UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 20172021
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ____________ to ____________
Commission File Number:001-13387
Mega Matrix Corp.
(formerly known as AeroCentury Corp.)
(Exact name of Registrant as Specified in Its Charter)
| Delaware | 94-3263974 | |
(State or Other Jurisdiction of | (IRS Employer Identification No.) |
3000 El Camino Real,
Bldg. 4, Suite 310200, Palo Alto, CA 94306
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: (650) 340-1888
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| Common Stock, par value $0.001 per share | MTMT | NYSE American Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer,” “smaller reporting company,” and "smaller reporting company"“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
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 June 30, 2017)such date, as reported by the NYSE American Exchange) was $12,966,200.$ 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.
The number of shares of the Registrant's Common Stockregistrant’s common stock outstanding as of March 8, 201815, 2022 was 1,416,699.22,084,055.
NOTE
Effective March 25, 2022, we changed our name from Aerocentury Corp. to Mega Matrix Corp. to better reflect our expansion into Metaverse and the GameFi businesses. All references in this Annual Report on Form 10-K incorporates information by reference fromand in the Registrant's Proxy Statement for its 2018 Annual Meeting of Stockholders. Except as expressly incorporated by reference, the Registrant's Proxy Statement shall not be deemedexhibits to be a part of this Annual Report on Form 10-K.10-K, unless the context indicates otherwise, to “AeroCentury” refers to AeroCentury Corp. and the “Company,” “we,” “us,” and “our” refers to AeroCentury 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.
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended ("the Exchange Act"(the “Exchange Act”). All statementsAny statement in this Reportreport other than statements of historical fact are "forward-looking statements"may be a forward-looking statement for purposes of these provisions, including any statements of the Company’s plans and objectives for future operations, the Company’s future financial condition or economic performance (including known or anticipated trends), and any statements ofthe assumptions underlying any ofor related to the foregoing. Statements that include the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential,"“may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” “projected,” “intends,” “believes,” or "continue,"“continue,” or the negative thereof, or other comparable terminology, are forward-looking statements.
Forward-looking statements in this report include these statements: (i) in Part I, Item 1, "Businessstatements about the following matters, although this list is not exhaustive:
| ● | the ongoing development of the GameFi industry and the ability of the Company and its subsidiary to continue development of such games; |
| ● | the ability of the Company to continue compliance with the development of applicable regulatory regulations in connection with blockchain, digital asset and the GameFi industry; |
| ● | the impact of certain industry trends on the Company and its performance; |
| ● | the ability of the Company and its customers to comply with applicable government and regulatory requirements in the numerous jurisdictions in which the Company and its customers operate; |
| ● | the Company’s cyber vulnerabilities and the anticipated effects on the Company if a cybersecurity threat or incident were to materialize; |
| ● | general economic, market, political and regulatory conditions, including anticipated changes in these conditions and the impact of such changes on customer demand and other facets of the Company’s business; and |
| ● | the impact of any of the foregoing on the prevailing market price and trading volume of the Company’s common stock. |
All of the Company," that the Company can purchase assets at an appropriate price and maintain an acceptable overall on-lease rate for the Company's assets; and that it is able and willing to enter into transactions with a wider range of lessees than would be possible for traditional, large lending institutions and leasing companies; (ii) in Part I, Item 1, "Working Capital Needs," that the Company will have sufficient cash flow to cover its expenses and provide excess cash flow; and that
This cautionary statements made in this Reportstatement should be read as being applicable toqualifying all related forward-looking statements included in this report, wherever they appear herein.appear. We urge you to consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of forward-looking statements. All forward-looking statements and risk factorsdescriptions of risks included in this documentreport are made as of the date hereof based on information available to the Company as of the date hereof, and except as required by applicable law, the Company assumes no obligation to update any such forward-looking statement or risk factor.for any reason. You should, however, consult the risk factors listedrisks and other disclosures described in the reports the Company files from time to time in the Company's filings with the Securities and Exchange Commission.
Table of Contents
i
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 DelawareCalifornia corporation incorporated in 1997, typically acquires used regional aircraft for lease to regional carriers worldwide. In August 2016, AeroCentury Corp. formed two wholly-owned subsidiaries, ACY 19002 Limited ("ACY 19002"(“Mega”) and ACY 19003 Limited ("ACY 19003") for the purpose of acquiring aircraft usingJetFleet Holding Corp., a combination of cash and financing separate from the parent's credit facility.
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 both JHC and the Company. As discussed in Item 7 – "Overview," below, the Company has entered into an Agreement and Plan of Merger to acquire JHC for ainnovative combination of stockNFTs and cash consideration (the "Merger"). The Merger has not been consummatedDeFi (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 factors concerning it are discussed below under Item 7 – "Outlook,"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 Notes 7 and 13California, United States.
In addition, through our 74.83% ownership in JHC as of December 31, 2021, we will continue to the Company's consolidated financial statementsfocus on third-party management service contracts for aircraft operations. We believe that as passive investor interest in Item 8 of this Annual Report on Form 10-K.
We were also engaged in the business of investing in used regional aircraft equipment leasedand 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 Company's principalfiling 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 objectiveas “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 increase stockholder valuethe 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 acquiring aircraftJHC 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 managing thosecompanies that transact in them.
In addition, since transactions in non-security digital assets in order tosuch as Bitcoin provide a return on investment through lease revenuereasonable 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 eventually, sale proceeds. The Company strives to achieve its business objective by reinvesting cash flowthere is the possibility that law enforcement agencies could close such platforms or other related infrastructure with little or no notice and using short-term and long-term debt and/prevent users from accessing or equity financing.
Digital assets that meet the definition of a lease, the Company's leases generally contain provisions that require lessees to either return the aircraft in a condition that allows the Company to expediently re-lease or sell the aircraft, or pay sufficient amounts based on usage“security” under the leasefederal 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 cover any maintenanceregister 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 overhaulpayment 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 aircraft requiredNFT may have to bringregister with the aircraft to such a state.
Regulations may substantially change in the future only ifand it is presently not possible to know how regulations will apply to our businesses, or when they will be effective. As the Company is able to expand the customer base by re-leasing assets currently on lease to significant customersregulatory and legal environment evolves, we may become subject to new customers and/or acquire assets for leaselaws, 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 new customers.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 provisions regulating dischargegovernment 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 greenhouse gas emissions (including carbon dioxide (CO2))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 environment and/or aircraft noise regulations, nor remedial agreements or other actions relatingUnited States. We will evaluate our development efforts to assess the environment, has had, orexistence and patentability of new intellectual property. To the extent that it is expectedfeasible, we will file new patent applications with respect to have,our technology and trademark applications with respect to our brands.
