UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________ 

 

Commission File Number: 333-201424

 

TEMPUS APPLIED SOLUTIONS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

  

Delaware   47-2599251
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. Employer

Identification Number)

 

471 McLaws Circle, Suite A
Williamsburg, Virginia
  23185
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (757) 875-7779

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☒

 

As of August 18, 2017, there were 17,342,734 shares of the registrant’s common stock issued and outstanding.

  

 

 

 

 

 

TEMPUS APPLIED SOLUTIONS HOLDINGS, INC.

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
   
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS 1
   
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders’ Deficit 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
   
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
   
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
   
ITEM 4. CONTROLS AND PROCEDURES 19
   
PART II. OTHER INFORMATION  
   
ITEM 1. LEGAL PROCEEDINGS 21
   
ITEM 1A. RISK FACTORS 21
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 21
   
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
   
ITEM 4. MINE SAFETY DISCLOSURE 22
   
ITEM 5. OTHER INFORMATION 22
   
ITEM 6. EXHIBITS 24

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Forward-looking statements give current expectations or forecasts of future events. Our forward-looking statements include, but are not limited to, statements regarding our business strategy, plans and objectives, expected or contemplated future operations, hopes, beliefs and intentions. In addition, any statements that refer to projections, forecasts or other characterizations or predictions of future events or circumstances, including any underlying assumptions on which such statements are expressly or implicitly based, in whole or in part, are forward-looking statements. The words “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “possible”, “potential”, “predict”, “project”, “should”, “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this Report may include, for example, statements about:

 

  the benefits or risks of the Business Combination (as defined later in this Report) and the related financing transactions;
     
  the future financial performance of Tempus Applied Solutions Holdings, Inc. and its subsidiaries (“we”, the “Company” or “Tempus Holdings”), including the Company’s wholly owned subsidiary, Tempus Applied Solutions, LLC (“Tempus”);
     
  changes in the markets for the Company’s products and services; and
     
  expansion plans and other plans and opportunities.

 

Our forward-looking statements are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results and developments could differ materially from those contemplated by our forward-looking statements, including as a result of the occurrence of one or more of the adverse effects contemplated in the risk factors discussions we include in our ongoing filings with the Securities and Exchange Commission (the “SEC”). As a result, you should not place undue reliance on our forward-looking statements. Additionally, the forward-looking statements contained in this Report represent our views as of the date of this Report (or any earlier date indicated in such statement). While we may update certain forward-looking statements from time to time, we specifically disclaim any obligation to update any statement at any time, whether as a result of new information, future developments or otherwise, except as required by applicable law. You are advised to consult any further disclosures we make on related subjects in the periodic and current reports we file with the SEC. Our SEC filings are available free of charge through the SEC’s website at www.sec.gov . None of the information contained on our website, or accessible from our website, is a part of this Report.

 

 

 

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

The financial statements of Tempus Applied Solutions Holdings, Inc, a Delaware corporation, included herein were prepared, without audit, pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”). Because certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America were condensed or omitted pursuant to such rules and regulations, these financial statements should be read in conjunction with the financial statements and notes thereto included in the audited financial statements of the Company in the Company’s Annual report on Form 10-K for the year ended December 31, 2016, and all amendments thereto.

 

  1  

 

  

Tempus Applied Solutions Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

 

    June 30,     December 31,  
    2017     2016  
ASSETS   (unaudited)        
CURRENT ASSETS            
Cash and cash equivalents   $ 19,243     $ 592,449  
Restricted cash     -       50,007  
Accounts receivable:                
Trade, net     1,837,274       1,415,083  
Other     1,637       1,119  
Related party     384,498       435,948  
Other assets     98,084       98,871  
Current assets of discontinued operations     5,220       65  
Total current assets     2,345,956       2,593,542  
                 
PROPERTY AND EQUIPMENT, NET     5,789,033       5,933,940  
                 
OTHER ASSETS                
Deposits     49,428       51,428  
Intangibles, net     541,965       554,839  
Noncurrent assets of discontinued operations     -       501,711  
Total other assets     591,393       1,107,978  
                 
Total assets   $ 8,726,382     $ 9,635,460  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT                
CURRENT LIABILITIES                
Accounts payable:                
Trade   $ 2,462,222     $ 3,363,229  
Related party     2,378,350       1,886,386  
Accrued liabilities     772,804       874,286  
Capital Lease obligation     -       5,835,181  
Notes Payable-Related Party     6,200,000       -  
Customer deposits     80,195       165,094  
Current liabilities of discontinued operations     2,796       569,937  
Total current liabilities     11,896,367       12,694,113  
                 
LONG TERM LIABILITIES                
Common stock warrant liability     723,913       102,185  
Total long term liabilities     723,913       102,185  
                 
Total liabilities     12,620,280       12,796,298  
                 
STOCKHOLDERS' DEFICIT                
Preferred stock, $0.0001 par value; 40,000,000 shares authorized, -0- and 4,578,070 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively     -       458  
Common stock, $0.0001 par value; 100,000,000 shares authorized; 16,630,234 and 11,064,664 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively     1,663       1,106  
Additional paid in capital     10,159,220       10,050,746  
Accumulated deficit     (14,054,781 )     (13,213,148 )
Total stockholders’ deficit     (3,893,898 )     (3,160,838 )
Total liabilities and stockholders' deficit   $ 8,726,382     $ 9,635,460  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  2  

 

 

Tempus Applied Solutions Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations (unaudited)

 

    Six Months     Six Months     Three Months     Three Months  
    Ended
June 30,
    Ended
June 30,
    Ended
June 30,
    Ended
June 30,
 
    2017     2016     2017     2016  
REVENUES   $ 8,459,205     $ 8,593,611     $ 4,072,366     $ 4,921,511  
                                 
COST OF REVENUE     6,828,928       8,616,014       3,067,872       5,029,954  
                                 
Gross profit (loss)     1,630,277       (22,403 )     1,004,494       (108,443 )
                                 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES     1,522,675       2,595,196       699,702       1,045,191  
                                 
