Tempus
Applied Solutions Holdings, Inc. and Subsidiaries
Consolidated
Balance Sheets
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
402,599
|
|
|
$
|
592,514
|
|
Restricted cash
|
|
|
50,007
|
|
|
|
50,007
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade, net
|
|
|
1,403,734
|
|
|
|
1,415,083
|
|
Other
|
|
|
1,119
|
|
|
|
1,119
|
|
Related party
|
|
|
355,025
|
|
|
|
435,948
|
|
Other assets
|
|
|
102,637
|
|
|
|
98,871
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,315,121
|
|
|
|
2,593,542
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
5,850,338
|
|
|
|
5,934,907
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
51,428
|
|
|
|
52,172
|
|
Intangibles, net
|
|
|
548,402
|
|
|
|
1,054,839
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
599,830
|
|
|
|
1,107,011
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,765,289
|
|
|
$
|
9,635,460
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable:
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
3,349,544
|
|
|
$
|
3,781,287
|
|
Related party
|
|
|
2,380,200
|
|
|
|
1,886,386
|
|
Accrued liabilities
|
|
|
514,363
|
|
|
|
912,314
|
|
Capital Lease obligation
|
|
|
5,799,886
|
|
|
|
5,835,181
|
|
Customer deposits
|
|
|
104,950
|
|
|
|
278,945
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,148,943
|
|
|
|
12,694,113
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Common stock warrant liability
|
|
|
11,385
|
|
|
|
102,185
|
|
|
|
|
|
|
|
|
|
|
Total long term liabilities
|
|
|
11,385
|
|
|
|
102,185
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
12,160,328
|
|
|
|
12,796,298
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies - Note 13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 40,000,000 shares authorized, 4,578,070 shares issued and outstanding at March 31, 2017 and December 31, 2016
|
|
|
458
|
|
|
|
458
|
|
Common stock, $0.0001 par value; 100,000,000 shares authorized; 11,064,664 shares issued and outstanding at March 31, 2017 and December 31, 2016
|
|
|
1,106
|
|
|
|
1,106
|
|
Additional paid in capital
|
|
|
10,084,896
|
|
|
|
10,050,746
|
|
Accumulated deficit
|
|
|
(13,481,499
|
)
|
|
|
(13,213,148
|
)
|
Total stockholders’ deficit
|
|
|
(3,395,039
|
)
|
|
|
(3,160,838
|
)
|
Total liabilities and stockholders' deficit
|
|
$
|
8,765,289
|
|
|
$
|
9,635,460
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Tempus
Applied Solutions Holdings, Inc. and Subsidiaries
Consolidated
Statements of Operations (unaudited)
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
REVENUES
|
|
$
|
4,386,839
|
|
|
$
|
3,749,023
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUE
|
|
|
3,761,056
|
|
|
|
3,750,595
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
625,783
|
|
|
|
(1,572
|
)
|
|
|
|
|
|
|
|
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
822,973
|
|
|
|
1,554,409
|
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
|
(197,190
|
)
|
|
|
(1,555,981
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
-
|
|
|
|
1,793
|
|
Interest expense
|
|
|
(175,122
|
)
|
|
|
-
|
|
Non-operational income (expense)
|
|
|
103,961
|
|
|
|
(309,669
|
)
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(71,161
|
)
|
|
|
(307,876
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(268,351
|
)
|
|
$
|
(1,863,857
|
)
|
|
|
|
|
|
|
|
|
|
BASIC LOSS PER COMMON SHARE
|
|
$
|
(0.02
|
)
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
DILUTED LOSS PER COMMON SHARE
|
|
$
|
(0.02
|
)
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC
|
|
|
11,064,664
|
|
|
|
9,132,839
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, DILUTED
|
|
|
11,064,664
|
|
|
|
9,132,839
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Tempus
Applied Solutions Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders’
Deficit
|
|
Common stock
|
|
|
Preferred stock
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
$0.0001 par value
|
|
|
$0.0001 par value
|
|
|
paid
|
|
|
Accumulated
|
|
|
stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
in capital
|
|
|
deficit
|
|
|
equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015 (audited)
|
|
|
8,836,421
|
|
|
$
|
884
|
|
|
|
1,369,735
|
|
|
$
|
137
|
|
|
$
|
262,496
|
|
|
$
|
(10,087,076
|
)
|
|
$
|
(9,823,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,126,072
|
)
|
|
|
(3,126,072
|
)
|
Conversion of warrant liability to common stock
|
|
|
1,986,112
|
|
|
|
198
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,797,164
|
|
|
|
-
|
|
|
|
2,797,362
|
|
Conversion of warrant liability to preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
3,208,335
|
|
|
|
321
|
|
|
|
6,339,960
|
|
|
|
-
|
|
|
|
6,340,281
|
|
Issuance of common stock for acquisition of Tempus Jets, Inc.
|
|
|
242,131
|
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
499,976
|
|
|
|
-
|
|
|
|
500,000
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
151,150
|
|
|
|
-
|
|
|
|
151,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016 (audited)
|
|
|
11,064,664
|
|
|
|
1,106
|
|
|
|
4,578,070
|
|
|
|
458
|
|
|
|
10,050,746
|
|
|
|
(13,213,148
|
)
|
|
|
(3,160,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(268,351
|
)
|
|
|
(268,351
|
)
|
Stock Based Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,150
|
|
|
|
-
|
|
|
|
34,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2017 (unaudited)
|
|
|
11,064,664
|
|
|
$
|
1,106
|
|
|
|
4,578,070
|
|
|
$
|
458
|
|
|
$
|
10,084,896
|
|
|
$
|
(13,481,499
|
)
|
|
$
|
(3,395,039
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements.
Tempus
Applied Solutions Holdings, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(unaudited)
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(268,351
|
)
|
|
$
|
(1,863,857
|
)
|
Adjustments to reconcile net loss to net cash used for operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
34,150
|
|
|
|
58,559
|
|
Depreciation and amortization
|
|
|
67,856
|
|
|
|
18,761
|
|
Loss on conversion of warrant liability to stock
|
|
|
-
|
|
|
|
3,550,487
|
|
Fair value adjustment of common stock warrants
|
|
|
(90,800
|
)
|
|
|
(3,239,884
|
)
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable-trade
|
|
|
11,349
|
|
|
|
(428,063
|
)
|
Accounts receivable-other
|
|
|
-
|
|
|
|
(569,307
|
)
|
Due to/from related parties
|
|
|
509,008
|
|
|
|
334,088
|
)
|
Inventory
|
|
|
-
|
|
|
|
24,999
|
|
Other current assets
|
|
|
(3,766
|
)
|
|
|
(3,296
|
)
|
Deposits
|
|
|
-
|
|
|
|
496,900
|
|
Accounts payable-trade
|
|
|
(13,319
|
)
|
|
|
516,796
|
|
Accrued liabilities
|
|
|
(362,786
|
)
|
|
|
(680,367
|
)
|
Deferred revenue
|
|
|
-
|
|
|
|
607,746
|
|
Customer deposits
|
|
|
(60,144
|
)
|
|
|
(349,075
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(176,803
|
)
|
|
|
(1,526,531
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
22,183
|
|
|
|
(35,467
|
)
|
Purchases of intangible assets
|
|
|
-
|
|
|
|
(24,164
|
)
|
Sale of Business
|
|
|
-
|
|
|
|
-
|
|
Decrease in restricted cash
|
|
|
-
|
|
|
|
900,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities
|
|
|
22,183
|
|
|
|
840,369
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Payments on Capital Lease Obligation
|
|
|
(35,295
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
(35,295
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(189,915
|
)
|
|
|
(685,144
|
)
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
592,514
|
|
|
|
1,288,495
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
402,599
|
|
|
$
|
603,351
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
175,122
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Intangible assets acquired through acquisition of Tempus Jets, Inc.
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Intangible assets and net liabilities disposed of through disposition of Tempus Jets Inc
|
|
$
|
500,000
|
|
|
$
|
-
|
|
Issuance of stock for exercise of warrants
|
|
$
|
-
|
|
|
|
7,591,530
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
TEMPUS
APPLIED SOLUTIONS HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
1.
|
DESCRIPTION
OF ORGANIZATION AND BUSINESS OPERATIONS
|
Tempus Applied Solutions Holdings, Inc.
(“we”, the “Company” or “Tempus Holdings”) is a Delaware corporation organized on December
19, 2014 as a direct, wholly owned subsidiary of Chart Acquisition Corp. (“Chart”). We were formed solely for the purpose
of effecting a business combination between Chart and Tempus Applied Solutions, LLC (“Tempus”). Tempus was organized
under the laws of Delaware on December 4, 2014 and provides turnkey flight operations, customized design, engineering and modification
solutions and training services that support critical aviation missions of the United States Department of Defense (the “DoD”),
the U.S. intelligence community, foreign governments, heads of state and high net worth individuals worldwide. Tempus currently
has the following six subsidiaries: three wholly owned operating subsidiaries, Global Aviation Support, LLC, Proflight Aviation
Services LLC, and Tempus Jets, Inc., and three recently formed, wholly owned entities that do not yet have any operations, Tempus
Applied Solutions, Inc., Tempus Aero Solutions SIA, and Tempus Training Solutions, LLC. On March 1, 2017, the Company entered into
a Stock Purchase Agreement (the “Agreement”), to be effective January 1, 2017, for the sale of Tempus Jets, Inc. See
Note 18 below. The Company has its headquarters in Williamsburg, Virginia. The Company’s activities are subject to significant
risks and uncertainties, including without limitation the risks of deadline and budget overruns and risks specific to government
and international contracting businesses.
