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.
Tempus Applied Solutions Holdings, Inc.
and Subsidiaries
Consolidated Balance Sheets
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,029
|
|
|
$
|
592,449
|
|
Restricted cash
|
|
|
-
|
|
|
|
50,007
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade, net
|
|
|
1,478,404
|
|
|
|
1,415,083
|
|
Other
|
|
|
61,105
|
|
|
|
1,119
|
|
Related party
|
|
|
-
|
|
|
|
38,962
|
|
Other assets
|
|
|
88,701
|
|
|
|
98,871
|
|
Current assets of discontinued operations
|
|
|
5,223
|
|
|
|
65
|
|
Total current assets
|
|
|
1,657,462
|
|
|
|
2,196,556
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
5,727,327
|
|
|
|
5,933,940
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
49,428
|
|
|
|
51,428
|
|
Intangibles, net
|
|
|
535,528
|
|
|
|
554,839
|
|
Noncurrent assets of discontinued operations
|
|
|
-
|
|
|
|
501,711
|
|
Total other assets
|
|
|
584,956
|
|
|
|
1,107,978
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,969,745
|
|
|
$
|
9,238,474
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable:
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
2,453,569
|
|
|
$
|
3,363,229
|
|
Related party
|
|
|
949,112
|
|
|
|
1,489,400
|
|
Accrued liabilities
|
|
|
975,852
|
|
|
|
874,286
|
|
Capital Lease obligation
|
|
|
-
|
|
|
|
5,835,181
|
|
Notes Payable-Related Party
|
|
|
6,200,000
|
|
|
|
-
|
|
Customer deposits, net
|
|
|
688,275
|
|
|
|
165,094
|
|
Current liabilities of discontinued operations
|
|
|
2,799
|
|
|
|
569,937
|
|
Total current liabilities
|
|
|
11,269,607
|
|
|
|
12,297,127
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Common stock warrant liability
|
|
|
127,135
|
|
|
|
102,185
|
|
Total long term liabilities
|
|
|
127,135
|
|
|
|
102,185
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
11,396,742
|
|
|
|
12,399,312
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 40,000,000 shares authorized, -0- and 4,578,070 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
|
|
-
|
|
|
|
458
|
|
Common stock, $0.0001 par value; 100,000,000 shares authorized; 17,805,234 and 11,064,664 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
|
|
1,781
|
|
|
|
1,106
|
|
Additional paid in capital
|
|
|
10,267,889
|
|
|
|
10,050,746
|
|
Accumulated deficit
|
|
|
(13,696,667
|
)
|
|
|
(13,213,148
|
)
|
Total stockholders’ deficit
|
|
|
(3,426,997
|
)
|
|
|
(3,160,838
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
7,969,745
|
|
|
$
|
9,238,474
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Tempus Applied Solutions Holdings, Inc.
and Subsidiaries
Consolidated Statements of Operations
(unaudited)
|
|
Nine Months
|
|
|
Nine Months
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
REVENUES
|
|
$
|
11,655,027
|
|
|
$
|
12,335,250
|
|
|
$
|
3,195,822
|
|
|
$
|
3,741,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUE
|
|
|
9,645,159
|
|
|
|
12,072,877
|
|
|
|
2,816,231
|
|
|
|
3,456,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
2,009,868
|
|
|
|
262,373
|
|
|
|
379,591
|
|
|
|
284,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
1,985,219
|
|
|
|
3,366,180
|
|
|
|
462,544
|
|
|
|
770,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit (loss)
|
|
|
24,649
|
|
|
|
(3,103,807
|
)
|
|
|
(82,953
|
)
|
|
|
(486,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
97
|
|
|
|
1,793
|
|
|
|
-
|
|
|
|
-
|
|
Interest expense
|
|
|
(498,107
|
)
|
|
|
(10,493
|
)
|
|
|
(156,274
|
)
|
|
|
(10,493
|
)
|
Non-operational income (expense)
|
|
|
(10,158
|
)
|
|
|
1,262,033
|
|
|
|
597,341
|
|
|
|
389,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(508,168
|
)
|
|
|
1,253,333
|
|
|
|
441,067
|
|
|
|
378,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME / (LOSS) FROM CONTINUING OPERATIONS
|
|
$
|
(483,519
|
)
|
|
$
|
(1,850,474
|
)
|
|
$
|
358,114
|
|
|
$
|
(107,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS FROM DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
|
(1,223,545
|
)
|
|
|
-
|
|
|
|
(391,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(483,519
|
)
|
|
$
|
(3,074,019
|
)
|
|
$
|
358,114
|
|
|
$
|
(498,423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.04
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
Discontinued operations
|
|
$
|
-
|
|
|
$
|
(0.13
|
)
|
|
$
|
-
|
|
|
$
|
(0.04
|
)
|
NET LOSS PER SHARE:
|
|
$
|
(0.04
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC AND DILUTED
|
|
|
13,428,930
|
|
|
|
10,024,972
|
|
|
|
17,707,136
|
|
|
|
11,064,664
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
Tempus Applied Solutions Holdings, Inc.