Total operating profit (loss)     107,602       (2,617,599 )     304,792       (1,153,634 )
                                 
OTHER INCOME (EXPENSE)                                
Interest income     97       1,793       97       -  
Interest expense     (341,833 )     -       (166,711 )     -  
Non-operational income (expense)     (607,499 )     872,556       (711,460 )     1,182,225  
                                 
Total other income (expense)     (949,235 )     874,349       (878,074 )     1,182,225  
                                 
NET LOSS FROM CONTINUING OPERATIONS   $ (841,633 )   $ (1,743,250 )   $ (573,282 )   $ 28,591  
                                 
NET LOSS FROM DISCONTINUED OPERATIONS     -       (832,346 )     -       (740,332 )
                                 
NET LOSS   $ (841,633 )   $ (2,575,596 )   $ (573,282 )   $ (711,741 )
                                 
BASIC AND DILUTED LOSS PER COMMON SHARE:                                
Continuing operations   $ (0.07 )   $ (0.18 )   $ (0.05 )   $ 0.00  
Discontinued operations   $ -     $ (0.09 )   $ -     $ (0.07 )
NET LOSS PER SHARE:   $ (0.07 )   $ (0.27 )   $ (0.05 )   $ (0.07 )
                                 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED     11,242,292       9,470,851       11,416,015       9,808,863  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  3  

 

 

Tempus Applied Solutions Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Deficit

 

    Common stock     Preferred stock     Additional           Total
stockholders'
 
    $0.0001 par value     $0.0001 par value     paid     Accumulated     equity  
    Shares     Amount     Shares     Amount     in capital     deficit     (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     -       -       -       -       -       (841,633 )     (841,633 )
Stock Based Compensation                                     29,573               29,573  
Conversion of preferred shares to common stock     4,578,070       458       (4,578,070 )     (458 )     -       -       -  
Conversion of warrant liability to common stock     987,500       99       -       -       78,901       -       79,000  
                                                         
Balance, June 30, 2017 (unaudited)     16,630,234     $ 1,663       -     $ -     $ 10,159,220     $ (14,054,781 )   $ (3,893,898 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  4  

 

 

Tempus Applied Solutions Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

 

    Six Months     Six Months  
    Ended
June 30,
    Ended
June 30,
 
    2017     2016  
CASH FLOWS FROM OPERATING ACTIVITIES-CONTINUING OPERATIONS            
Net loss   $ (841,633 )   $ (1,743,250 )
Adjustments to reconcile net loss to net cash used for operating activities:                
Stock-based compensation expense     29,573       117,118  
Depreciation and amortization     135,597       39,126  
Loss on conversion of warrant liability to stock     -       3,505,300  
Fair value adjustment of common stock warrants     621,728       (4,376,707 )
                 
Changes in operating assets and liabilities:                
Accounts receivable-trade     (422,191 )     (428,401 )
Accounts receivable-other     (518 )     (317,441 )
Due to/from related parties     (21,145 )     53,022  
Inventory     -       7,293  
Other current assets     787       323,714  
Deposits     2,000       463,572  
Accounts payable-trade     (536,188 )     1,340,761  
Accrued liabilities     (101,482 )     (612,995 )
Deferred revenue     -       (31,467 )
Customer deposits     (84,899 )     (396,239 )
                 
Net cash used for operating activities-continuing operations     (1,218,371 )     (2,056,594 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES-CONTINUING OPERATIONS                
Purchases of property and equipment     22,183       (35,467 )
Purchases of intangible assets     (6,025 )     (24,164 )
Decrease in restricted cash     50,007       900,000  
                 
Net cash provided by investing activities-continuing operations     66,165       840,369  
                 
CASH FLOWS FROM FINANCING ACTIVITIES-CONTINUING OPERATIONS                
Proceeds from conversion of warrants     79,000       -  
                 
Net cash provided by financing activities-continuing operations     79,000       -  
                 
CASH FLOWS FROM DISCONTINUED OPERATIONS                
Operating cash flows     (7,058 )     30,198  
Investing cash flows     506,993       (7,365 )
Financing cash flows     -       -  
                 
Net cash provided by discontinued operations     499,935       22,833  
                 
Net decrease in cash     (573,271 )     (1,193,392 )
                 
CASH AND CASH EQUIVALENTS                
Cash and cash equivalents at the beginning of the period held by Tempus Applied     592,449       1,288,495  
Cash and cash equivalents at the beginning of the period held by Tempus Jets     65       -  
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   $ 19,243     $ 95,103  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:                
Cash paid for interest   $ 341,833     $ -  
                 
Supplemental disclosure of non-cash investing and financing activities:                
Intangible assets acquired through acquisition of Tempus Jets, Inc.   $ -     $ 500,000  
Issuance of stock for exercise of warrants   $ -     $ 9,137,643  

Conversion of capital lease obligation to notes payable – related party

  $ (5,835,181 )   $ -  

Conversion of account payables – trade to notes payables – related party

  $ (364,819 )   $ -  

 

The accompanying notes are an integral part of these consolidated financial statements.

  5  

 

 

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. Tempus 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. 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.

 

2. GOING CONCERN

 

The Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern. The Company has suffered recurring losses from operations since inception which raises 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 .

 

The Company’s ability to continue as a going concern is dependent on its ability to generate profitable operations in the future and/or obtain the necessary financing to meets its obligations and repay its liabilities arising from the normal business operations when they come due. The Company continues to explore possibilities for raising both working capital and longer-term capital from outside sources in various possible transactions. These plans, if successful, will mitigate the factors which raise substantial doubt about the Company’s ability to continue as a going concern. 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.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The condensed consolidated unaudited interim financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested these condensed consolidated financial statements be read in conjunction with the December 31, 2016 audited consolidated financial statements and the accompanying notes thereto. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

 

These condensed consolidated unaudited financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of warrant liabilities, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities.