On
July 31, 2015, pursuant to an Agreement and Plan of Merger dated as of January 5, 2015, as amended (the “Merger Agreement”),
by and among Tempus Holdings, Chart, Tempus, the holders of Tempus’ membership interests named in the Merger Agreement (the
“Members”), Benjamin Scott Terry and John G. Gulbin III (together, in their capacity under the Merger Agreement as
the representative of the Members for the purposes set forth therein, the “Members’ Representative”), Chart
Merger Sub Inc. (“Chart Merger Sub”), Chart Financing Sub Inc. (“Chart Financing Sub”), TAS Merger Sub
LLC (“Tempus Merger Sub”), TAS Financing Sub Inc. (“Tempus Financing Sub”), Chart Acquisition Group LLC
(“CAG”), in its capacity under the Merger Agreement as the representative of the equity holders of Chart and Tempus
Holdings (other than the Members and their successors and assigns) for the purposes set forth therein and, for the limited purposes
set forth therein, CAG, Joseph Wright and Cowen Investments LLC, the following was effected: (i) Chart Financing Sub and Chart
Merger Sub merged with and into Chart, with Chart continuing as the surviving entity; (ii) Tempus Financing Sub and Tempus Merger
Sub merged with and into Tempus, with Tempus continuing as the surviving entity; and (iii) each of Chart and Tempus became wholly
owned subsidiaries of the Company. We refer to the transactions contemplated by the Merger Agreement as the “Business Combination.”
The
consummation of the Business Combination was preceded by a series of privately negotiated transactions, referred to collectively
herein as the “Financing”, involving aggregate cash investments of $10.5 million by three outside investor entities
(or affiliates thereof) that had not previously invested in Chart or Tempus (the “New Investors”), aggregate cash
investments of $5.0 million by the Sponsor, Mr. Joseph Wright and Cowen (collectively, the “Chart Affiliate Investors”)
and a cash investment of $500,000 by the Chief Financial Officer of Tempus (through his individual retirement account) (the “Tempus
Affiliate Investor”, and together with the Chart Affiliate Investors, the “Affiliate Investors”, and together
with the New Investors, the “Investors”).
The
Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern. The conditions
noted below raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Historically, the Company has experienced
operating losses and negative cash flows from operations, and it currently has a working capital deficit, due principally to delays
in the commencement of contracts, low margins on initial contracts. In addition, the Company has been seeking financing in order
to fund a purchase obligation of $5.5 million related to an aircraft. See note 18 below. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern, especially in the near term and within one year after the date
that the consolidated financial statements are issued.
In light of
the foregoing, the Company has implemented cost cutting initiatives, including reductions in our employee headcount, facilities
and other expenses. Headcount has been reduced from 52 in June 2016 to 13 as of March 31, 2017. The Company expects to undertake
additional cost-cutting measures in the future to the extent consistent with the provision of full performance under the Company’s
contracts with customers, including the disposition of unprofitable entities. In addition, the Company continues to explore possibilities
for raising both working capital and longer-term capital from outside sources in various possible transactions. Management expects
that these efforts will begin to achieve result over the remainder of 2017 and, assuming the timely commencement of new contracts,
that the Company will begin to reduce its working capital deficit over the coming year. Nevertheless, whether, and when, the Company
can attain positive operating cash flows for operations is highly dependent on the commencement of new contracts and the timing
of their commencement. There can be no assurance that the Company’s cash flows or costs of operations will develop as currently
expected. Our cash flows and liquidity plans remain subject to a number of risks and uncertainties. See “Item 1A. Risk Factors”
of our Annual Report on Form 10-K (the “Form 10-K”).
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
Company has prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally
accepted in the United States of America for interim financial information. In our opinion, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended
March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
The
accompanying consolidated financial statements are presented in U.S. dollars in conformity with accounting principles generally
accepted in the United State of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”).
Because
Tempus was deemed the accounting acquirer in the Business Combination, which was consummated on July 31, 2015, the historical
financial information for the three months ended March 31, 2017 and 2016 reflects the financial information and activities of
Tempus only. In conjunction with the Business Combination, all outstanding membership interests of Tempus were exchanged for shares
of the Company’s common stock. The historical members’ equity of Tempus (which is a limited liability company) has
been retroactively adjusted to reflect the stockholders’ equity structure of Tempus Holdings (which is a corporation), using
the respective exchange ratios established in the Business Combination. This reflects the number of shares Tempus Holdings issued
to the members of Tempus upon the consummation of the Business Combination. Accordingly, all shares and per share amounts for
all periods presented in these consolidated financial statements and the notes thereto have been adjusted retrospectively, where
applicable, to reflect the respective exchange ratios established in the Business Combination. For details on the conversion of
Tempus’ membership interests into Company common stock, see the Company’s Current Report on Form 8-K filed with the
SEC on August 6, 2015 in connection with the Business Combination.
The
Company manages, analyzes and reports on its business and results of operations on the basis of one operating segment, flight
operations and support. Our chief executive officer is the primary decision maker.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Tempus Holdings and its subsidiaries. Significant inter-entity accounts
and transactions have been eliminated.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Income
Tax
The
Company follows the reporting requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 740 “Income Taxes”, which requires an asset and liability approach to financial accounting and
reporting for income taxes. The Company recognizes deferred tax assets or liabilities based on differences between the financial
statement and tax basis of assets and liabilities that will result in future taxable or deductible amounts calculated on enacted
tax laws and rates applicable to the periods in which the differences are expected to be ultimately realized.
FASB
ASC 740, Income Taxes, sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain
tax positions. This interpretation uses a two-step approach wherein a tax benefit is recognized if a position is more-likely-than-not
to be sustained upon examination by taxing authorities. The amount of the benefit is then measured to be the highest tax benefit
that is greater than 50% likely to be realized.
Tempus,
a limited liability company, was the acquiror in the Business Combination; therefore, Tempus’ taxable income or loss for
the period commencing January 1, 2015 through July 31, 2015 (the effective date of the Business Combination) is allocated to its
members in accordance with its operating agreement and is reflected in the members’ income taxes. The members' income tax
filings are subject to audit by various taxing authorities depending on their physical residence. All members reside in the United
States of America.
Tempus’
consolidated financial statements reflect a provision or liability for Federal and state income taxes for the period commencing
January 1, 2015 through July 31, 2015 (the effective date of the Business Combination) for Chart, the predecessor company, and
for Tempus Holdings for the period commencing March 31, 2017.
The
Company’s tax returns are subject to possible examination by the taxing authorities. For income tax purposes, the tax returns
essentially remain open for possible examination for a period of three years after the respective filing of those returns.
Revenue
Recognition
The Company uses the percentage-of-completion
method for accounting for long-term aircraft maintenance and modification fixed-price contracts to recognize revenues and receivables
for financial reporting purposes. Revenues from firm fixed price contracts are measured by the percentage of costs incurred
to date to estimated total costs for each contract. Revenues from time-and-material line items are measured by direct labor
hours or flight hours incurred during the period at the contracted hourly rates plus the cost of materials, if applicable. To the
extent this earned revenue is not invoiced, it is recognized as earnings in excess of billings and is represented in other accounts
receivable on the consolidated balance sheets. Earnings in excess of billings were $459 at March 31, 2017 and December 31, 2016.
The
Company records payments received in advance for services to be performed under contractual agreements and billings in excess
of costs on uncompleted fixed-price contracts as deferred revenue until such related services are provided. Deferred revenue was
$0 at March 31, 2017 and December 31, 2016.
Revenue
on leased aircraft and equipment representing rental fees and financing charges are recorded on a straight line basis over the
term of the leases.
Currently,
the Company’s consolidated revenues consist principally of revenues earned under aircraft management contracts (which are
based on fixed expenses and fees plus variable expenses and fees tied to actual aircraft flight hours) and revenues earned from
the provision of leased aircraft.
Pre-contract
Costs
We
capitalize the pre-contract costs we incur, excluding start-up costs which are expensed as incurred, if we determine that it is
probable that we will be awarded a specific anticipated contract. These capitalized costs are recognized as a cost of revenue
ratably across flight hours that are expected to be flown, as they are actually flown, for that particular contract. Capitalized
pre-contract costs of $56,270 and $49,799 at March 31, 2017 and December 31, 2016, respectively, are included in other current
assets in the accompanying consolidated balance sheets. Should future orders not materialize or should we determine that the costs
are no longer probable of recovery, the associated capitalized costs would be written off.
Cash
and Cash Equivalents
For
purposes of cash flow, the Company considers all cash accounts that are not subject to withdrawal restrictions or penalties, and
highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash balances usually
do exceed federally insured limits.
Restricted
Cash
The
Company considers cash or highly liquid debt instruments on deposit with financial institutions that are held to secure an obligation
by the Company to be restricted cash. As of March 31, 2017 and December 31, 2016, the Company had restricted cash balances of
$50,007. This balance consists of a certificate of deposit that secures the Company’s credit card borrowings.
Accounts
Receivable
Trade accounts receivable are recorded
at the invoiced amount and do not bear interest.
The Company establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other relevant
information. Management believes that its contract acceptance, billing and collection policies are adequate to minimize the
potential credit risk associated with accounts receivable. The Company had $29,302 and $37,369 allowance for doubtful accounts
as of March 31, 2017 and December 31, 2016, respectively.
In June 2016, the Company entered a
factoring agreement to sell without recourse, certain U.S. government contract receivables to an unrelated third-party financial
institution. Under the current terms of the factoring agreement, the maximum amount of outstanding advances at any one time is
$1.0 million. The discount rate included in the agreement was subject to change based on the historical performance of the receivables
sold.