and Subsidiaries
Consolidated Statements of Stockholders’
Deficit
|
|
Common stock
|
|
|
Preferred stock
|
|
|
Additional
|
|
|
|
|
|
Total
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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(483,519
|
)
|
|
|
(483,519
|
)
|
Stock Based Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,360
|
|
|
|
-
|
|
|
|
44,360
|
|
Conversion of preferred shares to common stock
|
|
|
4,578,070
|
|
|
|
458
|
|
|
|
(4,578,070
|
)
|
|
|
(458
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Conversion of warrant liability to common stock
|
|
|
2,162,500
|
|
|
|
217
|
|
|
|
-
|
|
|
|
-
|
|
|
|
172,783
|
|
|
|
-
|
|
|
|
173,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2017 (unaudited)
|
|
|
17,805,234
|
|
|
$
|
1,781
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
10,267,889
|
|
|
$
|
(13,696,667
|
)
|
|
$
|
(3,426,997
|
)
|
The accompanying notes are an integral part
of these consolidated financial statements.
Tempus Applied Solutions Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES-CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(483,519
|
)
|
|
$
|
(1,850,474
|
)
|
Adjustments to reconcile net loss to net cash used for operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
44,360
|
|
|
|
175,677
|
|
Depreciation and amortization
|
|
|
203,740
|
|
|
|
59,490
|
|
Loss on conversion of warrant liability to stock
|
|
|
-
|
|
|
|
3,505,300
|
|
Fair value adjustment of common stock warrants
|
|
|
24,950
|
|
|
|
(4,759,207
|
)
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable-trade
|
|
|
(200,247
|
)
|
|
|
(147,320
|
)
|
Accounts receivable-other
|
|
|
(59,986
|
)
|
|
|
(159,717
|
)
|
Due to/from related parties, net
|
|
|
(501,326
|
)
|
|
|
66,553
|
|
Inventory
|
|
|
-
|
|
|
|
24,999
|
|
Other current assets
|
|
|
10,170
|
|
|
|
123,141
|
|
Deposits
|
|
|
2,000
|
|
|
|
463,572
|
|
Accounts payable-trade
|
|
|
(544,841
|
)
|
|
|
1,781,438
|
|
Accrued liabilities
|
|
|
101,566
|
|
|
|
(840,249
|
)
|
Deferred revenue
|
|
|
-
|
|
|
|
(48,130
|
)
|
Customer deposits, net
|
|
|
660,107
|
|
|
|
(498,096
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities-continuing operations
|
|
|
(743,025
|
)
|
|
|
(2,103,023
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES-CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
-
|
|
|
|
(35,467
|
)
|
Proceeds from the sale of property and equipment
|
|
|
22,183
|
|
|
|
-
|
|
Purchases of intangible assets
|
|
|
-
|
|
|
|
(41,676
|
)
|
Decrease in restricted cash
|
|
|
50,007
|
|
|
|
900,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities-continuing operations
|
|
|
72,190
|
|
|
|
822,857
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES-CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
Proceeds from conversion of warrants
|
|
|
173,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities-continuing operations
|
|
|
173,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
Operating cash flows
|
|
|
(570,650
|
)
|
|
|
10,795
|
|
Investing cash flows
|
|
|
500,000
|
|
|
|
(9,234
|
)
|
Financing cash flows
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
|
70,650
|
|
|
|
1,561
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(568,485
|
)
|
|
|
(1,278,605
|
)
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
24,029
|
|
|
$
|
9,890
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
498,107
|
|
|
$
|
10,493
|
|
|
|
|
|
|
|
|
|
|
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.