 

Making estimates requires management to exercise significant judgement. It is at reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near-term due to one or more future non-conforming events. Accordingly, actual results could differ significantly from estimates.

 

  6  

 

 

Property and Equipment

 

Property and equipment is stated at cost, less accumulated depreciation and is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives, ranging from 3-5 years of respective assets. Expenditures for maintenance and repairs are charged to expense as incurred. 

 

Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statement of operations.

 

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 June 30, 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.

 

It is the Company’s policy to commence amortization of computer software upon the date that assets are placed into service. Amortization is computed on a straight-line basis over a 3-year life.

 

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 $124,750 and $485,617 for the six months ended June 30, 2017 and 2016, respectively.

 

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.

 

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.

 

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.

 

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.

 

  7  

 

 

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 (which are based on actual aircraft flight hours) and modification of aircraft that will be utilized for the provision of leased aircraft services to our customers.

 

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 June 30, 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 and second quarters 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 ASC 860, “Transfers and Servicing” (“ASC 860”). The amount due from the factoring company, net of advances received from the factoring company, was approximately $32,000 at June 30, 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.

 

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. As of June 30, 2017 and December 31, 2016, the Company held $80,195 and $165,094, respectively, in customer deposits.

 

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

 

Foreign Currency Translation

 

The measurement currency of the company is the U.S. Dollar. Transactions in foreign currencies are translated at the exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in other than the measurement currency, if any, are translated at the exchange rates in effect at the balance sheet date. The resulting exchange gains and losses are recognized in earnings.

 

Net Earnings (Loss) per Share

 

Basic and diluted net loss per share information is presented under the requirements of ASC Topic 260, Earnings per Share. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per share reflects the potential dilution of securities by adding other common stock equivalents, including stock options, warrants and convertible notes in the weighted-average number of common shares outstanding for a period, if dilutive.

 

As the Company has incurred losses for the six months ended June 30, 2017 and 2016, the potentially dilutive shares are anti-dilutive and are thus not added into the loss per share calculations. For the six months ended June 30, 2017 and 2016, there were 11,242,292 and 9,470,851 weighted average shares outstanding, respectively.

 

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.

 

  8  

 

 

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 June 30, 2016. The error was not material to the unaudited consolidated financial statements for the six months period ended June 30, 2016 since the correction of the error increased assets and liabilities by the same amount.

 

4. RECENT ACCOUNTING PRONOUNCEMENTS

 

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 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.

 

With the exception of the new standards discussed above, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2017, as compared to the recent accounting pronouncements described in our Annual report on Form 10-K for the year ended December 31, 2016, that are of significance or potential significance to us.

 

5. INCOME TAXES

 

The Company did not record a tax provision or benefit for the period ended June 30, 2017, which is attributed primarily to the full valuation allowance that has been maintained against the Company’s net deferred tax assets as of June 30, 2017. The Company’s deferred tax assets consist principally of net operating losses, intangibles, and nondeductible reserves. The Company has not evaluated whether some or all of its net operating losses may be limited pursuant to IRC 382.

 

In accordance with ASC 740, “Accounting for Income Taxes”, the Company continually assesses the adequacy of the valuation allowance by assessing the tax consequences of events that have been realized in the Company’s financial statements or tax returns, tax planning strategies, and future profitability. As of June 30, 2017, the Company does not believe it is more likely than not that the deferred tax assets will be realized.

 

  9  

 

 

6. STOCKHOLDERS’ DEFICIT

 

Preferred Stock

 

As of June 30, 2017, we had 40,000,000 shares authorized and no shares of preferred stock outstanding. There is a total of 2,200,000 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.

 

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. 

 

During the six months ended June 30, 2017, 4,578,070 shares of preferred stock were converted for 4,578,070 shares of common stock.

 

Common Stock

 

As of June 30, 2017, we had 100,000,000 shares of common stock authorized and 16,630,234 shares of common stock issued and outstanding. Further, as of June 30, 2017, the company has 7,875,000 IPO and Placement Warrants outstanding exercisable into 7,875,000 shares of common stock that were issued in exchange for former Chart warrants, and 2,200,000 Series A Warrants and outstanding that are convertible into common stock or preferred stock.

 

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. 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. 

 

During the six months ended June 30, 2017 the company issued 4,578,070 shares of common stock for conversion of 4,578,070 shares of preferred stock.

 

During the six months ended June 30, 2017 the company issued 987,500 shares of common stock for conversion of 987,500 Series A warrants at a conversion price of $0.08 per share.

 

7. STOCK OPTIONS

 

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 six months ended June 30, 2017 and 2016 there were -0- and 499,000 stock options granted, under the Company’s option plan, respectively. The Company recognized $29,573 and $117,118 in stock-based compensation expense for the six months ended June 30, 2017 and 2016, respectively. Stock options to purchase 126,000 and 322,000 shares of common stock were outstanding as of June 30, 2017 and December 31, 2016, respectively.

 

  10  

 

 

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     196,000       -  
Options outstanding, June 30, 2017     126,000       2.05  
                 
Options exercisable, June 30, 2017     -     $ -  

 

Compensation cost is recognized over the required service period which is three years for all granted options. As of June 30, 2017, $88,719 of total unrecognized compensation cost related to stock options was expected to be recognized over the remaining 6 quarters. As of June 30, 2016, $585,591 of total unrecognized compensation cost related to stock options was expected to be recognized over the remaining 10 quarters.

 

8. CONVERTIBLE DEBT

 

On April 28, 2017, the Company entered into a Note Purchase Agreement with Santiago Business Co. International Ltd, (“ Santiago ”), regarding its 10% Senior Secured Convertible Note due April 28, 2018, in an aggregate principal amount of $6,200,000 (the “ Note ”) and Santiago 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 ”). Interest payments on the Note are due quarterly until repayment of the principal amount, which is due April 28, 2018. The Note is convertible by the holder into 77,500,000 shares of common stock of the Company (conversion price of $0.08 per share). If the Note is fully converted by the holder, the holder would receive shares representing 82.3% of the Company’s share capital outstanding as of June 30, 2017 (taking into account the shares issued upon conversion of the Note).