Approximately, $2.0 million of receivables
has been sold under the factoring agreement during fiscal year 2016 and the first quarter of 2017. The sale of these receivables
accelerated the collection of the Company’s cash and reduced credit exposure during year. Sales of accounts receivable are
reflected as a reduction of Accounts receivable trade, net in the Consolidated Balance Sheets, and any costs incurred by the Company
associated with the factoring activity is reflected in Other Income / Expense in the Consolidated Statements of Operations, as
they meet the applicable criteria of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities (“SFAS No. 140”). The amount due from the factoring company, net of advances received from the factoring
company, was approximately $29,000 at March 31, 2017. The Company pays factoring fees associated with the sale of receivables based
on the dollar value of the receivables sold. Such fees are immaterial and are included in the Other Income / Expense in the Consolidated
Statement of Operations.
Property
and Equipment
Property
and equipment is stated at cost, less accumulated depreciation. Maintenance and repairs, including replacement of minor items
of physical properties, are charged to expense; major additions to physical properties are capitalized.
It
is the Company’s policy to commence depreciation upon the date that assets are placed into service. For the three months
ended March 31, 2017, the Company recognized depreciation of fixed assets in the amount of $61,419; $12,324 of depreciation was
recognized for the three months ended March 31, 2016. Depreciation is computed on a straight-line basis over the estimated service
lives of the assets as follows:
|
|
Years
|
Computer
equipment
|
|
3-5
|
Furniture
and fixtures
|
|
3-5
|
Intangibles
Intangibles
are stated at cost, less accumulated amortization. Intangibles consist of computer software, Federal Aviation Administration (the
“FAA”) licenses and independent research and development costs associated with the development of supplemental type
certificates (“STCs”).
STCs
are authorizations granted by the FAA for specific modifications of a certain aircraft. An STC authorizes us to perform
modifications, installations, and assemblies on applicable customer-owned aircraft. Costs incurred to obtain STC’s are
capitalized and subsequently amortized against revenue being generated from aircraft modifications associated with the STC.
The costs are expensed as services are rendered on each aircraft through cost of sales using the units of production method.
The legal life of an STC is indefinite. We believe we have enough future sales to fully amortize our STC development costs.
As of March 31, 2017 and 2016 we have recognized no amortization of these costs.
On
October 1, 2015, the Company purchased Proflight Aviation Services, LLC, which provides flight training services under a Federal
Aviation Regulations (“FAR”) Part 141 certificate. The total purchase price of $50,000 was allocated to intangibles
and is considered to be indefinite-lived.
On
March 15, 2016, the Company purchased Tempus Jets, Inc. (“TJI”) from our CEO B. Scott Terry for non-cash consideration
of $500,000, paid in the form of 242,131 shares of common stock of the Company. TJI owns an operating certificate issued
by the FAA in accordance with the requirements of Parts 119 and 135 of the FAR (the “Operating Certificate”). The
total purchase price of $500,000 was allocated to intangibles and is considered to be indefinite-lived. TJI has been sold in a
transaction that was effective January 1, 2017. For the details on the sale of TJI, see the Company’s Current Report on
form 8-K filed with the SEC on March 1, 2017 in connection with the transaction.
It is the Company’s policy to
commence amortization of computer software upon the date that assets are placed into service. For the three months ended March
31, 2017 and 2016, the Company recognized amortization expense of computer software in the amount of $6,437. Amortization is computed
on a straight-line basis over the estimated service lives of the assets as follows:
|
|
Years
|
Computer
software
|
|
3
|
Long-Lived
Assets
The
Company reviews its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable. As a result of its review, the Company does not believe that
any such change has occurred. If such changes in circumstance are present, a loss is recognized to the extent the carrying value
of the asset is in excess of the fair value of cash flows expected to result from the sale of the asset and amounts expected to
be realized upon its eventual disposition.
Customer
Deposits
In
the normal course of business, the Company receives cash as security for certain contractual obligations, which are held on deposit
until termination of the contract. Customer deposits are returned to the customer at contract termination or taken into income
if the customer fails to perform under the contract. At March 31, 2017 and December 31, 2016, the Company held $104,950 and $278,945,
respectively, in customer deposits.
Sales
and Marketing
The
Company records costs for general advertising, promotion and marketing programs at the time those costs are incurred. Sales and
Marketing expense was $55,387 and $315,392 for the three months ended March 31, 2017 and 2016, respectively.
Inventory
The
Company values its inventory at the lower of average cost, first-in-first-out (“FIFO”) or net realizable value. Any
identified excess, slow moving, and obsolete inventory is written down to its market value through a charge to income from operations.
There were no costs held in inventory at March 31, 2017 or December 31, 2016.
Stock
Based Compensation
The
Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors based
upon fair value at the date of award using a fair value based option pricing model. The compensation expense is recognized on
a straight-line basis over the requisite service period.
Fair
Value of Financial Instruments
The
Company complies with ASC Topics 820, “Fair Value Measurement”, and 815, “Derivatives and Hedging” for
its liabilities, which are re-measured and reported at fair value for each reporting period. The fair value of the Company’s
assets and liabilities, which qualify as financial instruments under ASC Topic 820, approximates the carrying amounts represented
in the accompanying consolidated balance sheets.
Reclassification
Certain
prior period amounts have been reclassified to conform to the current period presentation in the accompanying consolidated financial
statements. These reclassifications had no material effect on the previously reported results of operations or accumulated deficit.
Correction of an Error
The Company determined that it had been
accounting for a lease agreement and its purchase obligation related to an aircraft in error. The Company should have accounted
for its purchase obligation as a capital lease, thereby recording a capital lease aircraft asset and a corresponding capital lease
liability of approximately $6,000,000 as of the end of the quarter ended March 31, 2016. The error was not material to the unaudited
consolidated financial statements for the quarterly period ended March 31, 2016 since the correction of the error increased assets
and liabilities by the same amount.
Recent
Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606). Under the update, revenue will be recognized based on a five-step model. The
core principle of the model is that revenue will be recognized when the transfer of promised goods or services to customers is
made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
In the third quarter of 2015, the FASB deferred the effective date of the standard to annual and interim periods beginning after
December 15, 2017. Early adoption will be permitted for annual and interim periods beginning after December 15, 2016. The Company
is currently evaluating the impact that adopting this ASU will have on its financial position, results of operations and cash flows.
In August 2014, the FASB issued ASU No. 2014-15,
“Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern.” This ASU is intended to define management’s responsibility to evaluate whether
there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote
disclosures, and provides guidance to an organization’s management, with principles and definitions that are intended to
reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement
footnotes. Until the issuance of this ASU, U.S. GAAP lacked guidance about management’s responsibility to evaluate whether
there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote
disclosures. The amendments are effective for annual periods ending after December 15, 2016 and interim periods within annual periods
beginning after December 15, 2016, with early adoption permitted. The Company has concluded that there is substantial doubt about
its ability to continue as a going concern and has presented the required disclosures of this ASU in Note 2.
In September 2015, the FASB issued ASU
2015-16, Business Combinations (Topic 805). Under the update, an acquirer in a business combination is no longer required to account
for measurement-period adjustments retrospectively, and, instead, will recognize a measurement-period adjustment during the period
in which it determines the amount of the adjustment. The ASU is effective for financial statements issued after December 15, 2017,
and interim periods within those years. Early adoption will be permitted for annual and interim periods beginning after December
15, 2016. The Company does not expect the impact of adopting this ASU to be material to the Company's financial statements and
related disclosures.
In November 2015, the FASB issued ASU
2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. Under the update, deferred taxes would be classified
as noncurrent in the statement of financial position instead of being separated into current and non-current amounts. The ASU is
effective for financial statements issued after January 1, 2017 with early adoption permitted. Additionally, the Company may apply
the standard either prospectively or retrospectively. The Company has adopted this ASU and will present deferred taxes in accordance
with this ASU when deferred taxes are required to be recorded and presented in the financial statements.
In February 2016, the FASB issued ASU
2016-02, Leases (Topic 842). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of
more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting policy
election by class of underlying asset not to recognize lease assets and lease liabilities. Further, the lease requires a finance
lease to recognize both an interest expense and an amortization of the associated expense. Operating leases generally recognize
the associated expense on a straight line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective
approach and adoption beginning on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on
its financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718). The update amends the guidelines for share-based payment transactions, including
the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash
flows. The standard is effective for annual and interim periods beginning January 1, 2017, and early adoption is permitted. The
Company adopted 2016-09 effective January 1, 2017. The adoption of this standard did not have a material impact on the results
of operations.
In November 21016, the FASB issued ASU
2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash. The ASU requires that a statement of cash flows explain the
change during the period in the total cash, cash equivalents and amounts generally described as restricted cash or restricted cash
equivalents. This update is for entities for fiscal years beginning after December 15, 2017, and for interim periods within those
fiscal years using a retrospective transition method for each period presented. Early adoption is permitted. The Company is currently
evaluating the impact that ASU 2016-18 will have on its financial position, results of operations and cash flows.
Other accounting standards that have
been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not
expected to have a material impact on our consolidated financial statements upon adoption.
