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EX-10.2 - REGISTRATION RIGHTS AGREEMENT, DATED AS OF APRIL 28, 2017, BETWEEN TEMPUS APPLIE - Tempus Applied Solutions Holdings, Inc. | f10q0317ex10ii_tempus.htm |
EX-32.2 - CERTIFICATION - Tempus Applied Solutions Holdings, Inc. | f10q0317ex32ii_tempus.htm |
EX-32.1 - CERTIFICATION - Tempus Applied Solutions Holdings, Inc. | f10q0317ex32i_tempus.htm |
EX-31.2 - CERTIFICATION - Tempus Applied Solutions Holdings, Inc. | f10q0317ex31ii_tempus.htm |
EX-31.1 - CERTIFICATION - Tempus Applied Solutions Holdings, Inc. | f10q0317ex31i_tempus.htm |
EX-10.1 - 10% SENIOR SECURED CONVERTIBLE NOTE DUE APRIL 28, 2018 IN THE PRINCIPAL AMOUNT O - Tempus Applied Solutions Holdings, Inc. | f10q0317ex10i_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 March 31, 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 May 22, 2017, there were 11,064,664 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 | 1 |
Consolidated Statements of Operations | 2 |
Consolidated Statements of Stockholders’ Deficit | 3 |
Consolidated Statements of Cash Flows | 4 |
Notes to Consolidated Financial Statements | 5 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 23 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 31 |
ITEM 4. CONTROLS AND PROCEDURES | 31 |
PART II. OTHER INFORMATION | |
ITEM 1. LEGAL PROCEEDINGS | 32 |
ITEM 1A. RISK FACTORS | 32 |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 32 |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES | 32 |
ITEM 4. MINE SAFETY DISCLOSURE | 32 |
ITEM 5. OTHER INFORMATION | 32 |
ITEM 6. EXHIBITS | 36 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Forward-looking statements give current expectations or forecasts of future events. Our forward-looking statements include, but are not limited to, statements regarding our business strategy, plans and objectives, expected or contemplated future operations, hopes, beliefs and intentions. In addition, any statements that refer to projections, forecasts or other characterizations or predictions of future events or circumstances, including any underlying assumptions on which such statements are expressly or implicitly based, in whole or in part, are forward-looking statements. The words “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “possible”, “potential”, “predict”, “project”, “should”, “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this Report may include, for example, statements about:
● | the benefits or risks of the Business Combination (as defined later in this Report) and the related financing transactions; | |
● | the future financial performance of Tempus Applied Solutions Holdings, Inc. and its subsidiaries (“we”, the “Company” or “Tempus Holdings”), including the Company’s wholly owned subsidiary, Tempus Applied Solutions, LLC (“Tempus”); | |
● | changes in the markets for the Company’s products and services; and | |
● | expansion plans and other plans and opportunities. |
Our forward-looking statements are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results and developments could differ materially from those contemplated by our forward-looking statements, including as a result of the occurrence of one or more of the adverse effects contemplated in the risk factors discussions we include in our ongoing filings with the Securities and Exchange Commission (the “SEC”). As a result, you should not place undue reliance on our forward-looking statements. Additionally, the forward-looking statements contained in this Report represent our views as of the date of this Report (or any earlier date indicated in such statement). While we may update certain forward-looking statements from time to time, we specifically disclaim any obligation to update any statement at any time, whether as a result of new information, future developments or otherwise, except as required by applicable law. You are advised to consult any further disclosures we make on related subjects in the periodic and current reports we file with the SEC. Our SEC filings are available free of charge through the SEC’s website at www.sec.gov. None of the information contained on our website, or accessible from our website, is a part of this Report.
PART 1 – FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Tempus Applied Solutions Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 402,599 | $ | 592,514 | ||||
Restricted cash | 50,007 | 50,007 | ||||||
Accounts receivable: | ||||||||
Trade, net | 1,403,734 | 1,415,083 | ||||||
Other | 1,119 | 1,119 | ||||||
Related party | 355,025 | 435,948 | ||||||
Other assets | 102,637 | 98,871 | ||||||
Total current assets | 2,315,121 | 2,593,542 | ||||||
PROPERTY AND EQUIPMENT, NET | 5,850,338 | 5,934,907 | ||||||
OTHER ASSETS | ||||||||
Deposits | 51,428 | 52,172 | ||||||
Intangibles, net | 548,402 | 1,054,839 | ||||||
Total other assets | 599,830 | 1,107,011 | ||||||
Total assets | $ | 8,765,289 | $ | 9,635,460 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable: | ||||||||
Trade | $ | 3,349,544 | $ | 3,781,287 | ||||
Related party | 2,380,200 | 1,886,386 | ||||||
Accrued liabilities | 514,363 | 912,314 | ||||||
Capital Lease obligation | 5,799,886 | 5,835,181 | ||||||
Customer deposits | 104,950 | 278,945 | ||||||
Total current liabilities | 12,148,943 | 12,694,113 | ||||||
LONG TERM LIABILITIES | ||||||||
Common stock warrant liability | 11,385 | 102,185 | ||||||
Total long term liabilities | 11,385 | 102,185 | ||||||
Total liabilities | 12,160,328 | 12,796,298 | ||||||
Commitments and contingencies - Note 13 | ||||||||
STOCKHOLDERS' DEFICIT | ||||||||
Preferred stock, $0.0001 par value; 40,000,000 shares authorized, 4,578,070 shares issued and outstanding at March 31, 2017 and December 31, 2016 | 458 | 458 | ||||||
Common stock, $0.0001 par value; 100,000,000 shares authorized; 11,064,664 shares issued and outstanding at March 31, 2017 and December 31, 2016 | 1,106 | 1,106 | ||||||
Additional paid in capital | 10,084,896 | 10,050,746 | ||||||
Accumulated deficit | (13,481,499 | ) | (13,213,148 | ) | ||||
Total stockholders’ deficit | (3,395,039 | ) | (3,160,838 | ) | ||||
Total liabilities and stockholders' deficit | $ | 8,765,289 | $ | 9,635,460 |
The accompanying notes are an integral part of these consolidated financial statements.
1 |
Tempus Applied Solutions Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations (unaudited)
Three Months | Three Months | |||||||
Ended March 31, | Ended March 31, | |||||||
2017 | 2016 | |||||||
REVENUES | $ | 4,386,839 | $ | 3,749,023 | ||||
COST OF REVENUE | 3,761,056 | 3,750,595 | ||||||
Gross profit (loss) | 625,783 | (1,572 | ) | |||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | 822,973 | 1,554,409 | ||||||
Total operating loss | (197,190 | ) | (1,555,981 | ) | ||||
OTHER INCOME (EXPENSE) | ||||||||
Interest income | - | 1,793 | ||||||
Interest expense | (175,122 | ) | - | |||||
Non-operational income (expense) | 103,961 | (309,669 | ) | |||||
Total other income (expense) | (71,161 | ) | (307,876 | ) | ||||
NET LOSS | $ | (268,351 | ) | $ | (1,863,857 | ) | ||
BASIC LOSS PER COMMON SHARE | $ | (0.02 | ) | $ | (0.20 | ) | ||
DILUTED LOSS PER COMMON SHARE | $ | (0.02 | ) | $ | (0.20 | ) | ||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC | 11,064,664 | 9,132,839 | ||||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, DILUTED | 11,064,664 | 9,132,839 |
The accompanying notes are an integral part of these consolidated financial statements.
2 |
Tempus Applied Solutions Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Deficit
Common stock | Preferred stock | Additional | Total | |||||||||||||||||||||||||
$0.0001 par value | $0.0001 par value | paid | Accumulated | stockholders' | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | in capital | deficit | equity (deficit) | ||||||||||||||||||||||
Balance, December 31, 2015 (audited) | 8,836,421 | $ | 884 | 1,369,735 | $ | 137 | $ | 262,496 | $ | (10,087,076 | ) | $ | (9,823,559 | ) | ||||||||||||||
Net loss | - | - | - | - | - | (3,126,072 | ) | (3,126,072 | ) | |||||||||||||||||||
Conversion of warrant liability to common stock | 1,986,112 | 198 | - | - | 2,797,164 | - | 2,797,362 | |||||||||||||||||||||
Conversion of warrant liability to preferred stock | - | - | 3,208,335 | 321 | 6,339,960 | - | 6,340,281 | |||||||||||||||||||||
Issuance of common stock for acquisition of Tempus Jets, Inc. | 242,131 | 24 | - | - | 499,976 | - | 500,000 | |||||||||||||||||||||
Stock-based compensation | - | - | - | - | 151,150 | - | 151,150 | |||||||||||||||||||||
Balance, December 31, 2016 (audited) | 11,064,664 | 1,106 | 4,578,070 | 458 | 10,050,746 | (13,213,148 | ) | (3,160,838 | ) | |||||||||||||||||||
Net Loss | - | - | - | - | - | (268,351 | ) | (268,351 | ) | |||||||||||||||||||
Stock Based Compensation | - | - | - | - | 34,150 | - | 34,150 | |||||||||||||||||||||
Balance, March 31, 2017 (unaudited) | 11,064,664 | $ | 1,106 | 4,578,070 | $ | 458 | $ | 10,084,896 | $ | (13,481,499 | ) | $ | (3,395,039 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
3 |
Tempus Applied Solutions Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Three Months | Three Months | |||||||
Ended March 31, | Ended March 31, | |||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (268,351 | ) | $ | (1,863,857 | ) | ||
Adjustments to reconcile net loss to net cash used for operating activities: | ||||||||
Stock-based compensation expense | 34,150 | 58,559 | ||||||
Depreciation and amortization | 67,856 | 18,761 | ||||||
Loss on conversion of warrant liability to stock | - | 3,550,487 | ||||||
Fair value adjustment of common stock warrants | (90,800 | ) | (3,239,884 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable-trade | 11,349 | (428,063 | ) | |||||
Accounts receivable-other | - | (569,307 | ) | |||||
Due to/from related parties | 509,008 | 334,088 | ) | |||||
Inventory | - | 24,999 | ||||||
Other current assets | (3,766 | ) | (3,296 | ) | ||||
Deposits | - | 496,900 | ||||||
Accounts payable-trade | (13,319 | ) | 516,796 | |||||
Accrued liabilities | (362,786 | ) | (680,367 | ) | ||||
Deferred revenue | - | 607,746 | ||||||
Customer deposits | (60,144 | ) | (349,075 | ) | ||||
Net cash used for operating activities | (176,803 | ) | (1,526,531 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property and equipment | 22,183 | (35,467 | ) | |||||
Purchases of intangible assets | - | (24,164 | ) | |||||
Sale of Business | - | - | ||||||
Decrease in restricted cash | - | 900,000 | ||||||
Net cash provided by (used for) investing activities | 22,183 | 840,369 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Payments on Capital Lease Obligation | (35,295 | ) | - | |||||
Net cash provided by financing activities | (35,295 | ) | - | |||||
Net decrease in cash | (189,915 | ) | (685,144 | ) | ||||
CASH AND CASH EQUIVALENTS | ||||||||
Cash and cash equivalents at the beginning of the period | 592,514 | 1,288,495 | ||||||
Cash and cash equivalents at the end of the period | $ | 402,599 | $ | 603,351 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
Cash paid for interest | $ | 175,122 | $ | - | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Intangible assets acquired through acquisition of Tempus Jets, Inc. | $ | - | $ | 500,000 | ||||
Intangible assets and net liabilities disposed of through disposition of Tempus Jets Inc | $ | 500,000 | $ | - | ||||
Issuance of stock for exercise of warrants | $ | - | 7,591,530 |
The
accompanying notes are an integral part of these consolidated financial statements. TEMPUS
APPLIED SOLUTIONS HOLDINGS, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Tempus Applied Solutions Holdings, Inc.