Additional Information
We are a material effect on the Company's capital expenditures, financial condition, results of operations or competitive position.
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 this information.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:
| ● | variations in our revenues, earnings and cash flow; |
● | 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; |
| ● | changes in the performance or market valuation of our company or our competitors; |
| ● | changes in financial estimates by securities analysts; |
| ● | changes in the number of our users and customers; |
| ● | fluctuations in our operating metrics; |
| ● | failures on our part to realize monetization opportunities as expected; |
| ● | additions or departures of our key management and personnel; |
| ● | detrimental negative publicity about us, our competitors or our industry; |
| ● | market conditions or regulatory developments affecting us or our industry; and |
| ● | 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:
| ● | make a special written suitability determination for the purchaser; |
| ● | receive the purchaser’s written agreement to the transaction prior to sale; |
| ● | 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 |
| ● | 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, 2017,2021, the Company did not own or lease any real property, plant or materially important physical properties. The Company maintainsleases its principal executive office space at 1440 Chapin Avenue,3000 El Camino Real, Building 4, Suite 310,200 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, 94010. However, since the Company has no employees and the Company's portfolio of leased aircraft assets is managed and administeredUnited States under the terms of the Management Agreement with JMC, all office facilities are provided by JMC.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'smechanic’s lien claims by vendors hired by lessees. NoneAlthough 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 current litigation, if resolved adversepending legal proceedings to which the Company is a party or any of its property is subject is anticipated to have a material adverse effect on the Company'sCompany’s business, financial condition or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and
Market Information
The shares of the Company's Common Stock areCompany’s common stock is traded on the NYSE American exchange ("NYSE American")Exchange under the symbol "ACY."“MTMT.”
| Period | High | Low | ||||||
| Fiscal year ended December 31, 2017: | ||||||||
| Fourth Quarter | $ | 15.75 | $ | 12.05 | ||||
| Third Quarter | 16.10 | 10.10 | ||||||
| Second Quarter | 13.10 | 9.65 | ||||||
| First Quarter | 11.10 | 9.00 | ||||||
| Fiscal year ended December 31, 2016: | ||||||||
| Fourth Quarter | 9.69 | 8.50 | ||||||
| Third Quarter | 9.50 | 8.50 | ||||||
| Second Quarter | 11.45 | 8.52 | ||||||
| First Quarter | 14.88 | 10.03 | ||||||
Number of Security Holders
According to the Company'sCompany’s transfer agent, the Company had approximately 1,300398 stockholders of record as of March 8, 2018.15, 2022. Because brokers and other institutions and nominees hold many of the Company’s shares of Common Stock on behalf of beneficial stockholders hold many of the Company's shares of Common Stock,owners, the Company is unable to estimate the total number of beneficial stockholdersowners represented by those record holders.nominees.
Dividends
In connection with the Company’s exit from Chapter 11 reorganization, as set forth in the Combined Disclosure Statement and Joint Chapter 11 Plan of Reorganization of AeroCentury Corp., and Its Affiliated Debtors Docket No. 0282 (the “Plan”) which was previously approved by the U.S. Bankruptcy Court for the District of Delaware on August 31, 2021, the previously approved special cash dividend of $0.6468 per share was paid to date. The Company has no plans at this time to declare or pay dividends, and intends to re-invest any earnings into the acquisitionstockholders that held shares of additional revenue-generating aircraft equipment.
Item 6. Selected Financial Data.Reserved.
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read together with the Company’s audited consolidated financial statements and the related notes included in this report. This discussion and analysis contains forward-looking statements. Please see the cautionary note regarding these statements at the beginning of this report.
Overview
The Company providesis engaged in the GameFi business in the metaverse ecosystem. In addition, to a lesser extent, the Company is engaged in the provision of aircraft advisory and management services since September 30, 2021.
On October 20, 2021, the Company set up 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” on March 25, 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” business model that the players can earn while they play in Mega’s metaverse universe “alSpace”.
Previously, the Company has historically provided leasing and finance services to regional airlines worldwide. The Company isworldwide and has been principally engaged in providing leasing services of mid-life regional aircraft to carriers, includingcustomers worldwide under operating leases and finance leases. In addition to leasing activities, the Company sellshas also sold aircraft from its operating lease portfolio to third parties, including other leasing companies, financial services companies, and airlines, as well as "parting out" aircraft when that is deemed the most profitable means of disposal. The Company'sairlines. Its operating performance iswas driven by the growthcomposition of its aircraft portfolio, the terms of its leases, and the interest rate of its debt, as well as asset sales.
On March 29, 2021, the Company and its subsidiaries filed 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”). The Company 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 September 30, 2021, we emerged from bankruptcy with a restructured balance sheet, a new management team, and a new purpose to focus on new lines of business other than the aircraft leasing business.
On October 26, 2017,September 30, 2021 (“Effective Date”) and pursuant to the Plan Sponsor Agreement, the Company 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 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.