4.
|
CUSTOMER
AND VENDOR CONCENTRATION
|
We
have significant customer and vendor concentration. Customer concentration as of the three months ended March 31, 2017 and 2016
was:
|
|
Three months ended March 31, 2017
|
|
|
Three months ended March 31, 2016
|
|
|
|
Revenue
|
|
|
Revenue
|
|
Customer A
|
|
$
|
1,059,450
|
|
|
|
24
|
%
|
|
$
|
978,207
|
|
|
|
26
|
%
|
Customer B
|
|
|
1,325,467
|
|
|
|
30
|
%
|
|
|
1,248,790
|
|
|
|
33
|
%
|
Customer C
|
|
|
1,150,857
|
|
|
|
26
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Customer D
|
|
|
659,807
|
|
|
|
15
|
%
|
|
|
132,240
|
|
|
|
4
|
%
|
Customer E
|
|
|
-
|
|
|
|
-
|
%
|
|
|
920,622
|
|
|
|
25
|
%
|
Other customers
|
|
|
191,258
|
|
|
|
5
|
%
|
|
|
469,164
|
|
|
|
12
|
%
|
|
|
$
|
4,386,839
|
|
|
|
100
|
%
|
|
$
|
3,749,023
|
|
|
|
100
|
%
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Accounts Receivable
|
|
|
Accounts Receivable
|
|
Customer A
|
|
$
|
329,955
|
|
|
|
24
|
%
|
|
$
|
387,729
|
|
|
|
27
|
%
|
Customer B
|
|
|
639,139
|
|
|
|
46
|
%
|
|
|
449,658
|
|
|
|
32
|
%
|
Customer C
|
|
|
383,619
|
|
|
|
27
|
%
|
|
|
383,619
|
|
|
|
27
|
%
|
Customer D
|
|
|
29,486
|
|
|
|
2
|
%
|
|
|
42,624
|
|
|
|
3
|
%
|
Customer E
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Other customers
|
|
|
21,535
|
|
|
|
1
|
%
|
|
|
151,453
|
|
|
|
11
|
%
|
|
|
$
|
1,403,734
|
|
|
|
100
|
%
|
|
$
|
1,415,083
|
|
|
|
100
|
%
|
Vendor
concentration as of the three months ended March 31, 2017 and 2016 was:
|
|
Three months ended March 31, 2017
|
|
|
Three months ended March 31, 2016
|
|
|
|
Cost of Revenue
|
|
|
Cost of Revenue
|
|
Vendor A
|
|
$
|
916,073
|
|
|
|
24
|
%
|
|
$
|
775,901
|
|
|
|
21
|
%
|
Vendor B
|
|
|
327,554
|
|
|
|
9
|
%
|
|
|
423,981
|
|
|
|
11
|
%
|
Vendor C
|
|
|
10,294
|
|
|
|
1
|
%
|
|
|
250,269
|
|
|
|
7
|
%
|
Vendor D
|
|
|
476,034
|
|
|
|
13
|
%
|
|
|
-
|
|
|
|
0
|
%
|
Other vendors
|
|
|
2,041,395
|
|
|
|
54
|
%
|
|
|
2,567,699
|
|
|
|
61
|
%
|
|
|
$
|
3,761,056
|
|
|
|
100
|
%
|
|
$
|
3,750,595
|
|
|
|
100
|
%
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Accounts Payable
|
|
|
Accounts Payable
|
|
Vendor A
|
|
$
|
412,763
|
|
|
|
12
|
%
|
|
$
|
304,826
|
|
|
|
8
|
%
|
Vendor B
|
|
|
130,871
|
|
|
|
4
|
%
|
|
|
235,388
|
|
|
|
6
|
%
|
Vendor C
|
|
|
-
|
|
|
|
-
|
%
|
|
|
18,615
|
|
|
|
0
|
%
|
Vendor D
|
|
|
223,016
|
|
|
|
7
|
%
|
|
|
170,998
|
|
|
|
4
|
%
|
Other vendors
|
|
|
2,582,894
|
|
|
|
77
|
%
|
|
|
674,969
|
|
|
|
82
|
%
|
|
|
$
|
3,349,544
|
|
|
|
100
|
%
|
|
$
|
3,781,287
|
|
|
|
100
|
%
|
The
Company follows the reporting requirements of FASB ASC 740 “Income Taxes”, which requires an asset and liability approach
to financial accounting and reporting for income taxes. The Company recognizes deferred tax assets or liabilities based on differences
between the financial statement and tax basis of assets and liabilities that will result in future taxable or deductible amounts
calculated on enacted tax laws and rates applicable to the periods in which the differences are expected to be ultimately realized.
These differences arose principally from the valuation of stock warrants, net operating loss carryovers, and temporary differences
in deprecation methods between financial reporting and income tax basis.
GAAP
requires companies to assess whether valuation allowances should be recorded to offset deferred tax assets based on the consideration
of all available evidence using a “more likely than not” standard. In making such assessments, significant weight
is given to evidence that can be objectively verified. A company’s current and previous losses are given more weight than
its future projections. A cumulative loss position is considered a significant factor that is difficult to overcome.
The Company evaluates its deferred tax assets each reporting period, including assessing its cumulative loss
position, to determine if valuation allowances are required. A significant factor is the Company’s cumulative loss position.
This, combined with uncertain near-term economic conditions, reduces the Company’s ability to rely on projections of future
taxable income in establishing its deferred tax assets valuation allowance. Due to the weight of the significant negative evidence,
GAAP requires that a valuation allowance be established on all of the Company’s net deferred tax assets. The Company
is projecting a 0% annual estimated tax rate
Deferred income taxes reflect the tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
FASB
ASC 740, Income Taxes, sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain
tax positions. This interpretation uses a two-step approach wherein a tax benefit is recognized if a position is more-likely-than-not
to be sustained upon examination by taxing authorities. The amount of the benefit is then measured to be the highest tax benefit
that is greater than 50% likely to be realized. Based on its analysis, the Company has determined that it has not incurred any
liability for unrecognized tax benefits as of December 31, 2015. The Company’s conclusions may be subject to review and
adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations
and interpretations thereof. The Company files an income tax return in the U.S. federal jurisdiction, and may file income tax
returns in various U.S. states and foreign jurisdictions. The Company recognizes interest and penalties related to
unrecognized tax benefits in interest expense and other expenses, respectively. No interest expense or penalties have been recognized
as of March 31, 2017.
At
March 31, 2017, approximately $8,000,000 in federal and state net operating losses were available to be carried forward, expiring
at various dates through 2035.
Pursuant
to Sections 382 and 383 of the Internal Revenue Code, annual use of net operating loss carryforwards may be limited in the
event a cumulative change in ownership of more than 50% occurs within a three-year period. We had a Business Combination in 2015;
however, we have not completed a Section 382 study to determine the limitations resulting from any ownership changes. Accordingly,
the timing or amount of our net operating loss carryforwards that are available for utilization in the future may be limited in
any given year.
The
Company’s tax returns are subject to possible examination by the taxing authorities. In general, tax returns remain open
for possible examination for a period of three years after the respective filing of those returns.
6.
|
BASIC
AND DILUTED SHARES OUTSTANDING
|
Basic
common shares outstanding as of March 31, 2017 are 11,064,664. Our weighted average basic shares outstanding for the three months
ended March 31, 2017 is calculated based on the average number of basic common shares outstanding over the period in question
and is calculated as 11,064,664 shares.
Our
weighted average diluted common shares outstanding as of March 31, 2017 would normally be calculated based on the sum of the weighted
average basic shares outstanding for the three months ended March 31, 2017 and the weighted average of the shares that would convert
into common stock from our preferred stock and warrants over the period in question. This conversion would be calculated on a
treasury method basis based on the average closing share price of our common stock over the period in question as compared to
the conversion rate of the preferred stock, and the strike price of the particular warrants. The number of warrants outstanding
along with their respective strike prices can be found in Note 15, below. However, due to the fact that the Company experienced
a net loss for the three months ended March 31, 2017 and diluted earnings per share would otherwise be higher than basic earnings
per share, our diluted common shares outstanding are represented to be the same as our basic common shares outstanding.
Other
receivables consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Earnings in excess of billings
|
|
$
|
459
|
|
|
$
|
459
|
|
Other receivable
|
|
|
660
|
|
|
|
660
|
|
Total
|
|
$
|
1,119
|
|
|
$
|
1,119
|
|
Other
assets consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Pre-contract costs
|
|
$
|
56,270
|
|
|
$
|
49,799
|
|
Other prepaid expenses
|
|
|
46,367
|
|
|
|
49,072
|
|
Total
|
|
$
|
102,637
|
|
|
$
|
98,871
|
|
9.
|
RELATED
PARTY TRANSACTIONS
|
In
the Business Combination, the members of Tempus received 3,642,084 shares of the Company’s common stock in exchange for
all of the issued and outstanding membership interests of Tempus. The members have the right to receive up to an additional 6,300,000
shares of the Company’s common stock upon the achievement of certain financial milestones.
On
March 15, 2016, the Company purchased Tempus Jets, Inc. (“TJI”) from our CEO B. Scott Terry for non-cash consideration
of $500,000, paid in the form of 242,131 shares of common stock of the Company. The purchase price was based on an independent
valuation of similar operations and approved by the independent directors of the board. The number of shares issued to Mr. Terry
was calculated based on the volume weighted average market price of the Company’s common stock for the previous 20 trading
days.
TJI owns an operating certificate issued
by the FAA in accordance with the requirements of Parts 119 and 135 of the FAR (the “Operating Certificate”). Prior
to the Company’s purchase of TJI, TJI divested itself of substantially all of its assets other than the Operating Certificate,
and settled or transferred all of its liabilities. As a result of the acquisition of TJI, the Company owns, and can operate under,
the Operating Certificate. Under the Agreement, Mr. Terry and Jackson River Aviation, an affiliate of Mr. Terry’s, have indemnified
the Company against liabilities that may arise from the acquisition. The transaction was approved by the independent directors
of the Company after a review to determine that (a) the terms of the transaction were on an arm’s length basis; and (b) the
transaction was effected by the issuance of Company securities to a person who is an owner of an asset in a business synergistic
with the business of the Company, the transaction provided benefits to the Company in addition to the investment of funds and the
transaction was not one in which the Company was issuing securities primarily for the purpose of raising capital or to an entity
whose primary business was investing in securities. TJI has been sold back to Mr. Terry in a transaction that was effective January
1, 2017 for consideration of $500,000. See Note 18 Subsequent Events of our Annual Report on Form 10-K (the “Form 10-K”).