(“we”, the “Company” or “Tempus Holdings”) is a Delaware corporation organized on December
19, 2014 as a direct, wholly owned subsidiary of Chart Acquisition Corp. (“Chart”). We were formed solely for the purpose
of effecting a business combination between Chart and Tempus Applied Solutions, LLC (“Tempus”). Tempus was organized
under the laws of Delaware on December 4, 2014 and provides turnkey flight operations, customized design, engineering and modification
solutions and training services that support critical aviation missions of the United States Department of Defense (the “DoD”),
the U.S. intelligence community, foreign governments, heads of state and high net worth individuals worldwide. Tempus currently
has the following six subsidiaries: three wholly owned operating subsidiaries, Global Aviation Support, LLC, Proflight Aviation
Services LLC, and Tempus Jets, Inc., and three recently formed, wholly owned entities that do not yet have any operations, Tempus
Applied Solutions, Inc., Tempus Aero Solutions SIA, and Tempus Training Solutions, LLC. On March 1, 2017, the Company entered into
a Stock Purchase Agreement (the “Agreement”), to be effective January 1, 2017, for the sale of Tempus Jets, Inc. See
Note 18 below. The Company has its headquarters in Williamsburg, Virginia. The Company’s activities are subject to significant
risks and uncertainties, including without limitation the risks of deadline and budget overruns and risks specific to government
and international contracting businesses. On
July 31, 2015, pursuant to an Agreement and Plan of Merger dated as of January 5, 2015, as amended (the “Merger Agreement”),
by and among Tempus Holdings, Chart, Tempus, the holders of Tempus’ membership interests named in the Merger Agreement (the
“Members”), Benjamin Scott Terry and John G. Gulbin III (together, in their capacity under the Merger Agreement as
the representative of the Members for the purposes set forth therein, the “Members’ Representative”), Chart
Merger Sub Inc. (“Chart Merger Sub”), Chart Financing Sub Inc. (“Chart Financing Sub”), TAS Merger Sub
LLC (“Tempus Merger Sub”), TAS Financing Sub Inc. (“Tempus Financing Sub”), Chart Acquisition Group LLC
(“CAG”), in its capacity under the Merger Agreement as the representative of the equity holders of Chart and Tempus
Holdings (other than the Members and their successors and assigns) for the purposes set forth therein and, for the limited purposes
set forth therein, CAG, Joseph Wright and Cowen Investments LLC, the following was effected: (i) Chart Financing Sub and Chart
Merger Sub merged with and into Chart, with Chart continuing as the surviving entity; (ii) Tempus Financing Sub and Tempus Merger
Sub merged with and into Tempus, with Tempus continuing as the surviving entity; and (iii) each of Chart and Tempus became wholly
owned subsidiaries of the Company. We refer to the transactions contemplated by the Merger Agreement as the “Business Combination.” The
consummation of the Business Combination was preceded by a series of privately negotiated transactions, referred to collectively
herein as the “Financing”, involving aggregate cash investments of $10.5 million by three outside investor entities
(or affiliates thereof) that had not previously invested in Chart or Tempus (the “New Investors”), aggregate cash
investments of $5.0 million by the Sponsor, Mr. Joseph Wright and Cowen (collectively, the “Chart Affiliate Investors”)
and a cash investment of $500,000 by the Chief Financial Officer of Tempus (through his individual retirement account) (the “Tempus
Affiliate Investor”, and together with the Chart Affiliate Investors, the “Affiliate Investors”, and together
with the New Investors, the “Investors”). The
Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern. The conditions
noted below raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Historically, the Company has experienced
operating losses and negative cash flows from operations, and it currently has a working capital deficit, due principally to delays
in the commencement of contracts, low margins on initial contracts. In addition, the Company has been seeking financing in order
to fund a purchase obligation of $5.5 million related to an aircraft. See note 18 below. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern, especially in the near term and within one year after the date
that the consolidated financial statements are issued. In light of
the foregoing, the Company has implemented cost cutting initiatives, including reductions in our employee headcount, facilities
and other expenses. Headcount has been reduced from 52 in June 2016 to 13 as of March 31, 2017. The Company expects to undertake
additional cost-cutting measures in the future to the extent consistent with the provision of full performance under the Company’s
contracts with customers, including the disposition of unprofitable entities. In addition, the Company continues to explore possibilities
for raising both working capital and longer-term capital from outside sources in various possible transactions. Management expects
that these efforts will begin to achieve result over the remainder of 2017 and, assuming the timely commencement of new contracts,
that the Company will begin to reduce its working capital deficit over the coming year. Nevertheless, whether, and when, the Company
can attain positive operating cash flows for operations is highly dependent on the commencement of new contracts and the timing
of their commencement. There can be no assurance that the Company’s cash flows or costs of operations will develop as currently
expected. Our cash flows and liquidity plans remain subject to a number of risks and uncertainties. See “Item 1A. Risk Factors”
of our Annual Report on Form 10-K (the “Form 10-K”). Basis
of Presentation The
Company has prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally
accepted in the United States of America for interim financial information. In our opinion, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended
March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The
accompanying consolidated financial statements are presented in U.S. dollars in conformity with accounting principles generally
accepted in the United State of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”). Because
Tempus was deemed the accounting acquirer in the Business Combination, which was consummated on July 31, 2015, the historical
financial information for the three months ended March 31, 2017 and 2016 reflects the financial information and activities of
Tempus only. In conjunction with the Business Combination, all outstanding membership interests of Tempus were exchanged for shares
of the Company’s common stock. The historical members’ equity of Tempus (which is a limited liability company) has
been retroactively adjusted to reflect the stockholders’ equity structure of Tempus Holdings (which is a corporation), using
the respective exchange ratios established in the Business Combination. This reflects the number of shares Tempus Holdings issued
to the members of Tempus upon the consummation of the Business Combination. Accordingly, all shares and per share amounts for
all periods presented in these consolidated financial statements and the notes thereto have been adjusted retrospectively, where
applicable, to reflect the respective exchange ratios established in the Business Combination. For details on the conversion of
Tempus’ membership interests into Company common stock, see the Company’s Current Report on Form 8-K filed with the
SEC on August 6, 2015 in connection with the Business Combination. The
Company manages, analyzes and reports on its business and results of operations on the basis of one operating segment, flight
operations and support. Our chief executive officer is the primary decision maker. Principles
of Consolidation The
consolidated financial statements include the accounts of Tempus Holdings and its subsidiaries. Significant inter-entity accounts
and transactions have been eliminated. Use
of Estimates The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Income
Tax The
Company follows the reporting requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 740 “Income Taxes”, which requires an asset and liability approach to financial accounting and
reporting for income taxes. The Company recognizes deferred tax assets or liabilities based on differences between the financial
statement and tax basis of assets and liabilities that will result in future taxable or deductible amounts calculated on enacted
tax laws and rates applicable to the periods in which the differences are expected to be ultimately realized. FASB
ASC 740, Income Taxes, sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain
tax positions. This interpretation uses a two-step approach wherein a tax benefit is recognized if a position is more-likely-than-not
to be sustained upon examination by taxing authorities. The amount of the benefit is then measured to be the highest tax benefit
that is greater than 50% likely to be realized. Tempus,
a limited liability company, was the acquiror in the Business Combination; therefore, Tempus’ taxable income or loss for
the period commencing January 1, 2015 through July 31, 2015 (the effective date of the Business Combination) is allocated to its
members in accordance with its operating agreement and is reflected in the members’ income taxes. The members' income tax
filings are subject to audit by various taxing authorities depending on their physical residence. All members reside in the United
States of America. Tempus’
consolidated financial statements reflect a provision or liability for Federal and state income taxes for the period commencing
January 1, 2015 through July 31, 2015 (the effective date of the Business Combination) for Chart, the predecessor company, and
for Tempus Holdings for the period commencing March 31, 2017. The
Company’s tax returns are subject to possible examination by the taxing authorities. For income tax purposes, the tax returns
essentially remain open for possible examination for a period of three years after the respective filing of those returns. Revenue
Recognition The Company uses the percentage-of-completion
method for accounting for long-term aircraft maintenance and modification fixed-price contracts to recognize revenues and receivables
for financial reporting purposes. Revenues from firm fixed price contracts are measured by the percentage of costs incurred
to date to estimated total costs for each contract. Revenues from time-and-material line items are measured by direct labor
hours or flight hours incurred during the period at the contracted hourly rates plus the cost of materials, if applicable. To the
extent this earned revenue is not invoiced, it is recognized as earnings in excess of billings and is represented in other accounts
receivable on the consolidated balance sheets. Earnings in excess of billings were $459 at March 31, 2017 and December 31, 2016. The
Company records payments received in advance for services to be performed under contractual agreements and billings in excess
of costs on uncompleted fixed-price contracts as deferred revenue until such related services are provided. Deferred revenue was
$0 at March 31, 2017 and December 31, 2016. Revenue
on leased aircraft and equipment representing rental fees and financing charges are recorded on a straight line basis over the
term of the leases. Currently,
the Company’s consolidated revenues consist principally of revenues earned under aircraft management contracts (which are
based on fixed expenses and fees plus variable expenses and fees tied to actual aircraft flight hours) and revenues earned from
the provision of leased aircraft. Pre-contract
Costs We
capitalize the pre-contract costs we incur, excluding start-up costs which are expensed as incurred, if we determine that it is
probable that we will be awarded a specific anticipated contract. These capitalized costs are recognized as a cost of revenue
ratably across flight hours that are expected to be flown, as they are actually flown, for that particular contract. Capitalized
pre-contract costs of $56,270 and $49,799 at March 31, 2017 and December 31, 2016, respectively, are included in other current
assets in the accompanying consolidated balance sheets. Should future orders not materialize or should we determine that the costs
are no longer probable of recovery, the associated capitalized costs would be written off. Cash
and Cash Equivalents For
purposes of cash flow, the Company considers all cash accounts that are not subject to withdrawal restrictions or penalties, and
highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash balances usually
do exceed federally insured limits. Restricted
Cash The
Company considers cash or highly liquid debt instruments on deposit with financial institutions that are held to secure an obligation
by the Company to be restricted cash. As of March 31, 2017 and December 31, 2016, the Company had restricted cash balances of
$50,007. This balance consists of a certificate of deposit that secures the Company’s credit card borrowings. Accounts
Receivable Trade accounts receivable are recorded
at the invoiced amount and do not bear interest. The Company establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other relevant
information. Management believes that its contract acceptance, billing and collection policies are adequate to minimize the
potential credit risk associated with accounts receivable. The Company had $29,302 and $37,369 allowance for doubtful accounts
as of March 31, 2017 and December 31, 2016, respectively. In June 2016, the Company entered a
factoring agreement to sell without recourse, certain U.S. government contract receivables to an unrelated third-party financial
institution. Under the current terms of the factoring agreement, the maximum amount of outstanding advances at any one time is
$1.0 million. The discount rate included in the agreement was subject to change based on the historical performance of the receivables
sold. Approximately, $2.0 million of receivables
has been sold under the factoring agreement during fiscal year 2016 and the first quarter of 2017. The sale of these receivables
accelerated the collection of the Company’s cash and reduced credit exposure during year. Sales of accounts receivable are
reflected as a reduction of Accounts receivable trade, net in the Consolidated Balance Sheets, and any costs incurred by the Company
associated with the factoring activity is reflected in Other Income / Expense in the Consolidated Statements of Operations, as
they meet the applicable criteria of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities (“SFAS No. 140”). The amount due from the factoring company, net of advances received from the factoring
company, was approximately $29,000 at March 31, 2017. The Company pays factoring fees associated with the sale of receivables based
on the dollar value of the receivables sold. Such fees are immaterial and are included in the Other Income / Expense in the Consolidated
Statement of Operations. Property
and Equipment Property
and equipment is stated at cost, less accumulated depreciation. Maintenance and repairs, including replacement of minor items
of physical properties, are charged to expense; major additions to physical properties are capitalized. It
is the Company’s policy to commence depreciation upon the date that assets are placed into service. For the three months
ended March 31, 2017, the Company recognized depreciation of fixed assets in the amount of $61,419; $12,324 of depreciation was
recognized for the three months ended March 31, 2016. Depreciation is computed on a straight-line basis over the estimated service
lives of the assets as follows: Intangibles Intangibles
are stated at cost, less accumulated amortization. Intangibles consist of computer software, Federal Aviation Administration (the
“FAA”) licenses and independent research and development costs associated with the development of supplemental type
certificates (“STCs”). STCs
are authorizations granted by the FAA for specific modifications of a certain aircraft. An STC authorizes us to perform
modifications, installations, and assemblies on applicable customer-owned aircraft. Costs incurred to obtain STC’s are
capitalized and subsequently amortized against revenue being generated from aircraft modifications associated with the STC.
The costs are expensed as services are rendered on each aircraft through cost of sales using the units of production method.
The legal life of an STC is indefinite. We believe we have enough future sales to fully amortize our STC development costs.
As of March 31, 2017 and 2016 we have recognized no amortization of these costs. On
October 1, 2015, the Company purchased Proflight Aviation Services, LLC, which provides flight training services under a Federal
Aviation Regulations (“FAR”) Part 141 certificate. The total purchase price of $50,000 was allocated to intangibles
and is considered to be indefinite-lived. On
March 15, 2016, the Company purchased Tempus Jets, Inc. (“TJI”) from our CEO B. Scott Terry for non-cash consideration
of $500,000, paid in the form of 242,131 shares of common stock of the Company. TJI owns an operating certificate issued
by the FAA in accordance with the requirements of Parts 119 and 135 of the FAR (the “Operating Certificate”). The
total purchase price of $500,000 was allocated to intangibles and is considered to be indefinite-lived. TJI has been sold in a
transaction that was effective January 1, 2017. For the details on the sale of TJI, see the Company’s Current Report on
form 8-K filed with the SEC on March 1, 2017 in connection with the transaction. It is the Company’s policy to
commence amortization of computer software upon the date that assets are placed into service. For the three months ended March
31, 2017 and 2016, the Company recognized amortization expense of computer software in the amount of $6,437. Amortization is computed
on a straight-line basis over the estimated service lives of the assets as follows: Long-Lived
Assets The
Company reviews its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable. As a result of its review, the Company does not believe that
any such change has occurred. If such changes in circumstance are present, a loss is recognized to the extent the carrying value
of the asset is in excess of the fair value of cash flows expected to result from the sale of the asset and amounts expected to
be realized upon its eventual disposition. Customer
Deposits In
the normal course of business, the Company receives cash as security for certain contractual obligations, which are held on deposit
until termination of the contract. Customer deposits are returned to the customer at contract termination or taken into income
if the customer fails to perform under the contract. At March 31, 2017 and December 31, 2016, the Company held $104,950 and $278,945,
respectively, in customer deposits. Sales
and Marketing The
Company records costs for general advertising, promotion and marketing programs at the time those costs are incurred. Sales and
Marketing expense was $55,387 and $315,392 for the three months ended March 31, 2017 and 2016, respectively. Inventory The
Company values its inventory at the lower of average cost, first-in-first-out (“FIFO”) or net realizable value. Any
identified excess, slow moving, and obsolete inventory is written down to its market value through a charge to income from operations.
