The aggregate market value of the voting and
non-voting common equity held by non-affiliates as of June 30, 2021, the last business day of the registrant’s most recently completed
second fiscal quarter (based upon the closing sale price of the registrant’s common stock as of such date, as reported
by the NYSE American Exchange) was $ 13,217,260 . Shares of common stock held by the registrant’s officers and directors and
beneficial owners of 10% or more of the outstanding shares of the registrant’s common stock have been excluded from the calculation
of this amount because such persons may be deemed to be affiliates of the registrant; however, the treatment of these persons as affiliates
of the registrant for purposes of this calculation is not, and shall not be considered, a determination as to whether any such person
is an affiliate of the registrant for any other purpose.
All of the Company’s forward-looking statements
involve risks and uncertainties that could cause the Company’s actual results to differ materially from those projected or assumed
by such forward-looking statements. Among others, the factors that could cause such differences include: the ability to develop a new
business in the GameFi industry; acceptance by players of the Company’s games utilizing a “Play-to-Earn” model; the
ongoing effects on the airline industry and global economy of the COVID-19 pandemic or any other public health emergencies; the impact
on the industry from a terrorist attack involving air travel; the ability of the Company to raise debt or equity financing when needed
on acceptable terms and in desired amounts, or at all; any noncompliance by the Company’s lessees with respect to their obligations
under their respective leases, including payment obligations; any economic downturn or other financial crisis; any inability to compete
effectively with the Company’s better capitalized competitors; limited trading volume in the Company’s stock. In addition,
the Company operates in a competitive and evolving industry in which new risks emerge from time to time, and it is not possible for the
Company to predict all of the risks it may face, nor can it assess the impact of all factors on its business or the extent to which any
factor or combination of factors could cause actual results to differ from expectations. As a result of these and other potential risks
and uncertainties, the Company’s forward-looking statements should not be relied on or viewed as predictions of future events.
PART
I
Item
1. Business.
Business
of the Company
Through our emergence from bankruptcy on September
30, 2021, and new investors and management, we are a holding company located in Palo Alto, California, with two subsidiaries: Mega Metaverse
Corp., a California corporation (“Mega”) and JetFleet Holding Corp., a California corporation (“JHC”). On January
1, 2022, JetFleet Management Corp. (“JMC”), a wholly-owned subsidiary of JHC, was merged with and into JHC, with JHC being
the surviving entity. As part of the merger, JHC changed its name to JetFleet Management Corp. We intend to focus on the emerging GameFi
sector through Mega which was recently formed in October 2021. To a lesser extent, we will also continue to focus on third-party management
service contracts for aircraft operations through our majority owned subsidiary JHC, which was part of our legacy business.
Through Mega, we intend to focus on the GameFi
sector through our first NFT (non-fungible token) game “Mano,” which was released on March 25, 2022. Mano is a competitive
idle role-playing game (RPG) deploying the concept of GameFi in the innovative combination of NFTs and DeFi (decentralized finance) based
on blockchain technology, with a “Play-to-Earn” business model in which players may earn financial rewards while they play
in Mega’s metaverse universe “alSpace.”
Our mission is to enable users to play and earn
financial rewards in the metaverse through GameFi. While our proposed future games will be supported in our alSpace universe, Mega’s
key plans going forward include: (i) NFT games with Mano as our first game, as well as other games to launch; and (ii) a marketplace
where players and users can place their in-game NFT to sell or to trade for other digital assets. Mega’s proposed revenue model
includes: (a) service fees for in-game NFT upgrade and new NFT creation, and (b) profit share for NFT sold or traded at alSpace marketplace.
Mega will conduct all of its operations from our Palo Alto office in California, United States.
In addition, through our 74.83% ownership in JHC
as of December 31, 2021, we will continue to focus on third-party management service contracts for aircraft operations. We believe that
as passive investor interest in aircraft assets has increased, there has been increasing demand from aircraft investors for professional
third-party aircraft leasing and portfolio management. We intend to take advantage of our reputation, experience and expertise in this
aircraft management area. JHC conducts all of its operations from its office located at 1818 Gilbreth Rd., Suite 243, Burlingame, California,
United States.
We were also engaged in the business of investing
in used regional aircraft equipment and leasing the equipment to foreign and domestic regional air carriers. Previously, we also provided
leasing and finance services to regional airlines worldwide. In addition to leasing activities, we also sold aircraft from our operating
lease portfolio to third parties. During 2019, we were in default of a credit facility with one of our lenders due to the failure of
our largest customer, a European regional carrier. During 2020, the COVID-19 pandemic further impeded our ability to regain compliance
with this lender and, in addition, led to significant cash flow issues for many of our customers who were unable to timely meet their
obligations under their lease obligations. As a result of lessors being unable to pay their lease payment, this, in turn, adversely affect
our ability to make payment under our debt obligation leading us to seek bankruptcy protection on March 29, 2021. We no longer own any
aircraft, but JHC holds a finance lease receivable that is secured by an aircraft.
Bankruptcy
We
and our subsidiaries, JHC and JMC, (collectively “Debtors”), filed on March 29, 2021 a voluntary petition for bankruptcy
protection under Chapter 11 of the U.S. Bankruptcy Code. The filing was made in the U.S. Bankruptcy Court for the District of Delaware
(the “Bankruptcy Court”) Case No. 21-10636 (the “Chapter 11 Case”). We also filed motions with the Bankruptcy
Court seeking authorization to continue to operate our business as “debtor-in-possession” under the jurisdiction of the Bankruptcy
Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
On August 16, 2021, in the Bankruptcy Court,
the Debtors filed unexecuted drafts of its Plan Sponsor Agreement to be entered into between us, Yucheng Hu, TongTong Ma, Qiang Zhang,
Yanhua Li, Yiyi Huang, Hao Yang, Jing Li, Yeh Ching and Yu Wang, and identifying such individuals, collectively, as “Plan Sponsors”
(the “Plan Sponsor Agreement”), and related agreements and documents required thereunder (collectively, with the Plan Sponsor
Agreement, the “Plan Sponsor Documents”). The Plan Sponsor Documents were intended to cover the transactions contemplated
by an investment term sheet entered into with Yucheng Hu and are part of the Debtors’ plan of reorganization as reflected in the
Combined Disclosure Statement and Plan filed with the Bankruptcy Court as amended and supplemented from time to time (the “Plan”).
On August 31, 2021, the Bankruptcy Court entered an order, Docket No. 0296 (the “Confirmation Order”), confirming the Plan
as set forth in the Combined Plan Statement and Plan Supplement.
On
September 30, 2021 and pursuant to the Plan Sponsor Agreement, we entered into and consummated the transactions contemplated by a Securities
Purchase Agreement with the Plan Sponsor, and Yucheng Hu, in the capacity as the representative for the Plan Sponsor thereunder, pursuant
to which we issued and sold, and the Plan Sponsor purchased, 2,870,927 (14,354,635 post-split) shares of our common stock at $3.85 for
each share of common stock for an aggregate purchase price of approximately $11,053,069.
Also
on September 30, 2021 and pursuant to the Plan Sponsor Agreement, we entered into and consummated the transactions contemplated by a
Series A Preferred Stock Purchase Agreement (the “JHC Series A Agreement”) with JHC, pursuant to which JHC issued and sold,
and we purchased, 104,082 shares of Series A Preferred Stock, no par value, at $19.2156 per share of JHC Series A Preferred Stock, for
an aggregate purchase price of $2 million.
The
JHC Series A Preferred Stock is non-convertible, non-transferable, and has the following rights:
Divided
Rights. The JHC Series A Preferred Stock, in preference to the Common Stock of JHC (“JHC Common Stock”), shall be entitled
to receive quarterly dividends at a rate of 7.50% (the “Dividend Rate”) of the Series A Original Issue Price per annum per
share of JHC Series A Preferred Stock commencing in the first fiscal quarter following the first fiscal year for which JHC reports a
positive Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for the preceding 12 month period (the “Initial
Profitable Year”).
Liquidation
Preference. In the event of a liquidation event, the holders of JHC Series A Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of the proceeds of such liquidation event (the “Proceeds”) to the holders of the other
series of preferred stock or the JHC Common Stock, an amount per share equal to the Series A Original Issue Price, plus declared but
unpaid dividends on such share. The JHC Series A Preferred Stock has the following features:
Redemption.
JHC shall have the right to ratably redeem, in whole or in parts, any shares of JHC Series A Preferred Stock at the Redemption Price
(as defined below) upon fifteen (15) days prior written notice to the holders of JHC Series A Preferred Stock. In addition, at any time
following seven (7) years after the date that JHC first issues any shares of JHC Series A Preferred Stock, and within thirty (30) days
upon a written request from the holders of a majority of the outstanding shares of JHC Series A Preferred Stock, all outstanding shares
of JHC Series A Preferred Stock shall be redeemed (the date of such redemption, the “Redemption Date”) by JHC by the payment
from any source of funds legally available at the Redemption Price (defined below). The redemption price per share of Series A Preferred
Stock (“Redemption Price”) shall be equal to:
(i)
if redeemed prior to an Initial Profitable Year: (A) the Series A Original Issue Price, plus (B) any declared but unpaid dividends, plus
(C) an amount per quarter equal to the Series A Original Issue Price multiplied by the Dividend Rate and divided by four for any full
quarterly period for which dividends were not declared that falls within the period beginning on the date such share was issued by JHC
and ending on the Redemption Date; or
(ii)
if redeemed after an Initial Profitable Year: (A) the Series A Original Issue Price, plus (B) any declared but unpaid dividends, plus
(C) an amount per quarter equal to the Series A Original Issue Price multiplied by the Dividend Rate and divided by four for any full
quarterly period after the Initial Profitable Year for which dividends were not declared that falls within the period beginning on the
date such shares was issued by JHC and ending on the Redemption Date.
In addition, each share of JHC Series A Preferred
Stock shall be entitled to one (1) vote on any matter that is submitted to a vote or for the consent of the shareholders of JHC. The
JHC Series A Preferred Stock provides the Company with 74.83% voting control over JHC immediately following its issuance.
On March 18, 2022, we filed a Certificate of
Amendment to our Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, amending
Article I and changing our name from AeroCentury Corp. to Mega Matrix Corp., with an effective date of March 25, 2022 (the “Name
Change”). In connection with the Name Change, we changed our ticker symbol from “ACY” to “MTMT” on the
NYSE American, which became effective on March 28, 2022.
Change
In Control
As a condition to the closing of the Securities
Purchase Agreement and effective as of September 30, 2021, Michael G. Magnusson resigned as President and Chief Executive Officer; Harold
M. Lyons resigned as Chief Financial Officer, Treasurer, Senior Vice President, Finance and Secretary; and Michael G. Magnusson, Toni
M. Perazzo, Roy E. Hahn, Evan M. Wallach and David P. Wilson resigned as directors of the Company effective October 1, 2021.
Effective
as of October 1, 2021, Yucheng Hu, Florence Ng, Jianan Jiang, Qin Yao and Siyuan Zhu (the “Incoming Directors”) were appointed
to serve as members on our Board of Directors. The Incoming Directors were designated by the Plan Sponsor pursuant to the Plan Sponsor
Agreement to hold office until our next annual meeting. The Board of Directors also appointed Mr. Hu to serve as Chairman, President
and Chief Executive Officer; Ms. Ng to serve as Vice President of Operations; and Qin (Carol) Wang to serve as its Chief Financial Officer,
Secretary and Treasurer the Company.
Government
Regulation
Related
to our GameFi Business
Government
regulation of blockchain and digital assets is being actively considered by the United States federal government via a number of agencies
and regulatory bodies, as well as similar entities in other countries. State government regulations also may apply to our activities
and other activities in which we participate or may participate in the future. Other regulatory bodies are governmental or semi-governmental
and have shown an interest in regulating or investigating companies engaged in the blockchain or cryptocurrency business.
Digital
assets are assets issued and transferred using distributed ledger or blockchain technology. They are often referred to as crypto assets,
cryptocurrency, or digital tokens, among other terminology. Digital assets can be securities, currencies, properties, or commodities,
and depending on their characteristics, participants of digital assets must adhere to applicable laws and regulations. For example, the
SEC treats some digital assets as “securities,” the Commodity Futures Trading Commission (CFTC) treats some digital assets
as “commodities,” and the Internal Revenue Service treats some digital assets as “property.” State regulators
oversee digital assets through state money transfer laws, and the Department of the Treasury’s Financial Crimes Enforcement Network
(FinCEN) monitors digital assets for anti-money laundering purposes.
Businesses
that are engaged in the transmission and custody of digital assets that is not a security (“non-security digital assets”)
such as Bitcoin, including brokers and custodians, can be subject to U.S. Treasury Department regulations as money services businesses
as well as state money transmitter licensing requirements. Non-security digital assets are subject to anti-fraud regulations under federal
and state commodity laws, and digital asset derivative instruments are substantively regulated by the U.S. Commodity Futures Trading
Commission. Certain jurisdictions, including, among others, New York and a number of countries outside the United States, have developed
regulatory requirements specifically for digital assets and companies that transact in them.
In
addition, since transactions in non-security digital assets such as Bitcoin provide a reasonable degree of pseudo anonymity, they are
susceptible to misuse for criminal activities, such as money laundering. This misuse, or the perception of such misuse (even if untrue),
could lead to greater regulatory oversight of non-security digital asset platforms, and there is the possibility that law enforcement
agencies could close such platforms or other related infrastructure with little or no notice and prevent users from accessing or retrieving
non-security digital assets via such platforms or infrastructure. For example, in her January 2021 nomination hearing before the Senate
Finance Committee, Treasury Secretary Janet Yellen noted that cryptocurrencies have the potential to improve the efficiency of the financial
system but that they can be used to finance terrorism, facilitate money laundering, and support malign activities that threaten U.S.
national security interests and the integrity of the U.S. and international financial systems. Accordingly, Secretary Yellen expressed
her view that federal regulators needed to look closely at how to encourage the use of cryptocurrencies for legitimate activities while
curtailing their use for malign and illegal activities. Furthermore, in December 2020, FinCEN proposed a new set of rules for cryptocurrency-based
exchanges aimed at reducing the use of cryptocurrencies for money laundering. These proposed rules would require filing reports with
FinCEN regarding cryptocurrency transactions in excess of $10,000 and also impose record-keeping requirements for cryptocurrency transactions
in excess of $3,000 involving users who manage their own private keys. In January 2021, the Biden Administration issued a memorandum
freezing federal rulemaking, including these proposed FinCEN rules, to provide additional time for the Biden Administration to review
the rulemaking that had been proposed by the Trump Administration. As a result, it remains unclear whether these proposed rules will
take effect.
Digital assets that meet the definition of a
“security” under the federal securities laws (“digital assets security”) are regulated by federal securities
regulations such as the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment
Advisers act of 1940.
In addition, businesses that provides a trading
platform or exchanges for digital assets that are deemed securities may be required to register with the SEC as a national securities
exchange unless an exemption is available. However, if such platform offers trading in digital assets that are not securities, it may
have to register as a money-transmission service (MTS) instead of a SEC-regulated national securities exchange. MTSs are money transfer
or payment operations that are mainly subject to state regulations, rather than federal regulations but may have to register with FinCEN
and face certain reporting requirements.
Currently the SEC has not provided interpretive
guidance on whether a NFT is a security or not. Currently the definition of “security” under the Securities Act does not
explicitly include digital assets or NFTs; however, in enforcement actions the SEC has argued offerings of digital assets are investment
contracts under the definition of “securities.” If an NFT is deemed a security, then it would be subject to SEC rules and
regulations, and the platform facilitating the sale and resale of the NFT may have to register with the SEC as a national securities
exchange unless an exemption is available.
Regulations may substantially change in the future
and it is presently not possible to know how regulations will apply to our businesses, or when they will be effective. As the regulatory
and legal environment evolves, we may become subject to new laws, further regulation by the SEC and other agencies, which may affect
Gamefi business and other activities. For instance, various bills have also been proposed in Congress related to our business that may
be adopted and have an impact on us. For additional discussion regarding our belief about the potential risks existing and future regulation
pose to our business, see the Section entitled “Risk Factors” herein.
Related
to our Aircraft Management Service
JHC
is subject to compliance with federal, state and local government regulations. As a company engaged in international trade, these regulations
include the Foreign Corrupt Practices Act, and various export control, money laundering, and anti-terrorism laws and regulations promulgated
by the U.S. Department of Commerce and the Department of Treasury.
Intellectual
Property
The
protection of our technology and intellectual property is an important aspect of our business. We currently rely upon a combination of
trademarks, trade secrets, copyrights, nondisclosure contractual commitments, and other legal rights to establish and protect our intellectual
property.
As
of December 31, 2021, we held one (1) registered trademark and four (4) pending trademark applications in the United States. We will
evaluate our development efforts to assess the existence and patentability of new intellectual property. To the extent that it is feasible,
we will file new patent applications with respect to our technology and trademark applications with respect to our brands.
Additional
Information
We are a Delaware corporation incorporated in
1997. Our headquarters are located at 3000 El Camino Real, Bldg. 4, Suite 200, Palo Alto, CA. Our main telephone number is (650) 340-1888.
Our website is located at: http://www.mtmtgroup.com.
Item
1A. Risk Factors.
An investment in our common stock involves risks.
Prior to making a decision about investing in our common stock, you should consider carefully the risks together with all of the other
information contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and in our subsequent filings with
the SEC. Each of the referenced risks and uncertainties could adversely affect our business, operating results and financial condition,
as well as adversely affect the value of an investment in our securities. Additional risks not known to us or that we believe are immaterial
may also adversely affect our business, operating results and financial condition and the value of an investment in our securities.