Jackson River Aviation (“JRA”)
is controlled by B. Scott Terry, the Company’s CEO and sole member of the Company’s Board of Directors. JRA (through
its subsidiary, TJI) prior to the acquisition of TJI by Tempus on March 15, 2016, provided FAR Part 135 aircraft charter services
to the Company. Total purchases by the Company from JRA for the three months ended March 31, 2017 and 2016 were $643,971and $5,591,
respectively. Billings by the Company to JRA for the three months ended March 31, 2017 and 2016 were $220,009 and 42,876, respectively.
As of March 31, 2017 the Company had a net outstanding payable to JRA of $284,051. As of December 31, 2016, the Company had a net
outstanding receivable from JRA of $38,962.
TIH is controlled by John G. Gulbin
III, a former member of our Board of Directors. TIH owns certain aircraft used by Tempus to provide services to certain customers.
(see Note 13 below). In addition, Tempus, through its wholly owned subsidiary Global Aviation Support, LLC, provided flight planning,
fuel handling and travel services to TIH. Prior to the close of the Business Combination, TIH provided administrative support,
including human resources, financial, legal, contracts and other general administrative services to Tempus. Subsequent to the Business
Combination, any administrative relationship is limited to certain shared information technology and marketing expenses, which
are incurred at cost. Total purchases by the Company from TIH for the three months ended March 31, 2017 and 2016 were $864,131
and 333,490, respectively. Total billings from the Company to TIH for the three months ended March 31, 2017 and 2016 were $33,612
and 70,588, respectively. The net outstanding payable from Tempus to TIH at March 31, 2017 and December 2016 was $1,528,036 and
1,284,886, respectively.
Southwind Capital, LLC (“Southwind”)
is controlled by R. Lee Priest, Jr., the Company’s Executive Vice President. Southwind owned certain aircraft used by Tempus
to provide services to certain customers. Total purchases by the Company from Southwind for the three months ended March 31, 2017
and 2016 were $0. The net outstanding payable from Tempus to Southwind at March 31, 2017 and December 31, 2016 was $142,496.
In 2015, the Company entered into an
aircraft purchase agreement with Pilatus Business Aircraft, Ltd. for the purchase of a Pilatus PC-12 with certain special mission
modifications for approximately $7.3 million. The Company entered into this agreement pursuant to a contract with a government
law enforcement agency whereby Tempus would lease the aircraft to the agency. Tempus subsequently assigned the lease contract and
the purchase obligation to Cowen Aviation Finance Holdings, Inc. (“CAF”) for no consideration and has entered into
a services agreement with CAF whereby it will provide certain administrative, servicing and marketing services for this and other
aircraft owned by CAF. CAF is owned by Cowen Group, Inc., (“Cowen”) whose CEO and Chairman, Peter Cohen, and board
member, Joe Wright, are former members of our board of directors. For the three months ended March 31, 2017 and 2016 Tempus billed
$16,388 and $18,605, respectively to CAF under the services agreement. At March 31, 2017 and December 31, 2016, the net payable
to CAF was $70,592 and $62,018, respectively.
All
related party transactions are entered into and performed under commercial terms consistent with what might be expected from a
third party service provider. Certain sales and marketing, and information technology functions of the Company are supported by
TIH and are expensed to the Company on a time and materials basis.
10.
|
PROPERTY
AND EQUIPMENT, NET
|
Property
and equipment, net consists of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Office equipment
|
|
$
|
135,897
|
|
|
$
|
168,055
|
|
Furniture and fixtures
|
|
|
456
|
|
|
|
456
|
|
Leased Aircraft
|
|
|
6,015,505
|
|
|
|
6,015,505
|
|
Total
|
|
|
6,151,858
|
|
|
|
6,184,016
|
|
Accumulated depreciation
|
|
|
(301,520
|
)
|
|
|
(249,109
|
)
|
Property and equipment, net
|
|
$
|
5,850,338
|
|
|
$
|
5,934,907
|
|
Intangibles,
net consists of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Infinite-lived intangible assets:
|
|
|
|
|
|
|
FAA licenses
|
|
$
|
50,000
|
|
|
$
|
550,000
|
|
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
STC costs
|
|
|
455,901
|
|
|
|
455,901
|
|
Accumulated amortization
|
|
|
-
|
|
|
|
-
|
|
|
|
|
455,901
|
|
|
|
455,901
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
85,275
|
|
|
|
85,275
|
|
Accumulated amortization
|
|
|
(42,774
|
)
|
|
|
(36,337
|
)
|
|
|
|
42,501
|
|
|
|
43,938
|
|
Total intangible assets, net
|
|
$
|
548,402
|
|
|
$
|
1,054,839
|
|
FAA licenses includes the $50,000 purchase
price for Proflight Aviation Services, LLC, which provides flight training services under a FAR Part 141 certificate and the $500,000
purchase price for TJI, which owns an Operating Certificate issued by the FAS in accordance with the requirements of Parts 119
and 135 of the FAR. The Company disposed of TJI effective January 1, 2017 for consideration of $500,000. See Note 18 Subsequent
Events of our Annual Report on Form 10-K (the “Form 10-K”)
STC costs relate to our efforts to gain
approval from the FAA for modifications to Gulfstream III, IV and V business jets to upgrade them for Future Air Navigation System
(“FANS”) and Automatic Dependent Surveillance Broadcast (“ADS-B”) capabilities. Regulatory mandates in
the U.S and abroad will require FANS / ADS-B compliance on certain preferred air routes on a rolling basis over the next four years.
Tempus was awarded this STC in the fourth quarter of 2016. Estimated amortization of this STC will be as follows:
|
|
Estimated
STC Amortization
|
|
2017
|
|
$
|
18,236
|
|
2018
|
|
|
45,590
|
|
2019
|
|
|
136,770
|
|
2020
|
|
|
255,305
|
|
Total
|
|
$
|
455,901
|
|
For
the three months ended March 31, 2017, recognized amortization of software was $6,437, all associated with software purchases.
Future amortization schedules associated with existing software is as follows:
|
|
Software
Amortization
|
|
2017
|
|
$
|
21,988
|
|
2018
|
|
|
19,843
|
|
2019
|
|
|
670
|
|
Total
|
|
$
|
42,501
|
|
Accrued
liabilities at March 31, 2017 and December 31, 2016 include the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Accrued employment costs
|
|
$
|
255,411
|
|
|
$
|
380,903
|
|
Aircraft maintenance reserves
|
|
|
74,349
|
|
|
|
37,050
|
|
Board fees
|
|
|
104,833
|
|
|
|
104,833
|
|
Other
|
|
|
79,770
|
|
|
|
389,528
|
|
Total
|
|
$
|
514,363
|
|
|
$
|
912,314
|
|
13.
|
COMMITMENTS
AND CONTINGENCIES
|
The
Company incurred lease expense for real office and hangar space for the three months ended March 31, 2017 of $45,743. Lease expense
for aircraft and simulators was $1,358,403 for the three months ended March 31, 2017.
The
Company leases office space on McLaws Circle in Williamsburg, Virginia. The Company occupied the premises as of September 1, 2016
under a month-to-month sublease from Jackson River Aviation, which is controlled by B. Scott Terry, the Company’s CEO and
a member of the Company’s Board of Directors.
The
Company leases office space in San Marcos, TX to support its training operations. The Company occupied the premises as of October,
1, 2015 under a fifteen (15) month lease at a rate of $10,500 per month. The lease was extended as of January 1, 2017 for an additional
12 months. The Company also leases simulators used in its training operations at this location. The simulator lease commenced
on October, 1, 2015 and extends to December 31, 2016 at a rate of $3,000 per month, at which point it was also renewed for an
additional 12 months. The future minimum lease payments associated with these leases at San Marcos, TX as of March 31, 2017 total
$121,500.
The Company leased hangar space in Newport
News, VA to support its operations. The Company occupied the premises as of October 1, 2015 under a one-year lease at a rate of
$2,000 per month. The term of the lease ended and was not renewed. The future minimum lease payments associated with this lease
as of March 31, 2017 is $0. Unpaid lease invoices at March 31, 2017 totaled $14,000 and are included in accounts payable.
The
Company leased office and hangar space in Brunswick, ME to support its operations. The Company occupied the premises as of March
1, 2016 under a six-month lease at a rate of $16,673, after which the lease has reverted to a month to month agreement. The facility
and related employees were transferred to Tempus Intermediate Holdings as of November 2016. Unpaid lease invoices at March 31,
2017 totaled $157,291 and are included in accounts payable.
In
2015, the Company entered into an aircraft purchase agreement with Pilatus Business Aircraft, Ltd. for the purchase of a Pilatus
PC-12 with certain special mission modifications for approximately $7.3 million. The Company entered into this agreement pursuant
to a contract with a government law enforcement agency whereby Tempus would lease the aircraft to the agency. Tempus subsequently
assigned the lease contract and the purchase obligation to Cowen Aviation Finance Holdings, Inc. (“CAF”) for no consideration
and has entered into a services agreement with CAF whereby it will provide certain administrative, servicing and marketing services
for this and other aircraft owned by CAF. CAF is owned by Cowen Group, Inc., (“Cowen”) whose board member, Joseph
Wright, is also one of our board of directors as of March 31, 2017. For the three months March 31, 2017, Tempus generated $16,388
of billings in support of CAF. Based on the assignment of the lease contract and purchase obligation to CAF, a $750,000 customer
deposit received from the law enforcement agency customer and the $500,000 deposit Tempus paid to Pilatus was transferred to CAF.