There were no costs held in inventory at March 31, 2017 or December 31, 2016. Stock
Based Compensation The
Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors based
upon fair value at the date of award using a fair value based option pricing model. The compensation expense is recognized on
a straight-line basis over the requisite service period. Fair
Value of Financial Instruments The
Company complies with ASC Topics 820, “Fair Value Measurement”, and 815, “Derivatives and Hedging” for
its liabilities, which are re-measured and reported at fair value for each reporting period. The fair value of the Company’s
assets and liabilities, which qualify as financial instruments under ASC Topic 820, approximates the carrying amounts represented
in the accompanying consolidated balance sheets. Reclassification Certain
prior period amounts have been reclassified to conform to the current period presentation in the accompanying consolidated financial
statements. These reclassifications had no material effect on the previously reported results of operations or accumulated deficit. Correction of an Error The Company determined that it had been
accounting for a lease agreement and its purchase obligation related to an aircraft in error. The Company should have accounted
for its purchase obligation as a capital lease, thereby recording a capital lease aircraft asset and a corresponding capital lease
liability of approximately $6,000,000 as of the end of the quarter ended March 31, 2016. The error was not material to the unaudited
consolidated financial statements for the quarterly period ended March 31, 2016 since the correction of the error increased assets
and liabilities by the same amount. Recent
Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606). Under the update, revenue will be recognized based on a five-step model. The
core principle of the model is that revenue will be recognized when the transfer of promised goods or services to customers is
made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
In the third quarter of 2015, the FASB deferred the effective date of the standard to annual and interim periods beginning after
December 15, 2017. Early adoption will be permitted for annual and interim periods beginning after December 15, 2016. The Company
is currently evaluating the impact that adopting this ASU will have on its financial position, results of operations and cash flows. In August 2014, the FASB issued ASU No. 2014-15,
“Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern.” This ASU is intended to define management’s responsibility to evaluate whether
there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote
disclosures, and provides guidance to an organization’s management, with principles and definitions that are intended to
reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement
footnotes. Until the issuance of this ASU, U.S. GAAP lacked guidance about management’s responsibility to evaluate whether
there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote
disclosures. The amendments are effective for annual periods ending after December 15, 2016 and interim periods within annual periods
beginning after December 15, 2016, with early adoption permitted. The Company has concluded that there is substantial doubt about
its ability to continue as a going concern and has presented the required disclosures of this ASU in Note 2. In September 2015, the FASB issued ASU
2015-16, Business Combinations (Topic 805). Under the update, an acquirer in a business combination is no longer required to account
for measurement-period adjustments retrospectively, and, instead, will recognize a measurement-period adjustment during the period
in which it determines the amount of the adjustment. The ASU is effective for financial statements issued after December 15, 2017,
and interim periods within those years. Early adoption will be permitted for annual and interim periods beginning after December
15, 2016. The Company does not expect the impact of adopting this ASU to be material to the Company's financial statements and
related disclosures. In November 2015, the FASB issued ASU
2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. Under the update, deferred taxes would be classified
as noncurrent in the statement of financial position instead of being separated into current and non-current amounts. The ASU is
effective for financial statements issued after January 1, 2017 with early adoption permitted. Additionally, the Company may apply
the standard either prospectively or retrospectively. The Company has adopted this ASU and will present deferred taxes in accordance
with this ASU when deferred taxes are required to be recorded and presented in the financial statements. In February 2016, the FASB issued ASU
2016-02, Leases (Topic 842). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of
more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting policy
election by class of underlying asset not to recognize lease assets and lease liabilities. Further, the lease requires a finance
lease to recognize both an interest expense and an amortization of the associated expense. Operating leases generally recognize
the associated expense on a straight line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective
approach and adoption beginning on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on
its financial position, results of operations and cash flows. In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718). The update amends the guidelines for share-based payment transactions, including
the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash
flows. The standard is effective for annual and interim periods beginning January 1, 2017, and early adoption is permitted. The
Company adopted 2016-09 effective January 1, 2017. The adoption of this standard did not have a material impact on the results
of operations. In November 21016, the FASB issued ASU
2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash. The ASU requires that a statement of cash flows explain the
change during the period in the total cash, cash equivalents and amounts generally described as restricted cash or restricted cash
equivalents. This update is for entities for fiscal years beginning after December 15, 2017, and for interim periods within those
fiscal years using a retrospective transition method for each period presented. Early adoption is permitted. The Company is currently
evaluating the impact that ASU 2016-18 will have on its financial position, results of operations and cash flows. Other accounting standards that have
been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not
expected to have a material impact on our consolidated financial statements upon adoption. We
have significant customer and vendor concentration. Customer concentration as of the three months ended March 31, 2017 and 2016
was: 4
1.
DESCRIPTION
OF ORGANIZATION AND BUSINESS OPERATIONS
2.
GOING
CONCERN 5
3.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES 6 7
Years
Computer
equipment
3-5
Furniture
and fixtures
3-5 8
Years
Computer
software
3 9
4.
CUSTOMER
AND VENDOR CONCENTRATION
Three months ended March 31, 2017
Three months ended March 31, 2016
Revenue
Revenue
Customer A
$ 1,059,450
24 %
$ 978,207
26 %
Customer B
1,325,467
30 %
1,248,790
33 %
Customer C
1,150,857
26 %
-
- %
Customer D
659,807
15 %
132,240
4 %
Customer E
-
- %
920,622
25 %
Other customers
191,258
5 %
469,164
12 %
$ 4,386,839
100 %
$ 3,749,023
100 % 10
March 31, 2017 | December 31, 2016 | |||||||||||||||
Accounts Receivable | Accounts Receivable | |||||||||||||||
Customer A | $ | 329,955 | 24 | % | $ | 387,729 | 27 | % | ||||||||
Customer B | 639,139 | 46 | % | 449,658 | 32 | % | ||||||||||
Customer C | 383,619 | 27 | % | 383,619 | 27 | % | ||||||||||
Customer D | 29,486 | 2 | % | 42,624 | 3 | % | ||||||||||
Customer E | - | - | % | - | - | % | ||||||||||
Other customers | 21,535 | 1 | % | 151,453 | 11 | % | ||||||||||
$ | 1,403,734 | 100 | % | $ | 1,415,083 | 100 | % |
Vendor
concentration as of the three months ended March 31, 2017 and 2016 was:
Three months ended March 31, 2017
Three months ended March 31, 2016
Cost of Revenue
Cost of Revenue
Vendor A
$ 916,073
24 %
$ 775,901
21 %
Vendor B
327,554
9 %
423,981
11 %
Vendor C
10,294
1 %
250,269
7 %
Vendor D
476,034
13 %
-
0 %
Other vendors
2,041,395
54 %
2,567,699
61 %
$ 3,761,056
100 %
$ 3,750,595
100 %
March 31, 2017 | December 31, 2016 | |||||||||||||||
Accounts Payable | Accounts Payable | |||||||||||||||
Vendor A | $ | 412,763 | 12 | % | $ | 304,826 | 8 | % | ||||||||
Vendor B | 130,871 | 4 | % | 235,388 | 6 | % | ||||||||||
Vendor C | - | - | % | 18,615 | 0 | % | ||||||||||
Vendor D | 223,016 | 7 | % | 170,998 | 4 | % | ||||||||||
Other vendors | 2,582,894 | 77 | % | 674,969 | 82 | % | ||||||||||
$ | 3,349,544 | 100 | % | $ | 3,781,287 | 100 | % |
The
Company follows the reporting requirements of FASB ASC 740 “Income Taxes”, which requires an asset and liability approach
to financial accounting and reporting for income taxes. The Company recognizes deferred tax assets or liabilities based on differences
between the financial statement and tax basis of assets and liabilities that will result in future taxable or deductible amounts
calculated on enacted tax laws and rates applicable to the periods in which the differences are expected to be ultimately realized.
These differences arose principally from the valuation of stock warrants, net operating loss carryovers, and temporary differences
in deprecation methods between financial reporting and income tax basis. GAAP
requires companies to assess whether valuation allowances should be recorded to offset deferred tax assets based on the consideration
of all available evidence using a “more likely than not” standard. In making such assessments, significant weight
is given to evidence that can be objectively verified. A company’s current and previous losses are given more weight than
its future projections. A cumulative loss position is considered a significant factor that is difficult to overcome. The Company evaluates its deferred tax assets each reporting period, including assessing its cumulative loss
position, to determine if valuation allowances are required. A significant factor is the Company’s cumulative loss position.
This, combined with uncertain near-term economic conditions, reduces the Company’s ability to rely on projections of future
taxable income in establishing its deferred tax assets valuation allowance. Due to the weight of the significant negative evidence,
GAAP requires that a valuation allowance be established on all of the Company’s net deferred tax assets. The Company
is projecting a 0% annual estimated tax rate Deferred income taxes reflect the tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. FASB
ASC 740, Income Taxes, sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain
tax positions. This interpretation uses a two-step approach wherein a tax benefit is recognized if a position is more-likely-than-not
to be sustained upon examination by taxing authorities. The amount of the benefit is then measured to be the highest tax benefit
that is greater than 50% likely to be realized. Based on its analysis, the Company has determined that it has not incurred any
liability for unrecognized tax benefits as of December 31, 2015. The Company’s conclusions may be subject to review and
adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations
and interpretations thereof. The Company files an income tax return in the U.S. federal jurisdiction, and may file income tax
returns in various U.S. states and foreign jurisdictions. The Company recognizes interest and penalties related to
unrecognized tax benefits in interest expense and other expenses, respectively. No interest expense or penalties have been recognized
as of March 31, 2017. At
March 31, 2017, approximately $8,000,000 in federal and state net operating losses were available to be carried forward, expiring
at various dates through 2035. Pursuant
to Sections 382 and 383 of the Internal Revenue Code, annual use of net operating loss carryforwards may be limited in the
event a cumulative change in ownership of more than 50% occurs within a three-year period. We had a Business Combination in 2015;
however, we have not completed a Section 382 study to determine the limitations resulting from any ownership changes. Accordingly,
the timing or amount of our net operating loss carryforwards that are available for utilization in the future may be limited in
any given year. The
Company’s tax returns are subject to possible examination by the taxing authorities. In general, tax returns remain open
for possible examination for a period of three years after the respective filing of those returns. Basic
common shares outstanding as of March 31, 2017 are 11,064,664. Our weighted average basic shares outstanding for the three months
ended March 31, 2017 is calculated based on the average number of basic common shares outstanding over the period in question
and is calculated as 11,064,664 shares. Our
weighted average diluted common shares outstanding as of March 31, 2017 would normally be calculated based on the sum of the weighted
average basic shares outstanding for the three months ended March 31, 2017 and the weighted average of the shares that would convert
into common stock from our preferred stock and warrants over the period in question. This conversion would be calculated on a
treasury method basis based on the average closing share price of our common stock over the period in question as compared to
the conversion rate of the preferred stock, and the strike price of the particular warrants. The number of warrants outstanding
along with their respective strike prices can be found in Note 15, below. However, due to the fact that the Company experienced
a net loss for the three months ended March 31, 2017 and diluted earnings per share would otherwise be higher than basic earnings
per share, our diluted common shares outstanding are represented to be the same as our basic common shares outstanding. Other
receivables consist of the following: Other
assets consist of the following: In
the Business Combination, the members of Tempus received 3,642,084 shares of the Company’s common stock in exchange for
all of the issued and outstanding membership interests of Tempus. The members have the right to receive up to an additional 6,300,000
shares of the Company’s common stock upon the achievement of certain financial milestones. On
March 15, 2016, the Company purchased Tempus Jets, Inc. (“TJI”) from our CEO B. Scott Terry for non-cash consideration
of $500,000, paid in the form of 242,131 shares of common stock of the Company. The purchase price was based on an independent
valuation of similar operations and approved by the independent directors of the board. The number of shares issued to Mr. Terry
was calculated based on the volume weighted average market price of the Company’s common stock for the previous 20 trading
days. TJI owns an operating certificate issued
by the FAA in accordance with the requirements of Parts 119 and 135 of the FAR (the “Operating Certificate”). Prior
to the Company’s purchase of TJI, TJI divested itself of substantially all of its assets other than the Operating Certificate,
and settled or transferred all of its liabilities. As a result of the acquisition of TJI, the Company owns, and can operate under,
the Operating Certificate. Under the Agreement, Mr. Terry and Jackson River Aviation, an affiliate of Mr. Terry’s, have indemnified
the Company against liabilities that may arise from the acquisition. The transaction was approved by the independent directors
of the Company after a review to determine that (a) the terms of the transaction were on an arm’s length basis; and (b) the
transaction was effected by the issuance of Company securities to a person who is an owner of an asset in a business synergistic
with the business of the Company, the transaction provided benefits to the Company in addition to the investment of funds and the
transaction was not one in which the Company was issuing securities primarily for the purpose of raising capital or to an entity
whose primary business was investing in securities. TJI has been sold back to Mr. Terry in a transaction that was effective January
1, 2017 for consideration of $500,000. See Note 18 Subsequent Events of our Annual Report on Form 10-K (the “Form 10-K”). Jackson River Aviation (“JRA”)
is controlled by B. Scott Terry, the Company’s CEO and sole member of the Company’s Board of Directors. JRA (through
its subsidiary, TJI) prior to the acquisition of TJI by Tempus on March 15, 2016, provided FAR Part 135 aircraft charter services
to the Company. Total purchases by the Company from JRA for the three months ended March 31, 2017 and 2016 were $643,971and $5,591,
respectively. Billings by the Company to JRA for the three months ended March 31, 2017 and 2016 were $220,009 and 42,876, respectively.
As of March 31, 2017 the Company had a net outstanding payable to JRA of $284,051. As of December 31, 2016, the Company had a net
outstanding receivable from JRA of $38,962. TIH is controlled by John G. Gulbin
III, a former member of our Board of Directors. TIH owns certain aircraft used by Tempus to provide services to certain customers.