Risks
Related to our Business
The
GameFi industry is new and developing and there is no assurance that our games currently under development will be accepted by players.
The development of the GameFi industry is new
and continues to rapidly evolve. We intend to develop games with a “Play-to-Earn” model that allows players to earn financial
rewards through NFT while they play in Mega’s metaverse universe “alSpace”. Our first NFT game was released on March
25, 2022. However, no assurance can be made that Mano will generate enough interest in order for players to use, trade, and sell their
Mano NFTs.
The
creation of NFTs for our games is dependent on our ability to develop an acceptable blockchain.
Our
ability to create NFTs that can be minted, accepted and transferred is dependent on our ability to develop or engage a third party to
develop an accepted and secured blockchain. Failure to develop or engage a third party to develop a secured and reliable blockchain,
will adversely affect our ability to create a marketplace where players and users trade and sell their NFTs.
Our
alSpace universe is still currently under development and no assurance can be given that our alSpace platform will be accepted by others
or generate sufficient interest.
Our
alSpace metaverse platform is still currently being developed and undergoing upgrades. It is our intent that the alSpace universe will
(i) support our NFT games to launch; (ii) provide an engine and studio where creators can create their own game and use alSpace; and
(iii) create a marketplace where players and users place their in-game NFT other NFT to sell and trade. Failure to develop a robust alSpace
metaverse universe will adversely affect our business objectives.
Our
business will be intensely competitive. We may not deliver successful and engaging games, or players and consumers may prefer our competitors’
products over our own.
Although
the development of the GameFi industry is new, we anticipate that competition in our business will be intense. Many new products will
be introduced, but we anticipate that only a relatively small number of products will drive significant engagement and account for a
significant portion of total revenue. It is anticipated that our competitors will range from mature well-funded companies to emerging
start-ups. If we do not develop consistent high-quality, well-received and engaging products that are of interest to players, the lack
of interest will adversely affect our business objectives.
There
can be no assurance that the market for NFTs will be developed and/or sustained, which may materially adversely affect the value of NFTs.
The market for digital assets, including, without
limitation, NFTs, whether related to in-game assets or otherwise, is still nascent. Accordingly, the market for NFTs may not develop,
or if a market does develop, such value be maintained. If a market does not develop for the NFTs, it may be difficult or impossible for
us to maintain a marketplace where players and users can trade and eventually sell their NFTs. Failure to develop a marketplace for our
NFTs will adversely affect our business objectives.
Our business will suffer to some extent if
we are unable to continue to develop successful games for alSpace, successfully monetize alSpace games, or successfully forecast alSpace
launches and/or monetization.
Our
business depends in part on developing and publishing alSpace games including Mano for live online players for earning NFTs, and that
such consumers will download and spend time playing. We have devoted and we expect to continue to devote substantial resources to development,
analytics and marketing of our alSpace games, however we cannot guarantee that we will continue to develop games that appeal to players.
The success of our games depend, in part, on unpredictable and volatile factors beyond our control including consumer preferences, competing
games, new metaverse platforms and the availability of other entertainment experiences. If our games are not launched on time or do not
meet consumer expectations, or if they are not brought to market in a timely and effective manner, our ability to grow revenue and our
financial performance will be negatively affected.
In
addition to the market factors noted above, our ability to successfully develop games for alSpace and our ability to achieve commercial
success will depend on our ability to:
| ● | effectively
market the alSpace games to existing gamers and new gamers without excess costs; |
| ● | effectively
monetize the games; |
| ● | adapt
to changing player preferences; |
| ● | expand
and enhance the alSpace games after their initial releases; |
| ● | attract,
retain and motivate talented game designers, product managers and engineers who have experience
developing games for metaverse platforms; |
| ● | minimize
launch delays and cost overruns on the development of our alSpace games; |
| ● | maintain
quality alSpace game experience; |
| ● | compete
successfully against a large and growing number of existing market participants; |
| ● | minimize
and quickly resolve bugs or outages; and |
| ● | acquire
and successfully integrate high quality metaverse assets, personnel or companies. |
These
and other uncertainties make it difficult to know whether we will succeed in continuing to develop successful alSpace games and launch
these games in accordance with our financial plan. If we do not succeed in doing so, our business model for this particular part will
suffer.
We
have a relatively new history in developing and launching metaverse games. As a result, we may have difficulty predicting the development
schedule of our new games and forecasting bookings for a game. If launches are delayed and we are unable to monetize the alSpace game
in the manner that we forecast, our ability to grow revenue and our financial performance will be negatively impacted.
One
primary strategy to grow our business is to develop NFTs and games for alSpace. If we are not able to attract players to our GameFi platform,
our financial position and operating results may suffer.
The
technology underlying blockchain technology is subject to a number of industry-wide challenges and risks relating to consumer acceptance
of blockchain technology. The slowing or stopping of the development or acceptance of blockchain networks and blockchain assets would
have a material adverse effect on the successful adoption of the NFTs.
The
growth of the blockchain industry is subject to a high degree of uncertainty regarding consumer adoption and long-term development. The
factors affecting the further development of the blockchain and NFT industry include, without limitation:
| ● | worldwide
growth in the adoption and use of NFTs and other blockchain technologies; |
| ● | government
and quasi-government regulation of NFTs and their use, or restrictions on or regulation of
access to and operation of blockchain networks or similar systems; |
| ● | the
maintenance and development of the open-source software protocol of blockchain networks; |
| ● | changes
in consumer demographics and public tastes and preferences; |
| ● | the
availability and popularity of other forms or methods of buying and selling goods and services,
or trading assets, including new means of using government-backed currencies or existing
networks; |
| ● | the
extent to which current interest in NFTs represents a speculative “bubble”; |
| ● | general
economic conditions in the United States and the world; |
| ● | the
regulatory environment relating to NFTs and blockchains; and |
| ● | a
decline in the popularity or acceptance of NFTs or other digital assets. |
The
NFT industry as a whole has been characterized by rapid changes and innovations and is constantly evolving. Although it has experienced
significant growth in recent years, the slowing or stopping of the development, general acceptance and adoption and usage of blockchain
networks and blockchain assets may deter or delay the acceptance and adoption of NFTs.
The
slowing or stopping of the development, general acceptance and adoption and usage of blockchain networks or blockchain assets may adversely
impact the value of NFTs. The value of specific NFTs relies on the development, general acceptance and adoption and usage of the applicable
blockchain network which depends on ability to readily access the applicable network.
The
prices of digital assets are extremely volatile, and such volatility may have a material adverse effect on the value of alSpace NFTs.
Decreases
in the price of even a single other digital asset may cause volatility in the entire digital asset industry and may affect the value
of other digital assets, including any alSpace NFTs. For example, a security breach or any other incident or set of circumstances
that affects purchaser or user confidence in a well-known digital asset may affect the industry as a whole and may also cause the price
of other digital assets, including NFTs, to fluctuate.
The
value of in-game asset NFTs relies in part on the development, general acceptance and adoption and usage of blockchain assets, rather
than solely on the in-game asset itself.
In-game
asset NFTs are a means to establish proof of ownership of in-game assets through cryptographic key pairs, the public key of the creator(s)
who created the in-game asset and the private key of the holder representing a verified instance (whether unique or part of a series)
of that in-game asset. The purchase of an in-game asset NFT gives the holder the right to hold, transfer and/or sell the NFT. The
NFT does not itself include any physical manifestation of the in-game asset. The value of in-game asset NFTs is derived from the cryptographic
record of ownership, rather than solely on the in-game asset itself (alBots and other in-game items); an in-game asset originated as
an NFT (i.e., the actual file or files constituting the in-game asset of which ownership is represented by an NFT) may have no value
absent the NFT, depending on what other rights were conveyed with the NFT, for example a copyright interest that could be transferred
separate from the NFT. Thus, the value of the in-game asset NFT relies in part on the continued development, acceptance, adoption and
usage of the applicable blockchain.
Expansion of our operations into new products,
services and technologies, including content categories, is inherently risky and may subject us to additional business, legal, financial
and competitive risks.
Historically, our operations have been focused
on third-party management service contracts for aircraft operations. Further expansion of our operations and our marketplace into additional
products and services, such as NFTs involves numerous risks and challenges, including potential new competition, increased capital requirements
and increased marketing spent to achieve customer awareness of these new products and services. Growth into additional content, product
and service areas may require changes to our existing business model and cost structure and modifications to our infrastructure and may
expose us to new regulatory and legal risks, any of which may require expertise in areas in which we have little or no experience. There
is no guarantee that we will be able to generate sufficient revenue from sales of such products and services to offset the costs of developing,
acquiring, managing and monetizing such products and services and our business may be adversely affected.
If we cannot continue to innovate technologically
or develop, market and sell new products and services, or enhance existing technology and products and services to meet customer requirements,
our ability to grow our revenue could be impaired.
Our growth largely depends on our ability to
innovate and add value to our existing creative platform and to provide our customers and contributors with a scalable, high-performing
technology infrastructure that can efficiently and reliably handle increased customer and contributor usage globally, as well as the
deployment of new features. For example, NFTs require additional capital and resources. Without improvements to our technology and infrastructure,
our operations might suffer from unanticipated system disruptions, slow performance or unreliable service levels, any of which could
negatively affect our reputation and ability to attract and retain customers and contributors. We are currently making, and plan to continue
making, significant investments to maintain and enhance the technology and infrastructure and to evolve our information processes and
computer systems in order to run our business more efficiently and remain competitive. We may not achieve the anticipated benefits, significant
growth or increased market share from these investments for several years, if at all. If we are unable to manage our investments
successfully or in a cost-efficient manner, our business and results of operations may be adversely affected.
The value of NFT is uncertain and may subject
us to unforeseeable risks.
We create and support NFTs. NFTs are unique,
one-of-a-kind digital assets made possible by certain digital asset network protocols. Because of their non-fungible nature, NFTs introduce
digital scarcity and have become popular as online “collectibles,” similar to physical rare collectible items, such as trading
cards or art. Like real world collectibles, the value of NFTs may be prone to “boom and bust” cycles as popularity increases
and subsequently subsides. If any of these bust cycles were to occur, it could adversely affect the value of certain of our future strategies.
In addition, because NFTs generally rely on the same types of underlying technologies as digital assets, most risks applicable to digital
assets are also applicable to NFTs and hence our creation of NFTs will be subject to general digital assets risks as described elsewhere
in these risk factors.
A particular digital asset’s status
as a “security” in any relevant jurisdiction is subject to a high degree of uncertainty and depending upon the activities
undertaken by our customers utilizing our products and services, we and our customers may be subject to regulatory scrutiny, investigations,
fines, and other penalties, which may adversely affect our business, operating results, and financial condition.
The SEC and its staff have taken the position
that certain digital assets fall within the definition of a “security” under the U.S. federal securities laws. The legal
test for determining whether any given digital asset is a security is a highly complex, fact-driven analysis that evolves over time,
and the outcome is difficult to predict. The SEC generally does not provide advance guidance or confirmation on the status of any particular
asset as a security. Furthermore, the SEC’s views in this area have evolved over time and it is difficult to predict the direction
or timing of any continuing evolution. With respect to various digital assets, there is currently no certainty under the applicable legal
test that such assets are not securities, notwithstanding the conclusions we may draw based on our risk-based assessment regarding the
likelihood that a particular asset could be deemed a “security” under applicable laws.
The classification of a digital asset as a security
under applicable law has wide-ranging implications for the regulatory obligations that flow from the offer, sale and trading of such
assets. For example, a digital asset that is a security in the United States may generally only be offered or sold in the United States
pursuant to a registration statement filed with the SEC or in an offering that qualifies for an exemption from registration. Persons
that effect transactions in assets that are securities in the United States may be subject to registration with the SEC as a “broker”
or “dealer.” Platforms that bring together purchasers and sellers to trade digital assets that are securities in the United
States are generally subject to registration as national securities exchanges, or must qualify for an exemption, such as by being operated
by a registered broker-dealer as an alternative trading system, or ATS, in compliance with rules for ATSs. Persons facilitating clearing
and settlement of securities may be subject to registration with the SEC as a clearing agency. Foreign jurisdictions may have similar
licensing, registration, and qualification requirements.
If the SEC, foreign regulatory authority, or
a court were to determine that a supported digital asset offered, sold, or traded by one of our customers on a platform provided by us
is a security, our customer would not be able to offer such asset for trading until it was able to do so in a compliant manner, which
would require significant expenditures by the customer. In addition, we or our customer could be subject to judicial or administrative
sanctions for failing to offer or sell the digital asset in compliance with the registration requirements, or for acting as a broker,
dealer, or national securities exchange without appropriate registration. Such an action could result in injunctions, cease and desist
orders, as well as civil monetary penalties, fines, disgorgement, criminal liability, and reputational harm which could negatively impact
our business, operating results, and financial condition.
Risks Related to our Company
Our filing of bankruptcy may adversely affect
our business and relationships.
On August 31, 2021, the Bankruptcy Court entered
its Findings of Fact, Conclusions of Law and Order Approving and Confirming the Combined Disclosure Statement and Joint Chapter 11 Plan
of AeroCentury Corp., and its Affiliated Debtors. The Effective Date of the Plan occurred on September 30, 2021. Each condition precedent to
consummation of the Plan has been satisfied and/or waived.
As a result of our bankruptcy filing:
|
● |
suppliers,
vendors or other contract counterparties may require additional financial assurances or enhanced performance from us; |
|
● |
our ability
to compete for new business may be adversely affected; |
|
● |
our ability
to attract, motivate and retain key executives and employees may be adversely affected; |
|
● |
our employees
may be distracted from performance of their duties or more easily attracted to other employment opportunities; and |
|
● |
we may
have difficulty obtaining the capital we need to operate and grow our business. |
The occurrence of one or more of these events
could have a material adverse effect on our business, financial condition, results of operations and reputation.
Upon our emergence from Chapter 11, the composition
of our stockholder base has changed significantly.
As a result of the concentration of our equity
ownership, our future strategy and plans may differ materially from those in the past. Upon our emergence from Chapter 11, the Plan Sponsors
collectively held approximately 65.0% of our common stock, while holders of our legacy equity interests held approximately 35.0% of our
common stock. Therefore, the Plan Sponsors have significant control on the outcome of matters submitted to a vote of stockholders, including,
but not limited to, electing directors and approving corporate transactions. As a result, our future strategy and plans may differ materially
from those of the past. Circumstances may occur in which the interests of the Plan Sponsors could be in conflict with the interests of
other stockholders, and the Plan Sponsors would have substantial influence to cause us to take actions that align with their interests.
Should conflicts arise, there can be no assurance that the Plan Sponsors would act in the best interests of other stockholders or that
any conflicts of interest would be resolved in a manner favorable to our other stockholders.
The composition of our board of directors has changed significantly.
Pursuant to the Plan, the composition of our
board of directors changed significantly. Upon our emergence from Chapter 11, our board of directors consisted of five directors, none
of whom had previously served on our board of directors. The new directors have different backgrounds, experiences and perspectives from
those who previously served on our board of directors and thus may have different views on the issues that will determine our future.
There can be no assurance that our new board of directors will pursue, or will pursue in the same manner, our previous strategy and business
plans.
Certain information contained in our historical
financial statements are not comparable to the information contained in our financial statements after the adoption of fresh start accounting.
Upon our emergence from Chapter 11, we adopted
fresh start accounting in accordance with ASC Topic 852 and became a new entity for financial reporting purposes. As a result, we revalued
our assets and liabilities based on our estimate of our enterprise value and the fair value of each of our assets and liabilities. These
estimates, projections and enterprise valuation were prepared solely for the purpose of the bankruptcy proceedings and should not be
relied upon by investors for any other purpose. At the time they were prepared, the determination of these values reflected numerous
estimates and assumptions, and the fair values recorded based on these estimates may not be fully realized in periods subsequent to our
emergence from Chapter 11.
The consolidated financial statements after our
emergence from bankruptcy will not be comparable to the consolidated financial statements on or before that date. This will make it difficult
for stockholders to assess our performance in relation to prior periods.
We have a limited operating history in our
post-bankruptcy new focus business, so there is a limited track record on which to judge our business prospects and management.
We have limited operating history in GameFi,
NFT and metaverse upon which to base an evaluation of our business and prospects. You must consider the risks and difficulties we face
as a small operating company with limited operating history. Further, our additional game development for metaverse games is a new venture,
to which we have no experience and will rely upon our third party developers to develop such a game.
We may need to raise additional capital by
issuing additional securities which could hurt the market for our securities or be on terms more favorable than those of our current
shareholders.
We will need to, or desire to, raise substantial
additional capital in the future if this funding is not fully carried out. Our future capital requirements will depend on the costs of
establishing or acquiring sales, marketing, and distribution capabilities for our services inducing sales of AlBots, the gaming portion
of the company, and operations and other potential unforeseen circumstances.
Our business depends on the continuing efforts
of our management. If it loses their services, our business may be severely disrupted.
Our business operations depend on the efforts
of our new management, particularly the executive officers named in this document. If one or more of our management were unable or unwilling
to continue their employment with us, it might not be able to replace them in a timely manner, or at all. We may incur additional expenses
to recruit and retain qualified replacements. Our business may be severely disrupted, and our financial condition and results of operations
may be materially and adversely affected. In addition, our management may join a competitor or form a competing company. As a result,
our business may be negatively affected due to the loss of one or more members of our management.
We may not be able to prevent or timely detect
cyber security breaches and may be subject to data, security and/or system breaches which could adversely affect our business operations
and financial conditions.