At March 31, 2017 and December 31, 2016 the net payable to CAF was $70,592 and $62,018, respectively.
Effective as of February 25, 2016, the
Company leased a Gulfstream G-IV, at a rate of $70,000 a month for a period of 40 months under a capital lease. The lease permits
the lessor to exercise an option to sell the aircraft to the Company at any time after November 30, 2016, or the Company to purchase
the aircraft from the lessor, in either case at a value of $5,500,000. We have modified this aircraft for a government customer
and are providing it to this customer at an hourly and daily rate, based on this customer’s usage of the aircraft. The monthly
lease rate we are paying for this aircraft is fully expensed as cost of revenue upon each event whereby we recognize revenue with
this government customer. As of November 4, 2016, the lessor has exercised its option to sell the aircraft to the Company. See
Item 5 Other Information of the Management Discussion and Analysis (MD&A) of this report for information on the purchase and
financing of this aircraft.
The
Company has employment agreements with certain key executives with terms that expire in 2018, with provisions for termination
obligations, should termination occur prior thereto, of up to 12 months’ severance. The Company expects to pay total aggregate
base compensation of approximately $350,000 annually through 2018, plus other normal customary fringe benefits and bonuses.
14.
|
FAIR
VALUE MEASUREMENTS
|
The
Company complies with ASC Topics 820, “Fair Value Measurement”, and 815, “Derivatives and Hedging” for
its liabilities, which are re-measured and reported at fair value for each reporting period.
The
following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis
as of December 31, 2016, and March 31, 2017, and indicates the fair value hierarchy of the valuation techniques the Company has
used to determine such fair value. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active
markets for identical assets or liabilities. Fair values determined by Level 2 inputs use data points that are observable, such
as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs use unobservable data points for the
asset or liability, and include situations where there is little, if any, market activity for the asset or liability:
|
|
December 31,
|
|
|
Quoted Prices
In Active
Markets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Other
Unobservable
Inputs
|
|
Description
|
|
2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
IPO and Placement Warrant Liability
|
|
$
|
78,750
|
|
|
$
|
78,750
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Series A Warrant Liability
|
|
|
23,435
|
|
|
|
-
|
|
|
|
23,435
|
|
|
|
-
|
|
Total Warrant Liability
|
|
$
|
102,185
|
|
|
$
|
78,750
|
|
|
$
|
23,435
|
|
|
$
|
-
|
|
|
|
March 31,
|
|
|
Quoted
Prices
In Active
Markets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Other
Unobservable
Inputs
|
|
Description
|
|
2017
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
IPO and Placement Warrant Liability
|
|
$
|
7,875
|
|
|
$
|
7,875
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Series A Warrant Liability
|
|
|
3,510
|
|
|
|
-
|
|
|
|
3,510
|
|
|
|
-
|
|
Total Warrant Liability
|
|
$
|
11,385
|
|
|
$
|
7,875
|
|
|
$
|
3,510
|
|
|
$
|
-
|
|
The
fair values of the Company’s warrant liabilities are determined through market, observable and corroborated sources.
The Company engaged an independent valuation firm (the “Valuation Firm”) to perform valuations of the warrant liabilities
as of December 31, 2015. The Valuation Firm used a multi-stage process to determine the fair value of the warrants of the Company,
which involved several types of analyses and calculations of value for the Company’s securities as follows:
IPO and Placement Warrants –
The value of the IPO and Placement Warrants was calculated based upon the quoted price of the warrants that trade on the OTC markets
under the ticker symbol TMPSW, which was $0.01 as of that date.
Series
A Warrants – The value of these warrants was calculated using a Black-Scholes option pricing model based on the value of
the common stock, the assumed volatility of such shares and the risk free rate at the of time of valuation.
Series
B Warrants – The Valuation Firm determined the impact of various common stock values as of the expiration date of the Series
B Warrants after considering the exercise features, including the alternate cashless exercise of those warrants. The Valuation
Firm then used a Monte Carlo simulation to determine the probability of common stock values as of the expiration date and calculated
the value of the Series B Warrants in each trial. The weighted average value of the Series B Warrants as of the valuation date
was then calculated.
Observable
inputs used in the calculation of the valuations include the implied valuation of the Company’s securities based on prior
sales, specifically the Financing associated with the Business Combination. Other inputs include a risk-free rate as of the valuation
date and implied volatility derived from comparable publicly traded companies, as well as the quoted price of Tempus’ common
shares and the quoted price of Tempus’ IPO and Placement Warrants.
IPO
and Placement Warrants
Upon
the consummation of the Business Combination, each outstanding Chart warrant was exchanged for a warrant to purchase one share
of our common stock, and as of the date of this filing, there were 7,875,000 such warrants outstanding, of which 7,500,000 warrants
were originally sold as part of the units in Chart’s initial public offering (the “IPO Warrants”) and 375,000
warrants were originally issued as part of placement units issued to CAG, Mr. Wright and Cowen in a private placement simultaneously
with the consummation of Chart’s initial public offering, (“the Placement Warrants”).
Each
IPO and Placement Warrant entitles the holder to purchase one share of common stock at an exercise price of $11.50 per share,
subject to adjustment. The IPO Warrants became exercisable on August 30, 2015, and expire at 5:00 p.m., New York time, on July
31, 2020 or earlier upon redemption or liquidation. Once the IPO Warrants become exercisable, we may redeem the outstanding IPO
Warrants at a price of $0.01 per warrant, if the last sale price of the common stock equals or exceeds $17.50 per share for any
20 trading days within a 30 trading day period ending on the third trading day before we send the notice of redemption to the
warrant holders. The Placement Warrants, however, are non-redeemable so long as they are held by the initial holders or their
permitted transferees.
Series
A Warrants and Series B Warrants
In
connection with the Financing, upon the consummation of the Business Combination on July 31, 2015, we issued a total of 3,000,000
Series A-1 Warrants and Series A-2 Warrants and 1,000,000 Series B-1 Warrants and Series B-2 Warrants. Pursuant to the Securities
Purchase Agreement, on August 14, 2015, we issued an additional 187,500 Series A-3 Warrants and 62,500 Series B-3 Warrants. The
Series A-1 Warrants, Series A-2 Warrants and Series A-3 Warrants are referred to collectively as the Series A Warrants, the Series
B-1 Warrants, Series B-2 Warrants and Series B-3 Warrants are referred to collectively as the Series B Warrants, and the Series
A Warrants and the Series B Warrants are referred to collectively as the Investor Warrants.
Each
Investor Warrant is immediately exercisable in cash and entitles the holder to take delivery of the shares purchased through the
exercise, at the sole election of the holder, in the form of either common stock or preferred stock, subject to the Maximum Warrant
Percentage, with the number of shares of preferred stock issued based on the conversion price, as described in Note 17, below,
under the heading “Preferred Stock”.
The
Series A Warrants have an exercise price of $4.80 per share purchased and expire on July 31, 2020. As of September 30, 2016 there
are no Series B Warrants outstanding.
The
Investor Warrants contain customary “cashless exercise” terms, pursuant to which holder of an Investor Warrant, at
any time after October 31, 2015, may choose to exercise such Investor Warrant (at a time when such Investor Warrant is otherwise
exercisable according to its terms) without paying cash, by effectively submitting in exchange for shares a greater number of
warrants than the number of shares purchased, rather than a number of warrants equal to the number of shares purchased plus cash.
The Series B Warrants (but not the Series A Warrants) also contain an additional alternative cashless exercise feature, pursuant
to which, beginning from December 31, 2015 and until the expiration of such Series B Warrant, on October 31, 2016, as applicable,
if 90% of the average of the four lowest volume-weighted average prices of common stock for the preceding 10 trading days (the
“Alternative Market Price”) is less than $4.00 (subject an Alternative Market Price floor of $1.80), the holder of
a Series B Warrant can exercise such Series B Warrant to acquire on a cashless basis a number of shares of common stock or preferred
stock equal to (depending on the Market Price) up to 488.9% of the number of shares that could otherwise be purchased under such
Series B Warrant pursuant to a cash exercise, with the lower the Alternative Market Price, the more shares being available for
acquisition by the Series B Warrant holder pursuant to this alternative cashless exercise.
The
Investor Warrants also include “full ratchet” anti-dilution protection provisions, which provide that if any shares
of common stock are issued at a price less than then current exercise price of such Investor Warrant, or if any warrants, options
or other securities with the right to acquire or that are convertible into or exchangeable for shares of common stock are issued
with an exercise price less than the then current exercise price of such Investor Warrant, then the exercise price of such Investor
Warrant will automatically be reduced to the issuance price of such new shares of common stock or the exercise price of such warrants,
options or other securities with the right to acquire or that are convertible into or exchangeable for shares of common stock.
These anti-dilution provisions do not apply in the case of an issuance of “Excluded Securities”, including certain
option and other equity incentive awards to directors and officers, and securities issued pursuant to acquisitions or strategic
transactions approved by a majority of our disinterested directors, but does not include a transaction in which we are issuing
securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities.