(see Note 13 below). In addition, Tempus, through its wholly owned subsidiary Global Aviation Support, LLC, provided flight planning,
fuel handling and travel services to TIH. Prior to the close of the Business Combination, TIH provided administrative support,
including human resources, financial, legal, contracts and other general administrative services to Tempus. Subsequent to the Business
Combination, any administrative relationship is limited to certain shared information technology and marketing expenses, which
are incurred at cost. Total purchases by the Company from TIH for the three months ended March 31, 2017 and 2016 were $864,131
and 333,490, respectively. Total billings from the Company to TIH for the three months ended March 31, 2017 and 2016 were $33,612
and 70,588, respectively. The net outstanding payable from Tempus to TIH at March 31, 2017 and December 2016 was $1,528,036 and
1,284,886, respectively. Southwind Capital, LLC (“Southwind”)
is controlled by R. Lee Priest, Jr., the Company’s Executive Vice President. Southwind owned certain aircraft used by Tempus
to provide services to certain customers. Total purchases by the Company from Southwind for the three months ended March 31, 2017
and 2016 were $0. The net outstanding payable from Tempus to Southwind at March 31, 2017 and December 31, 2016 was $142,496. In 2015, the Company entered into an
aircraft purchase agreement with Pilatus Business Aircraft, Ltd. for the purchase of a Pilatus PC-12 with certain special mission
modifications for approximately $7.3 million. The Company entered into this agreement pursuant to a contract with a government
law enforcement agency whereby Tempus would lease the aircraft to the agency. Tempus subsequently assigned the lease contract and
the purchase obligation to Cowen Aviation Finance Holdings, Inc. (“CAF”) for no consideration and has entered into
a services agreement with CAF whereby it will provide certain administrative, servicing and marketing services for this and other
aircraft owned by CAF. CAF is owned by Cowen Group, Inc., (“Cowen”) whose CEO and Chairman, Peter Cohen, and board
member, Joe Wright, are former members of our board of directors. For the three months ended March 31, 2017 and 2016 Tempus billed
$16,388 and $18,605, respectively to CAF under the services agreement. At March 31, 2017 and December 31, 2016, the net payable
to CAF was $70,592 and $62,018, respectively. All
related party transactions are entered into and performed under commercial terms consistent with what might be expected from a
third party service provider. Certain sales and marketing, and information technology functions of the Company are supported by
TIH and are expensed to the Company on a time and materials basis. Property
and equipment, net consists of the following: Intangibles,
net consists of the following: FAA licenses includes the $50,000 purchase
price for Proflight Aviation Services, LLC, which provides flight training services under a FAR Part 141 certificate and the $500,000
purchase price for TJI, which owns an Operating Certificate issued by the FAS in accordance with the requirements of Parts 119
and 135 of the FAR. The Company disposed of TJI effective January 1, 2017 for consideration of $500,000. See Note 18 Subsequent
Events of our Annual Report on Form 10-K (the “Form 10-K”) STC costs relate to our efforts to gain
approval from the FAA for modifications to Gulfstream III, IV and V business jets to upgrade them for Future Air Navigation System
(“FANS”) and Automatic Dependent Surveillance Broadcast (“ADS-B”) capabilities. Regulatory mandates in
the U.S and abroad will require FANS / ADS-B compliance on certain preferred air routes on a rolling basis over the next four years.
Tempus was awarded this STC in the fourth quarter of 2016. Estimated amortization of this STC will be as follows: For
the three months ended March 31, 2017, recognized amortization of software was $6,437, all associated with software purchases.
Future amortization schedules associated with existing software is as follows: Accrued
liabilities at March 31, 2017 and December 31, 2016 include the following: The
Company incurred lease expense for real office and hangar space for the three months ended March 31, 2017 of $45,743. Lease expense
for aircraft and simulators was $1,358,403 for the three months ended March 31, 2017. The
Company leases office space on McLaws Circle in Williamsburg, Virginia. The Company occupied the premises as of September 1, 2016
under a month-to-month sublease from Jackson River Aviation, which is controlled by B. Scott Terry, the Company’s CEO and
a member of the Company’s Board of Directors. The
Company leases office space in San Marcos, TX to support its training operations. The Company occupied the premises as of October,
1, 2015 under a fifteen (15) month lease at a rate of $10,500 per month. The lease was extended as of January 1, 2017 for an additional
12 months. The Company also leases simulators used in its training operations at this location. The simulator lease commenced
on October, 1, 2015 and extends to December 31, 2016 at a rate of $3,000 per month, at which point it was also renewed for an
additional 12 months. The future minimum lease payments associated with these leases at San Marcos, TX as of March 31, 2017 total
$121,500. The Company leased hangar space in Newport
News, VA to support its operations. The Company occupied the premises as of October 1, 2015 under a one-year lease at a rate of
$2,000 per month. The term of the lease ended and was not renewed. The future minimum lease payments associated with this lease
as of March 31, 2017 is $0. Unpaid lease invoices at March 31, 2017 totaled $14,000 and are included in accounts payable. The
Company leased office and hangar space in Brunswick, ME to support its operations. The Company occupied the premises as of March
1, 2016 under a six-month lease at a rate of $16,673, after which the lease has reverted to a month to month agreement. The facility
and related employees were transferred to Tempus Intermediate Holdings as of November 2016. Unpaid lease invoices at March 31,
2017 totaled $157,291 and are included in accounts payable. In
2015, the Company entered into an aircraft purchase agreement with Pilatus Business Aircraft, Ltd. for the purchase of a Pilatus
PC-12 with certain special mission modifications for approximately $7.3 million. The Company entered into this agreement pursuant
to a contract with a government law enforcement agency whereby Tempus would lease the aircraft to the agency. Tempus subsequently
assigned the lease contract and the purchase obligation to Cowen Aviation Finance Holdings, Inc. (“CAF”) for no consideration
and has entered into a services agreement with CAF whereby it will provide certain administrative, servicing and marketing services
for this and other aircraft owned by CAF. CAF is owned by Cowen Group, Inc., (“Cowen”) whose board member, Joseph
Wright, is also one of our board of directors as of March 31, 2017. For the three months March 31, 2017, Tempus generated $16,388
of billings in support of CAF. Based on the assignment of the lease contract and purchase obligation to CAF, a $750,000 customer
deposit received from the law enforcement agency customer and the $500,000 deposit Tempus paid to Pilatus was transferred to CAF.
At March 31, 2017 and December 31, 2016 the net payable to CAF was $70,592 and $62,018, respectively. Effective as of February 25, 2016, the
Company leased a Gulfstream G-IV, at a rate of $70,000 a month for a period of 40 months under a capital lease. The lease permits
the lessor to exercise an option to sell the aircraft to the Company at any time after November 30, 2016, or the Company to purchase
the aircraft from the lessor, in either case at a value of $5,500,000. We have modified this aircraft for a government customer
and are providing it to this customer at an hourly and daily rate, based on this customer’s usage of the aircraft. The monthly
lease rate we are paying for this aircraft is fully expensed as cost of revenue upon each event whereby we recognize revenue with
this government customer. As of November 4, 2016, the lessor has exercised its option to sell the aircraft to the Company. See
Item 5 Other Information of the Management Discussion and Analysis (MD&A) of this report for information on the purchase and
financing of this aircraft. The
Company has employment agreements with certain key executives with terms that expire in 2018, with provisions for termination
obligations, should termination occur prior thereto, of up to 12 months’ severance. The Company expects to pay total aggregate
base compensation of approximately $350,000 annually through 2018, plus other normal customary fringe benefits and bonuses. The
Company complies with ASC Topics 820, “Fair Value Measurement”, and 815, “Derivatives and Hedging” for
its liabilities, which are re-measured and reported at fair value for each reporting period. The
following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis
as of December 31, 2016, and March 31, 2017, and indicates the fair value hierarchy of the valuation techniques the Company has
used to determine such fair value. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active
markets for identical assets or liabilities. Fair values determined by Level 2 inputs use data points that are observable, such
as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs use unobservable data points for the
asset or liability, and include situations where there is little, if any, market activity for the asset or liability: Quoted Prices In Active Markets Significant Other Observable Inputs Significant Other Unobservable Inputs Quoted Prices In Active Markets Significant Other Observable Inputs Significant Other Unobservable Inputs The
fair values of the Company’s warrant liabilities are determined through market, observable and corroborated sources.
The Company engaged an independent valuation firm (the “Valuation Firm”) to perform valuations of the warrant liabilities
as of December 31, 2015. The Valuation Firm used a multi-stage process to determine the fair value of the warrants of the Company,
which involved several types of analyses and calculations of value for the Company’s securities as follows: IPO and Placement Warrants –
The value of the IPO and Placement Warrants was calculated based upon the quoted price of the warrants that trade on the OTC markets
under the ticker symbol TMPSW, which was $0.01 as of that date. Series
A Warrants – The value of these warrants was calculated using a Black-Scholes option pricing model based on the value of
the common stock, the assumed volatility of such shares and the risk free rate at the of time of valuation. Series
B Warrants – The Valuation Firm determined the impact of various common stock values as of the expiration date of the Series
B Warrants after considering the exercise features, including the alternate cashless exercise of those warrants. The Valuation
Firm then used a Monte Carlo simulation to determine the probability of common stock values as of the expiration date and calculated
the value of the Series B Warrants in each trial. The weighted average value of the Series B Warrants as of the valuation date
was then calculated. Observable
inputs used in the calculation of the valuations include the implied valuation of the Company’s securities based on prior
sales, specifically the Financing associated with the Business Combination. Other inputs include a risk-free rate as of the valuation
date and implied volatility derived from comparable publicly traded companies, as well as the quoted price of Tempus’ common
shares and the quoted price of Tempus’ IPO and Placement Warrants. IPO
and Placement Warrants Upon
the consummation of the Business Combination, each outstanding Chart warrant was exchanged for a warrant to purchase one share
of our common stock, and as of the date of this filing, there were 7,875,000 such warrants outstanding, of which 7,500,000 warrants
were originally sold as part of the units in Chart’s initial public offering (the “IPO Warrants”) and 375,000
warrants were originally issued as part of placement units issued to CAG, Mr. Wright and Cowen in a private placement simultaneously
with the consummation of Chart’s initial public offering, (“the Placement Warrants”). Each
IPO and Placement Warrant entitles the holder to purchase one share of common stock at an exercise price of $11.50 per share,
subject to adjustment. The IPO Warrants became exercisable on August 30, 2015, and expire at 5:00 p.m., New York time, on July
31, 2020 or earlier upon redemption or liquidation. Once the IPO Warrants become exercisable, we may redeem the outstanding IPO
Warrants at a price of $0.01 per warrant, if the last sale price of the common stock equals or exceeds $17.50 per share for any
20 trading days within a 30 trading day period ending on the third trading day before we send the notice of redemption to the
warrant holders. The Placement Warrants, however, are non-redeemable so long as they are held by the initial holders or their
permitted transferees. Series
A Warrants and Series B Warrants In
connection with the Financing, upon the consummation of the Business Combination on July 31, 2015, we issued a total of 3,000,000
Series A-1 Warrants and Series A-2 Warrants and 1,000,000 Series B-1 Warrants and Series B-2 Warrants. Pursuant to the Securities
Purchase Agreement, on August 14, 2015, we issued an additional 187,500 Series A-3 Warrants and 62,500 Series B-3 Warrants. The
Series A-1 Warrants, Series A-2 Warrants and Series A-3 Warrants are referred to collectively as the Series A Warrants, the Series
B-1 Warrants, Series B-2 Warrants and Series B-3 Warrants are referred to collectively as the Series B Warrants, and the Series
A Warrants and the Series B Warrants are referred to collectively as the Investor Warrants. Each
Investor Warrant is immediately exercisable in cash and entitles the holder to take delivery of the shares purchased through the
exercise, at the sole election of the holder, in the form of either common stock or preferred stock, subject to the Maximum Warrant
Percentage, with the number of shares of preferred stock issued based on the conversion price, as described in Note 17, below,
under the heading “Preferred Stock”. The
Series A Warrants have an exercise price of $4.80 per share purchased and expire on July 31, 2020. As of September 30, 2016 there
are no Series B Warrants outstanding. The
Investor Warrants contain customary “cashless exercise” terms, pursuant to which holder of an Investor Warrant, at
any time after October 31, 2015, may choose to exercise such Investor Warrant (at a time when such Investor Warrant is otherwise
exercisable according to its terms) without paying cash, by effectively submitting in exchange for shares a greater number of
warrants than the number of shares purchased, rather than a number of warrants equal to the number of shares purchased plus cash.
The Series B Warrants (but not the Series A Warrants) also contain an additional alternative cashless exercise feature, pursuant
to which, beginning from December 31, 2015 and until the expiration of such Series B Warrant, on October 31, 2016, as applicable,
if 90% of the average of the four lowest volume-weighted average prices of common stock for the preceding 10 trading days (the
“Alternative Market Price”) is less than $4.00 (subject an Alternative Market Price floor of $1.80), the holder of
a Series B Warrant can exercise such Series B Warrant to acquire on a cashless basis a number of shares of common stock or preferred
stock equal to (depending on the Market Price) up to 488.9% of the number of shares that could otherwise be purchased under such
Series B Warrant pursuant to a cash exercise, with the lower the Alternative Market Price, the more shares being available for
acquisition by the Series B Warrant holder pursuant to this alternative cashless exercise. The
Investor Warrants also include “full ratchet” anti-dilution protection provisions, which provide that if any shares
of common stock are issued at a price less than then current exercise price of such Investor Warrant, or if any warrants, options
or other securities with the right to acquire or that are convertible into or exchangeable for shares of common stock are issued
with an exercise price less than the then current exercise price of such Investor Warrant, then the exercise price of such Investor
Warrant will automatically be reduced to the issuance price of such new shares of common stock or the exercise price of such warrants,
options or other securities with the right to acquire or that are convertible into or exchangeable for shares of common stock.