We rely on information
technology networks and systems, including the use of third-party communications systems over the Internet, to process, transmit and
store electronic information, and to manage or support our business activities. These information technology networks and systems may
be subject to security breaches, hacking, phishing, or spoofing attempts by others to gain unauthorized access to our business information
and financial accounts. A cyberattack, unauthorized intrusion, or theft of personal, financial or sensitive business information could
have a material adverse effect of on our business operations or our clients’ information, and could harm our operations, reputation
and financial situation. In addition, due to an increase in the types of cyberattacks, our employees could be victim to such scams designed
to trick victims into transferring sensitive company data or funds, that could compromise and/or disrupt our business operations.
We were a victim of
a business email compromise scam (BEC) in December 2021. BEC scams involve using social engineering to cause employees to wire funds
to the perpetrators in the mistaken belief that the requests were made by a company executive or established vendor. As a result of the
BEC scam, we have enhanced BEC awareness within our organization, established additional controls to help detect BEC scams when they
occur, and require additional confirmations for large money transactions. In addition, we seek to detect and investigate all cybersecurity
incidents and to prevent their recurrence, but in some cases, we might be unaware of an incident or its magnitude, duration, and effects.
While we take every effort to train our employees to be cognizant of these types of attacks and to take appropriate precautions, and
have taken actions and implemented controls to protect our systems and information, the level of technological sophistication being used
by attackers has increased in recent years, and may be insufficient to protect our systems or information. Any successful cyberattack
against us could lead to the loss of significant company funds or result in in potential liability, including litigation or other legal
actions against us, or the imposition of penalties, which could cause us to incur significant remedial costs. Further, we cannot ensure
that our efforts and measures taken will be sufficient to prevent or mitigate any damage caused by a cybersecurity incident, and our
networks and systems may be vulnerable to security breaches, hacking, phishing, spoofing, BEC, employee error or manipulation, or other
adverse events.
Due to the evolving
nature and increased sophistication of these cybersecurity threats, the potential impact of any future incident cannot be predicted with
certainty; however, any such incidents could have a material adverse effect on our results of operations and financial condition, especially
if we fail to maintain sufficient insurance coverage to cover liabilities incurred or are unable to recover any funds lost in data, security
and/or system breaches, and could result in a material adverse effect on our business and results of operations.
As of December 31, 2021, our internal control
over financial reporting was ineffective, and if we continue to fail to improve such controls and procedures, investors could lose confidence
in our financial and other reports, the price of our common stock may decline, and we may be subject to increased risks and liabilities.
As a public company, we are subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and the Sarbanes-Oxley Act of 2002. The
Exchange Act requires, among other things, that we file annual reports with respect to our business and financial condition. Section
404 of the Sarbanes-Oxley Act requires, among other things, that we include a report of our management on our internal control over financial
reporting. We are also required to include certifications of our management regarding the effectiveness of our disclosure controls and
procedures. We previously identified a material weakness in our internal control over financial reporting relating to our tax review
control for complex transactions. We are in the process of enhancing our tax review control related to unusual transactions that we may
encounter, but that control has not operated for a sufficient time to determine if the control was effective as of December 31, 2021.
If we cannot effectively maintain our controls and procedures, we could suffer material misstatements in our financial statements and
other information we report which would likely cause investors to lose confidence. This lack of confidence could lead to a decline in
the trading price of our common stock.
Compliance with the Sarbanes-Oxley Act of
2002 will require substantial financial and management resources and may increase the time and costs of completing an acquisition.
Section 404 of the Sarbanes-Oxley Act of 2002
requires that we evaluate and report on our system of internal controls and may require us to have such system audited by an independent
registered public accounting firm. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny,
civil or criminal penalties and/or shareholder litigation. Any inability to provide reliable financial reports could harm our business.
Furthermore, any failure to implement required new or improved controls, or difficulties encountered in the implementation of adequate
controls over our financial processes and reporting in the future, could harm our operating results or cause us to fail to meet our reporting
obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could
have a negative effect on the trading price of our securities.
The trading prices of our common stock could
be volatile, which could result in substantial losses to our shareholders and investors.
The trading prices of our common stock could
be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors,
like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other similarly
situated companies that have listed their securities in the U.S. in recent years. The securities of some of these companies have experienced
significant volatility including, in some cases, substantial price declines in the trading prices of their securities. In addition, securities
markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance,
such as the large decline in share prices in the United States and other jurisdictions.
In addition to market and industry factors, the
price and trading volume for our common stock may be highly volatile for factors specific to our own operations including the following:
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variations
in our revenues, earnings and cash flow; |
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●
|
market conditions
in the GameFi and NFT services sectors or the economy as a whole;
|
| ● | announcements
of new product and service offerings, investments, acquisitions, strategic partnerships,
joint ventures, or capital commitments by us or our competitors; |
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changes
in the performance or market valuation of our company or our competitors; |
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changes
in financial estimates by securities analysts; |
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changes
in the number of our users and customers; |
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fluctuations
in our operating metrics; |
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failures
on our part to realize monetization opportunities as expected; |
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additions
or departures of our key management and personnel; |
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detrimental
negative publicity about us, our competitors or our industry; |
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market
conditions or regulatory developments affecting us or our industry; and |
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potential
litigations or regulatory investigations. |
Any of these factors may result in large and
sudden changes in the trading volume and the price at which our common stock will trade. In the past, shareholders of a public company
often brought securities class action suits against the listed company following periods of instability in the market price of that company’s
securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and
other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses
to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise
capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which
could have a material adverse effect on our financial condition and results of operations.
If our common stock becomes subject to the
SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions, and trading activity in
our securities may be adversely affected.
If at any time we have net tangible assets of
$5,000,001 or less and our common stock has a market price per share of less than $5.00, transactions in our common stock may be subject
to the “penny stock” rules promulgated under the Exchange Act. Under these rules, broker-dealers who recommend such securities
to persons other than institutional accredited investors must:
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make a
special written suitability determination for the purchaser; |
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receive
the purchaser’s written agreement to the transaction prior to sale; |
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provide
the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks”
and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and |
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obtain
a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure
document before a transaction in a “penny stock” can be completed. |
If our common stock becomes subject to these
rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely
affected. As a result, the market price of our common stock may be depressed, and you may find it more difficult to sell our common stock.
An active trading market for our common stock
may not develop, and you may not be able to easily sell your common stock.
An active trading market for shares of our common
stock following our emergence from bankruptcy may never develop or be sustained. If an active trading market does not develop, you may
have difficulty selling your shares of common stock or at all. An inactive market may also impair our ability to raise capital by selling
our common stock, and it may impair our ability to attract and motivate our employees through equity incentive awards and our ability
to acquire other companies by using our common stock as consideration.
If we do not continue to satisfy the NYSE
American continued listing requirements, our common stock could be delisted.
The listing of our common stock on NYSE American
is contingent on our compliance with the NYSE American’s conditions for continued listing.
On September 11, 2020, we received a deficiency
letter from NYSE American notifying us of our non-compliance with NYSE American’s stockholders’ equity listing standards
as set forth in Section 1003(a)(i) - (iii) of the NYSE American Company Guide. Subsequently, we submitted a plan to the NYSE American
to bring us into compliance with such listing standards within 18 months of receipt of the deficiency letter. On November 25, 2020, we
received a letter from the NYSE American notifying us of its acceptance of our plan and our continuing listing pursuant to an extension
with a target completion date of March 11, 2022.
As a result of management’s efforts, on
March 11, 2022, the NYSE American informed the Company that it has has regained compliance with all of the NYSE American continued listing
standards set forth in Part 10 of the Company Guide.
Should we fail to meet the NYSE American’s
continuing listing requirements, we may be subject to delisting by the NYSE America. In the event our common stock is no longer listed
for trading on the NYSE American, our trading volume and share price may decrease and we may experience difficulties in raising capital
which could materially affect our operations and financial results. Further, delisting from the NYSE American could also have other negative
effects, including potential loss of confidence by partners, lenders, suppliers and employees. Finally, delisting could make it harder
for us to raise capital and sell securities.
Sales of a significant number of our common
stock in the public market, or the perception that such sales could occur, could depress the market price of our common stock.
In connection with a private placement of 2,870,927
(14,354,635 post-split) shares of common stock that closed on September 30, 2021, we have filed a registration statement allowing the
holders thereof to resell the common stock. The sales of those shares of common stock in the public market could depress the market price
of our common stock and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect
that future sales of our common stock would have on the market price of our common stock.
Item 1B. Unresolved
Staff Comments.
None.
Item 2. Properties.
As of December 31, 2021, the Company did not
own any real property, plant or materially important physical properties. The Company leases its principal executive office space at
3000 El Camino Real, Building 4, Suite 200 Palo Alto, California 94306 under a lease agreement that expires on June 30, 2022. JHC
conducts all of its operations from its office located at 1818 Gilbreth Rd., Suite 243, Burlingame, California, United States under a
lease agreement that expires on November 30, 2022.
Item 3. Legal
Proceedings.
The Company from time to time engages in ordinary
course litigation incidental to the business, typically relating to lease collection matters against defaulting lessees and mechanic’s
lien claims by vendors hired by lessees. Although the Company cannot predict the impact or outcome of any of these proceedings, including,
among other things, the amount or timing of any liabilities or other costs it may incur, none of the pending legal proceedings to which
the Company is a party or any of its property is subject is anticipated to have a material effect on the Company’s business, financial
condition or results of operations.
Item 4. Mine
Safety Disclosures.
Not applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(US
Dollar, except for share data and per share data, unless otherwise stated)
| 1. | ORGANIZATION
AND PRINCIPAL ACTIVITIES |
Mega Matrix Corp. (formerly “AeroCentury
Corp.”) is a Delaware corporation incorporated in 1997. All references to the “Company,” or “AeroCentury”
refers to AeroCentury Corp. together with its consolidated subsidiaries prior to March 25, 2022, and renamed “Mega Matrix Corp.”
commencing on March 25, 2022, and, except where expressly noted otherwise or the context otherwise requires, its consolidated subsidiaries.
In August 2016, the Company formed two wholly-owned
subsidiaries, ACY 19002 Limited (“ACY 19002”) and ACY 19003 Limited (“ACY 19003”) for the purpose of acquiring
aircraft using a combination of cash and third-party financing (“UK LLC SPE Financing” or “special-purpose financing”)
separate from the Company’s credit facility (the “MUFG Credit Facility”). The UK LLC SPE Financing was repaid in full
in February 2019 as part of a refinancing involving new non-recourse term loans totaling approximately $44.3 million (“Nord Loans”)
made to ACY 19002, ACY 19003, and two other newly formed special-purpose subsidiaries of the Company, ACY SN 15129 LLC (“ACY 15129”)
and ACY E-175 LLC (“ACY E-175”), which were formed for the purpose of refinancing four of the Company’s aircraft using
the Nord Loans. The Company sold its membership interest in ACY E-175 in March 2021.
On October 20, 2021, the Company setup Mega Metaverse
Corp. (“Mega”), a wholly owned subsidiary incorporated in California. In December 2021, the Company launched its GameFi business
in the metaverse ecosystem through Mega, and released its first NFT game “Mano” in late March of 2022. Mano is a competitive
idle role-playing game (RPG) deploying the concept of GameFi in the innovative combination of NFTs (non-fungible token) and DeFi (decentralized
finance) based on blockchain technology, with a “Play-to-earn” model that the players can earn while they play in Mega’s
metaverse universe “alSpace”. Our alSpace metaverse platform is still currently being developed and undergoing upgrades.
It is our intent that the alSpace universe will (i) support our NFT games to launch; (ii) provide an engine and studio where creators
can create their own game and use alSpace; and (iii) create a marketplace where players and users place their in-game NFT other NFT to
sell and trade. Failure to develop a robust alSpace metaverse universe will adversely affect our business objectives.
On December 23, 2021, the Company filed with
the Secretary of State of the State of Delaware a Certificate of Amendment to the Certificate of Incorporation to (i) implement a 5-for-1
forward stock split of its issued and outstanding shares of common stock (the “Stock Split”), and (ii) to increase the number
of authorized shares of common stock of the Company from 13,000,000 to 40,000,000, effective December 30, 2021.
On March 25, 2021, the Company changed its name
from “AeroCentury Corp.” to “Mega Matrix Corp.” (“Name Change”) to better reflect its expansion into
Metaverse and GameFi business. In connection with the Name Change, the Company changed its ticker symbol from “ACY” to “MTMT”
on the NYSE American, effective on March 28, 2022.
Chapter 11 Bankruptcy Emergence
On March 29, 2021 (the “Petition Date”),
the Company and certain of its subsidiaries in the U.S. (collectively, the “Debtors” and the “Debtors-in-Possession”)
filed voluntary petitions for relief (collectively, the “Petitions”) under Chapter 11 of Title 11 (“Chapter 11”)
of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy
Court”). The Chapter 11 cases (the “Chapter 11 Case”) are being jointly administered under the caption In re: AeroCentury
Corp., et al., Case No. 21-10636.
The
Plan was confirmed by the Bankruptcy Court on August 31, 2021, and the Company emerged from the bankruptcy proceedings on September 30,
2021 (“the Effective Date”).
Fresh
Start Accounting
Upon
emergence from bankruptcy, we adopted fresh start accounting in accordance with Accounting Standards Codification (ASC) Topic 852 –
Reorganizations (ASC 852) and became a new entity for financial reporting purposes. As a result, the consolidated financial statements
after the Effective Date are not comparable with the consolidated financial statements on or before that date as indicated by the “black
line” division in the financial statements and footnote tables, which emphasizes the lack of comparability between amounts presented.
References to “Successor” relate to our financial position and results of operations after the Effective Date. References
to “Predecessor” refer to the financial position and results of operations of the Company and its subsidiaries on or before
the Effective Date. See Note 4 for additional information related to fresh start accounting.
During
the Predecessor period, ASC 852 was applied in preparing the consolidated financial statements. ASC 852 requires the financial statements,
for periods subsequent to the commencement of the Chapter 11 Cases, to distinguish transactions and events that are directly associated
with the reorganization from the ongoing operations of the business. ASC 852 requires certain additional reporting for financial statements
prepared between the bankruptcy filing date and the date of emergence from bankruptcy, including: (i) Reclassification of pre-petition
liabilities that are unsecured, under-secured or where it cannot be determined that the liabilities are fully secured, to a separate
line item on the consolidated balance sheet called, “Liabilities subject to compromise”; and (ii) Segregation of “Reorganization
items, net” as a separate line on the consolidated statements of comprehensive loss, included within income from continuing operations.
Upon
application of fresh start accounting, we allocated the reorganization value to our individual assets and liabilities, except for deferred
income taxes, based on their estimated fair values in conformity with ASC Topic 805, Business Combinations. The amount of deferred taxes
was determined in accordance with ASC Topic 740, Income Taxes. The Effective Date fair values of our assets and liabilities differed
materially from their recorded values as reflected on the historical balance sheets, see Note 4.
| 2. | SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES |
Basis
of presentation
The
accompanying consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally
accepted in the United States of America (“US GAAP”).
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction
of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to generate cash flows
from operations, and the Company’s ability to arrange adequate financing arrangements to support its working capital requirements.
Non-controlling interests
Non-controlling interests represent the equity
interests of JHC that are not attributable, either directly or indirectly, to the Company. As of December 31, 2021, non-controlling equity
holders held 24.17% equity interest in JHC.
Liquidity
As of April 15, 2021, the issuance date of the
Company’s consolidated financial statements as of and for the year ended December 31, 2020, the Company had concluded that there
was substantial doubt about its ability to continue as a going concern. The Company had suffered recurring losses from operations, was
in default of its debt obligations under the credit facility, and had a net capital deficiency. The consolidated financial statements
as of and for the year ended December 31, 2020, did not include any adjustments that might have resulted from the outcome of this uncertainty.
On September 30, 2021, the Company emerged from
bankruptcy with a restructured balance sheet. As of December 31, 2021, the Company had total net assets of approximately $11.8 million
and believes that this has alleviated the substantial doubt about the Company’s ability to continue as a going concern. As a result
of the effectiveness of the Plan, the Company believes it has the ability to meet its obligations for at least one year from the date
of issuance date of the Company’s consolidated financial statements for the year ended December 31, 2021. Accordingly, the accompanying
consolidated financial statements as of and for the year ended December 31, 2021, have been prepared assuming that the Company will continue
as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course business.
Impact
of COVID-19
The Company’s business could be adversely
affected by the effects of epidemics. COVID-19, a novel strain of coronavirus, has spread around the world. The ongoing COVID-19 Pandemic
has had an overwhelming effect on all forms of transportation globally, but most acutely for the airline industry. The combined effect
of fear of infection during air travel and international and domestic travel restrictions has caused a dramatic decrease in passenger
loads in all areas of the world, not just in those countries with active clusters of COVID-19, but in airline ticket net bookings (i.e.
bookings made less bookings canceled) of flights as well. This has led to significant cash flow issues for airlines, including some of
the Company’s customers. The Predecessor provided lease payment reductions to customers, and also sold aircraft to the customers
who failed to make scheduled lease payments.
In
the short term, the COVID-19 pandemic has created uncertainties and risks. Based on the current situation, the Company does not expect
a significant impact on the operations and financial results in the long run. The extent to which COVID-19 impacts the results of operations
will depend on the future development of the circumstances, which is highly uncertain and cannot be predicted with confidence at this
time.
Use
of Estimates
The
Company’s consolidated financial statements have been prepared in accordance with GAAP. The preparation of consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company bases its
estimates on historical experience and on various other assumptions that are believed to be reasonable for making judgments that are
not readily apparent from other sources.
The most significant estimates with regard to
these consolidated financial statements are accounting for the application of fresh start accounting, realization of goodwill, current
value of the Company’s assets held for sale, the amount and timing of future cash flows associated with each asset that are used
to evaluate whether assets are impaired, accounting for income taxes, and the amounts recorded as allowances for doubtful accounts.