Under
the terms of the Investor Warrants, we may not enter into or be party to a “Fundamental Transaction” unless the successor
entity assumes in writing all of our obligations under such Investor Warrants. A “Fundamental Transaction” means,
among other things, a transaction in which we, directly or indirectly, including through subsidiaries, affiliates or otherwise,
in one or more related transactions, (i) consolidate or merge with or into (whether or not we are the surviving corporation) another
entity; (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all of our properties or assets of or
any of our “significant subsidiaries” (as defined in Rule 1-02 of Regulation S-X) to one or more entities; (iii) make,
or allow one or more entities to make, or allow us to be subject to or have its common stock be subject to or party to one or
more entities making, a purchase, tender or exchange offer that is accepted by at least 50% of the outstanding shares of common
stock; (iv) consummate a stock or share purchase agreement or other business combination (including a reorganization, recapitalization,
spin-off or scheme of arrangement) with one or more entities whereby all such entities, individually or in the aggregate, acquire
at least 50% of the outstanding shares of common stock; or (v) reorganize, recapitalize or reclassify its common stock. The foregoing
provisions will not apply to a Fundamental Transaction where the purchaser or other successor entity, after giving effect to such
Fundamental Transaction, does not have any equity securities that are then listed or designated for quotation on a national securities
exchange or automated quotation system. Moreover, a holder of an Investor Warrant may choose, in connection with any Fundamental
Transaction, to have us or the successor entity purchase such Investor Warrant from the holder by paying the holder cash in an
amount equal to the “Black Scholes Value” (as defined in such Investor Warrant) of such Investor Warrant.
Under
the terms of the Investor Warrants, if we shall declare or make any dividend or other distribution of its assets (or rights to
acquire its assets) to holders of shares of common stock, then, in each such case, holders of such Investor Warrants shall be
entitled to participate in such distribution to the same extent that they would have participated if they had held the number
of shares of common stock acquirable upon complete exercise of such Investor Warrants (without regard to any limitations or restrictions
on exercise of such Investor Warrants) immediately before the date on which a record is taken for such distribution.
Under
the terms of the Investor Warrants, if we grant, issue or sell any options, convertible securities or rights to purchase stock,
warrants, securities or other property pro rata to all or substantially all of the record holders of any class of common stock,
which are referred to with respect to the warrants as Warrant Purchase Rights, then each holder of an Investor Warrant will be
entitled to acquire, upon the terms applicable to such Warrant Purchase Rights, the aggregate Warrant Purchase Rights which such
holder could have acquired if such holder had held the number of shares of common stock acquirable upon complete excise of all
Investor Warrants (without taking into account any limitations or restrictions on exercise of such Investor Warrants) held by
such holder immediately prior to the date on which a record is taken for the grant, issuance or sale of such Warrant Purchase
Rights.
Under
the terms of the Series A Warrants (but not the Series B Warrants), until July 31, 2016, the holders have pre-emptive rights pursuant
to which we must offer them the right to purchase at least 56.3% (with the Series A-1 entitled to purchase 35%, the Series A-2
entitled to purchase 18% and the Series A-3 entitled to purchase 3.3%) of any additional issuances by us or our subsidiaries of
equity securities or securities that are convertible into, exercisable or exchangeable for, or which give the holder the right
to acquire any of our equity securities or the securities of our subsidiaries, except for certain “Excluded Securities”
as described above.
Under
the terms of the Investor Warrants, if a holder exercises an Investor Warrant and we fail to deliver common stock or preferred
stock in response within the time periods and in the manner specified in the terms of such Investor Warrant, we may suffer substantial
penalties.
Under
the terms of the Series A-1 Warrants (but not the other Investor Warrants), we may not effect the exercise of any such Investor
Warrants and the exercise shall be null and void and treated as if never made, to the extent that after giving effect to such
exercise, the holder would beneficially own in excess of either 4.99% or 9.99% (the “Maximum Warrant Percentage”)
(as elected in writing by the holder on or prior to the initial issuance date of the warrants) of the shares of common stock outstanding
immediately after giving effect to such exercise. For purposes of the foregoing sentence, beneficial ownership shall be calculated
in accordance with Section 13(d) of the Exchange Act, and the shares of common stock issuable to a holder pursuant to the terms
of the warrants in excess of the Maximum Warrant Percentage shall not be deemed to be beneficially owned by such holder for any
purpose including for purposes of Section 13(d) or Rule 16a-1(a)(1) of the Exchange Act. All of the holders of the outstanding
Series A-1 Warrants as of the date of this filing have elected a Maximum Warrant Percentage of 4.99%.
Between
February 2, 2016 and February 3, 2016, the Company issued an aggregate of 1,680,557 shares of preferred stock valued at $3,361,114
to certain holders of Series B-1 Warrants who exercised their Series B-1 Warrants using the alternative cashless exercise feature
and elected to receive their shares in the form of preferred stock rather than common stock (see Note 17 below for an explanation
of this feature). These shares were issued pursuant to exemptions from the registration requirements of the Securities Act of
1933, as amended (the “Securities Act”) under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder.
On
February 24, 2016 the Company issued an aggregate of 641,666 shares of common stock valued at $1,251,249 to certain holders of
Series B-2 and Series B-3 Warrants who exercised their warrants using the alternative cashless exercise feature. These shares
were issued pursuant to exemptions from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder.
On
February 29, 2016 the Company issued an aggregate of 1,527,778 shares of preferred stock valued at $2,979,167 to certain holders
of Series B-1 Warrants who exercised their warrants using the alternative cashless exercise feature and elected to receive their
shares in the form of preferred stock rather than common stock (see Note 17 below for an explanation of this feature). These shares
were issued pursuant to exemptions from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder.
The
quantity of issued and outstanding warrants as of March 31, 2017 and respective strike prices for are outlined in the table below:
Security
|
|
Quantity
|
|
|
Strike Price
|
|
IPO & Placement Warrants
|
|
|
7,875,000
|
|
|
$
|
11.50
|
|
Series A Warrants
|
|
|
3,187,500
|
|
|
$
|
4.80
|
|
Series B Warrants
|
|
|
-
|
|
|
$
|
5.00
|
|
16.
|
STOCK
BASED COMPENSATION
|
The
Company maintains a stock option plan under which the Company may grant incentive stock options and non-qualified stock options
to employees and non-employee directors. Stock options have been granted with exercise prices at or above the fair market value
of the underlying shares of common stock on the date of grant. Options vest and expire according to terms established at the grant
date.
The
Company records compensation expense for the fair value of stock-based awards determined as of the grant date, including employee
stock options. For the three months ended March 31, 2017 and 2016 there were 499,000 stock options granted, under the Company’s
option plan. The Company recognized $34,150 and $58,559 in stock-based compensation expense for the three months ended March 31,
2017 and 2016, respectively.
Stock
options to purchase 291,000 & 322,000 shares of common stock were outstanding as of March 31, 2017 and December 31, 2016,
respectively.
The
Company uses the Black-Scholes option-pricing model to value the options. The life of the option is equivalent to the expiration
of the option award. The risk-free interest rate is assumed at 1.77%. The estimated volatility is based on management’s
expectations of future volatility and is assumed at 60%. Estimated dividend payout is zero, as the Company has not paid dividends
in the past and, at this time, does not expect to do so in the future.
|
|
Shares
|
|
|
Weighted Average Exercise Price Per Option
|
|
Options outstanding, December 31, 2016
|
|
|
322,000
|
|
|
$
|
2.05
|
|
Granted to employees and non-employee directors
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled/expired/forfeited
|
|
|
31,000
|
|
|
|
-
|
|
Options outstanding, March 31, 2017
|
|
|
291,000
|
|
|
|
2.05
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, March 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
Compensation
cost is recognized over the required service period which is three years for all granted options. As of March 31, 2017, $239,048
of total unrecognized compensation cost related to stock options was expected to be recognized over the remaining 7 quarters.
As of March 31, 2016 $644,150 of total unrecognized compensation cost related to stock options was expected to be recognized over
the remaining 11 quarters.
Preferred
Stock
As
of March 31, 2017, we had 4,578,070 shares of preferred stock issued and outstanding. Additionally, there are a total of 3,187,500
Series A Warrants outstanding that are convertible into common stock or preferred stock.
The
rights and obligations of the holders of the preferred stock are set forth in the certificate of designations relating thereto.
At
any time after its initial issuance date, each share of preferred stock is convertible into validly issued, fully paid and non-assessable
shares of common stock based on a conversion price of $4.00 per share, subject to adjustment for unpaid dividends and any accrued
charges, as well as equitable adjustments for stock splits, recapitalizations and similar transactions. However, it will effect
the conversion of any preferred stock and any such conversion shall be null and void and treated as if never made, to the extent
that after giving effect to such conversion, the holder would beneficially own in excess of either 4.99% or 9.99% (the “Maximum
Percentage”) (as elected in writing by the holder on or prior to the initial issuance date of the preferred stock) of the
shares of common stock outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence,
beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act, and the shares of common stock
issuable to a holder pursuant to the terms of the preferred stock in excess of the Maximum Percentage shall not be deemed to be
beneficially owned by such holder for any purpose including for purposes of Section 13(d) or Rule 16a-1(a)(1) of the Exchange
Act. All of the holders of the issued and outstanding preferred stock as of the date of this filing have elected a Maximum Percentage
of 4.99%.