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.
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, has had recurring negative cash
flows from operations, and it currently has a working capital deficit, which raises substantial doubt about the Company’s
ability to continue as a going concern. In addition, as disclosed in Note 14, subsequent to year-end the Company elected to terminate
a customer contract which will impact the Company’s future revenue and cash flow. 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.
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 September 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 $144,007 and $620,829 for
the nine months ended September 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 that 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.
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 September 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, second and third 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 $0 at September 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. Amounts receivables from customers are offset against
the customer deposit upon termination of the contract, if the contract permits offsetting. As of September 30, 2017, and December
31, 2016, the Company held $688,275 and $165,094, respectively, in customer deposits, net.
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 nine months ended September 30, 2017 and 2016, the potentially dilutive shares are anti-dilutive and are thus not added
into the loss per share calculations. For the nine months ended September 30, 2017 and 2016, there were 13,428,930 and 10,024,972
weighted average shares outstanding, respectively.
Reclassification
Prior period accounts receivable from related parties of $396,986 were reclassified and netted against
prior period accounts payable to related parties of $1,886,386. The balance of accounts payables to related parties after the reclassification
is $1,489,400 as per December 31, 2016.
Certain other prior period amounts have been reclassified to conform to the current period presentation
in the accompanying consolidated financial statements. These reclassifications had no material effect on the previously reported
results of operations or accumulated deficit.
Correction of an Error
The Company determined that it had been
accounting for a lease agreement and its purchase obligation related to an aircraft in error. The Company should have accounted
for its purchase obligation as a capital lease, thereby recording a capital lease aircraft asset and a corresponding capital lease
liability of approximately $6,000,000 as of the end of the quarter ended September 30, 2016. The error was not material to the
unaudited consolidated financial statements for the nine months period ended September 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 addition the new standard requires additional financial statement disclosures that will enable users to understand
the nature, timing and uncertainty of revenue and cash flows relating to customer contracts. This ASU, as amended, is effective
for fiscal years and interim periods within those years beginning after December 15, 2017. The guidance permits
two methods of adoption, retrospectively to each prior reporting period presented (full retrospective method) or retrospectively
with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective
method). The Company is currently evaluating the impact that adopting this ASU will have on its financial position, results of
operations and cash flows as well as the method of adoption that it plans to use.
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 nine months
ended September 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.
The Company did not record a tax provision
or benefit for the period ended September 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 September 30, 2017. The Company’s deferred tax assets
consist principally of net operating losses, intangibles, and nondeductible reserves. The Company is currently evaluating 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 September 30, 2017, the Company does not believe it is more likely than not that the deferred tax assets will
be realized.
Preferred Stock
As of September 30, 2017, we had 40,000,000
shares authorized and no shares of preferred stock outstanding. There is a total of 1,025,000 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 nine months ended September 30, 2017, the company issued 4,578,070 shares of common stock for
conversion of 4,578,070 shares of preferred stock.
Common Stock
As of September 30, 2017, we had
100,000,000 shares of common stock authorized and 17,805,234 shares of common stock issued and outstanding. Further, as of September
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 1,025,000 Series A Warrants outstanding that are convertible into common
stock or preferred stock.
Between July 3, 2017 and
July 14, 2017, the Company issued an aggregate of 1,175,000 shares of common stock to certain holders of Series A Warrants
who exercised their rights to purchase shares. These shares were registered for sale by the holders pursuant to the
prospectus (the “Prospectus”) filed under Rule 424(b)(3) on April 14, 2017, under the Securities Act of 1933, as
amended (the “Securities Act”) (Registration No. 333-206527).
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 therefore.
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 nine months ended September
30, 2017 the company issued 4,578,070 shares of common stock for conversion of 4,578,070 shares of preferred stock.
During the nine months ended September
30, 2017 the company issued 2,162,500 shares of common stock for conversion of 2,162,500 Series A warrants at a conversion price
of $0.08 per share.
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 nine months
ended September 30, 2017 and 2016 there were -0- and 499,000 stock options granted, under the Company’s option plan, respectively.
The Company recognized $44,360 and $175,677 in stock-based compensation expense for the nine months ended September 30, 2017 and
2016, respectively. Stock options to purchase 126,000 and 322,000 shares of common stock were outstanding as of September 30, 2017
and December 31, 2016, respectively.