Comprehensive
Income (Loss)
The
Company accounts for former interest rate cash flow hedges by reclassifying accumulated other comprehensive income into earnings in the
periods in which the expected transactions occur or when it is probable that the hedged transactions will no longer occur, and are included
in interest expense.
Cash,
Cash Equivalents and Restricted Cash
The
Company considers highly liquid investments readily convertible into known amounts of cash, with original maturities of 90 days or less
from the date of acquisition, as cash equivalents.
The Company’s restricted cash at December
31, 2020 was held for sale and was held in an account with the agent for the Company’s Nord Loans and disbursements from the account
were subject to the control and discretion of the agent for payment of principal on the Nord Loans.
Finance
Leases
In 2020, a customer under one of the Company’s
sales-type leases exercised a purchase option for $215,000, resulting in a gain of $12,700. Another customer exercised purchase options
totaling $3,536,500 under the Company’s three direct finance leases. A total of $2,734,600, representing security deposits and
maintenance reserves paid by the customer during the lease terms was applied to the amounts due under the purchase options. Losses totaling
$60,600 were recorded at the time the purchase options were exercised.
In 2020, two sales-type leases were substantially
modified to reduce the amount of monthly payments and purchase option amounts due under the leases. Although the modifications would
ordinarily have given rise to income or loss resulting from the changed term of the agreements, the lessee’s poor compliance with
the lease terms led the Company to value the sales-type leases at the fair value of the collateral and, as such, the modifications did
not give rise to any effect on income other than that related to the collateral value of the financed aircraft. As a result of payment
delinquencies by the two customers, the Company recorded a bad debt allowance of $1,503,000 during 2020. The two leases remained treated
as sales-type leases.
During the year ended December 31, 2021, the
Company sold one aircraft under sales-type lease. As of December 31, 2021, the Company had no sales-type lease secured by an aircraft.
The lease contained a lessee bargain purchase option at a price substantially below the subject asset’s estimated residual
value at the exercise date for the option. Consequently, the Company classified the lease as a finance lease for financial accounting
purposes. For such finance lease, the Company reported the discounted present value of (i) future minimum lease payments
(including the bargain purchase option) and (ii) any residual value not subject to a bargain purchase option, as a finance lease receivable
on its balance sheet, and accrued interest on the balance of the finance lease receivable based on the interest rate inherent
in the applicable lease over the term of the lease.
Aircraft
Capitalization and Depreciation
The
Company’s interests in aircraft and aircraft engines are recorded at cost, which includes acquisition costs. Since inception, the
Company has typically purchased only used aircraft and aircraft engines. It is the Company’s policy to hold aircraft for approximately
twelve years unless market conditions dictate otherwise. Therefore, depreciation of aircraft is initially computed using the straight-line
method over the anticipated holding period to an estimated residual value based on appraisal. For an aircraft engine held for lease as
a spare, the Company estimates the length of time that it will hold the aircraft engine based upon estimated usage, repair costs and
other factors, and depreciates it to the appraised residual value over such period using the straight-line method.
The
Company periodically reviews plans for lease or sale of its aircraft and aircraft engines and changes, as appropriate, the remaining
expected holding period for such assets. Estimated residual values are reviewed and adjusted periodically, based upon updated estimates
obtained from an independent appraiser. Decreases in the fair value of aircraft could affect not only the current value, discussed below,
but also the estimated residual value.
Assets
that are held for sale are not subject to depreciation and are separately classified on the balance sheet. Such assets are carried at
the lower of their carrying value or estimated fair values, less costs to sell.
Property, Equipment and Furnishings
The Company’s interests in equipment are
recorded at cost and depreciated using the straight-line method over five years. The Company’s leasehold improvements are recorded
at cost and amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the respective
assets.
Impairment
of Long-lived Assets
The
Company reviews assets for impairment when there has been an event or a change in circumstances indicating that the carrying amount of
a long-lived asset may not be recoverable. In addition, the Company routinely reviews all long-lived assets for impairment semi-annually.
Recoverability of an asset is measured by comparison of its carrying amount to the future estimated undiscounted cash flows (without
interest charges) that the asset is expected to generate. Estimates are based on currently available market data and independent appraisals
and are subject to fluctuation from time to time. If these estimated future cash flows are less than the carrying value of an asset at
the time of evaluation, any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its
fair value. Fair value is determined by reference to independent appraisals and other factors considered relevant by management.
Significant management judgment is required in the forecasting of future operating results that are used in the preparation of estimated
future undiscounted cash flows and, if different conditions prevail in the future, material write-downs may occur.
The Company recorded impairment losses totaling
$4.2 million and $28.8 million in 2021 and 2020, respectively, as a result of the Company’s determination that the carrying values
for certain aircraft were not recoverable.
The 2021 impairment losses consisted of $4.2
million for five of its aircraft that were written down to their sales prices, less cost of sale.
The 2020 impairment losses consisted of (i) $14.6
million for seven of its aircraft held for lease, comprised of $7.0 million for two aircraft that were written down to their sales prices,
less cost of sale, and $7.6 million for five aircraft that were written down based on third-party appraisals, (ii) $11.3 million for
a turboprop aircraft and three regional jet aircraft that are held for sale and that were written down based on third-party appraisals
and (iii) $2.8 million for three regional jet aircraft and two turboprop aircraft that are being sold in parts based on their estimated
sales prices, less cost of sale, provided by the part-out vendors.
Deferred
Financing Costs and Commitment Fees
Costs
incurred in connection with debt financing are deferred and amortized over the term of the debt. Costs incurred in connection with the
MUFG Credit Facility were deferred and amortized using the straight-line method until the MUFG Credit Facility debt converted to a term
loan in May 2020, after which costs are amortized using the effective interest method. Costs incurred in connection with the Nord Loans
are amortized using the effective interest method. Commitment fees for unused funds under the MUFG Credit Facility were expensed as incurred.
Security
Deposits
The
Company’s leases are typically structured so that if any event of default occurs under a lease, the Company may apply all or a
portion of the lessee’s security deposit to cure such default. If such application of the security deposit is made, the lessee
typically is required to replenish and maintain the full amount of the deposit during the remaining lease term. All of the security deposits
received by the Company are refundable to the lessee at the end of the lease upon satisfaction of all lease terms.
Taxes
As part of the process of preparing the Company’s
consolidated financial statements, management estimates income taxes in each of the jurisdictions in which the Company operates. This
process involves estimating the Company’s current tax exposure under the most recent tax laws and assessing temporary differences
resulting from differing treatment of items for tax and GAAP purposes. These differences result in deferred tax assets and liabilities,
which are included in the balance sheet. In assessing the valuation of deferred tax assets, the Company considers whether it is more
likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income or availability to carryback the losses to taxable income during periods in
which those temporary differences become deductible. The Company considered several factors when analyzing the need for a valuation allowance
including the Company’s current three-year cumulative loss through December 31, 2021, the impacts of COVID-19 pandemic on the worldwide
airline industry and the Company’s recent filing for and emergence from protection under Chapter 11 of the bankruptcy code. Significant
management judgment is required in determining the Company’s future taxable income for purposes of assessing the Company’s
ability to realize any benefit from its deferred taxes. Based on its analysis, the Company has concluded that a valuation allowance is
necessary for its U.S. and foreign deferred tax assets not supported by either future taxable income or availability of future reversals
of existing taxable temporary differences and has recorded a valuation allowance of $12,409,500 for the year ended December 31, 2021.
The Company had recorded a valuation allowance
of $7,493,800 for the year ended December 31, 2020, including some of its foreign deferred tax assets that are not expected to be realized
based on limitations on the utilization of its foreign net operating losses of $718,000 for the year ended December 31, 2020.
The Company accrues non-income based sales tax,
use tax, value added tax and franchise tax as other tax expense in the consolidated statement of operations.
Revenue
Recognition, Accounts Receivable and Allowance for Doubtful Accounts
Revenue
from leasing of aircraft assets pursuant to operating leases is recognized on a straight-line basis over the terms of the applicable
lease agreements. Deferred payments are recorded as accrued rent when the cash rent received is lower than the straight-line revenue
recognized. Such receivables decrease over the term of the applicable leases. Interest income is recognized on finance leases based on
the interest rate implicit in the lease and the outstanding balance of the lease receivable.
Maintenance
reserves retained by the Company at lease-end are recognized as maintenance reserves revenue.
In
instances where collectability is not reasonably assured, the Company recognizes revenue as cash payments are received. The Company estimates
and charges to income a provision for bad debts based on its experience with each specific customer, the amount and length of payment
arrearages, and its analysis of the lessee’s overall financial condition. If the financial condition of any of the Company’s
customers deteriorates, it could result in actual losses exceeding any estimated allowances.
The
Company had an allowance for doubtful accounts of $300,000 and $1,503,000 at December 31, 2021 and December 31, 2020, respectively.
Maintenance
Reserves and Accrued Maintenance Costs
Maintenance
costs under the Company’s triple net leases are generally the responsibility of the lessees. Some of the Company’s leases
require payment of maintenance reserves, which are based upon lessee-reported usage and billed monthly, and are intended to accumulate
and be applied by the Company toward reimbursement of most or all of the cost of the lessees’ performance of certain maintenance
obligations under the leases. Such reimbursements reduce the associated maintenance reserve liability.
Maintenance
reserves are characterized as either refundable or non-refundable depending on their disposition at lease-end. The Company retains non-refundable
maintenance reserves at lease-end, even if the lessee has met all of its obligations under the lease, including any return conditions
applicable to the leased asset, while refundable reserves are returned to the lessee under such circumstances. Any reserves retained
by the Company at lease-end are recorded as revenue at that time.
Accrued
maintenance costs include (i) maintenance for work performed for off-lease aircraft, which is not related to the release of maintenance
reserves received from lessees and which is expensed as incurred, and (ii) lessor maintenance obligations assumed and recognized as a
liability upon acquisition of aircraft subject to a lease with such provisions.
Interest
Rate Hedging
During
the first quarter of 2019, the Company entered into certain derivative instruments to mitigate its exposure to variable interest rates
under the Nord Loan debt and a portion of the MUFG Indebtedness. Hedge accounting is applied to such a transaction only if specific criteria
have been met, the transaction is deemed to be “highly effective” and the transaction has been designated as a hedge at its
inception. Under hedge accounting treatment, generally, the effects of derivative transactions are recorded in earnings for the period
in which the hedge transaction affects earnings. A change in value of a hedging instrument is reported as a component of other comprehensive
income/(loss) and is reclassified into earnings in the period in which the transaction being hedged affects earnings.
If
at any time after designation of a cash flow hedge, such as those entered into by the Company, it is no longer probable that the forecasted
cash flows will occur, hedge accounting is no longer permitted and a hedge is “de-designated.” After de-designation, if it
is still considered reasonably possible that the forecasted cash flows will occur, the amount previously recognized in other comprehensive
income/(loss) will continue to be reversed as the forecasted transactions affect earnings. However, if after de-designation it is probable
that the forecasted transactions will not occur, amounts deferred in accumulated other comprehensive income/(loss) will be recognized
in earnings immediately.
The two swaps related to the MUFG Credit Facility
were terminated in March 2020 and the Company incurred a $3.1 million obligation in connection with such termination, payment of which
was due no later than the March 31, 2021 maturity of the Drake Loan. As a result of the forecasted transaction being not probable to
occur, accumulated other comprehensive loss of $1,421,800 related to the MUFG Swaps was recognized as interest expense in 2020.
In March 2020, the Company determined that the
future hedged interest payments related to its five remaining Nord Loan interest rate hedges were no longer probable of occurring, and
consequently de-designated all five swaps from hedge accounting. Additionally, in December 2020, the Company determined that the interest
cash flows that were associated with its three remaining swaps were probable of not occurring after February 2021, and consequently reclassified
$600,400 of accumulated other comprehensive income into interest expense.
Reclassifications
Certain prior period amounts have been reclassified
to conform with the current period presentation. These reclassifications had no impact on previously reported net income or cash flows.
Concentration
risks
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits and receivables.
The Company places its deposits with financial institutions and other creditworthy issuers and limits the amount of credit exposure to
any one party.
For the year ended December 31, 2020, the Company
had six significant customers, five of which individually accounted for 27%, 23%, 19%, 15% and 14%, respectively, of operating lease
revenue, and one of which accounted for 100% of finance lease revenue.
At
December 31, 2020, the Company had receivables from two customers totaling $179,700 related to maintenance reserves for 2020, representing
70% of the Company’s total accounts receivable.
Recent
Accounting Pronouncements
ASU
2016-13
The
Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13,
Financial Instruments – Credit Losses (Topic 326), in June 2016 (“ASU 2016-13”). ASU 2016-13 provides
that financial assets measured at amortized cost are to be presented as a net amount, reflecting a reduction for a valuation allowance
to present the amount expected to be collected (the “current expected credit loss” model of reporting). As such, expected
credit losses will be reflected in the carrying value of assets and losses will be recognized before they become probable, as is required
under the Company’s present accounting practice. In the case of assets held as available for sale, the amount of the valuation
allowance will be limited to an amount that reflects the marketable value of the debt instrument. This amendment to GAAP is effective
in the first quarter of 2023 for calendar-year SEC filers that are smaller reporting companies as of the one-time determination date.
Early adoption is permitted beginning in 2019. The Company plans to adopt the new guidance on January 1, 2023, and has not determined
the impact of this adoption on its consolidated financial statements.
FASB
Staff Guidance on Effects of COVID-19
In
April 2020, the FASB staff provided some relief from the unprecedented effect of the COVID-19 Pandemic. Under this guidance, lessors
may elect to treat lease concessions due to COVID-19 as if they arose from enforceable rights and obligations that existed in the lease
contract, with the consequent effect that the concessions would not be treated as a lease modification which could require reclassification
and remeasurement of the lease and to either recognize income during the deferral period or to treat deferred rent as variable rent during
the period. Other guidance released in April 2020 provided that when hedge accounting is discontinued and it is probable that the forecasted
transaction that had been hedged will occur beyond two months after its originally expected date as a result of the effects of COVID-19,
the reporting entity may still defer recognizing related AOCI immediately and should defer recognition of such amounts until the forecasted
transactions actually occur. The Company has elected to treat certain lease concessions to lessees as if they arose from rights initially
in the lease contracts and so did not give rise to modifications of the leases, and to treat deferrals as variable rent during the period
of the deferral, reducing income during such period.
| 3. | EMERGENCE
FROM THE CHAPTER 11 CASES |
On
March 29, 2021, the Company and certain of its subsidiaries in the U.S. filed voluntary petitions for relief under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court. The Chapter 11 Cases are being jointly administered under the caption In re: AeroCentury
Corp., et al., Case No. 21-10636.
On
July 14, 2021, the Debtors filed the Combined Disclosure Statement and Joint Chapter 11 Plan of Reorganization of AeroCentury
Corp, and Its Affiliated Debtors Docket No. 0282, with the Bankruptcy Court (the “Combined Plan Statement”).
On August 16, 2021, the Company filed the Notice of Filing of Plan Supplement to the Combined Disclosure Statement and Joint
Chapter 11 Plan of AeroCentury Corp., and its Affiliated Debtors, Docket No. 0266, with the Bankruptcy Court (as may be later amended
or supplemented, the “Plan Supplement”). On August 30, 2021, the Company filed the Second Plan Supplement
to the Combined Disclosure Statement and Joint Chapter 11 Plan of AeroCentury Corp., and its Affiliated Debtors, Docket No. 0288,
with the Bankruptcy Court. On August 31, 2021, the Bankruptcy Court entered an order, Docket No. 282 (the “Confirmation
Order”), confirming the Plan as set forth in the Combined Plan Statement and Plan Supplement.
The
principal terms of the Plan Sponsor Agreement were below:
● | Plan Sponsor Equity Investment. The Plan Sponsor Agreement provided for the issuance by the Company of 2,870,927 of Common Stock (“New ACY Shares”) at a purchase price equal to $3.85 per share, for an aggregate purchase price of US$11 million. The New ACY Shares issuance resulted in post-issuance pro forma ownership percentages of the Company common stock of (a) 65% held by the Plan Sponsor, and (b) 35% held by existing shareholders of the Company on the Effective Date (the “Legacy ACY Shareholders”). |
● | New Capital Structure for JetFleet Holding Corp. (“JHC”). On the Effective Date, the following transactions relating to JHC equity ownership was executed: |
|
a) |
Cancellation of the Company’s Equity in
JHC. All outstanding stock of JetFleet Holding Corp. (“JHC”) currently held 100% by the Company, was
canceled. |
|
b) |
JHC Common Stock Issuance to Plan Sponsor and JHC Management.
