the next financing completed by us other than a bridge loan financing, or the six month anniversary of the closing date of the Notes.
OCTOBER 2007 PRIVATE PLACEMENT
On October 17, 2007, we received gross proceeds of $6,600,000 in a private placement transaction with International Financial Advisors, K.S.C.C. ("IFA") pursuant to a Securities Purchase Agreement dated October 15, 2007 (the "IFA SPA") and entered into on October 17, 2007. In accordance with the terms of the . . .
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