The principal terms of the Plan Sponsor Agreement are below:
| ● | Plan Sponsor Equity Investment. The Plan Sponsor Agreement provides for the issuance by the Company of 14,354,635 shares of common stock (given effect to five for one forward stock split) (“New ACY Shares”) at a purchase price equal to $0.77 (given effect to five for one forward stock split), for an aggregate purchase price of approximately $11 million. The New ACY Shares issuance would result 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”). |
| ● | Refundability of the Deposit. In the event the purchase of the New ACY Shares does not close as a result of Plan Sponsor’s failure to comply with the terms of Plan Sponsor Agreement, the Deposit will be forfeited to the Company. In the event the purchase of the New ACY Shares does not close as a result of Debtors’ failure to comply with the terms of the Plan Sponsor Agreement or the failure of the conditions precedent set forth in the Plan Sponsor Agreement, the Deposit will be refunded to Plan Sponsor. If Bankruptcy Court or any regulatory authority having the authority to block the consummation of the purchase of the New ACY Shares do not approve of the purchase of the New ACY Shares, the Deposit will be refunded to Plan Sponsor. |
| ● | Breakup Fee. If the Bankruptcy Court accepts and approves an exit financing transaction for the Company with a party other than the Plan Sponsor (an “Alternative Transaction”) then the Company shall pay Plan Sponsor, upon the closing of such Alternative Transaction, in addition to the return of the Deposit, a breakup fee equal to $1,000,000. |
| ● | New Capital Structure for JetFleet Holding Corp. (“JHC”). On the Effective Date, the following transactions relating to JHC equity ownership shall be 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 shall acquire 35,000 shares of common stock of JHC, and certain employees of JHC (“JHC Management”) who will be appointed to continue the legacy aircraft leasing business of the Company through JHC shall have the right to acquire 65,000 shares of common stock of JHC. All shares of common stock of JHC will be purchased at a price of $1 per share. In January 2022, JHC Management completed the purchase of 65,000 shares of common stock of JHC. | |
| c) | JHC Series A Preferred Stock Issuance to the Company. The Company will use $2 million of its proceeds from the Plan Sponsor’s purchase of New ACY Shares to purchase 104,082 shares of 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, shall be redeemable by JHC at any time, but shall only be redeemable by the Company after 7 years. As of December 31, 2021, 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”) will be established for the benefit of the Legacy ACY Shareholders, and JHC will issue 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 will be 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 December 23, 2021, the Company filed with the Secretary of Merger to acquire JHC,State of the corporate parentState of JMC, the Company's management company, forDelaware a combinationCertificate of stock and cash consideration. The Merger has not been consummated and factors concerning it are discussed below under "Outlook" as well as in Notes 7 and 13Amendment to the Company's consolidated financial statements in Item 8Certificate of this Annual Report on Form 10-K. TheIncorporation 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 believes that iffrom 13,000,000 to 40,000,000, effective December 30, 2021.
On March 18, 2022, the Merger is consummated, it will recordCompany filed a settlement loss relatedCertificate of Amendment to our Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, amending Article I to change its existing obligations undername from AeroCentury Corp. to Mega Matrix Corp., effective March 25, 2022 (the “Name Change”). In connection with the management agreement with JMCName Change, the Company’s ticker symbol was changed from “ACY” to “MTMT” on the Merger closing date in an amount equal to a substantial portion of the purchase consideration to be paid as part of the Merger. The amount of the loss cannot be ascertained exactly until the Merger closes, as it depends on several variables, including final adjustments to the agreed purchase price and the quoted market price of AeroCentury Common Stock on the Merger closing date, which is expected to occur in early April 2018.NYSE American, effective March 28, 2022.
Results of Operations
Revenues and three engines for cash, exchanged one of its spare engines for 150,000 shares of the Company's common stock held by a stockholder, and reclassified an airframe and one of its engines at lease termination to held for sale for parts, while the second engine remains held for lease. The Company also reclassified an aircraft that had previously been held for sale to held for lease. The Company ended the year with a total of twenty-three aircraft and one engine held for lease, with a net book value of approximately $195 million. This represents a 1% increase compared to the net book value at December 31, 2016. The Company also ended the year with nine aircraft subject to finance leases, of which three were acquired in 2017.Other Income
Revenues and other income decreased by 62% to $6.1 million in the year ended December 31, 2021 from $16.2 million in the year ended December 31, 2020. The decrease was primarily a result of $35.6(i) a 59% decrease in operating lease revenues to $6.3 million increased by $6.8in the year ended December 31, 2021 from $15.5 million compared to 2016, primarilyin the year ended December 31, 2020 as a result of increased operatingreduced rent income from the sale of aircraft during the fourth quarter of 2020 and the whole year of 2021, and (ii) reduced rent for three assets in the 2021 as a result of lease finance leaseextensions and maintenance reserves revenues,related rent reductions, the effects of which were substantiallypartially offset by decreased gains from asset dispositions.
Expenses
December 31, 2017 | December 31, 2016 | |||||||
| Number of aircraft and aircraft engines held for lease | 24 | 28 | ||||||
| Weighted average fleet age | 11.4 years | 11.3 years | ||||||
| Weighted average remaining lease term | 58 months | 59 months | ||||||
| Aggregate fleet net book value | $ | 195,098,200 | $ | 192,799,800 | ||||
| For the Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Average portfolio utilization | 93 | % | 93 | % | ||||
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Type | Number owned | % of net book value | Number owned | % of net book value | ||||||||||||
| Turboprop aircraft: | ||||||||||||||||
| Bombardier Dash-8-400 | 2 | 7 | % | 3 | 11 | % | ||||||||||
| Bombardier Dash-8-300 | 3 | 6 | % | 3 | 6 | % | ||||||||||
| Saab 340B Plus | 4 | 3 | % | 5 | 5 | % | ||||||||||
| Saab 340B | 1 | 1 | % | - | - | |||||||||||
| Fokker 50 | - | - | 1 | 1 | % | |||||||||||
| Regional jet aircraft: | ||||||||||||||||
| Canadair 900 | 4 | 31 | % | 4 | 33 | % | ||||||||||
| Embraer 175 | 3 | 16 | % | - | - | |||||||||||
| Canadair 1000 | 2 | 15 | % | 2 | 16 | % | ||||||||||
| Canadair 700 | 3 | 13 | % | 3 | 14 | % | ||||||||||
| Canadair 705 | 1 | 7 | % | 1 | 8 | % | ||||||||||
| Fokker 100 | - | - | 2 | 2 | % | |||||||||||
| Engines: | ||||||||||||||||
| Pratt & Whitney 150A | 1 | 1 | % | - | - | |||||||||||
| General Electric CF34-8E5A1 | - | - | 2 | 3 | % | |||||||||||
| General Electric CT7-9B | - | - | 2 | 1 | % | |||||||||||
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Region | Net book value | % of net book value | Net book value | % of net book value | ||||||||||||
| Europe | $ | 92,108,500 | 47 | % | $ | 105,088,300 | 55 | % | ||||||||
| North America | 72,270,700 | 37 | % | 42,824,300 | 22 | % | ||||||||||
| Asia | 6,082,100 | 3 | % | 6,463,700 | 3 | % | ||||||||||
| Africa | - | - | 21,724,400 | 11 | % | |||||||||||
| Australia | - | - | 3,585,900 | 2 | % | |||||||||||
| Off lease | 24,636,900 | 13 | % | 13,113,200 | 7 | % | ||||||||||
| $ | 195,098,200 | 100 | % | $ | 192,799,800 | 100 | % | |||||||||
For the year ended December 31, 2017, approximately 28%, 21%, 20%,2021, the Company had total operating expenses of $19.2 million, which was comprised primarily of impairment in value of aircraft, interest expense, professional fees and 11% of the Company's operating lease revenue was derived from customers in Slovenia, the United States, Spainadministrative expenses, and Mozambique, respectively. For the quarter ended December 31, 2017, approximately 29%, 28%, and 21% of the Company's operating lease revenue was derived from customers in Slovenia, the United States, and Spain, respectively. Operating lease revenue does not include interest income from the Company's finance leases.