Plan Sponsor acquired 35,000 shares of common stock of JHC, and certain employees of JHC (“JHC Management”)
who would be appointed to continue the legacy aircraft leasing business of the Company through JHC shall acquire 65,000 shares of
common stock of JHC. All shares of common stock of JHC would be purchased at a price of $1 per share. |
|
c) |
JHC Series A Preferred Stock Issuance to the Company. The Company
used $2 million of its proceeds from the Plan Sponsor’s purchase of New ACY Shares to purchase new JHC Series A Preferred Stock
from JHC. The JHC Series A Preferred Stock shall carry a dividend rate of 7.5% per annum, shall be non-convertible and non-transferable,
should be redeemable by JHC at any time, but shall only be redeemable by the Company after 7 years. The JHC Series A Preferred Stockholders
shall in the aggregate constitute 74.83% of the voting equity of JHC, voting as a single class together with the outstanding JHC
Common Stock. |
| d) | Distribution of Trust Interest in JHC Series B to Legacy ACY Shareholders. A trust (“Legacy Trust”) was established for the benefit of the Legacy ACY Shareholders, and JHC issued new JHC Series B Preferred Stock to the Legacy Trust. The JHC Series B Preferred Stock issued to the Legacy Trust will have an aggregate liquidation preference of $1, non-convertible, non-transferable, non-voting, will not pay a dividend, and will contain a mandatory, redeemable provision. The JHC Series B Preferred Stock was redeemable for an aggregate amount equal to (i) $1,000,000, if the JHC Series B Preferred Stock is redeemed after the first fiscal year for which JHC reports positive EBITDA for the preceding 12-month period, or (ii) $0.001 per share, if the JHC Series B Preferred Stock is redeemed prior the first fiscal year for which JHC reports positive EBITDA for the preceding 12-month period. |
On
September 30, 2021 (“Effective Date”) and pursuant to the Plan Sponsor Agreement, the Company entered into and consummated
(the “Closing”) the transactions contemplated by a Securities Purchase Agreement (the “Securities Purchase Agreement”)
with the Plan Sponsor, and Yucheng Hu, in the capacity as the representative for the Plan Sponsor thereunder, pursuant to which
the Company issued and sold, and the Plan Sponsor purchased, 14,354,635 shares of common stock (given effect to five for one forward
stock split), par value $0.001 per share, of the Company (the “ACY Common Stock”) at $0.77 (given effect to five for one
forward stock split) for each share of Common Stock, for an aggregate purchase price of approximately $11,053,100 (the “Purchase
Price”). The Securities Purchase Agreement contained customary representations, warranties and covenants by the parties to such
agreement.
On
the Effective Date, the Debtors satisfied all conditions precedent required for consummation of the Plan as set forth in the Plan, the
Plan became effective in accordance with its terms and the Debtors emerged from the Chapter 11 Cases without any need for further action
or order of the Bankruptcy Court.
Reorganization
items incurred as a result of the Chapter 11 Cases presented separately in the accompanying consolidated statements of operations were
as follows:
| |
Predecessor | |
| |
Period from January 1,
2021 through September 29, 2021 | | |
Year ended December 31,
2020 | |
Gain on settlement of liabilities subject to compromise (Note 4) | |
$ | 30,175,900 | | |
$ | - | |
Professional fees and other bankruptcy related costs | |
| (2,437,600 | ) | |
| - | |
Reorganization items, net | |
$ | 27,738,300 | | |
$ | - | |
The
Company incurred significant costs associated with the reorganization, primarily legal and professional fees. Subsequent to the Petition
Date, these costs were expensed as incurred and significantly affected our consolidated results of operations.
In
connection with our emergence from bankruptcy and in accordance with ASC Topic 852, we qualified for and adopted fresh start accounting
on the Effective Date. We were required to adopt fresh start accounting because (i) the holders of existing voting shares of the Predecessor
received less than 50% of the voting shares of the Successor, and (ii) the reorganization value of our assets immediately prior to confirmation
of the Plan was less than the post-petition liabilities and allowed claims.
The
adoption of fresh start accounting resulted in a new reporting entity for financial reporting purposes with no beginning retained earnings
or deficit. The issuance of new shares of common stock of the Successor caused a related change of control of the Company under ASC 852.
Upon the application of fresh start accounting,
the Company allocated the reorganization value to its individual assets based on their estimated fair values. Each asset and liability
existing as of the Effective Date, other than deferred taxes, have been stated at the fair value, and determined at appropriate risk-adjusted
interest rates. Deferred taxes were determined in conformity with applicable accounting standards.
Reorganization
value represents the fair value of the Successor’s assets before considering liabilities. Our reorganization value is derived from
an estimate of enterprise value. Enterprise value represents the estimated fair value of an entity’s long-term debt and shareholders’
equity. In support of the Plan, the enterprise value of the Successor was estimated to be approximately $18.9 million. The valuation
analysis was prepared using financial information and financial projections and applying standard valuation techniques, including a risked
net asset value analysis.
The
Effective Date estimated fair values of certain of the Company’s assets and liabilities differed materially from their recorded
values as reflected on the historical balance sheets. As a result of the application of fresh start accounting and the effects of the
implementation of the Plan, the Company’s consolidated financial statements on or after September 30, 2021 are not comparable to
the Company’s consolidated financial statements as of or prior to that date.
Reorganization
Value
The
enterprise value of the Successor Company was estimated to be between $18.0 million and $20.0 million. Based on the estimates and assumptions
discussed below, the Company estimated the enterprise value to be $18.9 million as of the Effective Date.
Management,
with the assistance of its valuation advisors, estimated the enterprise value (“EV”) of the Successor Company, using various
valuation methodologies, including a Discounted Cash Flow analysis (DCF), the Guideline Public Company Method (GPCM), and the Guideline
Transaction Method (GTM). Under the DCF analysis, the enterprise value was estimated by discounting the projections’ unlevered
free cash flow by the Weighted Average Cost of Capital (WACC), the Company’s estimated rate of return. A terminal value was estimated
by applying a Gordon Growth Model to the normalized level of cash flows in the terminal period. The Gordon Growth Model was based on
the WACC and the perpetual growth rate, and the terminal value was added back to the discounted cash flows.
Under the GPCM, the Company’s enterprise value was estimated
by performing an analysis of publicly traded companies that operate in a similar industry. A range of Enterprise Value / EBITDA (EV/EBITDA)
multiples were selected based on the financial and operating attributes of the Company relative to the comparable publicly
traded companies. The selected range of multiples were applied to the Company’s forecasted EBITDA to estimate the enterprise value
of the Company.
The
GTM approach is similar to the GPCM, in that it relies on EV/EBITDA multiples but rather than of publicly traded companies, the multiples
are based on precedent transactions. A range of multiples was derived by analyzing the operating and financial attributes of the acquired
companies and the implied EV/EBITDA multiples. This range of multiples were then applied to the forecasted EBITDA of the Company to arrive
an enterprise value.
The following table reconciles the enterprise
value to the estimated fair value of the Successor common stock as of the Effective Date:
Enterprise value | |
$ | 18,883,100 | |
Less: Fair value of accounts payable and accrued expenses | |
| (1,512,100 | ) |
Less: Accrued payroll | |
| (232,100 | ) |
Less: Income tax payable | |
| (19,600 | ) |
Less: Deferred tax liabilities | |
| (114,500 | ) |
Fair value of successor shareholders’ equity | |
$ | 17,004,800 | |
Shares issued and outstanding upon emergence* | |
| 22,084,055 | |
Per share value* | |
$ | 0.77 | |
| * | Retrospectively restated
to give effect to five for one forward stock split effective December 30, 2021. |
The adjustments set forth in the following Consolidated
Balance Sheet reflect the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”)
as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”).
| |
Predecessor | | |
|
| |
|
| |
Successor | |
| |
September 29,
2021 | | |
Reorganization
adjustments |
| |
Fresh start
adjustments |
| |
September 30,
2021 | |
Assets: | |
| | |
|
| |
|
| |
| |
Cash and cash equivalents | |
$ | 10,527,200 | | |
$ | 98,400 |
a | |
| - |
| |
| 10,625,600 | |
Accounts receivable | |
| - | | |
| - |
| |
| - |
| |
| - | |
Finance leases receivable, net | |
| 450,000 | | |
| - |
| |
| - |
| |
| 450,000 | |
Taxes receivable | |
| 1,234,500 | | |
| - |
| |
| - |
| |
| 1,234,500 | |
Prepaid expenses and other assets | |
| 1,884,400 | | |
| - |
| |
| - |
| |
| 1,884,400 | |
Goodwill | |
| - | | |
| - |
| |
| 4,688,600 |
a | |
| 4,688,600 | |
Assets held for sale | |
| 31,149,300 | | |
| (31,149,300 |
)b | |
| - |
| |
| - | |
Total assets | |
$ | 45,245,400 | | |
$ | (31,050,900 |
) | |
$ | 4,688,600 |
| |
$ | 18,883,100 | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
| | | |
| |
| |
| |
| |
| | |
Liabilities: | |
| | | |
| |
| |
| |
| |
| | |
Accounts payable and accrued expenses | |
$ | 1,513,700 | | |
$ | (1,600 |
)a | |
$ | - |
| |
$ | 1,512,100 | |
Accrued payroll | |
| 232,100 | | |
| - |
| |
| - |
| |
| 232,100 | |
Notes payable and accrued interest, net | |
| 38,675,300 | | |
| (38,675,300 |
)b | |
| - |
| |
| - | |
Lease liability | |
| 780,500 | | |
| (780,500 |
)b | |
| - |
| |
| - | |
Maintenance reserves | |
| 2,061,200 | | |
| (2,061,200 |
)b | |
| - |
| |
| - | |
Accrued maintenance costs | |
| 46,100 | | |
| (46,100 |
)b | |
| - |
| |
| - | |
Security deposits | |
| 466,000 | | |
| (466,000 |
)b | |
| - |
| |
| - | |
Unearned revenues | |
| - | | |
| - |
| |
| - |
| |
| - | |
Income taxes payable | |
| 19,600 | | |
| - |
| |
| - |
| |
| 19,600 | |
Deferred tax liabilities | |
| 114,500 | | |
| - |
| |
| - |
| |
| 114,500 | |
Subscription fee advanced from the Plan Sponsor | |
| 10,953,100 | | |
| (10,953,100 |
)c | |
| - |
| |
| - | |
Total liabilities | |
| 54,862,100 | | |
| (52,983,800 |
) | |
| - |
| |
| 1,878,300 | |
| |
| | | |
| |
| |
| |
| |
| | |
Equity (Deficit): | |
| | | |
| |
| |
| |
| |
| | |
Preferred stock | |
| - | | |
| - |
| |
| - |
| |
| - | |
Common stock | |
| 7,700 | | |
| 14,400 |
c | |
| - |
| |
| 22,100 | |
Paid-in capital | |
| 16,811,900 | | |
| 170,800 |
cd | |
| - |
| |
| 16,982,700 | |
Accumulated deficit | |
| (23,399,000 | ) | |
| 18,710,400 |
e | |
| 4,688,600 |
a | |
| - | |
| |
| (6,579,400 | ) | |
| 18,895,600 |
| |
| 4,688,600 |
| |
| 17,004,800 | |
Treasury stock | |
| (3,037,300 | ) | |
| 3,037,300 |
d | |
| - |
| |
| - | |
Total Mega Matrix Corp. (formerly “AeroCentury Corp.”) stockholders’
equity (deficit) | |
| (9,616,700 | ) | |
| 21,932,900 |
| |
| 4,688,600 |
| |
| 17,004,800 | |
Total liabilities and Equity (Deficit) | |
$ | 45,245,400 | | |
$ | (31,050,900 |
) | |
$ | 4,688,600 |
| |
$ | 18,883,100 | |
Reorganization adjustment
In accordance with the Plan of Reorganization,
the following adjustments were made:
(a) | Reflects final instalment of subscription fees of $100,000 for 14,354,635 common stocks (given effect to five for one forward stock split) paid by the Plan Sponsor, against the bank charges of $1,600 |
(b) |
Reflects settlement of
liabilities subject to compromise by the assets held for sale. |
As part of the Plan of Reorganization, the Bankruptcy
Court approved the settlement of claims reported within Liabilities subject to compromise in the Company’s Consolidated balance
sheet at their respective allowed claim amounts. The table below indicates the disposition of Liabilities subject to compromise:
Liabilities subject to compromise pre-emergence | |
| |
Accrued maintenance costs | |
$ | 46,100 | |
Lease liability | |
| 780,500 | |
Maintenance reserves | |
| 2,061,200 | |
Security deposits | |
| 466,000 | |
Drake Indebtedness | |
| 38,675,300 | |
| |
| 42,029,100 | |
Less: Amounts settled per the Plan of Reorganization | |
| | |
Aircraft included in the assets held for sale | |
| (31,149,300 | ) |
Reorganization gain per the Plan of Reorganization | |
$ | 10,879,800 | |
Add: Gain on settlement of liabilities subject to compromise before Plan of Reorganization* | |
| 19,296,100 | |
Reorganization gain | |
$ | 30,175,900 | |
* | The predecessor of the Company started to sell its aircraft before it filed Petitions under Chapter 11 in March 2021, and continued the sales of aircraft through the receipt of the Plan of the Reorganization. As of September 29, 2021, the Company closed sales of five aircraft with carrying amount of $22.3 million, and the proceeds from the sales were settled against the liabilities subject to compromise of $41.6 million, and the Company recognized reorganization gains of $19.3 million. |
(c) | Reflects issuance of 14,354,635 common stocks (given effect to five for one forward stock split) to the Plan Sponsor, at per share of $0.77 (given effect to five for one forward stock split), with total subscription fee of $11,053,100, among which $10,953,100 was paid before September 29, 2021 and $100,000 was paid on September 30, 2021. |
(d) | Reflects cancellation of paid-in capital of $10,867,900 and treasury stock of $3,037,300 attributable to predecessor shareholders |
(e) |
Reflects the cumulative
impacts of reorganization adjustments. |
Reorganization gain per the Plan of Reorganization | |
$ | 10,879,800 | |
Cancellation of paid in capital and treasury stock | |
| 7,830,600 | |
| |
$ | 18,710,400 | |
Fresh start adjustment
|
(a) |
Reflects the excess of
enterprise value over the fair value of total assets. On the effective date, the carrying amount of total assets approximated the
fair value. |
Enterprise value | |
$ | 18,883,100 | |
Less: Fair value of total assets | |
| (14,194,500 | ) |
Goodwill | |
$ | 4,688,600 | |
The Company’s leases are normally “triple
net leases” under which the lessee is obligated to bear all costs, including tax, maintenance and insurance, on the leased assets
during the term of the lease. In most cases, the lessee is obligated to provide a security deposit or letter of credit to secure its
performance obligations under the lease, and in some cases, is required to pay maintenance reserves based on utilization of the aircraft,
which reserves are available for qualified maintenance costs during the lease term and may or may not be refundable at the end of the
lease. Typically, the leases also contain minimum return conditions, as well as an economic adjustment payable by the lessee (and in
some instances by the lessor) for amounts by which the various aircraft or engine components are worse or better than a targeted condition
set forth in the lease. Some leases contain renewal or purchase options, although the Company’s sales-type leases contain a bargain
purchase option at lease end which the Company expects the lessees to exercise or require that the lessee purchase the aircraft at lease-end
for a specified price.
Because all of the Company’s leases transfer
use and possession of the asset to the lessee and contain no other substantial undertakings by the Company, the Company has concluded
that all of its lease contracts qualify for lease accounting. Certain lessee payments of what would otherwise be lessor costs (such as
insurance and property taxes) are excluded from both revenue and expense.
The Company evaluates the expected return on
its leased assets by considering both the rents receivable over the lease term, any expected additional consideration at lease end, and
the residual value of the asset at the end of the lease. In some cases, the Company depreciates the asset to the expected residual value
because it expects to sell the asset at lease end; in other cases, it may expect to re-lease the asset to the same or another lessee
and the depreciation term and related residual value will differ from the initial lease term and initial residual value. Residual value
is estimated by considering future estimates provided by independent appraisers, although it may be adjusted by the Company based on
expected return conditions or location, specific lessee considerations, or other market information.
In 2020 and 2021, three and nil, respectively,
of the Company’s operating lease assets were subject to manufacturer residual value guarantees totaling approximately $13.7
million at the end of their lease terms in the second quarter of 2027. The Company considers the best market for re-leasing and/or selling
its assets at the end of its leases, although it does not expect to retain ownership of the assets under sales-type leases given the
lessees’ bargain purchase options or required purchase.
During 2020, the Company recorded impairment
losses totaling $14,639,900 for seven of its aircraft held for lease, comprised of (i) $7,006,600 for two aircraft that were written
down to their sales prices, less cost of sale and (ii) $7,633,300 for five aircraft that were written down based on third-party appraisals.
During 2021, the Company recorded impairment
losses totaling $4,204,400 for five of its aircraft held for sale that were written down to their sales prices, less cost of sale.
(a) Assets Held for Lease
At December 31, 2021, the Company had one
regional jet aircraft held for lease. As of December 31, 2020, the Company had four regional jet aircrafts and two Turboprop aircrafts
held for lease.
The Company did not purchase any aircraft held for lease during 2021
and 2020. During the years ended December 31, 2021 and 2020, the Company sold one and two aircraft that had been held for lease, resulting
in a loss of $194,900 and a gain of $118,500, respectively.
None of the Company’s aircraft held for
lease were off lease at December 31, 2020. The Company had nine aircraft that are held for sale as of December 31, 2020: (i) three
regional jet aircraft that are on lease and were sold in March 2021; (ii) three off-lease regional jet aircraft; (iii) one off-lease
turboprop aircraft and (iv) two turboprop aircraft that are being sold in parts.
(b) Sales-Type and Finance Leases
In January 2020, the Company amended the leases
for three of its assets that were subject to sales-type leases with two customers. The amendments provided for (i) the exercise of a
purchase option of one aircraft to the customer in January 2020, which resulted in a gain of $12,700, (ii) application of collected maintenance
reserves and a security deposit held by the Company to past due amounts for the other two aircraft, (iii) payments totaling $585,000
in January 2020 for two of the leases and (iv) the reduction of future payments due under the two finance leases. Because of the
uncertainty of collection of amounts receivable under the finance leases, the Company does not recognize interest income on the finance
lease receivables (i.e., they are accounted for on a non-accrual basis) and their asset value is based on the collateral value of the
aircraft that secure the finance leases, net of projected sales costs. The Company recorded bad debt allowances totaling $1,503,000 related
to the two sales-type leases during 2020.