These anti-dilution provisions do not apply in the case of an issuance of “Excluded Securities”, including certain
option and other equity incentive awards to directors and officers, and securities issued pursuant to acquisitions or strategic
transactions approved by a majority of our disinterested directors, but does not include a transaction in which we are issuing
securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities. Under
the terms of the Investor Warrants, we may not enter into or be party to a “Fundamental Transaction” unless the successor
entity assumes in writing all of our obligations under such Investor Warrants. A “Fundamental Transaction” means,
among other things, a transaction in which we, directly or indirectly, including through subsidiaries, affiliates or otherwise,
in one or more related transactions, (i) consolidate or merge with or into (whether or not we are the surviving corporation) another
entity; (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all of our properties or assets of or
any of our “significant subsidiaries” (as defined in Rule 1-02 of Regulation S-X) to one or more entities; (iii) make,
or allow one or more entities to make, or allow us to be subject to or have its common stock be subject to or party to one or
more entities making, a purchase, tender or exchange offer that is accepted by at least 50% of the outstanding shares of common
stock; (iv) consummate a stock or share purchase agreement or other business combination (including a reorganization, recapitalization,
spin-off or scheme of arrangement) with one or more entities whereby all such entities, individually or in the aggregate, acquire
at least 50% of the outstanding shares of common stock; or (v) reorganize, recapitalize or reclassify its common stock. The foregoing
provisions will not apply to a Fundamental Transaction where the purchaser or other successor entity, after giving effect to such
Fundamental Transaction, does not have any equity securities that are then listed or designated for quotation on a national securities
exchange or automated quotation system. Moreover, a holder of an Investor Warrant may choose, in connection with any Fundamental
Transaction, to have us or the successor entity purchase such Investor Warrant from the holder by paying the holder cash in an
amount equal to the “Black Scholes Value” (as defined in such Investor Warrant) of such Investor Warrant. Under
the terms of the Investor Warrants, if we shall declare or make any dividend or other distribution of its assets (or rights to
acquire its assets) to holders of shares of common stock, then, in each such case, holders of such Investor Warrants shall be
entitled to participate in such distribution to the same extent that they would have participated if they had held the number
of shares of common stock acquirable upon complete exercise of such Investor Warrants (without regard to any limitations or restrictions
on exercise of such Investor Warrants) immediately before the date on which a record is taken for such distribution. Under
the terms of the Investor Warrants, if we grant, issue or sell any options, convertible securities or rights to purchase stock,
warrants, securities or other property pro rata to all or substantially all of the record holders of any class of common stock,
which are referred to with respect to the warrants as Warrant Purchase Rights, then each holder of an Investor Warrant will be
entitled to acquire, upon the terms applicable to such Warrant Purchase Rights, the aggregate Warrant Purchase Rights which such
holder could have acquired if such holder had held the number of shares of common stock acquirable upon complete excise of all
Investor Warrants (without taking into account any limitations or restrictions on exercise of such Investor Warrants) held by
such holder immediately prior to the date on which a record is taken for the grant, issuance or sale of such Warrant Purchase
Rights. Under
the terms of the Series A Warrants (but not the Series B Warrants), until July 31, 2016, the holders have pre-emptive rights pursuant
to which we must offer them the right to purchase at least 56.3% (with the Series A-1 entitled to purchase 35%, the Series A-2
entitled to purchase 18% and the Series A-3 entitled to purchase 3.3%) of any additional issuances by us or our subsidiaries of
equity securities or securities that are convertible into, exercisable or exchangeable for, or which give the holder the right
to acquire any of our equity securities or the securities of our subsidiaries, except for certain “Excluded Securities”
as described above. Under
the terms of the Investor Warrants, if a holder exercises an Investor Warrant and we fail to deliver common stock or preferred
stock in response within the time periods and in the manner specified in the terms of such Investor Warrant, we may suffer substantial
penalties. Under
the terms of the Series A-1 Warrants (but not the other Investor Warrants), we may not effect the exercise of any such Investor
Warrants and the exercise shall be null and void and treated as if never made, to the extent that after giving effect to such
exercise, the holder would beneficially own in excess of either 4.99% or 9.99% (the “Maximum Warrant Percentage”)
(as elected in writing by the holder on or prior to the initial issuance date of the warrants) of the shares of common stock outstanding
immediately after giving effect to such exercise. For purposes of the foregoing sentence, beneficial ownership shall be calculated
in accordance with Section 13(d) of the Exchange Act, and the shares of common stock issuable to a holder pursuant to the terms
of the warrants in excess of the Maximum Warrant Percentage shall not be deemed to be beneficially owned by such holder for any
purpose including for purposes of Section 13(d) or Rule 16a-1(a)(1) of the Exchange Act. All of the holders of the outstanding
Series A-1 Warrants as of the date of this filing have elected a Maximum Warrant Percentage of 4.99%. Between
February 2, 2016 and February 3, 2016, the Company issued an aggregate of 1,680,557 shares of preferred stock valued at $3,361,114
to certain holders of Series B-1 Warrants who exercised their Series B-1 Warrants using the alternative cashless exercise feature
and elected to receive their shares in the form of preferred stock rather than common stock (see Note 17 below for an explanation
of this feature). These shares were issued pursuant to exemptions from the registration requirements of the Securities Act of
1933, as amended (the “Securities Act”) under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder. On
February 24, 2016 the Company issued an aggregate of 641,666 shares of common stock valued at $1,251,249 to certain holders of
Series B-2 and Series B-3 Warrants who exercised their warrants using the alternative cashless exercise feature. These shares
were issued pursuant to exemptions from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder. On
February 29, 2016 the Company issued an aggregate of 1,527,778 shares of preferred stock valued at $2,979,167 to certain holders
of Series B-1 Warrants who exercised their warrants using the alternative cashless exercise feature and elected to receive their
shares in the form of preferred stock rather than common stock (see Note 17 below for an explanation of this feature). These shares
were issued pursuant to exemptions from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder. The
quantity of issued and outstanding warrants as of March 31, 2017 and respective strike prices for are outlined in the table below: The
Company maintains a stock option plan under which the Company may grant incentive stock options and non-qualified stock options
to employees and non-employee directors. Stock options have been granted with exercise prices at or above the fair market value
of the underlying shares of common stock on the date of grant. Options vest and expire according to terms established at the grant
date. The
Company records compensation expense for the fair value of stock-based awards determined as of the grant date, including employee
stock options. For the three months ended March 31, 2017 and 2016 there were 499,000 stock options granted, under the Company’s
option plan. The Company recognized $34,150 and $58,559 in stock-based compensation expense for the three months ended March 31,
2017 and 2016, respectively. Stock
options to purchase 291,000 & 322,000 shares of common stock were outstanding as of March 31, 2017 and December 31, 2016,
respectively. The
Company uses the Black-Scholes option-pricing model to value the options. The life of the option is equivalent to the expiration
of the option award. The risk-free interest rate is assumed at 1.77%. The estimated volatility is based on management’s
expectations of future volatility and is assumed at 60%. Estimated dividend payout is zero, as the Company has not paid dividends
in the past and, at this time, does not expect to do so in the future. 31,000 291,000 Compensation
cost is recognized over the required service period which is three years for all granted options. As of March 31, 2017, $239,048
of total unrecognized compensation cost related to stock options was expected to be recognized over the remaining 7 quarters.
As of March 31, 2016 $644,150 of total unrecognized compensation cost related to stock options was expected to be recognized over
the remaining 11 quarters. Preferred
Stock As
of March 31, 2017, we had 4,578,070 shares of preferred stock issued and outstanding. Additionally, there are a total of 3,187,500
Series A Warrants outstanding that are convertible into common stock or preferred stock. The
rights and obligations of the holders of the preferred stock are set forth in the certificate of designations relating thereto. At
any time after its initial issuance date, each share of preferred stock is convertible into validly issued, fully paid and non-assessable
shares of common stock based on a conversion price of $4.00 per share, subject to adjustment for unpaid dividends and any accrued
charges, as well as equitable adjustments for stock splits, recapitalizations and similar transactions. However, it will effect
the conversion of any preferred stock and any such conversion shall be null and void and treated as if never made, to the extent
that after giving effect to such conversion, the holder would beneficially own in excess of either 4.99% or 9.99% (the “Maximum
Percentage”) (as elected in writing by the holder on or prior to the initial issuance date of the preferred stock) of the
shares of common stock outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence,
beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act, and the shares of common stock
issuable to a holder pursuant to the terms of the preferred stock in excess of the Maximum Percentage shall not be deemed to be
beneficially owned by such holder for any purpose including for purposes of Section 13(d) or Rule 16a-1(a)(1) of the Exchange
Act. All of the holders of the issued and outstanding preferred stock as of the date of this filing have elected a Maximum Percentage
of 4.99%. Under
the certificate of designations, we may not enter into or be party to a “Fundamental Transaction” unless the successor
entity assumes in writing all of our obligations under the certificate of designations. A “Fundamental Transaction”
means, among other things, a transaction in which we, directly or indirectly, including through subsidiaries, affiliates or otherwise,
in one or more related transactions, (i) consolidate or merge with or into (whether or not we are the surviving corporation) another
entity; (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all of our properties or assets or any
of our “significant subsidiaries” (as defined in Rule 1-02 of Regulation S-X) to one or more entities; (iii) make,
or allow one or more entities to make, or allow us to be subject to or have our common stock be subject to or party to one or
more entities making, a purchase, tender or exchange offer that is accepted by at least 50% of the outstanding shares of common
stock; (iv) consummate a stock or share purchase agreement or other business combination (including a reorganization, recapitalization,
spin-off or scheme of arrangement) with one or more entities whereby all such entities, individually or in the aggregate, acquire
at least 50% of the outstanding shares of common stock; or (v) reorganize, recapitalize or reclassify our common stock. The foregoing
provisions will not apply to a Fundamental Transaction where the purchaser or other successor entity provides cash consideration
and such Fundamental Transaction does not involve the issuance of any securities to the holders of our securities or securities
of our affiliates. If
at any time we grant, issue or sell any options, convertible securities or rights to purchase stock, warrants, securities or other
property pro rata to all or substantially all of the record holders of any class of common stock, which is referred to as Purchase
Rights, then each holder of preferred stock will be entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of common stock acquirable
upon complete conversion of all preferred stock (without taking into account any limitations or restrictions on the convertibility
of the shares of preferred stock) held by such holder immediately prior to the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights. Holders
of preferred stock have no voting rights with respect to their preferred stock, except as required by law. Shares
of preferred stock rank pari passu to the shares of common stock in respect of preferences as to dividends, distributions and
payments upon our liquidation, dissolution and winding up, except that in a liquidation event, the holders of preferred stock
shall be entitled to receive in cash out of our assets an amount per share of preferred stock equal to the greater of $4.00 (plus
any unpaid dividends and accrued charges, as equitably adjusted for stock splits, recapitalizations and similar transactions)
and the amount per share such holder would receive if such holder converted such preferred stock into common stock immediately
prior to the date of such payment (without regard to any limitations on conversion), provided that if the liquidation funds are
insufficient to pay the full amount due to the holders, then each holder shall receive a percentage of the liquidation funds equal
to the full amount of liquidation funds payable to such holder, as a percentage of the full amount of liquidation funds payable
to all holders (on an as-converted basis, without regard to any limitations on conversion set forth herein) and all holders of
common stock. Under
the terms of the preferred stock, if holders convert their preferred stock and we fail to deliver common stock in response within
the time periods and in the manner specified in the certificate of designations, we may suffer substantial penalties. Our
Amended Charter and related Certificate of Incorporation also provides that additional shares of preferred stock may be issued
from time to time in one or more series. Our board of directors will be authorized to fix the voting rights, if any, designations,
powers, preferences, the relative, participating, optional or other special rights and any qualifications, limitations and restrictions,
applicable to such additional shares of each series. Our board of directors will be able to, without stockholder approval, issue
preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of the
common stock and could have anti-takeover effects, but subject to the rights of the holders of the preferred stock. The ability
of our board of directors to issue preferred stock without stockholder approval could have the effect of delaying, deferring or
preventing a change of control of us or the removal of existing management. Between
February 2, 2016 and February 3, 2016, the Company issued an aggregate of 1,680,557 shares of preferred stock at a value of $3,361,114
to certain holders of Series B-1 Warrants who exercised their Series B-1 Warrants using the alternative cashless exercise feature
and elected to receive their shares in the form of preferred stock rather than common stock. These shares were issued pursuant
to exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”)
under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. On
February 29, 2016 the Company issued an aggregate of 1,527,778 shares of preferred stock at a value of $2,979,167 to certain holders
of Series B-1 Warrants who exercised their warrants using the alternative cashless exercise feature and elected to receive their
shares in the form of preferred stock rather than common stock. These shares were issued pursuant to exemptions from the registration
requirements of the Securities Act under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. Common
Stock As
of March 31, 2017, we had 11,064,664 shares of common stock issued and outstanding. Additionally, there are 4,578,070 issued and
outstanding shares of preferred stock convertible into common stock, outstanding warrants exercisable into 7,875,000 shares of
common stock that were issued in exchange for former Chart warrants, and 3,187,500 Series A Warrants and 275,000 Series B Warrants
outstanding that are convertible into common stock or preferred stock (with the Series B Warrants convertible into a maximum of
1,344,446 shares using the alternative cashless exercise feature as described in Note 15, above, under the heading “Series
A Warrants and Series B Warrants”). Additionally,
pursuant to the terms of the Merger Agreement, we may be obligated to issue additional shares of common stock thereunder to the
Members (or the Members may be required to forfeit certain of their shares of common stock) as a result of (i) adjustments to
the merger consideration payable to the Members as a result of Tempus’ working capital and/or debt as of the completion
of the Business Combination varying from the estimates that were made at the time of the consummation of the Business Combination,
(ii) Tempus meeting certain financial milestones pursuant to the earn-out provisions of the Merger Agreement, up to a total of
6,300,000 shares and (iii) any indemnification payments that are made under the Merger Agreement by delivery of shares of common
stock. The shares of common stock issued to the Members under the Merger Agreement are subject to certain lock-up restrictions
as set forth in the Tempus Registration Rights Agreement to which the Members are subject. Additionally,
we may issue awards for up to a maximum of 640,616 shares of common stock under our 2015 Omnibus Equity Incentive Plan. On January
22, 2016 our compensation committee awarded 499,000 options to purchase our common stock at a price of $2.05, to our employees
and our board of directors. These options are subject to a minimum vesting period of three years. Holders
of common stock have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions
applicable to the common stock. Holders of common stock are entitled to receive such dividends, if any, as may be declared from
time to time by the board of directors in its discretion out of funds legally available therefor. Common
stockholders of record are entitled to one vote for each share held on all matters to be voted on by stockholders. Our board of
directors is divided into three classes, each of which will generally serve for a term of three years (with a shorter period for
the initial directors upon the Business Combination, where they continue until their class is up for election) with only one class
of directors being elected in each year and with directors only permitted to be removed for cause. There is no cumulative voting
with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election
of directors can elect all of the directors up for election at such time. Certain
shares of common stock that were issued in the Business Combination in exchange for Chart’s common stock held by certain
of its initial stockholders, which we refer to as Founder Shares, are subject to forfeiture upon certain conditions. With certain
limited exceptions, the Founder Shares are not transferable, assignable or salable (except to our officers and directors and other
persons or entities affiliated with the Chart’s initial stockholders, each of whom will be subject to the same transfer
restrictions) until the earlier of (i) July 31, 2016 or earlier if the last sales price of our common stock equals or exceeds
$12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading
days within any 30-trading day period commencing at least 150 days after July 31, 2015, or (ii) the date on which we consummate
a liquidation, merger, stock exchange or other similar transaction that results in all of our stockholders having the right to
exchange their shares of common stock for cash, securities or other property. In addition, 234,375 Founder Shares are subject
to forfeiture pro rata by Chart’s initial stockholders in the event the last sales price of our common stock does not equal
or exceed $11.50 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for
any 20 trading days within any 30-trading day period within 60 months following July 31, 2015. An additional 234,375 Founder Shares,
will be subject to forfeiture pro rata by Chart’s initial stockholders in the event the last sales price of our common stock
does not equal or exceed $13.50 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and
the like) for any 20 trading days within any 30-trading day period prior to July 31, 2020. Chart’ s initial stockholders
have agreed that such shares will be subject to lockup and will not sell or transfer Founder Shares that remain subject to forfeiture
as described above, until such time as the related forfeiture provisions no longer apply. The securities held by Chart’s
initial stockholders are also subject to certain other lock-up restrictions under the terms of the Founders’ Registration
Rights Agreement, to which such stockholders are subject. We
have made an adjustment to our capital contributed in excess of par to account for the fact that the Financing and Business Combination
expenses, along with the valuation of the warrant liabilities associated with the warrants issued pursuant thereto, caused capital
contributed in excess of par to go below zero. Any excess negative amount due to these transactions that would otherwise have
been allocated to capital contributed in excess of par has now been recognized as a negative retained earnings amount. On
February 24, 2016 the Company issued an aggregate of 641,666 shares of common stock at a value of $1,251,249 to certain holders
of Series B-2 and Series B-3 Warrants who exercised their warrants using the alternative cashless exercise feature. These shares
were issued pursuant to exemptions from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder. On
March 15, 2016, the Company purchased Tempus Jets, Inc. (“TJI”) from our CEO B. Scott Terry for consideration of $500,000,
paid in the form of 242,131 shares of common stock of the Company. The number of shares issued to Mr. Terry was calculated based
on the volume weighted average market price of the Company’s common stock for the previous 20 trading days. (See Note
8 above). On
June 24, 2016, the Company issued an aggregate of 1,344,446 shares of common stock valued at $1,546,113 to certain holders of
Series B-2 and Series B-3 Warrants who exercised their warrants using the alternate cashless exercise feature. These shares were
issued pursuant to exemptions from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities
Act and Rule 506 of the Regulation D promulgated thereunder. On
April 28, 2017, the Company entered into a Note Purchase Agreement with Santiago Business Co. International Ltd, (“Santiago”),
its 10% Senior Secured Convertible Note due April 28, 2018, in an aggregate principal amount of $6,200,000 (the “Note”)
and Santiago caused to be transferred to the Company certain shares of capital stock of a subsidiary of Santiago, Bluebell Business
Limited, a company limited by shares organized and existing under the laws of the British Virgin Islands (“Bluebell”),
and, upon receipt of the Note, to cause to be forgiven approximately $700,000 owed by the Company in connection with a certain
G-IV Aircraft Lease Agreement, dated as of February 25, 2016, and certain related matters. See Item 5. Other Information below. 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. Overview Tempus Applied Solutions Holdings, Inc.