The Company uses the Black-Scholes option-pricing
model to value the options. The life of the option is equivalent to the expiration of the option award. The risk-free interest
rate is assumed at 1.77%. The estimated volatility is based on management’s expectations of future volatility and is assumed
at 60%. Estimated dividend payout is zero, as the Company has not paid dividends in the past and, at this time, does not expect
to do so in the future.
|
|
Shares
|
|
|
Weighted Average Exercise Price Per Option
|
|
Options outstanding, December 31, 2016
|
|
|
322,000
|
|
|
$
|
2.05
|
|
Granted to employees and non-employee directors
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled/expired/forfeited
|
|
|
196,000
|
|
|
|
-
|
|
Options outstanding, September 30, 2017
|
|
|
126,000
|
|
|
|
2.05
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, September 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
Compensation cost is recognized over the
required service period which is three years for all granted options. As of September 30, 2017, $73,932 of total unrecognized compensation
cost related to stock options was expected to be recognized over the remaining 5 quarters. As of September 30, 2016, $527,032 of
total unrecognized compensation cost related to stock options was expected to be recognized over the remaining 9 quarters.
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 September 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 certain liabilities that 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 September 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
|
|
|
$
|
-
|
|
|
|
September 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
|
|
$
|
118,125
|
|
|
$
|
118,125
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Series A Warrant Liability
|
|
|
9,010
|
|
|
|
-
|
|
|
|
9,010
|
|
|
|
-
|
|
Total Warrant Liability
|
|
$
|
127,135
|
|
|
$
|
118,1258
|
|
|
$
|
9,010
|
|
|
$
|
-
|
|
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:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Office equipment
|
|
$
|
135,897
|
|
|
$
|
167,088
|
|
Furniture and fixtures
|
|
|
456
|
|
|
|
456
|
|
Aircraft
|
|
|
6,015,505
|
|
|
|
6,015,505
|
|
Total
|
|
|
6,151,858
|
|
|
|
6,183,049
|
|
Accumulated depreciation
|
|
|
(424,531
|
)
|
|
|
(249,109
|
)
|
Property and equipment, net
|
|
$
|
5,727,327
|
|
|
$
|
5,933,940
|
|
Intangibles, net consists of the following:
|
|
September 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
|
|
|
(55,648
|
)
|
|
|
(36,337
|
)
|
|
|
|
29,627
|
|
|
|
48,938
|
|
Total intangible assets, net
|
|
$
|
535,528
|
|
|
$
|
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 nine months ended September 30, 2017 and 2016 were $3,459,758 and $196,035,
respectively. Billings by the Company to JRA for the nine months ended September 30, 2017 and 2016 were $845,887 and $57,053, respectively.
As of September 30, 2017, the Company had a net outstanding payable to JRA of $170,025. As of December 31, 2016, the Company had
a net outstanding receivable from JRA of $38,962.
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 nine months ended September 30, 2017 and 2016 were $2,247,955 and $1,125,246, respectively.
Total billings from the Company to TIH for the nine months ended September 30, 2017 and 2016 were $806,023 and $136,482, respectively.
The net outstanding payable from Tempus to TIH at September 30, 2017 and December 2016 was $636,591 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 nine months ended September 30,
2017 and 2016 were $0 and $116,545, respectively. The net outstanding payable from Tempus to Southwind at September 30, 2017 and
December 31, 2016 was $142,496.
Since July 1, 2017, Santiago Business Co. International Ltd, (“Santiago”) has provided CFO
services to the Company, via full time service delivered by our CFO, Johan Aksel Bergendorff. The monthly fee is $12,500 plus expenses.
Total billings for the nine months ended September 2017 was $48,996. As per September 30, 2017 (and as per this filing date, November
28, 2017) the outstanding balance for these services was $48,996.
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 September 30, 2017 and December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current assets of discontinued operations
|
|
$
|
5,223
|
|
|
$
|
65
|
|
Noncurrent assets of discontinued operations
|
|
$
|
0
|
|
|
$
|
501,711
|
|
Current liabilities of discontinued operations
|
|
$
|
2,799
|
|
|
$
|
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 nine months ended September 30, 2017 and 2016.