In January 2020, the customer for an aircraft
leased pursuant to a direct financing lease notified the Company of its intention to exercise the lease-end purchase option for
the aircraft in March 2020. In February 2020, the Company and the same customer agreed to the early exercise of lease-end purchase options
for direct financing leases that were to expire in March 2021 and March 2022. All three purchase options were exercised in March
2020, resulting in a loss of $60,600.
As a result of the Sale Order approved by
the Bankruptcy Court in May 2021, the Company reclassified all of its aircraft under sales-type and finance leases to held for sale.
At December 31, 2021, September 29, 2021
and December 31, 2020, the net investment included in sales-type leases and direct financing leases receivable were as follows:
| |
Successor | | |
Predecessor | |
| |
December 31, | | |
September 29, | | |
December 31, | |
| |
2021 | | |
2021 | | |
2020 | |
| |
| | |
| | |
| |
Gross minimum lease payments receivable | |
$ | 300,000 | | |
$ | 1,597,000 | | |
$ | 4,138,000 | |
Less unearned interest | |
| - | | |
| - | | |
| (88,000 | ) |
Allowance for doubtful accounts | |
| (300,000 | ) | |
| (1,147,000 | ) | |
| (1,503,000 | ) |
Finance leases receivable | |
$ | - | | |
$ | 450,000 | | |
$ | 2,547,000 | |
As of December 31, 2021, there were no minimum future payments
receivable under finance leases.
|
6. |
ASSETS
AND LIABILITIES HELD FOR SALE |
Assets held for sale at December 31, 2020
included (i) three regional jet aircraft owned by ACY E-175 LLC, (ii) three off-lease regional jet aircraft, (iii) one off-lease turboprop
aircraft and (iv) airframe parts from two turboprop aircraft.
(a) ACY E-175 LLC
In March 2021, the Company sold its 100% percent
membership interest in ACY E-175 LLC, which owned three Embraer E-175 aircraft on lease to a U.S. regional airline. At December 31, 2020,
the Company classified the assets and liabilities of ACY E-175 LLC as held for sale and recorded an impairment loss of $2,649,800.
As a result of the Sale Order approved by
the Bankruptcy Court in May 2021, the Company, with the exception of one aircraft that is collateral for a sales-type lease receivable,
reclassified all of its remaining aircraft to held for sale. On the Effective date, pursuant to the Plan of Reorganization, the Company
settled the liabilities subject to compromise by these assets held for sale. See Note 4 – reorganization adjustment (b). Accordingly,
the Company did not have assets or liabilities held for sale as of December 31, 2021.
The table below sets forth the assets
and liabilities that were classified as held for sale at December 31, 2021, September 29, 2021 and December 31, 2020:
| |
Successor | | |
Predecessor | |
| |
December 31, | | |
September 29, | | |
December 31, | |
| |
2021 | | |
2021 | | |
2020 | |
| |
| | |
| | |
| |
Cash and cash equivalents | |
$ | - | | |
$ | - | | |
$ | 345,900 | |
Restricted cash | |
| - | | |
| - | | |
| 2,346,300 | |
Aircraft and Part-out Assets | |
| - | | |
| 31,149,300 | | |
| 38,146,700 | |
Notes payable and accrued interest, net | |
| - | | |
| - | | |
| (13,836,900 | ) |
Derivative liability | |
| - | | |
| - | | |
| (767,900 | ) |
The pre-tax
loss of ACY E-175 LLC for the year ended December 31, 2020 was $1,976,200.
(b) Off-lease aircraft
During 2020, the Company recorded impairment
losses of $11,337,200 for an off-lease turboprop aircraft and three off-lease regional jet aircraft that are held for sale and that were
written down based on third-party appraisals and $124,900 for a turboprop aircraft that is being sold in parts based on estimated sales
proceeds, less cost of sale, provided by the part-out vendors.
(c) Part-out Assets
The Company owned two aircraft being sold in
parts (“Part-out Assets”). During 2020, the Company received $391,800 in cash and accrued $34,400 in receivables related
to the Part-out Assets. These amounts were accounted for as follows: $117,400 reduced accounts receivable for parts sales accrued in
the fourth quarter of 2019; $239,900 reduced the carrying value of the parts; and $68,900 was recorded as gains in excess of the carrying
value of the parts.
For the year ended December 31, 2021, the Company
had two business segments which were comprised of 1) the leasing of regional aircraft to foreign and domestic regional airlines, and
2) the newly launched GameFi business. Because the GameFi business has not commenced operations, the assets and liabilities, revenues
and expenses are related to the business of leasing of regional aircraft to foreign and domestic regional airlines. For the year ended
December 31, 2020, the Company operated in one business segment, the leasing of regional aircraft to foreign and domestic regional airlines,
and therefore does not present separate segment information for lines of business.
Approximately 50% and 50% of the Company’s
operating lease revenue was derived from lessees domiciled in the United States during 2021 and 2020, respectively. All revenues relating
to aircraft leased and operated internationally, with the exception of rent payable in Euros for one and two of the Company’s aircraft
for the years ended December 31, 2021 and 2020, respectively, are denominated and payable in U.S. dollars.
The tables below set forth geographic information
about the Company’s operating lease revenue and net book value for leased aircraft and aircraft equipment, grouped by domicile
of the lessee:
| |
Successor | | |
Predecessor | |
| |
December 31, | | |
September 29, | | |
December 31, | |
| |
2021 | | |
2021 | | |
2020 | |
North America | |
$ | 540,000 | | |
$ | 4,060,400 | | |
$ | 10,119,100 | |
Europe | |
| - | | |
| 1,693,500 | | |
| 5,349,000 | |
| |
$ | 540,000 | | |
$ | 5,753,900 | | |
$ | 15,468,100 | |
Net Book Value of Aircraft and Aircraft Engines Held
for Lease |
|
| |
Successor | | |
Predecessor | |
| |
December 31,
| | |
September 29,
| | |
December 31,
| |
| |
2021 | | |
2021 | | |
2020 | |
North America | |
$ | - | | |
$ | - | | |
$ | 30,433,100 | |
Europe and United Kingdom | |
| - | | |
| - | | |
| 15,330,000 | |
| |
$ | - | | |
$ | - | | |
$ | 45,763,100 | |
Finance lease revenue for the year ended December
31, 2020 was all from Europe and United Kingdom.
| 8. | NOTES PAYABLE AND ACCRUED INTEREST |
At December 31, 2020, the Company’s notes payable and accrued
interest consisted of the following:
| |
December 31, |
| |
2020 |
MUFG Credit Facility/Drake Loan: | |
|
Principal | |
$ | 88,557,000 | |
Unamortized debt issuance costs | |
| (780,900 | ) |
Accrued interest | |
| 739,000 | |
Paycheck Protection Program Loan: | |
| | |
Principal | |
| 276,400 | |
Accrued interest | |
| 1,700 | |
Subtotal | |
$ | 88,793,200 | |
Nord Loans held for sale: | |
| | |
Principal | |
| 14,091,300 | |
Unamortized debt issuance costs | |
| (313,400 | ) |
Accrued interest | |
| 59,000 | |
| |
$ | 13,836,900 | |
(a) MUFG Credit Facility
In February 2019, the MUFG Credit Facility, which
was to expire on May 31, 2019, was extended to February 19, 2023, and was amended in certain other respects. Also, four aircraft that
previously served as collateral under the MUFG Credit Facility and two aircraft that previously served as collateral under special-purpose
subsidiary financings were refinanced in February 2019 using non-recourse term loans (the “Nord Loans”) with an aggregate
principal of $44.3 million.
In addition to payment obligations (including
principal and interest payments on outstanding borrowings and commitment fees based on the amount of any unused portion of the MUFG Credit
Facility), the MUFG Credit Facility agreement contained financial covenants with which the Company must comply, including, but not limited
to, positive earnings requirements, minimum net worth standards and certain ratios, such as debt to equity ratios.
The Company was not in compliance with various
covenants contained in the MUFG Credit Facility agreement, including those related to interest coverage and debt service coverage ratios
and a no-net-loss requirement under the MUFG Credit Facility, beginning in the third quarter of 2019.
On October 15, 2019, the agent bank for the MUFG
Lenders delivered a Reservation of Rights Letter to the Company which contained notice of the Borrowing Base Default and a demand for
repayment of the amount of the Borrowing Base Deficit by January 13, 2020, and also contained formal notices of default under the MUFG
Credit Facility relating to the alleged material adverse effects on the Company’s business as a result of the early termination
of leases for three aircraft and potential financial covenant noncompliance based on the Company’s financial projections provided
to the MUFG Lenders (the Borrowing Base Default and such other defaults referred to as the “Specified Defaults”). The Reservation
of Rights Letter also informed the Company that further advances under the MUFG Credit Facility agreement would no longer be permitted
due to the existence of such defaults.
In October, November and December 2019, the Company,
agent bank and the MUFG Lenders entered into a Forbearance Agreement and amendments extending the Forbearance Agreement with respect
to the Specified Defaults under the MUFG Credit Facility. The Forbearance Agreement (i) provided that the MUFG Lenders temporarily forbear
from exercising default remedies under the MUFG Credit Facility agreement for the Specified Defaults, (ii) reduced the maximum availability
under the MUFG Credit Facility to $85 million and (iii) extended the cure period for the Borrowing Base Deficit from January 13, 2020
to February 12, 2020. The Forbearance Agreement also allowed the Company to continue to use LIBOR as its benchmark interest rate, but
increased the margin on the Company’s LIBOR-based loans under the MUFG Credit Facility from a maximum of 3.75% to 6.00% and set
the margin on the Company’s prime rate-based loans at 2.75%, as well as added a provision for paid-in-kind interest (“PIK
Interest) of 2.5% to be added to the outstanding balance of the MUFG Credit Facility debt in lieu of a cash payment. The Company paid
cash fees of $406,250 in connection with the Forbearance Agreement and amendments, as well as a fee of $832,100, which was added to the
outstanding balance of the MUFG Credit Facility debt in lieu of a cash payment. The Forbearance Agreement was in effect until December
30, 2019, after which the Company and the MUFG Lenders agreed not to further amend the Forbearance Agreement. On February 12, 2020, the
agent bank for the MUFG Lenders delivered a Reservation of Rights Letter to the Company which contained notice of the failure to cure
the Borrowing Base Default by February 12, 2020.
On May 1, 2020, the Company and the MUFG Lenders
entered into a Fourth Amended and Restated Loan and Security Agreement, which amended and restated the existing agreement regarding
the Company's indebtedness to the MUFG Lenders and effected the following changes to the terms and provisions of such indebtedness:
| ● | A forbearance of the existing defaults and events of default under the MUFG Loan Agreement until May 10, 2020, with a provision to extend such forbearance to July 1, 2020 and August 15, 2020, if the Company is still in compliance with the agreement at May 10, 2020 and July 1, 2020, respectively; |
| | |
| ● | Elimination of the borrowing base collateral value covenant under the MUFG Loan Agreement, and of the existing event of default under the MUFG Loan Agreement for a borrowing base deficiency, along with cessation of the default interest accrual on the outstanding loan amount; |
| | |
| ● | Conversion of the revolving MUFG Credit Facility structure to a term loan structure with an initial principal balance of $83,689,900.86 and a final maturity date of March 31, 2021; |
| | |
| ● | Interest accrual on the indebtedness based on the Base Rate (defined as the greater of (i) the rate of interest most recently announced by MUFG as to its U.S. dollar “Reference Rate”, or (ii) the Federal Funds Rate plus one-half of one percent (0.50%)), according to the following schedule: (a) Base Rate + 525 bps (0 bps as cash interest and 525 bps as payment in kind ("PIK")) until June 30, 2020, and (b) Base Rate + 525 bps (100 bps as cash interest and 425 bps as PIK) from and after July 1, 2020, subject to a Base Rate floor at 325 bps for both time periods; |
| | |
| ● | Deferral of the cash component of the interest payments (on the loan indebtedness and swap termination payment obligation) that was due on April 1, 2020 and May 1, 2020, until the earlier of (i) the date of receipt of net proceeds into the Company's restricted account held at MUFG to hold sales proceeds (the "Restricted Account") from the sale of certain enumerated aircraft assets and (ii) July 1, 2020; |
| ● | Required sweep of any unrestricted cash in the Company’s bank accounts in excess of $1,000,000 at the end of each fiscal quarter; |
| | |
| ● | Addition of certain default provisions triggered by certain defaults or other events with respect to the Company’s aircraft leases for the Company's aircraft that are collateral for the MUFG Loan Agreement ("Aircraft Collateral"); |
| | |
| ● | Provision for certain payments from the Restricted Account to (i) the Company’s investment banking advisor; (ii) payments due under the agreement and for interest on the swap termination indebtedness owed by the Company; and (iii) Lenders’ outside counsel and consultants; |
| | |
| ● | Addition of a requirement for the Company's engagement of a Financial Advisor/Consultant, at the Company’s expense, with a specific scope of work as prescribed by the MUFG Loan Agreement; |
| | |
| ● | Revisions to the Company’s required appraisal process for the Aircraft Collateral; and |
| | |
| ● | Establishment of deadlines for achievement of milestones toward execution of Company strategic alternatives for the Company and/or its assets with respect to the MUFG Loan Agreement indebtedness ("Strategic Alternatives") as follows: (a) obtaining indications of interest for Strategic Alternatives by May 6, 2020, which was subsequently extended to May 20, 2020 and was met by the Company at that time; (b) obtaining a fully-executed (tentative or generally non-binding) agreement on the terms and conditions for a Strategic Alternative by June 29, 2020, which milestone has been met, and (c) consummation of the selected strategic Alternative by August 15, 2020. |
On July 8, 2020, the agent bank for the MUFG
Lenders delivered a Reservation of Rights Letter to the Company which contained notice of defaults with respect to failure to deliver
a lessee acknowledgment of the MUFG Lender’s mortgage from one of the Company’s lessees (which was delayed due to extended
negotiations between MUFG and the lessee relating to form of such acknowledgment) and (ii) the failure to make a deferred interest payment
as required under the Loan Agreement that was due and payable on the earlier of July 1, 2020 or the date of the sale of a certain aircraft
scheduled to be sold upon its return from its lessee (the closing of which sale was delayed beyond July 1, 2020).
(b) MUFG’s Sale of Indebtedness to Drake
On October 30, 2020, Drake purchased from the
MUFG Lenders all of the outstanding indebtedness of the Company under such loan, totaling approximately $87.9 million as well as
all of the Company's indebtedness to MUFG Bank, Ltd. of approximately $3.1 million for termination of interest rate swaps entered into
with respect to such Loan Agreement indebtedness (such total indebtedness with Drake as Lender referred to as the “Drake Indebtedness”).
The purchase and sale was consented to by the Company pursuant to a Consent and Release Agreement of Borrower Parties, entered
into by the Company and its subsidiaries. The closing of this debt purchase transaction satisfied the requirement under the
Loan Agreement for execution of a Strategic Alternative with respect to the MUFG Loan indebtedness satisfactory to the MUFG Lenders.
On the same day, the Company entered into an
Amendment No. 1 to the Loan Agreement (“Amendment No. 1”) with Drake and UMB Bank, N.A., the replacement Administrative Agent
under the Loan Agreement, to amend the Loan Agreement (such Loan Agreement as amended, with Drake as Lender thereunder, referred to as
the “Drake Loan Agreement”) as follows:
|
● |
Deferral of the cash component
of the interest payments due under the Drake Loan Agreement, commencing with the payments due for March 2020, and continuing on each
consecutive month thereafter, which deferred interest is to be capitalized and added to the principal balance of the indebtedness
on each respective interest payment due date, until such time as the indebtedness is repaid. |
|
|
|
|
● |
Deletion of the requirement
for the Company's execution of a Strategic Alternative and of the milestones therefor; |
|
|
|
|
● |
Deletion of the requirement
for the Company's maintenance of a restricted account held with an MUFG Lender to hold aircraft sales proceeds pending application
toward the Drake Indebtedness; |
|
|
|
|
● |
Replacement of references
to “MUFG Union Bank, N.A.,” with “UMB, Bank, N.A.”, the new Administrative Agent under the Loan Agreement; |
|
|
|
|
● |
Requirement of approval
by Drake for any “Material Amendments” to leases for the collateral, defined as any amendment of, or waiver or consent
under, any lease involving a modification of lease payments, any reduction in, or waiver or deferral of, Rent, a modification to
any residual value guaranty, any modification that adversely affects the collateral or the rights and interests of the lender and/or
administrative agent in the collateral, any reduction of any amounts payable to any lender or Agent under any indemnity, or any change
to the state of registration of aircraft collateral; and |
|
|
|
|
● |
Deletion of certain financial
reporting requirements and changes to required frequency of certain other surviving reporting requirements. |
The Drake Indebtedness is secured by a first
priority lien held by Drake, which lien is documented in an amended and restated mortgage and security agreement assigned to Drake, on
all of the Company's assets, including the Company’s entire aircraft portfolio, except for two aircraft on lease to Kenyan lessees
and five aircraft, two of which were sold in October 2020 and three of which were sold in March 2021, that were subject to special purpose
financing held by subsidiaries of the Company.