| For the Years Ended December 31, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| Region | Number of lessees | % of operating lease revenue | Number of lessees | % of operating lease revenue | ||||||||||||
| Europe | 4 | 52 | % | 5 | 41 | % | ||||||||||
| North America | 5 | 29 | % | 3 | 28 | % | ||||||||||
| Africa | 1 | 12 | % | 2 | 18 | % | ||||||||||
| Asia | 1 | 4 | % | 2 | 7 | % | ||||||||||
| Australia | 1 | 3 | % | 1 | 5 | % | ||||||||||
| South America | - | - | 1 | 1 | % | |||||||||||
During the Company's finance lease revenue was derived from customers in Africa and Europe, respectively. For the quarteryear ended December 31, 2017, approximately 70% and 30% of the Company's finance lease revenue was derived from customers in Africa and Europe, respectively.
The Company’s interest expense decreased by 85% to $35.6$2.5 million in 2017the year ended December 31, 2021 from $28.7$16.8 million in 2016.
Professional fees, general and administrative and other expenses increased by 16%$2.2 million, or 50% to $1.9$6.9 million in 2017the year ended December 31, 2021 from $1.7$4.6 million in 2016. The increase wasthe year ended December 31, 2020, primarily a result of $619,400 of expenses incurred in 2017 related to the proposed acquisition of JHC by the Company, the total of which exceeded expenses incurred in 2016 in connection with the return of three aircraft by a lessee.
Depreciation expense decreased by $5.9 million, or 83% to $1.2 million in the year ended December 31, 2021 from $7.0 million in the year ended December 31, 2020 primarily as a result of the reclassification of aircraft from held for lease to held for sale during the fourth quarter of 2020 and second quarter of 2021, as well as a decrease in maintenance performed bydepreciation for two aircraft that were written down to their estimated sale values during the Company on off-lease aircraft to prepare them for sale or re-lease.second quarter of 2020 and were sold during the fourth quarter.
During 2017,the year ended December 31, 2021, the Company recorded impairment charges$27.7 million as reorganization gains.
The Company had a tax provision of (i) $0.7$18,000 for the year ended December 31, 2021 compared to tax benefit of $3.6 million for two turboprop aircraft, based on their appraised values, (ii) $0.1 millionthe year ended December 31, 2020. The effective tax rate for an asset that was written down to its net sales value and subsequently sold in 2017 and (iii) $0.2 million for an asset that was written down to its net sales value and sold in early 2018. During 2016, the Company recorded impairment charges of (i) $0.9 million for a spare engine, based on its appraised value, (ii) $0.2 million on a second spare engine, based on its net sales value and (iii) $0.1 million related to two of its four regional jet aircraft based their net sales value.
Liquidity and Capital Resources
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.
As the Company has disclosed in Note 4 to the expected future tax rate applicableconsolidated financial statements, the Company settled the liabilities subject to when differences betweencompromise with aircraft included in the book carrying valueassets held for sale.
On September 30, 2021 and pursuant to the Plan Sponsor Agreement, the Company closed the transactions with the Plan Sponsor, pursuant to which the Company issued and sold, and the adjusted tax basisPlan 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 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 Plan Sponsor made the payments before September 30, 2021.
As a result of the effectiveness of the Plan, the Company believes it has the ability to meet its obligations for the next 12 months from the date of issuance of this Form 10-K. Accordingly, the accompanying consolidated financial statements 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.
The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities at the date of the financial statements, (ii) the disclosure of contingent assets and liabilities, and (iii) the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. Estimates and judgments are expectedused when 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 be realized (orevaluate whether assets are impaired, accounting for income taxes, and the value or cost of other recognized items, suchamounts recorded as tax credits). As such,allowances for doubtful accounts.
Cash Flow
Because the Company just emerged from bankruptcy on September 30, 2021, the cash flow for the year ended December 31, 2021 was attributable to provision and givenusage by the net deferred tax liability positionpredecessor of the Company for the reducedperiod from January 1, 2021 through September 29, 2021, and provision and usage by the successor of the Company for the period from September 30, 2021 through December 31, 2021.
Since emerging from bankruptcy to date, we have financed the operations primarily through cash flow from operations and capital injections from our sponsors. We plan to support our future corporate rate resulted in a decrease in net tax liabilities, which is reflected as a decrease in tax expense in 2017 of approximately $5.4 millionoperations primarily from cash generated from our operations and a net tax benefit, or increase to income, of $4.0 million.cash on hand.
Currently, the Company's Credit Facility, as described in Note 6(a) to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K, was increased from $150 million to $170 million.
Actual results could deviate substantially from time to time borrow additional funds under the Credit Facility to provide funding for such payments.
The following is a discussion of historical cash flows from operating, investing and financing activities:
Operating activities
The Company’s net cash outflow from operations increased by $3.2was $1.1 million for the period from September 30, 2021 through December 31, 2021, which was mainly attributable to payment of $1.3 million for professional fees and legal expenses with respect to the Company’s Chapter 11 Cases and restructuring and recapitalization effort.
The Company’s net cash outflow from operations was $1.3 million for the period from January 1, 2021 through September 29, 2021, which was mainly attributable collection of finance lease income of $1.1 million, against payment of $2.4 million for professional fees and legal expenses with respect to the Company’s Chapter 11 Cases and restructuring and recapitalization effort.
The Company’s net cash inflow from operations was $4.0 million in 2017 compared to 2016. As discussed below,2020, which was mainly primarily the increase in cash flow was primarily a result of increases in paymentsrents received of $13.4 million and expenditures for operating lease revenueG&A, salaries and maintenance reservesinterest of $3.8 million, $2.1 million and $3.5 million, respectively.
Investing activities
For the period from September 30, 2021 through December 31, 2021, the Company made a decrease in payments for maintenance. This positive effect was partially offset by increases in payments for interest and management fees.
For the period from $24.9 million in 2016, primarily due to additional rent from assets purchased and leased to customers in late 2016 and during 2017.
During the year end December 31, 2020, the Company received net cash of $17.1 million from asset sales.
Financing activities
For the period from September 30, 2021 through December 31, 2021, the Company paid special dividends of $999,800 to stockholders that held shares of Common Stock of the Company as of the effective date of the Plan prior to the sale and issuance of Common Stock of the Company to the plan sponsor investors.