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
-
|
|
|
$
|
1,256,881
|
|
|
|
-
|
|
|
$
|
668,150
|
|
Gross profit
|
|
|
-
|
|
|
|
(960,075
|
)
|
|
|
-
|
|
|
|
(279,179
|
)
|
Selling, general and administrative expenses
|
|
|
-
|
|
|
|
(261,998
|
)
|
|
|
-
|
|
|
|
(111,250
|
)
|
Depreciation and amortization
|
|
|
-
|
|
|
|
(1,472
|
)
|
|
|
-
|
|
|
|
(770
|
)
|
Net loss from discontinued operations
|
|
|
-
|
|
|
$
|
(1,223,545
|
)
|
|
|
-
|
|
|
$
|
(391,199
|
)
|
The company has evaluated subsequent
events from September 30, 2017 and November 28, 2017, the date this report was available to be issued and determined to disclose
the following:
|
i.
|
On
August 14, 2017, the Company entered into a definitive purchase agreement for the acquisition
of six Lockheed L-1011, subject to satisfactory completion of inspection of the aircraft.
The inspection was completed satisfactorily by the end of October, 2017. The closing of the
transaction is now only subject to the seller fulfilling their obligations under the
purchase agreement to remove all liens on the aircraft. The sale is expected to close
in the fourth quarter of 2017. As payment for the aircraft, the Company expects to issue
approximately 6.7 million shares to the seller during the fourth quarter of 2017.
|
|
|
|
|
ii.
|
On
October 6, 2017, the Company entered into an equity financing agreement with GHS Investments
LLC, a Nevada limited liability company, under which the Company may issue, over the
next 24 months, shares of common stock representing up to an aggregate of $12,000,000
of equity financing. The number of shares to be issued would depend on the price per
share, which will be based on a discount to the volume weighted average market price
of the shares during a 10-trading day period. Shares issued under the equity financing
agreement are subject to a registration rights agreement.
|
|
|
|
|
iii.
|
On
November 22, 2017, the Company notified one of its customers that the Company was terminating
an aircraft management agreement with them due to their on-going and repeated failure
to make payment in full of all amounts due under the contract. The contract represents
a material portion of the Company’s consolidated revenues ($4.0 million for the
first nine months of 2017), but has not contributed significantly to either consolidated
gross profit or net profit. The Company also informed the customer that it would seek
damages for losses and expenses in light of the customer’s repudiatory breach of
the contract. Depending on the outcome of negotiations with the customer, and possibly
litigation, the receivables owed to the Company for services rendered, together with
damages, would be applied against the operating deposit of $750,000 to be repaid to the
customer following contract termination.
|
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. See also “Outlook” and “Going Concern” below.
Acquisition of six L-1011s to provide air-to-air
refueling services
On August 14, 2017, we announced
that we have entered into a definitive purchase agreement for the acquisition of six Lockheed L-1011s formerly owned and operated
by the Royal Air Force (RAF) of the United Kingdom. Four of these aircraft are specifically configured for air-to-air refueling
(AAR) operations and the remaining two are configured for passenger and cargo operations only. Although the aircraft served
the RAF and NATO for 30 years until their retirement in 2014, we have completed a successful inspection and evaluation of the aircraft
and associated log books and support equipment, and based on that inspection, we believe that the aircraft have many years of service
life remaining. The L-1011s have been in flyable storage in the UK since their retirement. We expect to acquire the
aircraft in the immediate future by issuing approximately 6,730,769 shares of our common stock to the seller of the aircraft.
We intend to utilize three of the AAR configured aircraft while
the additional three aircraft will be used as spare parts. Marketing of the aircraft for contractor owned/operated AAR operations
will begin immediately with a focus on the US Navy, NATO, and other allied air forces which require hose and drogue AAR services.
The aircraft are currently registered in the United States and will be ferried from the UK to an existing Tempus Applied Solutions
(TAS) base of operations in the continental USA upon acceptance and the completion of required maintenance.
The
inspection we performed on the aircraft was entirely consistent with industry standards, but it may not reveal performance or
other deficiencies which appear or arise following actual usage; such deficiencies could cause remaining service life of one or
more aircraft to be reduced, or Federal Aviation Administration certification to be delayed, refused, suspended or withdrawn.
In addition, our success in marketing profitable services based on the use of these aircraft depends on numerous factors which
are not under our control, such as market demand, prevailing prices and operating costs for the services offered, and competition.