(c) Nord Loans
On February 8, 2019, the Company, through four
wholly-owned subsidiary limited liability companies (“LLC Borrowers”), entered into a term loan agreement NordDeutsche Landesbank
Girozentrale, New York Branch (“Nord”) that provides for six separate term loans (“Nord Loans”) with an aggregate
principal amount of $44.3 million. Each of the Nord Loans is secured by a first priority security interest in a specific aircraft (“Nord
Loan Collateral Aircraft”) owned by an LLC Borrower, the lease for such aircraft, and a pledge by the Company of its membership
interest in each of the LLC Borrowers, pursuant to a Security Agreement among the LLC Borrowers and a security trustee, and certain pledge
agreements. Two of the Nord Loan Collateral Aircraft that were owned by the Company’s two UK special-purpose entities and were
sold in October 2020 were previously financed using special-purpose financing. The interest rates payable under the Nord Loans vary by
aircraft, and are based on a fixed margin above either 30-day or 3-month LIBOR. The proceeds of the Nord Loans were used to pay down
the MUFG Credit Facility and pay off the UK LLC SPE Financing. The maturity of each Nord Loan varies by aircraft, with the first Nord
Loan maturing in October 2020 and the last Nord Loan maturing in May 2025. The debt under the Nord Loans is expected to be fully amortized
by rental payments received by the LLC Borrowers from the lessees of the Nord Loan Collateral Aircraft during the terms of their respective
leases and remarketing proceeds.
The Nord Loans include covenants that impose
various restrictions and obligations on the LLC Borrowers, including covenants that require the LLC Borrowers to obtain Nord consent
before they can take certain specified actions, and certain events of default. If an event of default occurs, subject to certain cure
periods for certain events of default, Nord would have the right to terminate its obligations under the Nord Loans, declare all or any
portion of the amounts then outstanding under the Nord Loans to be accelerated and due and payable, and/or exercise any other rights
or remedies it may have under applicable law, including foreclosing on the assets that serve as security for the Nord Loans. The Company
was in default of its obligation to make its quarterly payments due on March 24, 2020 and June 24, 2020.
As a result of the COVID-19 Pandemic, in March
and June 2020, one of the Company’s customers, which leases two regional jet aircraft subject to Nord Loan financing, did not make
its quarterly rent payments totaling approximately $2.8 million. The nonpayment led to corresponding Nord Loan financing payment events
of default under the Nord Loans for each of the LLC Borrowers. In May 2020, with Nord’s consent, the Company collected on
the customer’s security letters of credit and paid a portion of the March and June financing payments due under the Nord Loans,
and entered into an agreement with the customer to defer payment of the remaining balance of the March rent to June 2020. In June 2020,
the Company agreed with the customer to defer payment of the March and June rent to September 2020, and entered into an agreement with
Nord to defer until September 24, 2020 (i) payment of the principal amount due under the respective Nord Loans for the two aircraft due
in March and June 2020 and (ii) payment of past due interest at the default interest rate on the March and June 2020 overdue payments. The
lease arrearage was repaid by the lessee in late September, which permitted the special-purpose subsidiaries to come back into compliance
with their Nord Loan indebtedness. In October 2020, the Company sold the two aircraft to the lessee, and fully repaid the indebtedness
on such aircraft with the proceeds of the sale. The excess proceeds from the sale were held as restricted cash by ACY E-175. The restricted
cash, the three aircraft held by ACY E-175 and ACY E-175’s Nord Loans and derivative liability were classified as held for sale
at December 31, 2020. In March 2021, the Company sold its interest in the special-purpose subsidiary and was released from any remaining
guarantee obligations under the Nord Loan and interest swap obligations of the special-purpose subsidiary.
As a result of the customer’s non-payments
in March and June 2020 and potential consequent uncertainty concerning future interest payments under the related Nord Loans, the Company
de-designated the two related derivative instruments from hedge accounting during the first quarter of 2020 since the swapped interest
was not deemed as probable to occur. After discussions with the lessee for the remaining three swaps related to the Nord Loans, the Company
determined that there was sufficient uncertainty related to rent payments and related debt payments, and that the Company could not conclude
that the payments related to the swaps were probable of occurring, so that the Company de-designated those swaps from hedge accounting
in March 2020 as well. In December 2020, the Company determined that the payments after February 2021 for the three remaining swaps were
probable not to occur as a result of the Company’s agreement to sell its interest in ACY E-175 during the first quarter of 2021,
and recognized the accumulated other comprehensive income related to such payments as interest expense.
(d) Paycheck Protection Program Loan
On May 20, 2020, JetFleet Management Corp. (the
“PPP Borrower”), a subsidiary of the Company., was granted a loan (the “PPP Loan”) from American Express National
Bank in the aggregate amount of $276,353, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title
I of the CARES Act, which was enacted March 27, 2020. The application for these funds required the Company to, in good faith, certify
that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification
further required the Company to take into account its current business activity and its ability to access other sources of liquidity
sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds,
and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying
for the forgiveness of such loan based on its future adherence to the forgiveness criteria.
The PPP Loan, which was in the form of a Note
dated May 18, 2020 issued by the PPP Borrower and is included in the Company's notes payable and accrued interest, matures on April
22, 2022 and bears interest at a rate of 1.00% per annum, payable in 18 monthly payments commencing on October 19, 2021. The Note may
be prepaid by the PPP Borrower at any time prior to maturity with no prepayment penalties. Funds from the PPP Loan may only be used for
payroll costs and any payments of certain covered interest, lease and utility payments. The Company intends to use the entire PPP Loan
amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying
expenses as described in the CARES Act. Although the Company has applied for forgiveness and expects that all or a significant portion
of the PPP loan will be forgiven, no assurance can be provided that the Company will obtain such forgiveness. The Company was granted
a second PPP Loan in February 2021.
As of September 29, 2021, notes payable and accrued
interest are included in the liabilities subject to compromise. See Note 4 – reorganization adjustment (b). As part of the Plan
of Reorganization, the Bankruptcy Court approved the settlement of claims reported within Liabilities subject to compromise in the Company’s
Consolidated balance sheet at their respective allowed claim amounts. Accordingly, the Company did not have notes payable or accrued
interest as of December 31, 2021.
At December 31, 2021 and September 29, 2021,
the Company’s notes payable and accrued interest subject to compromise consisted of the following.
| |
Successor | | |
Predecessor | |
| |
December 31, 2021 | | |
September 29, 2021 | |
Drake Indebtedness, subject to compromise: | |
| | |
| |
Principal | |
$ | - | | |
$ | 38,675,300 | |
In the first quarter of 2019, the Company entered
into eight fixed pay/receive variable interest rate swaps. The Company entered into the interest rate swaps in order to reduce its exposure
to the risk of increased interest rates.
The Company estimates the fair value of derivative
instruments using a discounted cash flow technique and uses creditworthiness inputs that corroborate observable market data evaluating
the Company’s and counterparties’ risk of non-performance. Valuation of the derivative instruments requires certain assumptions
for underlying variables and the use of different assumptions would result in a different valuation. Management believes it has applied
assumptions consistently during the period.
The Company designated seven of its interest
rate swaps as cash flow hedges upon entering into the swaps. Changes in the fair value of the hedged swaps were included in other comprehensive
income/(loss), which amounts are reclassified into earnings in the period in which the transaction being hedged affected earnings (i.e.,
with future settlements of the interest rate swaps). One of the interest rate swaps was not eligible under its terms for hedge treatment
and was terminated in 2019 when the associated asset was sold and the related debt was paid off. Changes in fair value of non-hedge derivatives
are reflected in earnings in the periods in which they occur.
(a) MUFG Swaps
The two interest rate swaps entered into by the
Company (the “MUFG Swaps”) were intended to protect against the exposure to interest rate increases on $50 million of the
Company’s MUFG Credit Facility debt prior to its sale to Drake during the fourth quarter of 2020. The MUFG Swaps had notional amounts
totaling $50 million and were to extend through the maturity of the MUFG Credit Facility in February 2023. Under the ISDA agreement for
these interest rate swaps, defaults under the MUFG Credit Facility gave the swap counterparty the right to terminate the interest rate
swaps with any breakage costs being the liability of the Company.
In October 2019, the Company determined that
it was no longer probable that forecasted cash flows for its two interest rate swaps with a nominal value of $50 million would occur
as scheduled as a result of the Company’s defaults under the MUFG Credit Facility. Therefore, those swaps were no longer subject
to hedge accounting and changes in fair market value thereafter were recognized in earnings as they occurred. As a result of the forecasted
transaction being not probable to occur, accumulated other comprehensive loss of $1,421,800 related to the MUFG Swaps was recognized
as interest expense for the year ended December 31, 2020. The two swaps related to the MUFG Credit Facility were terminated in March
2020 and the Company incurred a $3.1 million obligation, recorded as interest expense and derivative termination liability, in connection
with such termination, payment of which was due no later than the March 31, 2021 maturity of the Drake Indebtedness.
The derivative termination liability was included
in the liabilities subject to compromise. As part of the Plan of Reorganization, the Bankruptcy Court approved the settlement of claims
reported within Liabilities subject to compromise in the Company’s Consolidated balance sheet at their respective allowed claim
amounts. See Note 4 – reorganization adjustment (b). Accordingly, the Company did not have derivative termination liability as
of December 31, 2021.
(b) Nord Swaps
With respect to the interest rate swaps entered
into by the LLC Borrowers (“the Nord Swaps”), the swaps were deemed necessary so that the anticipated cash flows of such
entities, which arise entirely from the lease rents for the aircraft owned by such entities, would be sufficient to make the required
Nord Loan principal and interest payments, thereby preventing default so long as the lessees met their lease rent payment obligations.
The Nord Swaps were entered into by the LLC Borrowers
and provided for reduced notional amounts that mirrored the amortization under the Nord Loans entered into by the LLC Borrowers, effectively
converting each of the related Nord Loans from a variable to a fixed interest rate, ranging from 5.38% to 6.30%. Each of Nord Swaps extended
for the duration of the corresponding Nord Loan. Two of the swaps had maturities in the fourth quarter of 2020 and were terminated when
the associated assets were sold and the related debt was paid off. The other three Nord Swaps had maturities in 2025, but were sold in
March 2021 as part of the Company’s sale of its membership interest in ACY E-175.
In March 2020, the Company determined that the
future hedged interest payments related to its Nord Swaps were no longer probable of occurring, as a result of lease payment defaults
for the aircraft owned by ACY 19002 and ACY 19003 and conversations with the lessee for the three aircraft owned by ACY E-175 regarding
likely rent concessions, and consequently de-designated all five Nord Swaps as hedges because the lease payments that were used to service
the Nord Loans associated with the Nord Swaps were no longer probable to occur. As a result of de-designation, future changes in market
value were recognized in ordinary income and AOCI was reclassified to ordinary income as the forecasted transactions occurred. In December
2020, the Company determined that the payments after February 2021 for the three remaining Nord Swaps were probable not to occur as a
result of the Company’s agreement to sell its interest in ACY E-175 during the first quarter of 2021. The Company has reflected
the following amounts in its net income (loss) and comprehensive income (loss) for the relevant periods:
| |
Successor | | |
Predecessor | |
| |
September 30,
2021 through
December 31, 2021 | | |
Period from January 1, 2021 through September 29,
2021 | | |
Year ended December 31, 2020 | |
Change in value of undesignated interest rate
swaps | |
$ | - | | |
$ | (48,700 | ) | |
$ | 1,979,800 | |
Reclassification from other comprehensive income to interest
expense | |
| | | |
| 2,600 | | |
| 1,150,900 | |
Reclassification from other comprehensive
income to interest expense – forecasted transaction probable not to occur | |
| - | | |
| - | | |
| 1,167,700 | |
Included in interest expense | |
$ | - | | |
$ | (46,100 | ) | |
$ | 4,298,400 | |
| |
Successor | | |
Predecessor | |
| |
September 30,
2021 through
December 31, 2021 | | |
Period from January 1, 2021 through September 29,
2021 | | |
Year ended December 31, 2020 | |
Loss on derivative instruments deferred into other
comprehensive income/(loss) | |
$ | - | | |
$ | - | | |
$ | (575,000 | ) |
Reclassification from other comprehensive income to interest
expense | |
| - | | |
| 2,600 | | |
| 1,150,900 | |
Reclassification from other comprehensive
income to interest expense – forecasted transaction probable not to occur | |
| - | | |
| - | | |
| 1,167,700 | |
Change in accumulated other comprehensive
income | |
$ | - | | |
$ | 2,600 | | |
$ | 1,743,600 | |
At December 31, 2021 and 2020, the
fair value of the Company’s interest rate swaps was $nil and $767,900 respectively.
The Company evaluates the creditworthiness of
the counterparties under its hedging agreements. The swap counterparties for the Company’s interest rate swaps are large financial
institutions in the United States that possess an investment grade credit rating. Based on this rating, the Company believes
that the counterparties are creditworthy and that their continuing performance under the hedging agreements is probable.
| 10. | LEASE RIGHT OF USE ASSETS AND LIABILITIES |
The Company was a lessee under a lease of the
office space it occupies in Burlingame, California, which expired in June 2020. The lease also provided for two, successive
one-year lease extension options for amounts that were substantially below the market rent for the property. The lease provided for monthly
rental payments according to a fixed schedule of increasing rent payments. As a result of the below-market extension options, the Company
determined that it was reasonably certain that it would extend the lease and, therefore, included such extended term in its calculation
of the right of use asset (“ROU Asset”) and lease liability recognized in connection with the lease.
In addition to a fixed monthly payment schedule,
the office lease also included an obligation for the Company to make future variable payments for certain common areas and building operating
and lessor costs, which were recognized as expense in the periods in which they are incurred. As a direct pass-through of applicable
expense, such costs were not allocated as a component of the lease.
Effective January 1, 2020, the Company reduced
both the size of the office space leased and the amount of rent payable in the future. As such, the Company recognized a reduction in
both the capitalized amount related to the surrendered office space and a proportionate amount of the liability associated with its future
lease obligations. In January 2020, the Company recorded a loss of $160,000 related to the reduction in its ROU Asset, net of the reduction
in its operating lease liability.
In March 2020, the Company elected not to exercise
the extension options for its office lease. The lease liability associated with the office lease was calculated at March 31, 2020 by
discounting the fixed, minimum lease payments over the remaining lease term, including the below-market extension periods, at a discount
rate of 7.25%, which represents the Company’s estimate of the incremental borrowing rate for a collateralized loan for the type
of underlying asset that was the subject of the office lease at the time the lease liability was evaluated. As a result of non-exercise
of its extension option, the Company reduced the lease liability to reflect only the three remaining rent payments in the second quarter
of 2020.
In July 2020, the lease for the Company’s
office lease was extended for one month to July 31, 2020 at a rate of $10,000. The Company signed a lease for a smaller office suite
in the same building effective August 1, 2020. The lease provided for a term of 30 months expiring on January 31, 2023, at a monthly
base rate of approximately $7,400, with no rent due during the first six months. The Company recognized an ROU asset and lease liability
of $169,800, both of which were non-cash items and are not reflected in the consolidated statement of cash flows. No cash was paid at
the inception of the lease, and a discount rate of 3% was used, based on the interest rates available on secured commercial real estate
loans available at the time. Upon emergence from bankruptcy on September 30, 2021, the Company terminated the office lease agreement,
and the Company had no right of use assets or lease liabilities as of September 29, 2021 and December 31, 2021.
The Company recognized rental expenses as follows:
| |
Successor | | |
Predecessor | |
| |
September 30,
2021 through
December 31, 2021 | | |
Period from January 1, 2021 through September 29,
2021 | | |
Year ended December 31, 2020 | |
| |
| | |
| | |
| |
Fixed rental expense during the year | |
$ | 20,500 | | |
$ | 172,200 | | |
$ | 552,200 | |
Variable lease expense | |
| - | | |
| - | | |
| 23,100 | |
Lease expenses | |
$ | 20,500 | | |
$ | 172,200 | | |
$ | 575,300 | |
11. | FAIR VALUE MEASUREMENT |
Fair value is defined as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair
value must maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible. The fair value
hierarchy under GAAP is based on three levels of inputs.
Level 1 – Quoted prices in active markets
for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that
are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term
of the assets or liabilities.
Level 3 – Unobservable inputs that are
supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and Liabilities Measured and Recorded
at Fair Value on a Recurring Basis
The Company estimates the fair value of derivative
instruments using a discounted cash flow technique and has used creditworthiness inputs that corroborate observable market data evaluating
the Company’s and counterparties’ risk of non-performance.
The Successor of the Company had no interest
rate swaps on December 31, 2021 and for the period from September 30, 2021 through December 31, 2021.
The Predecessor of the Company had no interest
rate swaps since April 2021. In the period from January 1, 2021 through September 29, 2021, the Predecessor of the Company recorded realized
gains from interest rate swaps of $48,700 through the consolidated statement of operations as an increase in interest expense.
As of December 31, 2020, the Company measured
the fair value of its interest rate swaps of $14,091,300 (notional amount) based on Level 2 inputs, due to the usage of inputs that can
be corroborated by observable market data. The Company estimates the fair value of derivative instruments using a discounted cash flow
technique and has used creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’
risk of non-performance. The interest rate swaps had a net fair value liability of $767,900 as of December 31, 2020. In the year
ended December 31, 2020, $1,979,800 was realized through the consolidated statement of operations as an increase in interest expense.
The following table shows, by level within the
fair value hierarchy, the predecessor periods of the Company’s assets and liabilities at fair value on a recurring basis as of
September 29, 2021 and December 31, 2020:
| |
September
29, 2021 (Predecessor) | | |
December
31, 2020 (Predecessor) | |
| |
Total | | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
Derivatives | |
$ | - | | |
| - | | |
$ | - | | |
| - | | |
$ | (767,900 | ) | |
$ | - | | |
$ | (767,900 | ) | |
$ | - | |
Total | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | (767,900 | ) | |
$ | - | | |
$ | (767,900 | ) | |
$ | - | |
There were no transfers into or out of Level
3 during the year ended December 31, 2020, or during the period from January 1, 2021 through September 29, 2021.