 

9. 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 June 30, 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     $ -  

 

    June 30,    

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   $ 93,913     $ 93,913     $ -     $         -  
Series A Warrant Liability     630,000       -       630,000       -  
Total Warrant Liability   $ 723,913     $ 93,913     $ 630,000     $ -  

 

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The fair values of the Company’s warrant liabilities are determined through market, observable and corroborated sources. The approach is described below:  

 

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.

 

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.

 

10. PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consists of the following:

 

    June 30,     December 31,  
    2017     2016  
Office equipment   $ 115,462     $ 167,088  
Furniture and fixtures     456       456  
Aircraft     6,015,505       6,015,505  
Total     6,131,423       6,183,049  
Accumulated depreciation     (342,390 )     (249,109 )
Property and equipment, net   $ 5,789,033     $ 5,933,940  

 

11. INTANGIBLES, NET

 

Intangibles, net consists of the following:

 

    June 30,     December 31,  
    2017     2016  
Infinite-lived intangible assets:            
FAA license   $ 50,000     $ 50,000  
                 
Finite-lived intangible assets:                
STC costs     455,901       455,901  
Accumulated amortization     -       -  
      455,901       455,901  
                 
Software     85,275       85,275  
Accumulated amortization     (49,211 )     (36,337 )
      36,064       48,938  
Total intangible assets, net   $ 541,965     $ 554,839  

 

FAA licenses include the $50,000 purchase price for Proflight Aviation Services, LLC, which provides flight training services under a FAR Part 141 certificate.

 

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.

 

12. RELATED PARTY TRANSACTIONS

 

Jackson River Aviation (“JRA”) is under common control with the Company.” JRA (through its subsidiary, TJI) provides FAR Part 135 aircraft charter services to the Company. Total purchases by the Company from JRA for the six months ended June 30, 2017 and 2016 were $2,117,808 and $162,576, respectively. Billings by the Company to JRA for the six months ended June 30, 2017 and 2016 were $461,250 and $53,302, respectively. As of June 30, 2017, the Company had a net outstanding payable to JRA of $333,143. As of December 31, 2016, the Company had a net outstanding receivable from JRA of $38,962.

 

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The majority of Tempus Intermediate Holdings, LLC (“TIH”) is owned by Firefly Financials, Ltd, which is under common control with the Company. The Manager of TIH is our CFO, Johan Aksel Bergendorff. TIH owns certain aircraft used by Tempus to provide services to certain customers. Total purchases by the Company from TIH for the six months ended June 30, 2017 and 2016 were $1,278,422 and 947,011, respectively. Total billings from the Company to TIH for the six months ended June 30, 2017 and 2016 were $46,146 and 118,294, respectively. The net outstanding payable from Tempus to TIH at June 30, 2017 and December 2016 was $1,518,213 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 six months ended June 30, 2017 and 2016 were $0 and $98,226, respectively. The net outstanding payable from Tempus to Southwind at June 30, 2017 and December 31, 2016 was $142,496.

 

All related party transactions are entered into and performed under commercial terms consistent with what might be expected from a third- party service provider.

 

See also ITEM 5. OTHER INFORMATION - 10% Senior Secured Convertible Note due April 28, 2018.

 

13. DISCONTINUED OPERATIONS

 

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. The following table shows the components of assets and liabilities that are classified as discontinued operations in the Company’s consolidated balance sheet as per June 30, 2017 and December 31, 2016:

 

    June 30,     December 31,  
    2017     2016  
Current assets of discontinued operations   $ 5,220     $ 65  
Noncurrent assets of discontinued operations   $ 0     $ 501,711  
Current liabilities of discontinued operations   $ 2,796     $ 569,937  
Net assets of discontinued operations   $ 2,424     $ (68,161 )

 

Summarized operating results related to these entities are included in discontinued operations in the accompanying consolidated statements of operations and comprehensive loss for the three and six month ended June 30, 2017 and 2016.

 

    Six months ended     Three months ended  
    June 30     June 30, 2016  
    2017     2016     2017     2016  
Revenue           $ 588,731             $ 511,808  
Gross profit             (680,896 )             (593,284 )
Selling, general and administrative expenses             (150,748 )             (146,346 )
Depreciation and amortization             (702 )             (702 )
Net loss from discontinued operations     -     $ (832,346 )     -     $ (740,332 )

  

14. SUBSEQUENT EVENT

 

The company has evaluated subsequent events from June 30, 2017 and August 21, 2017, the date this report was available to be issued and determined to disclose the following:

 

i. A number of the Company’s Series A Warrants were exercised resulting in the issuance of 812,500 new common shares.
     
ii. As of August 14, 2017, the Company entered a definitive purchase agreement for the acquisition of six Lockheed L-1011, subject only to satisfactory completion of inspection of the aircraft. As payment for the aircraft, the Company expects to issue approximately 6.7 million shares to the seller during the third quarter of 2017.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited interim financial statements and the notes thereto contained elsewhere in this Report. Certain information contained in this discussion and analysis includes forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements” set forth elsewhere in this Report.

 

Management Overview

 

Tempus Applied Solutions Holdings, Inc. (“we”, the “Company” or “Tempus Holdings”) is a Delaware corporation organized on December 19, 2014. The Company provides turnkey flight operations; customized design, engineering and modification solutions; and training services that support critical aviation mission requirements for such customers as the U.S. Department of Defense (the “DoD”), U.S. intelligence agencies, foreign governments, heads of state and high net worth individuals worldwide. Our management and employees have extensive experience in the design and implementation of special mission aircraft modifications related to intelligence, surveillance, and reconnaissance (“ISR”) systems, new generation command, control and communications systems and VIP interior components; the provision of ongoing operational support, including flight crews, maintenance and other services to customers; and the operation and leasing of corporate, VIP and other specialized aircraft.