Under
the certificate of designations, we may not enter into or be party to a “Fundamental Transaction” unless the successor
entity assumes in writing all of our obligations under the certificate of designations. A “Fundamental Transaction”
means, among other things, a transaction in which we, directly or indirectly, including through subsidiaries, affiliates or otherwise,
in one or more related transactions, (i) consolidate or merge with or into (whether or not we are the surviving corporation) another
entity; (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all of our properties or assets or any
of our “significant subsidiaries” (as defined in Rule 1-02 of Regulation S-X) to one or more entities; (iii) make,
or allow one or more entities to make, or allow us to be subject to or have our common stock be subject to or party to one or
more entities making, a purchase, tender or exchange offer that is accepted by at least 50% of the outstanding shares of common
stock; (iv) consummate a stock or share purchase agreement or other business combination (including a reorganization, recapitalization,
spin-off or scheme of arrangement) with one or more entities whereby all such entities, individually or in the aggregate, acquire
at least 50% of the outstanding shares of common stock; or (v) reorganize, recapitalize or reclassify our common stock. The foregoing
provisions will not apply to a Fundamental Transaction where the purchaser or other successor entity provides cash consideration
and such Fundamental Transaction does not involve the issuance of any securities to the holders of our securities or securities
of our affiliates.
If
at any time we grant, issue or sell any options, convertible securities or rights to purchase stock, warrants, securities or other
property pro rata to all or substantially all of the record holders of any class of common stock, which is referred to as Purchase
Rights, then each holder of preferred stock will be entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of common stock acquirable
upon complete conversion of all preferred stock (without taking into account any limitations or restrictions on the convertibility
of the shares of preferred stock) held by such holder immediately prior to the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights.
Holders
of preferred stock have no voting rights with respect to their preferred stock, except as required by law.
Shares
of preferred stock rank pari passu to the shares of common stock in respect of preferences as to dividends, distributions and
payments upon our liquidation, dissolution and winding up, except that in a liquidation event, the holders of preferred stock
shall be entitled to receive in cash out of our assets an amount per share of preferred stock equal to the greater of $4.00 (plus
any unpaid dividends and accrued charges, as equitably adjusted for stock splits, recapitalizations and similar transactions)
and the amount per share such holder would receive if such holder converted such preferred stock into common stock immediately
prior to the date of such payment (without regard to any limitations on conversion), provided that if the liquidation funds are
insufficient to pay the full amount due to the holders, then each holder shall receive a percentage of the liquidation funds equal
to the full amount of liquidation funds payable to such holder, as a percentage of the full amount of liquidation funds payable
to all holders (on an as-converted basis, without regard to any limitations on conversion set forth herein) and all holders of
common stock.
Under
the terms of the preferred stock, if holders convert their preferred stock and we fail to deliver common stock in response within
the time periods and in the manner specified in the certificate of designations, we may suffer substantial penalties.
Our
Amended Charter and related Certificate of Incorporation also provides that additional shares of preferred stock may be issued
from time to time in one or more series. Our board of directors will be authorized to fix the voting rights, if any, designations,
powers, preferences, the relative, participating, optional or other special rights and any qualifications, limitations and restrictions,
applicable to such additional shares of each series. Our board of directors will be able to, without stockholder approval, issue
preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of the
common stock and could have anti-takeover effects, but subject to the rights of the holders of the preferred stock. The ability
of our board of directors to issue preferred stock without stockholder approval could have the effect of delaying, deferring or
preventing a change of control of us or the removal of existing management.
Between
February 2, 2016 and February 3, 2016, the Company issued an aggregate of 1,680,557 shares of preferred stock at a value of $3,361,114
to certain holders of Series B-1 Warrants who exercised their Series B-1 Warrants using the alternative cashless exercise feature
and elected to receive their shares in the form of preferred stock rather than common stock. These shares were issued pursuant
to exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”)
under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
On
February 29, 2016 the Company issued an aggregate of 1,527,778 shares of preferred stock at a value of $2,979,167 to certain holders
of Series B-1 Warrants who exercised their warrants using the alternative cashless exercise feature and elected to receive their
shares in the form of preferred stock rather than common stock. These shares were issued pursuant to exemptions from the registration
requirements of the Securities Act under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
Common
Stock
As
of March 31, 2017, we had 11,064,664 shares of common stock issued and outstanding. Additionally, there are 4,578,070 issued and
outstanding shares of preferred stock convertible into common stock, outstanding warrants exercisable into 7,875,000 shares of
common stock that were issued in exchange for former Chart warrants, and 3,187,500 Series A Warrants and 275,000 Series B Warrants
outstanding that are convertible into common stock or preferred stock (with the Series B Warrants convertible into a maximum of
1,344,446 shares using the alternative cashless exercise feature as described in Note 15, above, under the heading “Series
A Warrants and Series B Warrants”).
Additionally,
pursuant to the terms of the Merger Agreement, we may be obligated to issue additional shares of common stock thereunder to the
Members (or the Members may be required to forfeit certain of their shares of common stock) as a result of (i) adjustments to
the merger consideration payable to the Members as a result of Tempus’ working capital and/or debt as of the completion
of the Business Combination varying from the estimates that were made at the time of the consummation of the Business Combination,
(ii) Tempus meeting certain financial milestones pursuant to the earn-out provisions of the Merger Agreement, up to a total of
6,300,000 shares and (iii) any indemnification payments that are made under the Merger Agreement by delivery of shares of common
stock. The shares of common stock issued to the Members under the Merger Agreement are subject to certain lock-up restrictions
as set forth in the Tempus Registration Rights Agreement to which the Members are subject.
Additionally,
we may issue awards for up to a maximum of 640,616 shares of common stock under our 2015 Omnibus Equity Incentive Plan. On January
22, 2016 our compensation committee awarded 499,000 options to purchase our common stock at a price of $2.05, to our employees
and our board of directors. These options are subject to a minimum vesting period of three years.
Holders
of common stock have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions
applicable to the common stock. Holders of common stock are entitled to receive such dividends, if any, as may be declared from
time to time by the board of directors in its discretion out of funds legally available therefor.
Common
stockholders of record are entitled to one vote for each share held on all matters to be voted on by stockholders. Our board of
directors is divided into three classes, each of which will generally serve for a term of three years (with a shorter period for
the initial directors upon the Business Combination, where they continue until their class is up for election) with only one class
of directors being elected in each year and with directors only permitted to be removed for cause. There is no cumulative voting
with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election
of directors can elect all of the directors up for election at such time.
Certain
shares of common stock that were issued in the Business Combination in exchange for Chart’s common stock held by certain
of its initial stockholders, which we refer to as Founder Shares, are subject to forfeiture upon certain conditions. With certain
limited exceptions, the Founder Shares are not transferable, assignable or salable (except to our officers and directors and other
persons or entities affiliated with the Chart’s initial stockholders, each of whom will be subject to the same transfer
restrictions) until the earlier of (i) July 31, 2016 or earlier if the last sales price of our common stock equals or exceeds
$12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading
days within any 30-trading day period commencing at least 150 days after July 31, 2015, or (ii) the date on which we consummate
a liquidation, merger, stock exchange or other similar transaction that results in all of our stockholders having the right to
exchange their shares of common stock for cash, securities or other property. In addition, 234,375 Founder Shares are subject
to forfeiture pro rata by Chart’s initial stockholders in the event the last sales price of our common stock does not equal
or exceed $11.50 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for
any 20 trading days within any 30-trading day period within 60 months following July 31, 2015. An additional 234,375 Founder Shares,
will be subject to forfeiture pro rata by Chart’s initial stockholders in the event the last sales price of our common stock
does not equal or exceed $13.50 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and
the like) for any 20 trading days within any 30-trading day period prior to July 31, 2020. Chart’ s initial stockholders
have agreed that such shares will be subject to lockup and will not sell or transfer Founder Shares that remain subject to forfeiture
as described above, until such time as the related forfeiture provisions no longer apply. The securities held by Chart’s
initial stockholders are also subject to certain other lock-up restrictions under the terms of the Founders’ Registration
Rights Agreement, to which such stockholders are subject.
We
have made an adjustment to our capital contributed in excess of par to account for the fact that the Financing and Business Combination
expenses, along with the valuation of the warrant liabilities associated with the warrants issued pursuant thereto, caused capital
contributed in excess of par to go below zero. Any excess negative amount due to these transactions that would otherwise have
been allocated to capital contributed in excess of par has now been recognized as a negative retained earnings amount.
On
February 24, 2016 the Company issued an aggregate of 641,666 shares of common stock at a value of $1,251,249 to certain holders
of Series B-2 and Series B-3 Warrants who exercised their warrants using the alternative cashless exercise feature. These shares
were issued pursuant to exemptions from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder.
On
March 15, 2016, the Company purchased Tempus Jets, Inc. (“TJI”) from our CEO B. Scott Terry for consideration of $500,000,
paid in the form of 242,131 shares of common stock of the Company. The number of shares issued to Mr. Terry was calculated based
on the volume weighted average market price of the Company’s common stock for the previous 20 trading days. (See Note
8 above).
On
June 24, 2016, the Company issued an aggregate of 1,344,446 shares of common stock valued at $1,546,113 to certain holders of
Series B-2 and Series B-3 Warrants who exercised their warrants using the alternate cashless exercise feature. These shares were
issued pursuant to exemptions from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities
Act and Rule 506 of the Regulation D promulgated thereunder.
On
April 28, 2017, the Company entered into a Note Purchase Agreement with Santiago Business Co. International Ltd, (“
Santiago
”),
its 10% Senior Secured Convertible Note due April 28, 2018, in an aggregate principal amount of $6,200,000 (the “
Note
”)
and Santiago caused to be transferred to the Company certain shares of capital stock of a subsidiary of Santiago, Bluebell Business
Limited, a company limited by shares organized and existing under the laws of the British Virgin Islands (“
Bluebell
”),
and, upon receipt of the Note, to cause to be forgiven approximately $700,000 owed by the Company in connection with a certain
G-IV Aircraft Lease Agreement, dated as of February 25, 2016, and certain related matters. See Item 5. Other Information below.