Assets Measured and Recorded at Fair Value
on a Nonrecurring Basis
The Company determines fair value of long-lived
assets held and used, such as aircraft and aircraft engines held for lease and these and other assets held for sale, by reference to
independent appraisals, quoted market prices (e.g., offers to purchase) and other factors. The independent appraisals utilized the market
approach which uses recent sales of comparable assets, making appropriate adjustments to reflect differences between them and the subject
property being analyzed. Certain assumptions are used in the management’s estimate of the fair value of aircraft including the
adjustments made to comparable assets, identifying market data of similar assets, and estimating cost to sell. These are considered Level
3 within the fair value hierarchy. An impairment charge is recorded when the Company believes that the carrying value of an asset will
not be recovered through future net cash flows and that the asset’s carrying value exceeds its fair value.
The Successor of the Company did not record impairment
against assets held for sale, because the Effective Date was the same as the reporting date of September 30, 2021.
During the period from July 1 through September
29, 2021, the Predecessor of the Company settled the liabilities subject to compromise by the aircraft included in the assets held for
sale, and no impairment losses were recorded. See Note 4 - reorganization adjustment (b). For the period from January 1, 2021 through
September 29, 2021, the Company recorded impairment losses of $4,204,400 on five assets held for sale, based on appraised values or expected
sales proceeds, which had an aggregate fair value of $29,333,100. During 2020, the Company recorded impairment losses totaling $28,751,800.
Of this total, $14,639,900 was for seven of its aircraft held for lease, comprised of (i) $7,006,600 for two aircraft that were written
down to their estimated sales prices, less cost of sale and were sold in 2020 and (ii) $7,633,300 for five aircraft that were written
down based on third-party appraisals. The Company also recorded losses of $11,337,200 for a turboprop aircraft and three regional jet
aircraft that are held for sale and that were written down based on third-party appraisals and $2,774,700 for two turboprop aircraft
that are being sold in parts and three regional jet aircraft based on their estimated sales prices, less cost of sale.
The following table shows, by level within the
fair value hierarchy, the Company’s assets at fair value on a nonrecurring basis as of September 29, 2021 and December 31, 2020:
| |
Assets Written Down to Fair Value (Predecessor) | | |
Total Losses (Predecessor) | |
| |
September 29, 2021 | | |
December 31, 2020 | | |
| | |
| |
| |
Level | | |
Level | | |
| | |
| | |
| |
| |
Total | | |
1 | | |
2 | | |
3 | | |
Total | | |
1 | | |
2 | | |
3 | | |
Period from
January 1,
2021 through
September 29,
2021 | | |
Year ended
December 31,
2020 | |
Assets held for lease | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 32,650,000 | | |
$ | - | | |
$ | - | | |
$ | 32,650,000 | | |
$ | - | | |
$ | 7,633,300 | |
Assets held for sale | |
| - | | |
| - | | |
| - | | |
| - | | |
| 38,041,600 | | |
| - | | |
| - | | |
| 38,041,600 | | |
| 4,204,400 | | |
| 14,111,900 | |
Total | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 70,691,600 | | |
$ | - | | |
$ | - | | |
$ | 70,691,600 | | |
$ | 4,204,400 | | |
$ | 21,745,200 | |
There were no transfers into or out of Level
3 during the year ended December 31, 2020, or during the period from January 1, 2021 through September 29, 2021.
Fair Value of Other Financial Instruments
The Company’s financial instruments, other
than cash and cash equivalents, consist principally of finance leases receivable, amounts borrowed under the MUFG Credit Facility and
Drake Loan, notes payable under special-purpose financing, its derivative termination liability and its derivative instruments. The fair
value of accounts receivable, accounts payable and the Company’s maintenance reserves and accrued maintenance costs approximates
the carrying value of these financial instruments because of their short-term maturity. The fair value of finance lease receivables approximates
the carrying value. The fair value of the Company’s derivative instruments is discussed in Note 9 and in this note above in “Assets
and Liabilities Measured and Recorded at Fair Value on a Recurring Basis.”
Borrowings under the Company’s Drake Loan
bore floating rates of interest that reset periodically to a market benchmark rate plus a credit margin. The Company believes the effective
interest rate under the Drake Loan approximates current market rates, and therefore that the outstanding principal and accrued interest
of $89,296,000 at December 31, 2020, approximate their fair values on such date. The fair value of the Company’s outstanding balance
of its Drake Loan is categorized as a Level 3 input under the GAAP fair value hierarchy.
The Company believes the effective interest rate
under the special-purpose financings approximates current market rates for such indebtedness at the dates of the consolidated balance
sheets, and therefore that the outstanding principal and accrued interest of $14,150,300 approximate their fair values at December
31, 2020. Such fair value is categorized as a Level 3 input under the GAAP fair value hierarchy.
As part of the Plan of Reorganization, the Bankruptcy
Court approved the settlement of claims reported within Liabilities subject to compromise in the Company’s Consolidated balance
sheet at their respective allowed claim amounts. Accordingly, the Company did not have finance leases receivable, amounts borrowed under
the MUFG Credit Facility and Drake Loan, notes payable under special-purpose financing, its derivative termination liability and its
derivative instruments as of December 31, 2021.
As a result of payment delinquencies by the Company’s
two customers of aircraft subject to sales-type finance leases, the Company recorded a bad debt allowance of $1,297,000 and $1,503,000
during 2021 and 2020, respectively. The finance lease receivables are valued at their collateral value under the practical expedient
alternative.
There were no transfers in or out of assets or
liabilities measured at fair value under Level 3 during 2021 or 2020.
| 12. | COMMITMENTS AND CONTINGENCIES |
In the ordinary course of the Company’s
business, the Company may be subject to lawsuits, arbitrations and administrative proceedings from time to time. The Company believes
that the outcome of any existing or known threatened proceedings, even if determined adversely, should not have a material adverse effect
on the Company’s business, financial condition, liquidity or results of operations.
Income tax provision/(benefit) were comprised
of the following:
| |
Successor | | |
Predecessor | |
| |
September 30, 2021 through
December 31, 2021 | | |
Period from January 1,
2021 through September 29, 2021 | | |
Year ended December 31,
2020 | |
Current income tax provision | |
| | |
| | |
| |
Federal | |
$ | - | | |
$ | 16,900 | | |
$ | (11,400 | ) |
State | |
| 3,200 | | |
| 4,000 | | |
| 4,000 | |
Foreign | |
| (500 | ) | |
| 50,000 | | |
| (20,100 | ) |
| |
| 2,700 | | |
| 70,900 | | |
| (27,500 | ) |
Deferred income tax provision (benefits) | |
| | | |
| | | |
| | |
Federal | |
$ | (2,027,100 | ) | |
| (1,640,000 | ) | |
| (9,589,200 | ) |
State | |
| (28,200 | ) | |
| (103,800 | ) | |
| (90,700 | ) |
Foreign | |
| 11,400 | | |
| (1,700 | ) | |
| (1,351,100 | ) |
Valuation allowance | |
| 1,929,400 | | |
| 1,804,400 | | |
| 7,493,800 | |
| |
| (114,500 | ) | |
| 58,900 | | |
| (3,537,200 | ) |
Income tax provision (benefits) | |
$ | (111,800 | ) | |
$ | 129,800 | | |
$ | (3,564,700 | ) |
Total income tax provision (benefit) differs
from the amount that would be provided by applying the statutory federal income tax rate to pretax earnings as illustrated below:
| |
Successor | | |
Predecessor | |
| |
September 30, 2021 through
December 31, 2021 | | |
Period from January 1,
2021 through September 29, 2021 | | |
Year ended December 31,
2020 | |
Income tax provision (benefit) at statutory federal income tax rate | |
$ | (880,300 | ) | |
$ | 1,711,500 | | |
$ | (9,619,800 | ) |
State tax expense (benefit), net of federal benefit | |
| (200 | ) | |
| 80,200 | | |
| (67,200 | ) |
Foreign tax expenses (benefit) | |
| 581,900 | | |
| 200,800 | | |
| (1,375,000 | ) |
Non-deductible management and acquisition fees | |
| - | | |
| 593,500 | | |
| - | |
PPP loan forgiveness | |
| (59,900 | ) | |
| - | | |
| - | |
Non-taxable income | |
| (4,037,200 | ) | |
| (4,260,600 | ) | |
| - | |
Other non-deductible expenses | |
| 187,600 | | |
| - | | |
| 3,500 | |
Valuation allowance | |
| 4,096,300 | | |
| 1,804,400 | | |
| 7,493,800 | |
Income tax provision (benefits) | |
$ | (111,800 | ) | |
$ | 129,800 | | |
$ | (3,564,700 | ) |
Temporary differences and carry-forwards that
give rise to a significant portion of deferred tax assets and liabilities as of December 31, 2021 and 2020 were as follows:
| |
Successor | | |
Predecessor | |
| |
December 31, | | |
September 29, | | |
December 31, | |
| |
2021 | | |
2021 | | |
2020 | |
Deferred tax assets: | |
| | |
| | |
| |
Debt basis differences | |
$ | 8,560,700 | | |
$ | 8,560,700 | | |
$ | - | |
Current and prior year tax losses | |
| 7,970,100 | | |
| 4,093,400 | | |
| 9,616,600 | |
Deferred interest expense | |
| 4,110,900 | | |
| 4,136,200 | | |
| 3,631,600 | |
Foreign tax credit | |
| 705,600 | | |
| 705,600 | | |
| 573,900 | |
Maintenance reserves | |
| - | | |
| - | | |
| 390,500 | |
Deferred derivative losses | |
| - | | |
| - | | |
| 81,100 | |
Deferred maintenance, bad debt allowance and other | |
| - | | |
| - | | |
| 59,900 | |
Accrued vacation and others | |
| 40,500 | | |
| 51,200 | | |
| - | |
| |
| 21,387,800 | | |
| 17,547,100 | | |
| 14,353,600 | |
Valuation allowance | |
| (12,409,500 | ) | |
| (8,637,800 | ) | |
| (7,493,800 | ) |
Deferred tax
assets, net of valuation allowance | |
$ | 8,978,300 | | |
$ | 8,909,300 | | |
$ | 6,859,800 | |
| |
| | | |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | | |
| | |
Accumulated depreciation on aircraft and aircraft engines | |
$ | (6,556,600 | ) | |
$ | (6,581,300 | ) | |
$ | (5,654,700 | ) |
Deferred income | |
| (2,421,700 | ) | |
| (2,421,700 | ) | |
| (58,000 | ) |
Leasehold interest | |
| - | | |
| - | | |
| 3,800 | |
Unrealized foreign exchange gain | |
| - | | |
| (20,800 | ) | |
| - | |
Deferred tax
liabilities | |
| (8,978,300 | ) | |
| (9,023,800 | ) | |
| (5,708,900 | ) |
Net deferred tax
assets/(liabilities), net of valuation allowance and deferred tax liabilities | |
$ | - | | |
$ | (114,500 | ) | |
$ | 1,150,900 | |
Reported as:
| |
Successor | | |
Predecessor | |
| |
December 31, | | |
September 29, | | |
December 31, | |
| |
2021 | | |
2021 | | |
2020 | |
Deferred tax assets | |
$ | 12,409,500 | | |
$ | 8,523,300 | | |
$ | 8,644,700 | |
Deferred tax liabilities | |
| - | | |
| - | | |
| - | |
Valuation allowance | |
| (12,409,500 | ) | |
| (8,637,800 | ) | |
| (7,493,800 | ) |
Net deferred tax assets/(liabilities) | |
$ | - | | |
$ | (114,500 | ) | |
$ | 1,150,900 | |
Consolidated deferred federal income taxes arise
from temporary differences between the valuation of assets and liabilities as determined for financial reporting purposes and federal
income tax purposes and are measured at enacted tax rates. The Company’s deferred tax items are measured at an effective federal
tax rate of 21.47% as of December 31, 2021 and 2020.
The CARES Act included provisions under which
the amount of deductible interest increased from 30% to 50% of adjusted taxable income for the 2019 and 2020 years. The Company’s
adjusted taxable income is computed without regard to any: (1) item of income, gain, deduction or loss, which is not allocable to its
trade or business; (2) business interest income or expense; (3) net operating loss deduction; and (4) depreciation, amortization or depletion
for tax years beginning before January 1, 2022, but taking into account depreciation, amortization, and depletion thereafter. The amount
of interest deferred under this provision may be carried forward and deducted in years with excess positive adjusted taxable income.
The Company had total disallowed interest expense for the years ended December 31, 2021 and 2020, of $3.1 million and $16.8 million,
respectively. The cumulative deferred interest expense of $19.6 million may be carried forward indefinitely until the Company has excess
positive adjusted taxable income against which it can deduct the deferred interest balance.
The current year federal operating loss carryovers
of approximately $2.3 million will be available to offset 80% of annual taxable income in future years. Approximately $16 million of
federal net operating loss carryovers may be carried forward through 2037 and the remaining $23.0 million federal net operating loss
carryovers may be carried forward indefinitely. The current year state operating loss carryovers of approximately $0.9 million will be
available to offset taxable income in the two preceding years and in future years through 2041. As discussed below, the Company does
not expect to utilize the net operating loss carryovers remaining at December 31, 2021 in future years.
During the year ended December 31, 2021, the
Company had pre-tax profits from domestic sources of approximately $5.6 million and pre-tax profits from foreign sources of approximately
$3.0 million. The Company had pre-tax loss from domestic sources of approximately $6.8 million and pre-tax loss from foreign sources
of approximately $39 million for the year ended December 31, 2020. The year-over-year increase in profit before taxes is mostly driven
by the cancellation of debt income from the Company's reorganization plan. The Company’s foreign tax credit carryover will be available
to offset federal tax expense in future years through 2030.
As of December 31, 2021, the Company has a full
valuation allowance of approximately $12.4 million against its net deferred tax assets not supported by either future taxable income
or availability of future reversals of existing taxable temporary differences, for which realization cannot be considered more likely
than not at this time. In assessing the need for a valuation allowance, the Company considered all positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance.
Recent negative operating results, internal bankrupt reorganization and default on its credit facility has caused the Company to be in
a cumulative loss position as of December 31, 2021.
As of December 31, 2020, the Company had a valuation
allowance of approximately $7.5 million. The net deferred tax assets of $1.15 million at December 31, 2020, represented expected future
refunds for taxes previously paid and recoverable from net operating loss carrybacks of foreign subsidiaries that were not parties to
the U.S. bankruptcy proceedings.
The Company and its subsidiaries file income
tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer
subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2017. At December 31,
2021 and 2020, the Company had a balance of accrued tax, penalties and interest totaling $66,200 and $74,000, respectively, related to
unrecognized tax benefits on its non-U.S. operations included in the Company’s accounts and taxes payable. The Company anticipates
decreases of approximately $10,000 to the unrecognized tax benefits within twelve months of this reporting date. A reconciliation of
the beginning and ending amount of unrecognized tax benefits is as follows:
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
Balance at January 1 | |
$ | 74,000 | | |
$ | 94,400 | |
Additions for prior years’ tax positions | |
| 800 | | |
| 5,100 | |
Reductions from expiration of statute of limitations | |
| (8,600 | ) | |
| (25,500 | ) |
Balance at December 31 | |
$ | 66,200 | | |
$ | 74,000 | |
The Company accounts for interest related to
uncertain tax positions as interest expense, and for income tax penalties as tax expense.
| 1) | Regain compliance
with NYSE |
The Company received
notice from the NYSE American LLC (the “NYSE American”) on September 11, 2020 that it was not in compliance with Section
1003(a)(i) – (iii) of the NYSE American Company Guide (the “Company Guide”). Subsequently, the Company received
notice from the NYSE American on May 28, 2021 that it was not in compliance with Section 1003(a)(ii) of the Company Guide.
As a result of management’s efforts, on
March 11, 2022, the NYSE American informed the Company that it has regained compliance by meeting the exemption requirements under Section
1003(a) of the Company Guide of having at least 1,100,000 shares publicly held, a market value of publicly held shares of at least $15,000,000,
and 400 round lot shareholders.
| 2) | Change of company
name and ticker symbol |
On March 25, 2022, the
Company changed its name from “AeroCentury Corp” to “Mega Matrix Corp.” (“Name Change”) to better
reflect its expansion into Metaverse and GameFi business. In connection with the Name Change, the Company changed its ticker
symbol from “ACY” to “MTMT” on the NYSE American, effective on March 28, 2022.
3) | Issuance of 65,000 common shares of JHC |
In January 2022, JHC
granted 65,000 common shares of JHC to six of its management under 2022 Equity Incentive Plan of JHC.
F-35
Reflects the cumulative impacts of reorganization adjustments.
Reflects settlement of liabilities subject to compromise by the assets held for sale.
Reflects cancellation of paid-in capital of $10,867,900 and treasury stock of $3,037,300 attributable to predecessor shareholders
Reflects final instalment of subscription fees of $100,000 for 14,354,635 common stocks (given effect to five for one forward stock split) paid by the Plan Sponsor, against the bank charges of $1,600
Reflects issuance of 14,354,635 common stocks (given effect to five for one forward stock split) to the Plan Sponsor, at per share of $0.77 (given effect to five for one forward stock split), with total subscription fee of $11,053,100, among which $10,953,100 was paid before September 29, 2021 and $100,000 was paid on September 30, 2021.
The predecessor of the Company started to sell its aircraft before it filed Petitions under Chapter 11 in March 2021, and continued the sales of aircraft through the receipt of the Plan of the Reorganization. As of September 29, 2021, the Company closed sales of five aircraft with carrying amount of $22.3 million, and the proceeds from the sales were settled against the liabilities subject to compromise of $41.6 million, and the Company recognized reorganization gains of $19.3 million.
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