  

Our principal areas of expertise include:

 

  Flight Operations: turnkey flight operations and related support services required by the customer for the ultimate successful execution of its mission, including leasing, planning, maintenance, training, logistics support and other support services; and
     
  Design, Engineering and Modification: the modification of aircraft for airborne research and development, the addition and upgrading of ISR and electronic warfare capabilities and wide body aircraft VIP interior conversions.

 

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), revenues earned from the provision of leased aircraft (which are based on actual aircraft flight hours) and modification of aircraft that will be utilized for the provision of leased aircraft services to our customers.

 

The Company regularly engages in marketing and negotiation efforts and submits bids with the aim of converting current business opportunities into signed contracts and identifying and developing new business opportunities. The Company expects to be able to make public announcements from time to time when it is able to enter into additional, material contracts with customers.

 

We operate out of our corporate headquarters in Williamsburg, Virginia. Additionally, we utilize office and hangar space in Brunswick, Maine and San Marcos, TX to provide the required facilities for production and logistic support for our customers.

 

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. Anticipated contracts are large and the periods of performance are long.

 

Going Concern 

 

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 as the Company works to achieve market share and high overhead costs associated with sales, marketing and proposal costs related to the team of Company personnel assigned to aggressively pursue new contracts. Management expects that these efforts will begin to achieve results 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 months. Nevertheless, whether, and when, the company can attain positive operating cash flows from operations is highly dependent on the commencement of these new contracts and the timing of their commencement. Management believes that the uncertainties regarding these contracts and their timing cast substantial doubt upon 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.

 

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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 11 as of June 30, 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. In addition, the Company continues to explore possibilities for raising both working capital and longer-term capital from outside sources in various possible transactions. As of the date of this filing, the Company expects its cash flows to cover its costs of operations. However, 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”).

 

Results of Continuing Operations

 

Three Months Ended June 30, 2017 and 2016

 

Revenues

 

Revenues were $4,072,366 for the three months ended June 30, 2017. As set forth below, three customers each represented greater than 10% of our revenues during this period.

 

Revenues were $4,921,511 for the three months ended June 30, 2016. As set forth below, three customers each represented greater than 10% of our revenues over this period.

 

The 17% decrease in revenue was due primarily to the completion of a contract involving the provision of a leased aircraft to an agency of the U.S. Government.

 

The table below sets forth the amount of revenues we recognized for the three months ended June 30, 2017 and 2016:

 

    Three months ended     Three months ended  
    June 30, 2017     June 30, 2016  
    Revenue     Revenue  
Customer A   $ 337,957       8 %   $ 1,171,777       24 %
Customer B     1,444,796       35 %     1,563,192       32 %
Customer C     1,323,756       33 %     -       - %
Customer D     821,152       20 %     1,323,804       27 %
Other customers     144,705       4 %     862,738       17 %
    $ 4,072,366       100 %   $ 4,921,511       100 %

 

Cost of Revenue and Gross Profit

 

Cost of revenue for the three months ended June 30, 2017 was $3,067,872, which represented 75% of revenues. The Company’s gross profit was $1,004,494 or 25% of revenues for the three months ended June 30, 2017.

 

Cost of revenue for the three months ended June 30, 2016 was $5,029,954, which represented 102% of revenues. The Company’s gross loss was ($108,443) or (2%) of revenues for the three months ended June 30, 2016.

 

The improvement in gross profit was primarily due to an increased mix of higher margin contracts for the three months ended June 2017 as compared to the prior year period.

 

Selling, general and administrative.

 

Selling, general and administrative expenses were $699,702 for the three months ended June 30, 2017, which represented 17% of revenues for this period.

 

Selling, general and administrative expenses were $1,045,191 for the three months ended June 30, 2016, which represented 21% of revenues for this period.

 

The decrease over the comparable prior year period was primarily due to (i) lower staffing costs as the Company reduced headcount; and (ii) decreased sales and marketing expenses in light of the Company’s smaller sales and marketing force; (iii) which were partially offset by increases in depreciation expense, as a consequence of the G-IV aircraft no longer being leased, but having become an asset of the Company.

 

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Other Income (Expense)

 

Other income (expense) was ($878,074) for the three months ended June 30, 2017 and $1,182,225 for the three months ended June 30, 2016. The increased expense period over period is primarily due to non-cash charges associated with the change in warrant valuation along with an increase in interest expense primarily related to debt obligations on aircraft.

 

Net Loss

 

Net loss for the three months ended June 30, 2017 was ($573,282). Net loss for the three months ended June 30, 2016 was ($711,741).

 

Six Months Ended June 30, 2017 and 2016

 

Revenues

 

Revenues were $8,459,205 for the six months ended June 30, 2017. As set forth below, four customers each represented greater than 10% of our revenues during this period.

 

Revenues were $8,593,611 for the six months ended June 30, 2016. As set forth below, four customers each represented greater than 10% of our revenues over this period.

 

The 1.6% decrease in revenue was due primarily to the completion of a contract involving the provision of a leased aircraft to an agency of the U.S. Government.

 

The table below sets forth the amount of revenues we recognized for the six months ended June 30, 2017 and 2016:

 

    Six months ended     Six months ended  
    June 30, 2017     June 30, 2016  
    Revenue     Revenue  
Customer A   $ 1,397,407       17 %   $ 2,149,984       25 %
Customer B     2,770,263       33 %     2,811,982       33 %
Customer C     2,474,613       29 %     -       - %
Customer D     1,480,959       18 %     1,456,044       17 %
Customer E     -       - %     1,387,518       16 %
Other customers     335,963       3 %     788,083       9 %
    $ 8,459,205       100 %   $ 8,593,611       100 %

 

Cost of Revenue and Gross Profit

 

Cost of revenue for the six months ended June 30, 2017 was $6,828,928, which represented 81% of revenues. The Company’s gross profit was $1,630,277 or 19% of revenues for the six months ended June 30, 2017.