For the period from January 1, 2021 through September 29, 2021, the Plan Sponsor contributed $11.0 million to the Company to subscribe for 14,354,635 shares of common stock (given effect to five for one forward stock split), and repaid notes payable of $16.5 million
During 2020 and 2021, the Company borrowed $5.6 million and $6.3$2.5 million, respectively fromin the saleform of assets. During 2016, the Company also received $18.9 million of insurance proceeds relatedpaid-in-kind interest that was added to the total loss of an aircraft during the period and for the 2015 damage to an aircraft.
Critical Accounting Policies, Judgments and Estimates
The Company'sCompany’s discussion and analysis of its financial condition and results of operations are based upon the consolidated financial statements included in this report, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities at the date of the financial statements.statements or during the applicable reporting period. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, the Company'sCompany’s operating results and financial position could be materially affected. For a further discussion of Critical Accounting Policies, Judgments and Estimates, refer to Note 12 to the Company'sCompany’s consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Disclosure under Item 305 of Regulation S-Kthis item has been omitted pursuant to the rules of the Securities and Exchange CommissionSEC that permit "smallersmaller reporting companies"companies to omit suchthis information.
Item 8. Financial Statements and Supplementary Data.
The financial statements required by this item begin on page F-1 with the index to financial statements followed by the financial statements.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of the end of the period covered by this report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be included in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, relating to the Company, including our consolidated subsidiaries, and was made known to them by others within those entities, particularly during the period when this report was being prepared. Based upon that evaluation, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has concluded that, due to the material weakness described below, as of December 31, 2021, our disclosure controls and procedures were not effective. We will continue undertaking the remedial steps to address the material weakness in our internal control over financial reporting as described below in the section titled “Management’s Report on Internal Control Over Financial Reporting.”
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurances with respect to financial statement preparation and presentation. Additionally, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. As of December 31, 2021, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Based on such assessment, management determined that the Company maintained ineffective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. 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.
This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding the effectiveness of the Company’s internal control over financial reporting, as such report is not required due to the Company’s status as a smaller reporting company.
Change in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the three months ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Directors, Executive Officers and Significant Employees
The following table and text set forth the names and ages of our current directors, executive officers and significant employees as of December 31, 2021. Our Board of Directors is comprised of only one class. All of the directors will serve until the next annual meeting of stockholders or until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. There are no family relationships among any of the directors and executive officers. Our directors have received compensation in the form of cash for their services on the Board.
| Name | Age | Position | |||
| Yucheng Hu | 36 | Chairman, President, Chief Executive Officer, and Director | |||
| Florence Ng(1) | 57 | Vice President of Operations and Business Development, and Director | |||
| Qin (Carol) Wang | 32 | Chief Financial Officer, Treasurer and Secretary | |||
| Siyuan Zhu (2)(3) | 35 | Director | |||
| Jianan Jiang (2)(4) | 36 | Director | |||
| Qin Yao (2)(5) | 39 | Director |
| (1) | On March 25, 2022, Ms. Florence Ng resigned as our Vice President of Operations and Business Development, and was appointed as our Chief Operating Officer, effective on the same day. Ms. Ng continues to serve as a director of the Company. |
| (2) | Independent Director |
| (3) | Chairperson of the Audit Committee and Member of the Compensation Committee |
| (4) | Chairperson of the Compensation Committee and Member of the Audit Committee |
| (5) | Member of the Audit Committee and the Compensation Committee |
There are no arrangements or understandings between our directors and executive officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer.
Business Experience
Mr. Yucheng Hu, Chairman, President and Chief Executive Officer. Mr. Yucheng Hu has been our president and chief executive officer since September 30, 2021, and our director since October 1, 2021. Mr. Hu is the founder of Chengdu Quleduo Technology Co., Ltd., and has served as its Chief Executive Officer since 2011. Mr. Hu is a successful entrepreneur with over 15 years of experience in the internet industry. Mr. Hu established the Xiyou online mobile game platform (wwwx52xiyou.com), which is a popular online gaming platform in China. Mr. Hu has also formed various software programming studios, such as the Mengqu studio, and has developed various mini-programs for social media applications such as the “click-and-play” application for instant on-line games access. Mr. Hu brings a wealth of management experience to the Board, including several executive positions within the internet and online gaming industry. Mr. Hu also helps to satisfy California’s underrepresented community requirement.
Ms. Florence Ng, Chief Operating Officer. Ms. Florence Ng is currently our Chief Operating Officer and has served as our director since October 1, 2021. Ms. Ng previously served as our vice president of operations from September 30, 2021 to March 25, 2022, our vice president of business development from November 1, 2021 to March 25, 2022, and our general counsel from September 30, 2021 to November 1, 2021. Ms. Ng is a lawyer qualified in Hong Kong Special Administrative Region since 2011, specializing in international cross border mergers and acquisitions transactions and corporate commercial matters. Ms. Ng is currently an independent non-executive director of China Internet Investment Finance Holdings Limited (stock code: 810) since 2013, a company listed on the Hong Kong Stock Exchange, and has served as a legal consultant for ATIF Holdings Limited (stock code: ATIF) since 2019, which is a company listed on the Nasdaq Stock Market. Ms. Ng holds a Bachelor’s degree in Art from San Francisco State University, a Bachelor’s degree in Laws from University of London, and a Master’s degree in Laws from the City University of Hong Kong with distinction award. Ms. Ng is a Hong Kong qualified lawyer and brings a wealth of experience in mergers and acquisitions and commercial matters. Ms. Ng also helps to satisfy California’s female and underrepresented community requirements.
Ms. Qin (Carol) Wang, Chief Financial Officer, Treasurer and Secretary. Ms. Qin (Carol) Wang has been our chief financial officer, secretary and treasurer since September 30, 2021. Ms. Wang has been an independent financial consultant since June 2020, specializing in M&A transactions for companies listed on the Nasdaq Stock Market and New York Stock Exchange. Prior to that, Ms. Wang served as the finance controller and financial advisor of TD Holdings, Inc. (NASDAQ: GLG) from February 2018 to May 2020. Through July 2016 to January 2018, Ms. Wang served as a senior investment manager for Yikuan Asset Management Company. Ms. Wang began her career at Ernst & Young where she served as a senior auditor from September 2012 to June 2015. She is skilled at M&A transactions, US GAAP and IFRS financial reporting, implementing new accounting standards, corporate financial management and planning. Ms. Wang holds a Master’s degree in Finance from Renmin University of China and a Bachelor’s degree in Economics from Donghua University. Ms. Wang is a certified public accountant and is a member of the Chinese Institute of Certified Public Accountants and a member of Association of International Accountants.