(“we”, the “Company” or “Tempus Holdings”) is a Delaware corporation organized on December
19, 2014 as a direct, wholly owned subsidiary of Chart Acquisition Corp. (“Chart”). We were formed solely for the purpose
of effecting a business combination between Chart and Tempus Applied Solutions, LLC (“Tempus”). Business Combination On July 31, 2015, pursuant to an Agreement
and Plan of Merger dated as of January 5, 2015, as amended (the “Merger Agreement”) by and among Tempus Holdings, Chart,
Tempus, the holders of Tempus’ membership interests named in the Merger Agreement (the “Members”), Benjamin Scott
Terry and John G. Gulbin III (together, in their capacity under the Merger Agreement as the representative of the Members for the
purposes set forth therein, the “Members’ Representative”), Chart Merger Sub Inc. (“Chart Merger Sub”),
Chart Financing Sub Inc. (“Chart Financing Sub”), TAS Merger Sub LLC (“Tempus Merger Sub”), TAS Financing
Sub Inc. (“Tempus Financing Sub”), Chart Acquisition Group LLC (“CAG”), in its capacity under the Merger
Agreement as the representative of the equity holders of Chart and Tempus Holdings (other than the Members and their successors
and assigns) for the purposes set forth therein and, for the limited purposes set forth therein, CAG, Joseph Wright and Cowen Investments
LLC (“Cowen”), the following was effected: (i) Chart Financing Sub and Chart Merger Sub merged with and into Chart,
with Chart continuing as the surviving entity; (ii) Tempus Financing Sub and Tempus Merger Sub merged with and into Tempus, with
Tempus continuing as the surviving entity; and (iii) each of Chart and Tempus became wholly owned subsidiaries of the Company.
We refer to the transactions contemplated by the Merger Agreement as the “Business Combination.” The Business Combination
was approved by Chart’s stockholders at a special meeting of stockholders held on July 31, 2015 (the “Special Meeting”).
At the Special Meeting, 4,985,780 shares of Chart common stock were voted in favor of the proposal to approve the Business Combination
and no shares of Chart common stock were voted against that proposal. In connection with the stockholders’ approval of the
Business Combination, Chart redeemed a total of 2,808,329 shares of its common stock pursuant to the terms of Chart’s amended
and restated certificate of incorporation. The consummation of the Business Combination
was preceded by a series of privately negotiated transactions, referred to collectively herein as the “Financing”,
involving aggregate cash investments of $10.5 million by three outside investor entities (or affiliates thereof) that had not previously
invested in Chart or Tempus (the “New Investors”), aggregate cash investments of $5.0 million by CAG, Joseph Wright
and Cowen (collectively, the “Chart Affiliate Investors”) and a cash investment of $500,000 by R. Lee Priest, Jr.,
the Chief Financial Officer of Tempus (through his individual retirement account) (the “Tempus Affiliate Investor”,
and together with the Chart Affiliate Investors, the “Affiliate Investors”, and together with the New Investors, the
“Investors”). In the Business Combination, the Members
received 3,642,084 shares of Tempus Holdings’ common stock (the “Merger Shares”) in exchange for all of the issued
and outstanding membership interests of Tempus. The number of Merger Shares received reflected a downward merger consideration
adjustment (in accordance with the Merger Agreement) of 57,916 shares of Tempus Holdings common stock, based on Tempus’ estimated
working capital and debt as of the closing of the Business Combination. Such merger consideration adjustment is subject to a post-closing
true-up based on Tempus’ actual working capital and debt as of the closing of the Business Combination. In addition, pursuant
to the earn-out provisions of the Merger Agreement, the Members have the right to receive up to an additional 6,300,000 shares
of Tempus Holdings’ common stock upon the achievement of certain financial milestones. In connection with the Business Combination,
Chart stockholders and warrant holders received shares of Tempus Holdings common stock and warrants to purchase shares of Tempus
Holdings common stock in exchange for their existing shares of Chart common stock and existing Chart warrants. In connection with
the Business Combination, (i) the Affiliate Investors received an aggregate of 1,375,000 shares of Tempus Holdings common stock,
1,031,250 Series A-2 Warrants and 343,750 Series B-2 Warrants (collectively, the “Affiliate Investor Securities”) and
(ii) the New Investors received an aggregate of 1,255,265 shares of Tempus Holdings common stock, 1,369,735 shares of Tempus Holdings
Preferred Stock, 1,968,750 Series A-1 Warrants and 656,250 Series B-1 Warrants (collectively, the “New Investor Securities”,
and collectively with the Affiliate Investor Securities, the “Financing Securities”). The terms and provisions of the
Financing Securities are described in more detail in the registration statement on Form S-4 filed in connection with the Business
Combination (SEC File No. 333-201424) (the “Form S-4”), in the section therein entitled “Description of Tempus
Holdings’ Securities”, which section is incorporated herein by reference. Business of Tempus We provide 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: We operate out of our corporate headquarters
in Williamsburg, Virginia. Additionally, we utilize office and hangar space in Brunswick, Maine and San Marcos, TX to provide the
required facilities for production and logistic support for our customers. The Company’s activities are subject
to significant risks and uncertainties, including without limitation the risks of deadline and budget overruns and risks specific
to government and international contracting businesses. Anticipated contracts are large and the periods of performance are long. Going Concern The Company’s consolidated financial
statements have been prepared assuming that it will continue as a going concern. The conditions noted below raise substantial doubt
about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty. Historically, the Company has experienced
operating losses and negative cash flows from operations, and it currently has a working capital deficit, due principally to delays
in the commencement of contracts, low margins on initial contracts as the Company works to achieve market share and high overhead
costs associated with sales, marketing and proposal costs related to the team of Company personnel assigned to aggressively pursue
new contracts. Management expects that these efforts will begin to achieve results over the remainder of 2017 and, assuming the
timely commencement of new contracts, that the Company will begin to reduce its working capital deficit over the coming months.
Nevertheless, whether, and when, the company can attain positive operating cash flows from operations is highly dependent on the
commencement of these new contracts and the timing of their commencement. Management believes that the uncertainties regarding
these contracts and their timing cast substantial doubt upon the Company’s ability to continue as a going concern, especially
in the near term and within one year after the date that the consolidated financial statements are issued. In light of the foregoing, the Company
has implemented cost cutting initiatives, including reductions in our employee headcount, facilities and other expenses. Headcount
has been reduced from 52 in June 2016 to 13 as of March 31, 2017. The Company expects to undertake additional cost-cutting measures
in the future to the extent consistent with the provision of full performance under the Company’s contracts with customers.
In addition, the Company continues to explore possibilities for raising both working capital and longer-term capital from outside
sources in various possible transactions. As of the date of this filing, the Company expects its cash flows to cover its costs
of operations. However, there can be no assurance that the Company’s cash flows or costs of operations will develop as currently
expected. Our cash flows and liquidity plans remain subject to a number of risks and uncertainties. See “Item 1A. Risk Factors”
of our Annual Report on Form 10-K (the “Form 10-K”). Results of Operations 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 (based on fixed price contracts) 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 as and
when it is able to enter into additional, material contracts with customers. As a result of the Business Combination,
which was consummated on July 31, 2015, we have begun to, and expect to continue to, incur increased operating expenses as a result
of being a public company (for legal, financial reporting, accounting and auditing compliance); increased sales, marketing and
business development efforts; increased professional services, recruiting, salaries and benefits and facility costs; and other
expenses. Three Months Ended March 31, 2017
and 2016 Revenues Revenues were $4,386,839 for the three
months ended March 31, 2017. As set forth below, four customers each represented greater than 10% of our revenues during this period.
These four customers represented 24%, 30% and 26%, and 15% of our revenues respectively. Revenues were $3,749,023 for the three
months ended March 31, 2016. As set forth below, three customers each represented greater than 10% of our revenues over this period.
These three customers represented 26%, 33% and 25% of our revenues respectively. Revenue growth is due to increased flying
activity, and the commencement of an aircraft modification contract with a government customer. The table below sets forth the amount of revenues we recognized
for the three months ended March 31, 2017 and 2016: Cost of Revenue and Gross Profit Cost of revenue for the three months ended March 31, 2017 was
$3,761,056, which represented 86% of revenues. The Company’s gross profit was $625,783 or 14% of revenues for the three months
ended March 31, 2017. Cost of revenue for the three months ended March 31, 2016 was
$3,750,595, which represented 100% of revenues. The Company’s gross loss was ($1,572) or 0% of revenues for the three months
ended March 31, 2016. The improvement in gross profit was
primarily due to decreased fixed costs associated with aircraft for customer contracts. Other factors affecting gross profit include
an increased mix of higher margin contracts for the three months ended March 31, 2017 as compared to the prior year period. Selling, general and administrative. Selling, general and administrative
expenses were $822,973 for the three months ended March 31, 2017, which represented 19% of revenues for this period. Selling, general and administrative
expenses were $1,554,409 for the three months ended March 31, 2016, which represented 41% of revenues for this period. The decrease over the comparable prior
year period is primarily associated with the following: (i) lower staffing costs; (ii) decreased sales and marketing expenses;
(iii) offset by increases in depreciation expense. Other Income (Expense) Other income (expense) was ($71,161) for the three months ended
March 31, 2017 and ($307,876) for the three months ended March 31, 2016. The decreased expense period over period is primarily
due to non-cash charges associated with the change in warrant valuation along with a charge for interest expense primarily related
to capital leases on aircraft. Net Loss Net loss for the three months ended
March 31, 2017 was ($268,351). Net loss for the three months ended March 31, 2016 was ($1,863,857). Liquidity and Capital Resources As of March 31, 2017, we had cash and cash equivalents of $402,599.