 

Cost of revenue for the six months ended June 30, 2016 was $8,616,014, which represented 100.2% of revenues. The Company’s gross loss was ($22,403) or (0.2%) of revenues for the six months ended June 30, 2016.

 

The improvement in gross profit was primarily due to an increased mix of higher margin contracts for the six months ended June 2017 as compared to the prior year period. 

 

Selling, general and administrative.

 

Selling, general and administrative expenses were $1,522,675 for the six months ended June 30, 2017, which represented 18% of revenues for this period.

 

Selling, general and administrative expenses were $2,595,196 for the six months ended June 30, 2016, which represented 30% of revenues for this period.

 

The decrease over the comparable prior year period is primarily associated with the following: (i) lower staffing costs; and (ii) decreased sales and marketing expenses; (iii) which were partially offset by increases in depreciation expense.

 

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Other Income (Expense)

 

Other income (expense) was ($949,235) for the six months ended June 30, 2017 and $874,349 for the six months ended June 30, 2016. The increased expense period over period is primarily due to non-cash charges associated with the change in warrant valuation along with a charge for interest expense primarily related to debt obligations on aircraft.

 

Net Loss

 

Net loss for the six months ended June 30, 2017 was ($841,633). Net loss for the six months ended June 30, 2016 was ($1,743,250).

 

Liquidity and Capital Resources

 

As of June 30, 2017, we had cash and cash equivalents of $19,243. As of that date, we held no restricted cash. Credit card borrowings outstanding as of June 30, 2017 totaled $258,532.

 

Our working capital as of June 30, 2017 was ($9,550,411), equal to the difference between our total current assets as of that date of $2,345,956 and our total current liabilities as of that date of $11,896,367.

 

Tempus continues to incur operating expenses in support of business development efforts in addition to various organizational and transactional costs in support of potential merger and acquisition activity. In addition, new customers and contracts will require investment in working capital and aircraft assets.

 

Effective as of February 25, 2016, we entered into an agreement to lease a Gulfstream G-IV, at a rate of $70,000 a month for a period of 40 months, in support of a modification contract and expected operational contract with a government customer. The lease permitted 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 the customer’s usage of the aircraft. On November 4, 2016, the lessor exercised its option to sell the aircraft to the Company as of April 28, 2017; on such date, the seller provided seller financing to the Company by accepting in payment for the aircraft the 10% Senior Secured Convertible Note due April 28, 2018, which is convertible at the seller’s discretion into company stock (see part II, Item 5 below). If the note is fully converted by the seller, the seller would receive shares representing 82.3% of the Company’s share capital outstanding as of June 30, 2017 (taking into account the share issued upon conversion of the note).

 

The Company will continue to evaluate the merits of aviation asset ownership, whereby aircraft and related modifications will be owned by the Company, as compared to arrangements whereby the Company leases the aviation assets used in support of its customers. Factors considered will include availability of investment capital, required down payments, interest rates on asset backed loans, expected lease rates, expected customer utilization rates, expected customer duration and the level of guaranteed minimum usage to which our customers contractually commit.

 

For the six months ended June 30, 2017, the Company incurred lease expense for aviation assets used in the provision of its services of $1,771,803. Lease expenses for aviation assets for the six months ended June 30, 2016 were $2,795,533.

 

Currently, we have limited operating capital. Management believes that uncertainties regarding the commencement of new contracts that have been won or are expected to be won, and the timing of their commencement, cast significant doubt upon the Company’s ability to continue as a going concern, especially in the near term and prior to the passage of the next 12 months. See Going Concern.

 

Off-Balance Sheet Arrangements

 

None. 

 

Distributions

 

None.

 

Contractual Obligations

 

The Company incurred lease expense for real office and hangar space for the six months ended June 30, 2017 and 2016 of $95,701 and $219,526 respectively. Lease expense for aircraft and simulators was $1,771,803 and $2,891,633 respectively, for the six months ended June 30, 2017 and 2016.

 

The Company leases office space in Williamsburg, Virginia to support its operations. The Company occupied the premises as of September 1, 2016 under a month-to-month sublease to Jackson River Aviation, which is controlled by the Company’s primary investor.

 

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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 June 30, 2017 total $81,000. Unpaid lease invoices at June 30, 2017 totaled $67,950 and are included in account 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 per month, after which the lease 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 June 30, 2017 totaled $157,291 and are included in accounts payable.

 

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 a total aggregate base compensation of approximately $350,000 annually through 2018, plus other normal customary fringe benefits and bonuses.

 

Effective as of February 25, 2016, we entered into an agreement to lease a Gulfstream G-IV, at a rate of $70,000 a month for a period of 40 months. 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 the 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. As of November 4, 2016, the lessor exercised its option to sell the aircraft to the Company. In connection with the issuance by the Company on April 28, 2017, of a 10% Senior Secured Convertible Note, the Company purchased the aircraft using owner financing. See the Company’s Current Report on Form 8-K filed with the SEC on May 3, 2017, and Item 5 Other Information below, in connection with this event.

 

Significant Accounting Policies

 

Our financial statements are based on the application of accounting principles generally accepted in the United States. GAAP requires the use of estimates; assumptions, judgements and subjective interpretations of accounting principles that have an impact on assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions and conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

 

Our significant accounting policies are summarized in Note 3 of our financial statements above and also included in the Company’s Current Report on Form 10-K filed on March 31, 2017. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgement and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other any other reasonable judgements or estimate methodologies would an effect on our results operations, financial position or liquidity for the periods presented in this report.

 

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.

 

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 June 30, 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.

 

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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.