Ms. Siyuan Zhu. Ms. Siyuan Zhu has been our director since October 1, 2021. Ms. Zhu is currently a senior finance manager of Asia Region of IAC (Shanghai) Management Co., Ltd. since 2016. From 2013 to 2015, Ms. Zhu has served as a finance manager in IAC (Shanghai) Automotive Component Technology Co., Ltd. Prior to 2013, Ms. Zhu held various positions at KPMG Huazhen for a total of seven years and served as a program manager from 2011 to 2013. Ms. Zhu has served as an independent director of TD Holdings, Inc. (NASDAQ: GLG) from May 2019 to April 2021. Ms. Zhu holds a Bachelor’s degree in Foreign Language and Literature from Shanghai International Studies University. Ms. Zhu is a certified public accountant in China and has served as an independent director on another Nasdaq listed company, which, the Company believes, makes Ms. Zhu qualified to be on the Board. Ms. Zhu also helps to satisfy California’s female and underrepresented community requirements.
Mr. Jianan Jiang. Mr. Jianan Jiang has been our director since October 1, 2021. Since February 2019, Mr. Jiang has been serving as the lead data scientist for Stori Card in Washington, DC, which is a fast-growing Fintech company using Artificial Intelligence technology to provide better financial products for the underserved community in Latin America. Prior to that, he worked as data analyst and data science manager for Capital One from October 2014 to January 2019. Mr. Jiang served as co-founder and chief executive office of Schema Fusion LLC from May 2013 to September 2014. Mr. Jiang received his Bachelor’s degree in Civil Engineering from Qingdao Technological University in 2008, and received his Master of Science in Management Science and Engineering from Tongji University in 2011, and received his Master of Science in Engineering and Technology Innovation Management from Carnegie Mellon University in 2013. The Board believes that Mr. Jiang brings a long history of technical experience to the Board which qualifies him to serve on the Board. Mr. Jiang also helps to satisfy California’s underrepresented community requirement.
Ms. Qin Yao. Ms. Qin Yao has been our director since October 1, 2021. Ms. Yao is currently an information engineer at Tencent Holdings Co., Ltd (stock code: 00700), a company listed on the Hong Kong Stock Exchange, and responsible for the products and market expansion of Tencent’s industrial Internet Sector since 2017. From 2010 to 2017, Ms. Yao served as an electronic information engineer in China United Network Communications Co., Ltd. Ms. Yao has more than 10 years of investment experience in the field of cloud computing, big data, artificial intelligence and technology information services. She also has profound knowledge of financial planning, financial budgeting and financial risk management related to the cloud business. Ms. Yao holds a Bachelor’s degree in Electronic Information Engineering from the University of Electronic Science and Technology in Chengdu in 2004. The Board believes Ms. Yao brings a long history of product and market expansion experience to the Board, which qualifies her to serve on the Board. Ms. Yao also helps to satisfy California’s female and underrepresented community requirements.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of our directors or executive officers were involved in any of the following: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Board Meetings and Committees.
During the period between October 1, 2021 through December 31, 2021, the board of directors, post-Bankruptcy, held one meeting. During that period, no incumbent director attended fewer than 74.83% of the meetings of the Board of Directors and its committees on which he or she served that were held during the period in which he or she was a director. The Company has an Audit Committee, a Compensation Committee and an Executive Committee of the Board of Directors, each of which is discussed below.
Audit Committee. The Audit Committee operates under a charter adopted and approved by the board of directors, which is available on the Company’s website at https://file.mtmtgroup.com/uploads/files/468db0660db4a73f43ede24115b704e2.pdf. The Audit Committee meets with the Company’s management and its independent registered public accounting firm to review internal financial information, audit plans and results, and financial reporting procedures. The current Audit Committee consists of Siyuan Zhu (Chair), Qin Yao, and Jianan Jiang. The board of directors has determined that Siyuan Zhu, Qin Yao and Jianan Jiang are independent within the meaning of Sections 803A and 803B(2) of the NYSE American Company Guide, and that Ms. Zhu is an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K promulgated by the SEC. The Audit Committee held six meetings during the fiscal year ended December 31, 2021.
Compensation Committee. The Compensation Committee assists the board of directors in discharging its responsibilities relating to compensation of the Company’s directors and officers and complying with disclosure requirements regarding such compensation, if and when required and in accordance with applicable SEC and stock exchange rules and regulations. The Compensation Committee operates under a charter adopted and approved by the board of directors, which is available on the Company’s website at https://file.mtmtgroup.com/uploads/files/f09b1d6dab27ee8822047a3ff459de31.pdf. The current Compensation Committee consists of Jianan Jiang (Chair), Siyuan Zhu, and Qin Yao. The board of directors has determined that Siyuan Zhu, Jianan Jiang, and Qin Yao are independent within the meaning of Section 803A and 805(c) of the NYSE American Company Guide and Rule 10C-1(b)(1) under the Securities Exchange Act of 1934, and a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act. The Compensation Committee held four meetings during the fiscal year ended December 31, 2021.
Nominating and Governance Committee. The Company does not have a formal nominating committee. The independent directors separately consider and make recommendations to the full board of directors regarding any candidate being considered to serve on the board of directors, and the full board of directors reviews and makes determination regarding such potential candidates. In light of this practice, which is similar to the practices of many boards of directors that have a standing nominating committee, the board of directors believes it is unnecessary to formally establish such a committee.
Although the board of directors does not have a formal policy with respect to board of directors diversity, it strives to constitute the board of directors with directors who bring to our Company a variety of perspectives, cultural sensitivity, life experiences, skills, expertise, and sound business understanding and judgment derived from a broad range of business, professional, community involvement, and finance experiences, as well as directors who have skills and experience that are relevant and helpful to the Company’s industry and operations and who have the desire and capacity to actively serve. In addition, the board of directors is aware of the recently enacted California law requiring publicly held corporations whose principal executive offices are located in California to have (i) at least one (1) female director on their boards by the end of the 2019 calendar year, (ii) at least one (1) to three (3) female directors, depending on the size of the board, by the end of the 2021 calendar year, (iii) at least one (1) director from an underrepresented community by the end of 2021 calendar year, and (iv) at least one (1) to three (3) directors from an underrepresented community by the end of 2022 calendar year. Because our principal executive offices are located in California, we are subject to these requirements. The Company is currently in compliance with this law.