As of that date, we held restricted cash of $50,007, consisting of a certificate of deposit securing credit card borrowings. Credit
card borrowings outstanding as of March 31, 2017 totaled $285,029. Our working capital as of March 31,
2017 was ($9,833,822), equal to the difference between our total current assets as of that date of $2,315,121 and our total current
liabilities as of that date of $12,148,943. 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. In 2015, the Company entered into an aircraft
purchase agreement with Pilatus Business Aircraft, Ltd. for the purchase of a Pilatus PC-12 with certain special mission modifications
for approximately $7.3 million. The Company entered into this agreement pursuant to a contract with a government law enforcement
agency whereby Tempus would lease the aircraft to the agency. Tempus subsequently assigned the lease contract and the purchase
obligation to Cowen Aviation Finance Holdings, Inc. (“CAF”) for no consideration and has entered into a services agreement
with CAF whereby it will provide certain administrative, servicing and marketing services for this and other aircraft owned by
CAF. For the three months ended March 31, 2017 Tempus billed $16,388 to CAF under the services agreement. Based on the assignment
of the lease contract and purchase obligation to CAF, a $750,000 customer deposit received from the law enforcement agency customer
and the $500,000 deposit Tempus paid to Pilatus was transferred to CAF. At March 31, 2017 and December 31, 2016, the net payable
to CAF was $70,592 and $62,018, respectively. Subsequent to December 31, 2015, 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 permits
the lessor to exercise an option to sell the aircraft to the Company at any time after November 30, 2016, or the Company to purchase
the aircraft from the lessor, in either case at a value of $5,500,000. We have modified this aircraft for a government customer
and are providing it to this customer at an hourly and daily rate, based on the customer’s usage of the aircraft. As of November
4, 2016 the lessor has exercised its option to sell the aircraft to the Company. As of April 24, 2017 the lender has provided owner
financing to the Company in exchange for a note payable, convertible at the lender’s discretion into company stock. 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 three months ended March 31, 2017,
the Company incurred lease expense for aviation assets used in the provision of its services of $1,358,403. Lease expenses for
aviation assets for the three months ended March 31, 2016 were $1,293,735. We believe that cash on hand, funds generated
from increased flight operations in the last three quarters of the year and secured borrowings for aircraft will be sufficient
to satisfy our liquidity and capital resource needs over the next twelve months. Our liquidity plans are subject to a number of
risks and uncertainties, including those described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K (the
“Form 10-K”). Off-Balance Sheet Arrangements None. Distributions None. Contractual Obligations 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 B. Scott Terry, the Company’s CEO and sole member of the Company’s Board
of Directors. The Company leases office space in San
Marcos, TX to support its training operations. The Company occupied the premises as of October, 1, 2015 under a fifteen (15) month
lease at a rate of $10,500 per month. The lease was extended as of January 1, 2017 for an additional 12 months. The Company also
leases simulators used in its training operations at this location. The simulator lease commenced on October 1, 2015 and extends
to December 31, 2016 at a rate of $3,000 per month, at which point it was also renewed for an additional 12 months. The future
minimum lease payments associated with these leases at San Marcos, TX as of March 31, 2017 total $121,500. The Company leased hangar space in Newport
News, VA to support its operations. The Company occupied the premises as of October 1, 2015 under a one-year lease at a rate of
$2,000 per month. The term of the lease ended and was not renewed. Unpaid invoices at March 31, 2017 was $14,000 and are included
in accounts payable. The Company leased office and hangar space
in Brunswick, ME to support its operations. The Company occupied the premises as of March 1, 2016 under a six-month lease at a
rate of $16,673 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 March 31, 2017 totaled $157,291 and are
included in accounts payable. The Company has employment agreements
with certain key executives with terms that expire in 2018, with provisions for termination obligations, should termination occur
prior thereto, of up to 12 months’ severance. The Company expects to pay a total aggregate base compensation of approximately
$350,000 annually through 2018, plus other normal customary fringe benefits and bonuses. In 2015, the Company entered into an
aircraft purchase agreement with Pilatus Business Aircraft, Ltd. for the purchase of a Pilatus PC-12 with certain special mission
modifications for approximately $7.3 million. The Company entered into this agreement pursuant to a contract with a government
law enforcement agency whereby Tempus would lease the aircraft to the agency. Tempus subsequently assigned the lease contract and
the purchase obligation to Cowen Aviation Finance Holdings, Inc. (“CAF”) for no consideration and has entered into
a services agreement with CAF whereby it will provide certain administrative, servicing and marketing services for this and other
aircraft owned by CAF. CAF is owned by Cowen Group, Inc., (“Cowen”) whose board member, Joe Wright, was also on our
board of directors at such time. For the three months ended March 31, 2017 Tempus billed $16,388 to CAF under the services agreement.
Based on the assignment of the lease contract and purchase obligation to CAF, a $750,000 customer deposit received from the law
enforcement agency customer and the $500,000 deposit Tempus paid to Pilatus was transferred to CAF. At March 31, 2017 and December
31, 2016, the net payable to CAF was $70,592 and $62,018, respectively. Effective as of February 25, 2016,
we entered into an agreement to lease a Gulfstream G-IV, at a rate of $70,000 a month for a period of 40 months. The lease permits
the lessor to exercise an option to sell the aircraft to the Company at any time after November 30, 2016, or the Company to purchase
the aircraft from the lessor, in either case at a value of $5,500,000. We have modified the aircraft for a government customer
and are providing it to this customer at an hourly and daily rate, based on this customer’s usage of the aircraft. As of
November 4, 2016, the lessor exercised its option to sell the aircraft to the Company. In connection with the issuance by the
Company on April 28, 2017, of a 10% Senior Secured Convertible Note, the Company purchased the aircraft using owner financing.
See the Company’s Current Report on Form 8-K filed with the SEC on May 3, 2017, and Item 5 Other Information below, in connection
with this event. Significant Accounting Policies Basis of Presentation The Company has prepared the accompanying
unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of
America for interim financial information. In our opinion, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2017 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2017. The accompanying consolidated financial
statements are presented in U.S. dollars in conformity with accounting principles generally accepted in the United State of America
(“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Because Tempus was deemed the accounting
acquirer in the Business Combination, which was consummated on July 31, 2015, the historical financial information for the three
months ended March 31, 2016 and 2015 reflects the financial information and activities of Tempus only. In conjunction with the
Business Combination, all outstanding membership interests of Tempus were exchanged for shares of the Company’s common stock.
The historical members’ equity of Tempus (which is a limited liability company) has been retroactively adjusted to reflect
the stockholders’ equity structure of Tempus Holdings (which is a corporation), using the respective exchange ratios established
in the Business Combination. This reflects the number of shares Tempus Holdings issued to the members of Tempus upon the consummation
of the Business Combination. Accordingly, all shares and per share amounts for all periods presented in these consolidated financial
statements and the notes thereto have been adjusted retrospectively, where applicable, to reflect the respective exchange ratios
established in the Business Combination. For details on the conversion of Tempus’ membership interests into Company common
stock, see the Company’s Current Report on Form 8-K filed with the SEC on August 6, 2015 in connection with the Business
Combination. The Company manages, analyzes and reports
on its business and results of operations on the basis of one operating segment, flight operations and support. Our chief executive
officer is the primary decision maker. Principles of Consolidation The consolidated financial statements include
the accounts of Tempus Holdings and its subsidiaries. Significant inter-entity accounts and transactions have been eliminated. Use of Estimates The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Income Tax The Company follows the reporting requirements
of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 “Income
Taxes”, which requires an asset and liability approach to financial accounting and reporting for income taxes. The Company
recognizes deferred tax assets or liabilities based on differences between the financial statement and tax basis of assets and
liabilities that will result in future taxable or deductible amounts calculated on enacted tax laws and rates applicable to the
periods in which the differences are expected to be ultimately realized. FASB ASC 740, Income Taxes, sets out a
consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. This interpretation
uses a two-step approach wherein a tax benefit is recognized if a position is more-likely-than-not to be sustained upon examination
by taxing authorities. The amount of the benefit is then measured to be the highest tax benefit that is greater than 50% likely
to be realized. Tempus, a limited liability company, was
the acquiror in the Business Combination; therefore, Tempus’ taxable income or loss for the period commencing January 1,
2015 through July 31, 2015 (the effective date of the Business Combination) is allocated to its members in accordance with its
operating agreement and is reflected in the members’ income taxes. The members' income tax filings are subject to audit by
various taxing authorities depending on their physical residence. All members reside in the United States of America. Tempus’ consolidated financial statements
reflect a provision or liability for Federal and state income taxes for the period commencing January 1, 2015 through July 31,
2015 (the effective date of the Business Combination) for Chart, the predecessor company, and for Tempus Holdings for the period
commencing July 31, 2015 through March 31, 2017. The Company’s tax returns are subject
to possible examination by the taxing authorities. For income tax purposes, the tax returns essentially remain open for possible
examination for a period of three years after the respective filing of those returns. Revenue Recognition The Company uses the percentage-of-completion
method for accounting for long-term aircraft maintenance and modification fixed-price contracts to recognize revenues and receivables
for financial reporting purposes. Revenues from firm fixed price contracts are measured by the percentage of costs incurred
to date to estimated total costs for each contract. Revenues from time-and-material line items are measured by direct labor
hours or flight hours incurred during the period at the contracted hourly rates plus the cost of materials, if applicable. To the
extent this earned revenue is not invoiced, it is recognized as earnings in excess of billings and is represented in other accounts
receivable on the consolidated balance sheets. Earnings in excess of billings were $459 at March 31, 2017 and at December 31, 2016. The Company records payments received in
advance for services to be performed under contractual agreements and billings in excess of costs on uncompleted fixed-price contracts
as deferred revenue until such related services are provided. Deferred revenue was $0 at March 31, 2017 and December 31, 2016. Revenue on leased aircraft and equipment
representing rental fees and financing charges are recorded on a straight line basis over the term of the leases. Currently, the Company’s consolidated
revenues consist principally of revenues earned under aircraft management contracts (which are based on fixed expenses and fees
plus variable expenses and fees tied to actual aircraft flight hours) and revenues earned from the provision of leased aircraft. 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. While the legal life of an STC is indefinite, we intend to fully amortize STC development
costs on a straight line basis over the expected economic life of the STC. It is the Company’s policy to commence amortization
of STCs upon the date that the STC is formally granted by the FAA. As of March 31,2017 and 2016, we have recognized no amortization
of these costs. On October 1, 2015, the Company purchased
Proflight Aviation Services, LLC, which provides flight training services under a Federal Aviation Regulations (“FAR”)
Part 141 certificate. The total purchase price of $50,000 was allocated to intangibles and is considered to be indefinite-lived. On March 15, 2016, the Company purchased
Tempus Jets, Inc. (“TJI”) from our CEO B. Scott Terry for non-cash consideration of $500,000, paid in the form of 242,131
shares of common stock of the Company. TJI owns an operating certificate issued by the FAA in accordance with the requirements
of Parts 119 and 135 of the FAR (the “Operating Certificate”). The total purchase price of $500,000 was allocated to
intangibles and is considered to be indefinite-lived. TJI has been sold in a transaction that was effective January 1, 2017. For
the details on the sale of TJI, see the Company’s Current Report on form 8-K filed with the SEC on March 1, 2017 in connection
with the transaction. It is the Company’s policy to commence
amortization of computer software upon the date that assets are placed into service. For the three months ended March 31, 2017,
the Company recognized amortization expense of computer software in the amount of $6,437. For the three months ended March 31,
2016 the Company also recognized amortization expense of computer software in the amount of $6,437. Amortization is computed on
a straight-line basis over the estimated service lives of the assets as follows: Recent Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606). Under the update, revenue will be recognized based on a five-step model. The
core principle of the model is that revenue will be recognized when the transfer of promised goods or services to customers is
made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
In the third quarter of 2015, the FASB deferred the effective date of the standard to annual and interim periods beginning after
December 15, 2017. Early adoption will be permitted for annual and interim periods beginning after December 15, 2016. The Company
is currently evaluating the impact that adopting this ASU will have on its financial position, results of operations and cash flows. In August 2014, the FASB issued ASU No. 2014-15,
“Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern.” This ASU is intended to define management’s responsibility to evaluate whether
there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote
disclosures, and provides guidance to an organization’s management, with principles and definitions that are intended to
reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement
footnotes. Until the issuance of this ASU, U.S. GAAP lacked guidance about management’s responsibility to evaluate whether
there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote
disclosures. The amendments are effective for annual periods ending after December 15, 2016 and interim periods within annual periods
beginning after December 15, 2016, with early adoption permitted. The Company has concluded that there is substantial doubt about
its ability to continue as a going concern and has presented the required disclosures of this ASU in Note 2. In September 2015, the FASB issued ASU
2015-16, Business Combinations (Topic 805). Under the update, an acquirer in a business combination is no longer required to account
for measurement-period adjustments retrospectively, and, instead, will recognize a measurement-period adjustment during the period
in which it determines the amount of the adjustment. The ASU is effective for financial statements issued after December 15, 2017,
and interim periods within those years. Early adoption will be permitted for annual and interim periods beginning after December
15, 2016. The Company does not expect the impact of adopting this ASU to be material to the Company's financial statements and
related disclosures. In November 2015, the FASB issued ASU
2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. Under the update, deferred taxes would be classified
as noncurrent in the statement of financial position instead of being separated into current and non-current amounts. The ASU is
effective for financial statements issued after January 1, 2017 with early adoption permitted. Additionally, the Company may apply
the standard either prospectively or retrospectively. The Company has adopted this ASU and will present deferred taxes in accordance
with this ASU when deferred taxes are required to be recorded and presented in the financial statements. In February 2016, the FASB issued ASU
2016-02, Leases (Topic 842). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of
more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting policy
election by class of underlying asset not to recognize lease assets and lease liabilities. Further, the lease requires a finance
lease to recognize both an interest expense and an amortization of the associated expense. Operating leases generally recognize
the associated expense on a straight line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective
approach and adoption beginning on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on
its financial position, results of operations and cash flows. In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718). The update amends the guidelines for share-based payment transactions, including
the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash
flows. The standard is effective for annual and interim periods beginning January 1, 2017, and early adoption is permitted. The
Company adopted 2016-09 effective January 1, 2017. The adoption of this standard did not have a material impact on the results
of operations. In November 21016, the FASB issued ASU
2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash. The ASU requires that a statement of cash flows explain the
change during the period in the total cash, cash equivalents and amounts generally described as restricted cash or restricted cash
equivalents. This update is for entities for fiscal years beginning after December 15, 2017, and for interim periods within those
fiscal years using a retrospective transition method for each period presented. Early adoption is permitted. The Company is currently
evaluating the impact that ASU 2016-18 will have on its financial position, results of operations and cash flows. Other accounting standards that have
been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not
expected to have a material impact on our consolidated financial statements upon adoption. ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK Not Applicable. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and
Procedures Under the supervision and with the participation
of our management, including our Chief Executive Officer and our Chief Financial Officer (together, the “Certifying Officers”),
we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based
on the foregoing, our Certifying Officers concluded that our disclosure controls and procedures were effective as of the end of
the period covered by this Report. Disclosure controls and procedures are controls and other procedures designed to ensure that
information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers, or persons performing
similar functions, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial
Reporting Our management has concluded that our internal
control over financial reporting may not have been consistently effective through the date hereof, due to the fact that, at times,
including in particular at times since December 31, 2016, we may not have employed a sufficient number of accounting personnel
to adequately segregate duties. A failure to adequately segregate duties means that, for example, journal entries and account reconciliations
may not be reviewed by someone other than the preparer, heightening the risk of error or fraud. Such a failure constitutes a material
weakness in our internal control over financial reporting. A “material weakness” is a deficiency, or a combination
of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented or detected on a timely basis. If we are unable to remediate
this material weakness or avoid other control deficiencies, we may not be able to report our financial results accurately, prevent
errors or fraud or file our periodic reports as a public company in a timely manner. The foregoing could result in the loss of
investor confidence, errors in our public filings and declines in the market price of our securities. Limitations on the Effectiveness of
Internal Controls Readers are cautioned that our management
does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent
all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our control
have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. PART II — OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS To the knowledge of our management, there
are no material legal proceedings currently pending against us, any of our officers or directors as such or against any of our
property. In February 2017, a lawsuit was filed by a former counterparty of certain businesses affiliated with our CEO, Benjamin
Scott Terry, and on our former board members, John G. Gulbin III, against such businesses and individuals, alleging claims for
damages in the approximate total of $10 million. Tempus Applied Solutions Holdings, Inc. was also named as a defendant in that
suit. We do not believe that the allegations in the complaint involve us in any way, and we expect the suit against us to be abandoned
or dismissed. However, there can be no assurance as to the outcome of this matter. ITEM 1A. RISK FACTORS There have been no material changes to
our risk factors as disclosed in the section titled “Risk Factors” in the Form 10-K. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. MINE SAFETY DISCLOSURE None. ITEM 5. OTHER INFORMATION 10% Senior Secured
Convertible Note due April 28, 2018 The
following descriptions of the 10% Senior Secured Convertible Note due April 28, 2018, and the related agreements do not purport
to be complete and are qualified in their entirety by reference to their full text, copies of which are included in this Report
as Exhibits 10.1 and 10.2, and are incorporated herein by reference. On
April 28, 2017, the Company entered into a Note Purchase Agreement with Santiago (as defined below) pursuant to which the Company
issued and sold to Santiago Business Co. International Ltd, a business company organized under the laws of the British Virgin Islands
(“Santiago”), its 10% Senior Secured Convertible Note due April 28, 2018, in an aggregate principal amount of
$6,200,000 (the “Note”) and Santiago caused to be transferred to the Company certain shares of capital stock
of a subsidiary of Santiago, Bluebell Business Limited, a company limited by shares organized and existing under the laws of the
British Virgin Islands (“Bluebell”), and, upon receipt of the Note, to cause to be forgiven approximately $700,000
owed by the Company in connection with a certain Aircraft Lease Agreement, dated as of February 25, 2016, and certain related matters. Upon
conversion of the Note at a conversion price of $0.08 per share, Santiago has the right to acquire up to 77,500,000 shares of Common
Stock. Assuming conversion of the Note in full, assuming further that no warrants to purchase Common Stock or securities
convertible into shares of Common Stock held by parties other than Santiago are exercised or converted, and taking into account
2,032,944 shares of Common Stock acquired by Santiago in a separate transaction (see below), shares beneficially owned by Santiago
and which it has the right to acquire would constitute approximately 89.8% of the shares of Common Stock that would be issued and
outstanding following conversion in full of the Note. Pursuant
to its authority as the controlling person of Santiago, Johan Eliasch, an individual, may be deemed to indirectly beneficially
own any shares of Common Stock attributable to Santiago (Santiago and Eliasch are collectively referred to below as the “Shareholders”).