 

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 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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable. 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer (together, the “Certifying Officers”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on the foregoing, our Certifying Officers concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report. Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

 

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Changes in Internal Control over Financial Reporting

 

Our management has concluded that our internal control over financial reporting may not have been consistently effective through the date hereof, due to the fact that, at times, including in particular at times since December 31, 2016, we may not have employed a sufficient number of accounting personnel to adequately segregate duties. A failure to adequately segregate duties means that, for example, journal entries and account reconciliations may not be reviewed by someone other than the preparer, heightening the risk of error or fraud. Such a failure constitutes a material weakness in our internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. If we are unable to remediate this material weakness or avoid other control deficiencies, we may not be able to report our financial results accurately, prevent errors or fraud or file our periodic reports as a public company in a timely manner. The foregoing could result in the loss of investor confidence, errors in our public filings and declines in the market price of our securities.

 

Limitations on the Effectiveness of Internal Controls

 

Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our control have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

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PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

To the knowledge of our management, there are no material legal proceedings currently pending against us, any of our officers or directors as such or against any of our property. In February 2017, a lawsuit was filed by a former counterparty of certain businesses affiliated with our CEO, Benjamin Scott Terry, and on our former board members, John G. Gulbin III, against such businesses and individuals, alleging claims for damages in the approximate total of $10 million. Tempus Applied Solutions Holdings, Inc. was also named as a defendant in that suit. We do not believe that the allegations in the complaint involve us in any way, and we expect the suit against us to be abandoned or dismissed. However, there can be no assurance as to the outcome of this matter.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes to our risk factors as disclosed in the section titled “Risk Factors” in the Form 10-K.

 

The Company may experience difficulty in obtaining new contracts or maintaining existing contracts due to customer concerns about the Company’s solvability.

 

The Company’s continuing uncertainty regarding its ability to remain a going concern may create difficulties in obtaining new contracts and customers, or in maintaining existing contracts. Both potential new customers and existing customers may question the Company’s ability to provide proposed or contracted services. The Company is currently in discussion with one major customer seeking assurances as to the Company’s ability to provide the contracted services, but the outcome of such discussions cannot be guaranteed. In the event the customer chooses not to continue its contract with the Company, the loss of the contract would have material negative consequences on the Company’s business and financial situation.

 

The Company may have difficulty in retaining existing employees or recruiting new employees due to reductions in salary.

 

As part of the Company’s efforts to reduce its operating costs, it has informed certain senior employees that there will be reductions in salaries beginning in the near future. Certain employees may be offered equity incentives to offset the reductions in salary. As a result of such reductions, and despite the equity incentives, the Company may experience difficulties in retaining or recruiting qualified personnel. In the event the Company is not able to fill key positions with qualified personnel, the Company‘s business and prospects may suffer a material negative impact.

 

The decreased sales force resulting from the general reduction in the Company’s headcount may make it more difficult to obtain new contracts.

 

The general reduction in the Company’s headcount has also decreased the size of its sales force. As a result, it may be more difficult for the Company to identify and exploit business opportunities and obtain new customers and contracts. The Company’s results of operations and prospectus for growth may thus be negatively impacted.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURE

 

None.

 

ITEM 5. OTHER INFORMATION

 

10% Senior Secured Convertible Note due April 28, 2018

 

The following descriptions of the 10% Senior Secured Convertible Note due April 28, 2018, and the related agreements do not purport to be complete and are qualified in their entirety by reference to their full text, copies of which are included in this Report as Exhibits 10.1 and 10.2, and are incorporated herein by reference.

 

On April 28, 2017, the Company entered into a Note Purchase Agreement with Santiago (as defined below) pursuant to which the Company issued and sold to Santiago Business Co. International Ltd, a business company organized under the laws of the British Virgin Islands (“ 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 ”).

 

Upon conversion of the Note at a conversion price of $0.08 per share, Santiago has the right to acquire up to 77,500,000 shares of Common Stock.  Assuming conversion of the Note in full, assuming further that no warrants to purchase Common Stock or securities convertible into shares of Common Stock held by parties other than Santiago are exercised or converted, and taking into account 2,032,944 shares of Common Stock acquired by Santiago in a separate transaction (see below), shares beneficially owned by Santiago and which it has the right to acquire would constitute approximately 84.5% of the shares of Common Stock that would be issued and outstanding following conversion in full of the Note, as of June 30, 2017. 

 

Pursuant to their authority as the controlling persons of Santiago as reported on the Schedule 13D filed on May 8, 2017, and amended on May 16, 2017 (such persons referred to collectively herein as the “Shareholders”), the Shareholders may be deemed to indirectly beneficially own any shares of Common Stock attributable to Santiago. The Shareholders have the voting rights, protective provisions and registration rights described below.  Such rights may give the Shareholders the ability to influence control of the Company, including the ability to elect a majority of the Company’s board of directors.

 

Voting Rights

 

The terms of the Note entitle Santiago or its successors or assigns (the “ Holder ”), with respect to all matters submitted to a vote of the shareholders of the Company, to vote on an as-converted basis.  The Company has agreed to take any and all actions as may be necessary, including, if necessary, amending the terms of its certificate of incorporation and bylaws, to provide the Company the right to vote on an as-converted basis and to assure that the Company is at all times entitled, if the Company exercises its right to vote on an as-converted basis in full, to nominate and elect a majority of the members of the Company’s board of directors.