Executive Committee. The Executive Committee has the authority to acquire, dispose of and finance investments for the Company and execute contracts and agreements, including those related to the borrowing of money by the Company, and generally exercises all other powers of the board of directors except for those which require action by all of the directors or the independent directors under the Certificate of Incorporation or the Bylaws of the Company, or under applicable law or stock exchange requirements. The current Executive Committee consists of only two (2) directors, Yucheng Hu and Florence Ng, and did not meet during the fiscal year ended December 31, 2021.
Indemnification Agreements
The Company executed a standard form of indemnification agreement (“Indemnification Agreement”) with each of its Board members and executive officers (each, an “Indemnitee”).
Pursuant to and subject to the terms, conditions and limitations set forth in the Indemnification Agreement, the Company agreed to indemnify each Indemnitee, against any and all expenses incurred in connection with the Indemnitee’s service as our officer, director and or agent, or is or was serving at the Company’s request as a director, officer, employee, agent or advisor of another corporation, partnership, joint venture, trust, limited liability company, or other entity or enterprise but only if the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to our best interest, and in the case of a criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. In addition, the indemnification provided in the indemnification agreement is applicable whether or not negligence or gross negligence of the Indemnitee is alleged or proven. Additionally, the Indemnification Agreement establishes processes and procedures for indemnification claims, advancement of expenses and costs and contribution obligations.
Delinquent Section 16 Filings.
Section 16(a) of the Exchange Act requires the Company’s directors and officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent beneficial owners are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. Based solely upon a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes the Company’s officers, directors and greater than ten percent beneficial owners complied with all Section 16(a) filing requirements applicable to them in the fiscal year ended December 31, 2021.
Code of Ethics.
The Company has adopted a code of business conduct and ethics, or the “code of conduct.” The code of conduct applies to all of the Company’s employees, including its executive officers, and non-employee directors, and it qualifies as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. A copy of the code of conduct is available on the Company’s website at https://file.mtmtgroup.com/uploads/files/ab7adf9a1974a8d7e34a8f1577d01657.pdf or upon written request to the Investor Relations Department, 3000 El Camino Real, Bldg. 4, Suite 200, Palo Alto, California 94306. To the extent required by law, any amendments to, or waivers from, any provision of the code of conduct will be promptly disclosed publicly. To the extent permitted by such requirements, the Company intends to make such public disclosure on its website in accordance with SEC rules.
Item 11. Executive Compensation.
The following table sets forth information concerning all forms of compensation earned by our named executive officers during the year ended December 31, 2021 for services provided to the Company and its subsidiary.
SUMMARY COMPENSATION TABLE
| Name and Position | Year | Salary($) | Bonus($) | All Other Compensation ($) | Total($) | |||||||||||||
| Yuheng Hu, Chairman, President and Chief Executive Officer(1) | 2021 | 48,000 | - | - | 48,000 | |||||||||||||
| Florence Ng, Vice President of Operations and Business Development(2) | 2021 | 60,000 | - | - | 60,000 | |||||||||||||
| Qin (Carol) Wang, Chief Financial Officer, Treasurer and Secretary(3) | 2021 | 30,000 | - | - | 30,000 | |||||||||||||
| Michael G. Magnusson, Former President of the Company(4) | 2021 | 281,250 | - | 879 | 282,129 | |||||||||||||
| 2020 | 375,000 | 18,188 | 3,732 | (5) | 396,920 | |||||||||||||
| Harold M. Lyons, Former Chief Financial Officer, Treasurer and Secretary of the Company(6) | 2021 2020 | 168,750 225,000 |
| - 11,986 | 879 3,732 | (5) | 169,629 240,718 | |||||||||||
| (1) | Mr. Hu was appointed as President and Chief Executive Officer on September 30, 2021. |
| (2) | Ms. Ng was appointed as Vice President of Operations and General Counsel on September 30, 2021. On November 1, 2021, Ms. Ng resigned as our General Counsel and was appointed as our Vice President of Business Development. Ms. Ng did not receive additional compensation for serving as the Company’s Vice President of Business Development. |
| (3) | Ms. Wang was appointed as Chief Financial Officer, Treasurer and Secretary on September 30, 2021. |
| (4) | Mr. Magnusson resigned as President on September 30, 2021. He is Chief Executive Officer of JetFleet Management Corp., a California corporation and of which the Company owns a 74.83% interest. |
| (5) | Consists of a matching contribution under employees’ 401(k) plan and life insurance premiums paid by the Company for each employee. |
| (6) | Mr. Lyons resigned as Chief Financial Officer, Treasurer and Secretary of the Company on September 30, 2021. Mr. Lyons is Chief Financial Officer of JetFleet Management Corp., of which the Company owns a 74.83% interest. |
Narrative Disclosure to Summary Compensation Table
The compensation paid to our named executive officers consists solely of base salary plus cash bonus payments, if any. No named executive officer of the Company receives equity compensation.
On December 29, 2021, our shareholders approved our 2021 Equity Incentive Plan (“2021 Plan”). The 2021 Plan authorizes the issuance of awards for up to 1,100,000 shares of our common stock in the form of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock units, restricted stock awards and unrestricted stock awards to officers, directors and employees of, and consultants and advisors to, the Company or its affiliates. No awards were granted under the 2021 Plan during fiscal year ended December 31, 2021.
In April of 2019, the Board approved a Bonus Plan for which all employees of the Company were eligible. A bonus pool of $294,500 was established as the maximum potential bonus pool available. The amount to be awarded under the Plan was determined based on the Company’s 2019 performance against four target metrics for Company revenue, income, asset on-lease percentage and volume of acquisitions, and a discretionary piece, each weighted at 20%. The metric for revenue growth was fully met and the metric for on-lease percentage of assets surpassed the minimum floor but did not reach the target metric for 2019, and no discretionary amount was added to the pool. Thus, the total bonus pool for 2019 was approximately 24% of the maximum pool bonus amount, or $71,416. The bonus pool allocated to each employee participated in the bonus pool based on a predetermined percentage set by management and approved by the Compensation Committee. Mr. Magnusson and Mr. Lyons were paid bonuses under this plan in February of 2020, in the amounts of $18,188 and $11,986, respectively.
As of December 31, 2021, there are no outstanding options, stock appreciation rights or long-term incentive awards outstanding.
Named Executive Officer Employment Agreements.