Equity Financing Agreement
On October 6, 2017, we entered into
an equity financing agreement with GHS Investments LLC, a Nevada limited liability company, under which we may issue, over the
next 24 months, shares of common stock representing up to an aggregate of $12,000,000 of equity financing. The number of shares
to be issued would depend on the price per share, which will be based on a discount to the volume weighted average market price
of the shares during a 10-trading day period. See “Liquidity and Capital Resources” below. Shares issued under the
equity financing agreement are subject to a registration rights agreement; the registration statement for the shares was filed
with the Securities and Exchange Commission (the “SEC”) on October 20, 2017, and must be declared effective by the
SEC for us to be able to draw down on the equity financing. See “Liquidity and Capital Resources” below
Early termination by the Company
of a material services contract
On November 22, 2017, we notified
one of our customers that the Company was terminating an aircraft management agreement with them due to their on-going and repeated
failure to make payment in full of all amounts due under the contract. The contract represents a material portion of our consolidated
revenues ($4.0 million for the first nine months of 2017), but has not contributed significantly to either our consolidated gross
profit or net profit. The contract also has not contributed significantly to net positive cash flow from operations, since margin
on the contract is very low.
We have informed the customer that
we would seek damages for losses and expenses in light of their repudiatory breach of the contract. Depending on the outcome of
negotiations with the customer, and possibly litigation, the receivables owed to us for services rendered, together with damages,
would be applied against the operating deposit of $750,000 to be repaid to the customer following contract termination. The final
amount to be repaid to the customer, or which would be due to us by the customer, will depend on the results of negotiations with
the customer. In the event the negotiations do not lead to an agreement, litigation may result. See “Our early termination
of a material services contract will reduce our revenues, require repayment of an operating deposit, and may lead to litigation.”
Outlook
As communicated previously, our
revenues are based principally on a very small number of important contracts. For the third quarter of 2017, 77% of our revenues
came from two contracts. Although not inconsistent with the Company’s strategy and business, the importance to our revenue
stream of a small number of contracts exposes us to a substantial risk in the event any such contract is terminated early or not
renewed, or if the customer defaults. See “Early termination by the Company of a material services contract” above,
and our Annual Report on Form 10-K for the year ended December 31, 2016, for further discussion of the risks involved in reliance
on a small number of contracts.
In addition, in light of our history of operating losses and negative cash flows from operations, we have
accumulated $2.5 million of trade accounts payable at September 30, 2017, in addition to $2.1 million of accounts payable to related
parties. If the Company’s creditors refuse to provide further goods or services, the Company may not be able to provide services
under its client contracts, which would cause substantial harm to the Company’s business and financial condition. See “
Our
current cash flow from operations may not be sufficient to cover our upcoming operating costs, which would have a significant negative
impact on our ability to continue as a going concern.”
under
Part II, Item 1A below.
The Company nevertheless has opportunities
to develop its revenues, such as the L-1011s for air refueling services, which are expected to be acquired shortly, and to strengthen
its financial resources, such as the equity financing agreement, as described above. Company management is therefore currently
focused on carefully managing available cash to ensure sufficient liquidity, and obtaining new service contracts and renewing existing
contracts using available resources to maintain cash flow and develop revenues. While the recent reduction in headcount has effectively
reduced fixed costs, management must be successful in achieving the tasks described above to enable the Company to continue in
operations and grow. However, as noted in “Going Concern” below, there can be no assurance that the Company’s
cash flows or business will develop as currently expected, and uncertainties remain regarding the Company’s ability to continue
as a going concern.
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. See ‘Outlook’ above. 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. See “
Our
current cash flow from operations may not be sufficient to cover our upcoming operating costs, which would have a significant negative
impact on our ability to continue as a going concern.”
under
Part II, Item 1A below.
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 September 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. 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 September 30,
2017 and 2016
Revenues
Revenues were $3,195,822 for the three
months ended September 30, 2017. As set forth below, two customers each represented greater than 10% of our revenues during this
period.
Revenues were $3,741,639 for the three
months ended September 30, 2016. As set forth below, three customers each represented greater than 10% of our revenues over this
period.
The 15% 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 September 30, 2017 and 2016:
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Revenue
|
|
|
Revenue
|
|
Customer A
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
1,092,255
|
|
|
|
29
|
%
|
Customer B*
|
|
|
1,239,060
|
|
|
|
39
|
%
|
|
|
1,498,732
|
|
|
|
40
|
%
|
Customer C
|
|
|
1,209,958
|
|
|
|
38
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Customer D
|
|
|
690
|
|
|
|
0
|
%
|
|
|
632,648
|
|
|
|
17
|
%
|
Other customers
|
|
|
746,114
|
|
|
|
23
|
%
|
|
|
518,004
|
|
|
|
14
|
%
|
|
|
$
|
3,195,822
|
|
|
|
100
|
%
|
|
$
|
3,741,639
|
|
|
|
100
|
%
|
* The Company terminated this contract on November
22, 2017. See “Early termination by the Company of a material services contract” above.
Cost of Revenue and Gross Profit
Cost of revenue for the three months ended
September 30, 2017 was $2,816,231, which represented 88% of revenues. The Company’s gross profit was $379,591 or 12% of revenues
for the three months ended September 30, 2017.
Cost of revenue for the three months ended
September 30, 2016 was $3,456,863, which represented 92% of revenues. The Company’s gross profit was $284,776 or 8% of revenues
for the three months ended September 30, 2016.
The improvement in gross profit was primarily
due to an increased mix of higher margin contracts for the three months ended September 2017 as compared to the prior year period.
Selling, General and Administrative
Selling, general and administrative expenses
were $462,544 for the three months ended September 30, 2017, which represented 14% of revenues for this period.
Selling, general and administrative expenses
were $770,984 for the three months ended September 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 result of the Gulfstream G-IV aircraft becoming an asset of the Company.
Other Income (Expense)
Other income (expense) was $441,067 for
the three months ended September 30, 2017 and $378,984 for the three months ended September 30, 2016. The increased income period
over period is primarily due to non-cash income associated with the change in warrant valuation offset by an increase in interest
expense primarily related to debt obligations on aircraft (namely, the 10% Senior Secured Convertible Note due April 28, 2018).
Net Loss
Net income for the three months ended September
30, 2017 was $358,114. Net loss for the three months ended September 30, 2016 was ($498,423).
Nine Months Ended September 30, 2017
and 2016
Revenues
Revenues were $11,655,027 for the nine
months ended September 30, 2017. As set forth below, four customers each represented greater than 10% of our revenues during this
period.
Revenues were $12,335,250 for the nine
months ended September 30, 2016. As set forth below, four customers each represented greater than 10% of our revenues over this
period.
The 5.5% 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 nine months ended September 30, 2017 and 2016:
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Revenue
|
|
|
Revenue
|
|
Customer A
|
|
$
|
1,397,407
|
|
|
|
12
|
%
|
|
$
|
3,155,041
|
|
|
|
26
|
%
|
Customer B*
|
|
|
4,009,283
|
|
|
|
34
|
%
|
|
|
4,310,714
|
|
|
|
35
|
%
|
Customer C
|
|
|
3,684,571
|
|
|
|
32
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Customer D
|
|
|
1,481,649
|
|
|
|
13
|
%
|
|
|
2,088,692
|
|
|
|
17
|
%
|
Customer E
|
|
|
-
|
|
|
|
-
|
%
|
|
|
1,390,027
|
|
|
|
11
|
%
|
Other customers
|
|
|
1,082,117
|
|
|
|
9
|
%
|
|
|
1,390,776
|
|
|
|
11
|
%
|
|
|
$
|
11,655,027
|
|
|
|
100
|
%
|
|
$
|
12,335,250
|
|
|
|
100
|
%
|
* The Company terminated this contract on November
22, 2017. See “Early termination by the Company of a material services contract” above.
Cost of Revenue and Gross Profit
Cost of revenue for the nine months ended
September 30, 2017 was $9,645,159, which represented 83% of revenues. The Company’s gross profit was $2,009,868 or 17% of
revenues for the nine months ended September 30, 2017.
Cost of revenue for the nine months ended
September 30, 2016 was $12,072,877, which represented 98% of revenues. The Company’s gross profit was $262,373 or 2% of revenues
for the nine months ended September 30, 2016.
The improvement in gross profit was primarily
due to an increased mix of higher margin contracts for the nine months ended September 2017 as compared to the prior year period.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses
were $1,985,219 for the nine months ended September 30, 2017, which represented 17% of revenues for this period.
Selling, general and administrative expenses
were $3,366,180 for the nine months ended September 30, 2016, which represented 27% 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 (mainly the Gulfstream G-IV aircraft, which was acquired
in 2017).
Other Income (Expense)
Other income (expense) was ($508,168) for
the nine months ended September 30, 2017 and $1,253,333 for the nine months ended September 30, 2016. The increased expense period
over period is primarily due to reduction in non-cash income associated with the change in warrant valuation along with a charge
for interest expense primarily related to debt obligations on aircraft (the $6.2m convertible note, with 10% interest).
Net Loss
Net loss for the nine months ended September
30, 2017, was ($483,519). Net loss for the nine months ended September 30, 2016 was ($3,074,019).
Liquidity and Capital Resources
As of September 30, 2017, we had cash and
cash equivalents of $24,029. As of that date, we held no restricted cash. Credit card borrowings outstanding as of September 30,
2017 totaled $271,345.
Our working capital as of September 30, 2017 was ($9,612,145), equal to the difference between our total
current assets as of that date of $1,657,462 and our total current liabilities as of that date of $11,269,607.
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 provided 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 September 30, 2017 (taking into
account the shares 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 nine months ended September 30,
2017, the Company incurred lease expense for aviation assets used in the provision of its services of $2,409,203. Lease expenses
for aviation assets for the nine months ended September 30, 2016 were $4,238,694.
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” above and
the first risk factor in Part II, Item IA below.
Equity Financing Agreement
On October 6, 2017, we entered into an equity financing agreement
with GHS Investments LLC, a Nevada limited liability company (the “Investor”), under which, during the 24 months thereafter,
we may put shares to the Investor representing up to an aggregate of $12,000,000 in equity. The timing and amounts of the purchases
shall be at the discretion of the Company. The maximum dollar amount of each purchase will not exceed three times the average of
the daily trading dollar volume for our common stock during the ten (10) trading days preceding the put date. No purchase will
be made in an amount greater than three hundred thousand dollars ($300,000). Purchases are further limited to the investor owning
no more than 9.99% of our common stock at any given time. The purchase price shall be set at ninety-five percent (95%) of the volume
weighted average price (“VWAP”) for our common stock during the valuation period. If the closing price for our common
stock on the last trading day of the valuation period is less than the VWAP during the valuation period, then the purchase price
shall equal 95% of the lowest closing price during the valuation period. If the purchase price is less than one-dollar ($1.00)
per share, an additional five percent (5%) will be discounted off the applicable purchase price.
Shares issued under the equity financing
agreement are subject to a registration rights agreement. On October 20, 2017, we filed a registration statement with the SEC on
Form S-1 for the possible resale by the Investor of up to 50,000,000 shares of common stock. The registration statement for the
shares must be declared effective by the SEC for us to be able to draw down on the equity financing. We are currently responding
to comments from the SEC, and we cannot guaranty when or if the registration statement will be declared effective. At the same
time, we filed a registration statement on Form S-1 for the possible resale of up to 5, 842,404 shares of common stock by the selling
shareholders named therein exercising their piggyback registration rights.
The issue and sale of the shares
under the equity financing agreement may have an adverse effect on the market price of the common shares. The Investor may resell
some, if not all, of the shares that we issue to it under the equity financing agreement, and such sales could cause the market
price of the common stock to decline significantly. To the extent of any such decline, any subsequent puts would require us to
issue and sell a greater number of shares to the investor in exchange for each dollar of the put amount. Under these circumstances,
the existing shareholders of our company will experience greater dilution. The effect of this dilution may, in turn, cause the
price of our common stock to decrease further, both because of the downward pressure on the stock price that would be caused by
a large number of sales of our shares into the public market by the investor, and because our existing stockholders may disagree
with a decision to sell shares to the investor at a time when our stock price is low, and may in response decide to sell additional
shares, further decreasing our stock price.
Off-Balance Sheet Arrangements
None.
Distributions
None.
Contractual Obligations
The Company incurred lease expense for
real office and hangar space for the nine months ended September 30, 2017 and 2016 of $118,285 and $351,795 respectively. Lease
expense for aircraft and simulators was $2,409,203 and $4,238,694 respectively, for the nine months ended September 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.
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 extended
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 September 30, 2017 total $40,500. Unpaid lease invoices
at September 30, 2017 totaled $72,450 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 September 30, 2017 totaled $151,291 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 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 the aircraft for a government customer and provided
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 September 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.
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