 

Protective Provisions

 

The terms of the Note further provide that, for so long as the Note remains outstanding, the Company will not (by amendment, merger, consolidation or otherwise) take any of the following actions without first obtaining the written approval of the Holder:

 


(i)        approve or consummate a transaction with any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity that is directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer;

 

(ii)       effect or approve any Liquidation Event (as defined in the Note);

 

(iii)       effect any alteration, repeal, change or amendment of the certificate of incorporation of the Issuer (except to the extent otherwise required to comply with the provisions of the Note), including any increase or decrease in the authorized capital stock of the Company, or to create, or authorize the creation of, any additional class or series of capital stock or securities of the Company;

 

  22  

 

 

(iv)      reclassify, alter or amend any existing security of the Company;

 

(v)       effect any authorization, creation or issuance of (or any obligation to authorize, create or issue) any equity securities of a subsidiary of the Company to any third party;

 

(vi)      create or authorize the creation of any debt security or instrument or otherwise incur new indebtedness of any kind (other than pursuant to credit facilities of the Company existing on the issuance date of the Note);

 

(vii)     amend, change, waive or otherwise alter the Company’s bylaws (except to the extent otherwise required to comply with the provisions of the Note);

 

(viii)    adopt or amend any Company equity incentive plan, including any amendment to increase the number of shares of Common Stock reserved for issuance pursuant to any Company stock plan, equity incentive plan, restricted stock plan or other similar arrangement;

 

(ix)        purchase or redeem (or permit any subsidiary to purchase or redeem) or pay or declare any dividend or make any distribution on, any shares of capital stock of the Company;

 

(x)        use any available cash at the Company or any of its subsidiaries, other than net cash provided by operating activities, for working capital;

 

(xi)       effect any change in the authorized number of directors of the Company;

 

(xii)      commence or consummate any public offering;

 

(xiii)    effect any sale, transfer or other disposition, in a single transaction or series of related transactions, of more than $10,000 of the assets of the Company and its subsidiaries;

 

(xiv)    approve any annual budget or any material deviation therefrom; or

 

(xv)      make any changes to the executive officers of the Issuer, including, but not limited to, those individuals performing the chief executive, financial, legal and accounting functions.

 

For the purposes of the foregoing provisions, any reference to the Company will be deemed to include any subsidiary of the Company.

 

Registration Rights

 

The Company and Santiago have entered into a registration rights agreement, dated as of April 28, 2017 (the “ Registration Rights Agreement ”).  Pursuant to the Registration Rights Agreement and subject to the terms and conditions therein, within 30 days of April 28, 2017, the Company shall prepare and file with the Securities and Exchange Commission a “resale” registration statement (the “ Registration Statement ”)   providing for the resale of the number of shares of Common Stock issuable to the Holder upon conversion of the Note (the “ Registrable Securities ”) pursuant to an offering to be made on a continuous basis under Rule 415 promulgated under the Securities Act of 1933, as amended (the “ Securities Act ”).  The Company’s obligation as described in the preceding sentence is subject to limited exceptions specified in the Registration Rights Agreement.  The Company has agreed to use its reasonable best efforts to cause the Registration Statement to be declared effective under the Securities Act and to keep the Registration Statement continuously effective under the Securities Act until the earlier of (x) the date when all Registrable Securities covered by such Registration Statement have been sold or (y) the date on which all Registrable Securities then held by Santiago, or which may be acquired by Santiago upon conversion of the Note, may be sold without restriction pursuant to Rule 144 under the Securities Act.  The Company has further agreed, upon the written demand of Santiago, facilitate in the manner described in the Registration Rights Agreement a “takedown” of Registrable Securities off of the Registration Statement.

 

Subject to limited exceptions, the Company will pay the registration expenses incident to the performance of or compliance with the Registration Rights Agreement but will not be responsible for any underwriters’, brokers’ and dealers’ discounts and commissions, transfer taxes or similar fees incurred by Santiago in connection with the sale of the Registrable Securities.

 

The Registration Rights Agreement contains customary cross-indemnification provisions, pursuant to which the Company is obligated to indemnify Santiago in the event of material misstatements or omissions in the registration statement attributable to the Company, and Santiago is obligated to indemnify the Company for material misstatements or omissions attributable to it.

 

The Registration Rights Agreement will terminate on the earlier (i) the first date on which no Registrable Securities are outstanding or are issuable upon conversion of the Note; and (ii) the fifth anniversary of the effective date of the Registration Statement; provided, however, that the parties’ rights and obligations under the indemnification provisions of the Registration Rights Agreement shall continue in full force and effect in accordance with their respective terms.

 

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Collateral

 

The Company’s obligations under the Note are to be secured by the following collateral: (i) a pledge by the Company of all of the issued and outstanding shares of Bluebell; (ii) a mortgage and security interest to be granted by N198GS Inc. and Bluebell of their respective interests in a specified Gulfstream G-IV aircraft; and (iii) a security interest to be granted by Bluebell in its rights under the trust agreement between Bluebell and N198GS Inc.

 

Tempus Jets, Inc. transaction

 

On May 10, 2017, Santiago acquired 2,032,994 shares of Common Stock from Benjamin Scott Terry, Director and CEO of the Company, in partial satisfaction of a promissory note (the “ Promissory Note ”) pursuant to which Tempus Jets, Inc., a Kansas corporation, was indebted to an affiliate of Santiago; such shares had been pledged to the affiliate to secure payment of the Promissory Note. 

 

Board of Directors Resignations

 

The unconditional resignations of four of the Company’s directors were automatically effected on Wednesday, April 26, 2017. As of such date, director and Company CEO, Benjamin Scott Terry, has been the only sitting member of the Board. The circumstances relating to the foregoing events were reported in the Company’s Form 8-K filed with the Commission on May 3, 2017, which is incorporated by reference herein.

 

ITEM 6. EXHIBITS

 

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

 

Exhibit Number   Description
     
10.1   10% Senior Secured Convertible Note due April 28, 2018 in the principal amount of $6,200,000 (incorporated by reference to Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the three months ended March 31, 2017, filed on May 22, 2017).
     
10.2   Registration Rights Agreement, dated as of April 28, 2017, between Tempus Applied Solutions Holdings, Inc. and Santiago Business Co. International Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the three months ended March 31, 2017, filed on May 22, 2017).
     
31.1   Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
     
31.2   Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
     
32.1   Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
     
32.2   Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

  

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  TEMPUS APPLIED SOLUTIONS HOLDINGS, INC.

 

Dated: August 21, 2017  By: /s/ Johan Aksel Bergendorff
  Name:
Title:

Johan Aksel Bergendorff

Chief Financial Officer

(Principal financial and accounting officer)

 

 

25