The Shareholders have the voting rights, protective provisions and registration rights described below. Such rights may give
the Shareholders the ability to influence control of the Company, including the ability to elect a majority of the Company’s
board of directors. Voting Rights The
terms of the Note entitle Santiago or its successors or assigns (the “Holder”), with respect to all matters
submitted to a vote of the shareholders of the Company, to vote on an as-converted basis. The Company has agreed to take
any and all actions as may be necessary, including, if necessary, amending the terms of its certificate of incorporation and bylaws,
to provide the Company the right to vote on an as-converted basis and to assure that the Company is at all times entitled, if the
Company exercises its right to vote on an as-converted basis in full, to nominate and elect a majority of the members of the Company’s
board of directors. Protective
Provisions The
terms of the Note further provide that, for so long as the Note remains outstanding, the Company will not (by amendment, merger,
consolidation or otherwise) take any of the following actions without first obtaining the written approval of the Holder: (ii) effect
or approve any Liquidation Event (as defined in the Note); (iii) effect
any alteration, repeal, change or amendment of the certificate of incorporation of the Issuer (except to the extent otherwise required
to comply with the provisions of the Note), including any increase or decrease in the authorized capital stock of the Company,
or to create, or authorize the creation of, any additional class or series of capital stock or securities of the Company; (iv)
reclassify, alter or amend any existing security of the Company; (v)
effect any authorization, creation or issuance of (or any obligation to authorize, create or issue) any equity securities of
a subsidiary of the Company to any third party; (vi) create
or authorize the creation of any debt security or instrument or otherwise incur new indebtedness of any kind (other than pursuant
to credit facilities of the Company existing on the issuance date of the Note); (vii) amend,
change, waive or otherwise alter the Company’s bylaws (except to the extent otherwise required to comply with the provisions
of the Note); (viii) adopt
or amend any Company equity incentive plan, including any amendment to increase the number of shares of Common Stock reserved for
issuance pursuant to any Company stock plan, equity incentive plan, restricted stock plan or other similar arrangement; (ix) purchase
or redeem (or permit any subsidiary to purchase or redeem) or pay or declare any dividend or make any distribution on, any shares
of capital stock of the Company; (x) use
any available cash at the Company or any of its subsidiaries, other than net cash provided by operating activities, for working
capital; (xi) effect
any change in the authorized number of directors of the Company; (xii) commence
or consummate any public offering; (xiii) effect
any sale, transfer or other disposition, in a single transaction or series of related transactions, of more than $[10,000] of the
assets of the Company and its subsidiaries; (xiv) approve
any annual budget or any material deviation therefrom; or (xv) make
any changes to the executive officers of the Issuer, including, but not limited to, those individuals performing the chief executive,
financial, legal and accounting functions. For the purposes
of the foregoing provisions, any reference to the Company will be deemed to include any subsidiary of the Company. Registration Rights The
Company and Santiago have entered into a registration rights agreement, dated as of April 28, 2017 (the “Registration
Rights Agreement”). Pursuant to the Registration Rights Agreement and subject to the terms and conditions therein,
within 30 days of April 28, 2017, the Company shall prepare and file with the Securities and Exchange Commission a “resale”
registration statement (the “Registration Statement”) providing for the resale of the number of shares of Common
Stock issuable to the Holder upon conversion of the Note (the “Registrable Securities”) pursuant to an offering
to be made on a continuous basis under Rule 415 promulgated under the Securities Act of 1933, as amended (the “Securities
Act”). The Company’s obligation as described in the preceding sentence is subject to limited exceptions specified
in the Registration Rights Agreement. The Company has agreed to use its reasonable best efforts to cause the Registration
Statement to be declared effective under the Securities Act and to keep the Registration Statement continuously effective under
the Securities Act until the earlier of (x) the date when all Registrable Securities covered by such Registration Statement have
been sold or (y) the date on which all Registrable Securities then held by Santiago, or which may be acquired by Santiago upon
conversion of the Note, may be sold without restriction pursuant to Rule 144 under the Securities Act. The Company has further
agreed, upon the written demand of Santiago, facilitate in the manner described in the Registration Rights Agreement a “takedown”
of Registrable Securities off of the Registration Statement. Subject
to limited exceptions, the Company will pay the registration expenses incident to the performance of or compliance with the Registration
Rights Agreement but will not be responsible for any underwriters’, brokers’ and dealers’ discounts and commissions,
transfer taxes or similar fees incurred by Santiago in connection with the sale of the Registrable Securities. The
Registration Rights Agreement contains customary cross-indemnification provisions, pursuant to which the Company is obligated to
indemnify Santiago in the event of material misstatements or omissions in the registration statement attributable to the Company,
and Santiago is obligated to indemnify the Company for material misstatements or omissions attributable to it. The
Registration Rights Agreement will terminate on the earlier (i) the first date on which no Registrable Securities are outstanding
or are issuable upon conversion of the Note; and (ii) the fifth anniversary of the effective date of the Registration Statement;
provided, however, that the parties’ rights and obligations under the indemnification provisions of the Registration Rights
Agreement shall continue in full force and effect in accordance with their respective terms. Collateral The
Company’s obligations under the Note are to be secured by the following collateral: (i) a pledge by the Company
of all of the issued and outstanding shares of Bluebell; (ii) a mortgage and security interest to be granted by N198GS Inc.
and Bluebell of their respective interests in a specified Gulfstream G-IV aircraft; and (iii) a security interest to be granted
by Bluebell in its rights under the trust agreement between Bluebell and N198GS Inc. Tempus Jets, Inc. transaction On May 10, 2017, Santiago acquired 2,032,994 shares of Common Stock from Benjamin Scott Terry, Director
and CEO of the Company, in partial satisfaction of a promissory note (the “Promissory Note”) pursuant
to which Tempus Jets, Inc., a Kansas corporation, was indebted to an affiliate of Santiago; such shares had been pledged to the
affiliate to secure payment of the Promissory Note. Board
of Directors Resignations The unconditional resignations of four
of the Company’s directors were automatically effected on Wednesday, April 26, 2017. As of such date, director and Company
CEO, Benjamin Scott Terry, has been the only sitting member of the Board. The circumstances relating to the foregoing events were
reported in the Company’s Form 8-K filed with the Commission on May 3, 2017, which is incorporated by reference herein. ITEM 6. EXHIBITS The following exhibits are filed as part of, or incorporated
by reference into, this Quarterly Report on Form 10-Q. 10% Senior Secured Convertible Note due April 28, 2018 in the principal amount of $6,200,000 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. Steven Bush Chief Financial Officer (Principal financial and accounting officer) 37
5.
INCOME
TAXES 11
6.
BASIC
AND DILUTED SHARES OUTSTANDING 12
7.
OTHER
RECEIVABLES
March 31,
December 31,
2017
2016
Earnings in excess of billings
$ 459
$ 459
Other receivable
660
660
Total
$ 1,119
$ 1,119
8.
OTHER
ASSETS
March 31,
December 31,
2017
2016
Pre-contract costs
$ 56,270
$ 49,799
Other prepaid expenses
46,367
49,072
Total
$ 102,637
$ 98,871
9.
RELATED
PARTY TRANSACTIONS 13
10.
PROPERTY
AND EQUIPMENT, NET
March 31,
December 31,
2017
2016
Office equipment
$ 135,897
$ 168,055
Furniture and fixtures
456
456
Leased Aircraft
6,015,505
6,015,505
Total
6,151,858
6,184,016
Accumulated depreciation
(301,520 )
(249,109 )
Property and equipment, net
$ 5,850,338
$ 5,934,907
11.
INTANGIBLES,
NET
March 31,
December 31,
2017
2016
Infinite-lived intangible assets:
FAA licenses
$ 50,000
$ 550,000
Finite-lived intangible assets:
STC costs
455,901
455,901
Accumulated amortization
-
-
455,901
455,901
Software
85,275
85,275
Accumulated amortization
(42,774 )
(36,337 )
42,501
43,938
Total intangible assets, net
$ 548,402
$ 1,054,839
Estimated
STC Amortization
2017
$
18,236
2018
45,590
2019
136,770
2020
255,305
Total
$
455,901
14
Software
Amortization
2017
$
21,988
2018
19,843
2019
670
Total
$
42,501
12.
ACCRUED
LIABILITES
March 31, 2017
December 31, 2016
Accrued employment costs
$ 255,411
$ 380,903
Aircraft maintenance reserves
74,349
37,050
Board fees
104,833
104,833
Other
79,770
389,528
Total
$ 514,363
$ 912,314
13.
COMMITMENTS
AND CONTINGENCIES 15
14.
FAIR
VALUE MEASUREMENTS
December 31,
Description
2016
(Level 1)
(Level 2)
(Level 3)
Liabilities:
IPO and Placement Warrant Liability
$ 78,750
$ 78,750
$ -
$ -
Series A Warrant Liability
23,435
-
23,435
-
Total Warrant Liability
$ 102,185
$ 78,750
$ 23,435
$ -
March 31,
Description
2017
(Level 1)
(Level 2)
(Level 3)
Liabilities:
IPO and Placement Warrant Liability
$ 7,875
$ 7,875
$ -
$ -
Series A Warrant Liability
3,510
-
3,510
-
Total Warrant Liability
$ 11,385
$ 7,875
$ 3,510
$ - 16
15.
WARRANTS 17 18
Security
Quantity
Strike Price
IPO & Placement Warrants
7,875,000
$ 11.50
Series A Warrants
3,187,500
$ 4.80
Series B Warrants
-
$ 5.00
16.
STOCK
BASED COMPENSATION
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
-
Options outstanding, March 31, 2017
2.05
Options exercisable, March 31, 2017
-
$ - 19
17.
STOCKHOLDERS’
EQUITY 20 21
18.
SUBSEQUENT EVENT 22 23
●
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. 24 25
Three months ended
Three months ended
March 31, 2017
March 31, 2016
Revenue
Revenue
Customer A
$ 1,059,450
24 %
$ 978,207
26 %
Customer B
1,325,467
30 %
1,248,790
33 %
Customer C
1,150,857
26 %
-
- %
Customer D
659,807
15 %
132,240
4 %
Customer E
-
- %
920,622
25 %
Other customers
191,258
5 %
469,164
12 %
$ 4,386,839
100 %
$ 3,749,023
100 % 26 27 28 29
Years
Computer software
3 30 31 32
(i) approve or consummate a transaction with any individual, corporation, partnership,
limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or
any agency or political subdivision thereof or any other entity that is directly or indirectly controlling or controlled by or
under direct or indirect common control with the Issuer; 33 34 35
Exhibit Number
Description
10.1
10.2
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 36
TEMPUS APPLIED SOLUTIONS HOLDINGS, INC.
Dated: May 22,
2017
By:
/s/ Steven Bush
Name:
Title: