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EX-10.1 - AIRCRAFT PURCHASE AGREEMENT DATED AUGUST 11, 2017, FOR SIX L-1011S - Tempus Applied Solutions Holdings, Inc.f10q0917ex10-1_tempus.htm
EX-32.2 - CERTIFICATION - Tempus Applied Solutions Holdings, Inc.f10q0917ex32-2_tempus.htm
EX-32.1 - CERTIFICATION - Tempus Applied Solutions Holdings, Inc.f10q0917ex32-1_tempus.htm
EX-31.2 - CERTIFICATION - Tempus Applied Solutions Holdings, Inc.f10q0917ex31-2_tempus.htm
EX-31.1 - CERTIFICATION - Tempus Applied Solutions Holdings, Inc.f10q0917ex31-1_tempus.htm
EX-10.2 - SERVICES AGREEMENT, DATED AS OF JULY 1, 2017, WITH SANTIAGO BUSINESS CO. INTERNA - Tempus Applied Solutions Holdings, Inc.f10q0917ex10-2_tempus.htm

 

 

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 September 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 November 28, 2017, there were 17,805,234 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 21
   
ITEM 4. CONTROLS AND PROCEDURES 21
   
PART II. OTHER INFORMATION  
   
ITEM 1. LEGAL PROCEEDINGS 22
   
ITEM 1A. RISK FACTORS 22
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 22
   
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23
   
ITEM 4. MINE SAFETY DISCLOSURE 23
   
ITEM 5. OTHER INFORMATION 23
   
ITEM 6. EXHIBITS 23

 

 

 

 

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 I – 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

 

    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.

 

 2 

 

 

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.

 

 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   -    -    -    -    -    (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.

 

 4 

 

 

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.

 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, 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.

 

 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 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.

 

 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 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.

 

 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 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.

 

5. INCOME TAXES

 

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.

 

 9 

 

 

6. STOCKHOLDERS’ DEFICIT

 

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.

 

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 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.

 

 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, 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.

 

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 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     $ -  

 

 11 

 

 

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 

 

11. INTANGIBLES, NET

 

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.

 

 12 

 

 

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)

  

14. SUBSEQUENT EVENT

 

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.

 

 13 

 

 

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.

 

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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.

 

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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 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.

 

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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).

 

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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.

 

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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.

 

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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.

  

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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

 

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.

 

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, despite the fact that a material weakness in the Company’s internal control over financial reporting was identified that rendered the internal control over financial reporting ineffective as of such date (see below), and subject to the following: The Staff of the SEC has expressed its view that the existence of such material weakness in our internal control over financial reporting also renders the Company’s disclosure controls and procedures ineffective. Consequently, the Company advises that because of the material weakness in its internal control over financial reporting, its disclosure controls and procedures were also ineffective as of the end of the period covered.

  

Changes in Internal Control over Financial Reporting

 

Our management has concluded that our internal control over financial reporting was not 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 our former board member, 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.

 

See also “Our early termination of a material services contract will reduce our revenues, require repayment of an operating deposit, and may lead to litigation.” in Item 1A below.

 

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, except as set forth below.

 

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.

 

The Company has historically experienced operating losses and negative cash flows from operations. There is no certainty as to whether or when the Company can attain positive operating cash flows from operations on a reliable basis. It is not at present certain that our current cash flow from operations will be sufficient to cover our upcoming operating costs. As a result, there can be no assurance that the Company can continue as a going concern. See “Outlook” and “Going Concern” under Part I, Item 2 above.

 

Our early termination of a material services contract will reduce our revenues, require repayment of an operating deposit, and may lead to litigation.

 

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. We also informed the customer that we would seek damages for losses and expenses in light of their repudiatory breach of the contract.

 

Following contract termination, an operating deposit of $750,000 is to be returned to the customer. We intend to deduct the receivables owed to us for services rendered, together with damages, from the amount to be repaid to the customer. 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. The outcome of the negotiations and possible litigation cannot be predicted with certainty, and, together with the legal costs, could have a material negative impact on the Company’s financial condition.

 

Changes in the market price of our common shares impact the valuation of the Company’s warrant obligations, which directly affects Other Income (Expense) and thus reported earnings.

 

In recent periods, the market price of the Company’s common shares has reflected considerable volatility, with a low of $0.03 recorded on June 6, 2017, and a high of $1.00 recorded on June 26, 2017. Changes in the market price of the shares impact the valuation of our warrant obligations, which in turn impacts Other Income (Expense). In the event Other (Expense) increases, our reported earnings are decreased by the same amount.

 

In the quarter ending September 30, 2017, the valuation of our warrant obligations decreased by $596,778, causing our reported earnings for the quarter to increase by the same amount. In the quarter ending June 30, 2017, the valuation of our warrant obligations increased by $712,528, causing an equivalent decrease in our reported earnings for the quarter. We expect the market price of our shares to continue to be volatile, and therefore to continue to impact our reported earnings.

 

The Company has accumulated a significant level of trade accounts payable, which could result in the Company being unable to perform its services.

 

At September 30, 2017, the Company had approximately $2.5 million of trade accounts payable, in addition to approximately $2.1 million of accounts payable to related parties. In the event the Company’s creditors bring action for payment, refuse to provide the goods or services giving rise to such accounts payable, or reclaim goods which have been provided to the Company, the Company may no longer be able to perform the services called for by some or all of its contracts. Such circumstances could lead to early termination of the contracts, as well as penalty payments, which would substantially harm the Company’s business and financial situation.

 

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.

 

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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.

 

See “Acquisition of six L-1011s to provide air-to-air refueling services” in Part I, Item 2 above.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURE

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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   Aircraft Purchase Agreement dated August 11, 2017, for six L-1011s.
     
10.2   Services Agreement, dated as of July 1, 2017, with Santiago Business Co. International Ltd with respect to the services provided by Johan Bergendorf as Chief Financial Officer of the Company.
     

10.3

 

Equity Financing Agreement, dated October 6, 2017, with GHS Financing LLC (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the registrant on October 10, 2017).

     
10.4   Registration Rights Agreement, dated October 6, 2017, with GHS Financing LLC (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the registrant on October 10, 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: November 28, 2017  By: /s/ Johan Aksel Bergendorff
  Name:
Title:

Johan Aksel Bergendorff

Chief Financial Officer

(Principal financial and accounting officer)

 

 

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