Michael G. Magnusson. On May 9, 2019, the Company entered into an Employment Agreement (“Employment Agreement”) with Michael G. Magnusson, the Company’s former President and Chief Executive Officer. The Employment Agreement superseded and replaced Mr. Magnusson’s prior employment agreement with JMC. Mr. Magnusson’s Employment Agreement as President and Chief Executive Officer of the Company was terminated with no further payment pursuant to the Bankruptcy. Following is a summary of the terms of the Employment Agreement with Mr. Magnusson, which does not purport to be complete and is qualified in its entirety by reference to the complete text of the Employment Agreement, a copy of which is filed as Exhibit 10.1 to the Company’s Form 8-K report filed with the SEC on May 13, 2019. The Company is providing this description for informational purposes only. The Employment Agreement was terminated on September 30, 2021 as part of the Plan.
Term: | The initial term of the Employment Agreement expires on December 31, 2021, and is automatically renewable for additional one-year renewal terms unless one party gives the other at least 90 days’ notice prior to scheduled expiration of the Employment Agreement that it will not be renewed. | |
Termination: | The Company may terminate the Employment Agreement at any time for “Cause,” defined as (1) a material breach by Mr. Magnusson of his duties and responsibilities as set forth under the Employment Agreement, resulting from other than Mr. Magnusson’s complete or partial incapacity due to Disability, (2) gross misconduct, (3) a breach of the Employment Agreement, the Company’s employment standards of conduct or employee manual, (4) neglect of duties under the Employment Agreement, or (5) violation of a federal or state law or regulation applicable to the business of the Company. The Company may terminate Mr. Magnusson’s employment for Disability, defined as “any physical or mental incapacitation that results in Mr. Magnusson’s inability to perform his duties and responsibilities for the Company for a period in excess of 90 consecutive days or for more than 120 days during any consecutive 12 month period. Mr. Magnusson may terminate his employment with the Company for Good Reason, defined as one of the following events: (i) a material and adverse change in Mr. Magnusson’s position, duties, responsibilities, or status; (ii) a material reduction in Mr. Magnusson’s salary or benefits then in effect, other than a reduction comparable to reductions generally applicable to similarly situated employees of the Company or (iii) the Company materially breaches this Employment Agreement. | |
Annual Compensation/Signing Bonus: | Mr. Magnusson’s annual base salary for Fiscal Year 2019 is $375,000, with subsequent year base salary rates to be determined at the sole discretion of the Compensation Committee of the board of directors, but in no event less than $375,000. Mr. Magnusson received a $75,000 bonus upon signing of the Employment Agreement. | |
Bonus Compensation: | Mr. Magnusson shall be entitled to participate in all executive cash bonus/long term incentive compensation plan approved by the board of directors for executive officers and key executives of the Company, when and if established by the Compensation Committee, as determined by good faith negotiation with the Compensation Committee. | |
Severance: | In the event the Company terminates the Employment Agreement for any reason other than Cause or Disability, or in the event that Mr. Magnusson terminates the Employment Agreement for Good Reason, Mr. Magnusson will be entitled to severance payments equal to his then effective base salary payable on a semi-monthly basis until the date that is the earlier of (i) the scheduled expiration date of the Employment Agreement or (ii) twenty-four months after such event of termination. If Mr. Magnusson commences subsequent employment during such payment period, the payment amounts during such period shall be reduced by an amount equal to 75% of the base compensation received by Mr. Magnusson from his successor employer during the overlapping period of the severance payment period and Mr. Magnusson’s new employment. |
Yucheng Hu. In connection with Mr. Hu’s appointment as Chairman, President and Chief Executive Officer, and as an executive director of the Company, Mr. Hu entered into the Company’s standard form of employment agreement, effective as of October 1, 2021. The employment agreement provides for an annual base salary of $192,000. In addition, Mr. Hu shall be eligible to receive an annual target cash bonus and equity-based incentive compensation, as determined by the board of directors and the Compensation Committee of the board of directors, employee benefits as may be determined by the Company in its sole discretion, and reimbursement of expenses in the course and scope of authorized Company business. On November 1, 2021, Mr. Hu and the Company amended Mr. Hu’s annual base salary to $1.00. Mr. Hu’s employment is at-will and may be terminated at any time for any reason.
Florence Ng. In connection with Ms. Ng’s appointment as General Counsel and Vice President of Operations, and as an executive director of the Company, Ms. Ng entered into an employment agreement, effective as of October 1, 2021, for a term of three (3) years, which provides for an annual salary of $165,000 and a one-time signing fee of $18,750, plus reimbursement of expenses. Ms. Ng will also be covered under an insurance policy that the Company will maintain providing directors’ and officers’ liability insurance. In addition, Ms. Ng is also eligible for participation in any health insurance coverage plan that currently exists or may be subscribed to by the Company in the future. On November 1, 2021, Ms. Ng entered into an Amendment to Employment Agreement, to change Ms. Ng’s title from “General Counsel and Vice President of Operations” to “Vice President of Operations and Business Development” as a result of Ms. Ng’s relocation to the Company’s headquarters in Palo Alto, California from Hong Kong at the request of the Company to head the Company’s operations and business development. On March 25, 2022, the Company amended the existing employment agreement with Ms. Ng to reflect her new appointment as Chief Operating Officer and her resignation as Vice President of Operations and Business Development. Ms. Ng will not receive additional compensation for serving as the Company’s Chief Operating Officer. The remaining material terms of Ms. Ng’s original employment agreement were unchanged.
Qin (Carol) Wang. In connection with Ms. Wang’s appointment as Chief Financial Officer, Company Secretary and Treasurer of the Company, Ms. Wang entered into the Company’s standard form of employment agreement, effective as of October 1, 2021, for a term of three (3) years, which provides for an annual base salary of $120,000. In addition, Ms. Wang shall be eligible to receive an annual target cash bonus and equity-based incentive compensation, as determined by the board of directors and the Compensation Committee of the board of directors, employee benefits as may be determined by the Company in its sole discretion, and reimbursement of expenses in the course and scope of authorized Company business.
Director Compensation
Director Compensation Table
Below is summary of compensation accrued or paid to our non-executive directors during fiscal year ended December 31, 2021. Mr. Hu, our chairman, chief executive officer and president, and Ms. Ng., our former Vice President of Operations and Business Development and our current Chief Operating Officer, received no compensation for their service as directors and is not included in the table. The compensation Mr. Hu and Ms. Ng receive as an employee of the Company is included in the section titled “Executive Compensation.”
| Name | Year | Fees Earned or Paid in Cash ($) | Stock Awards(2) ($) | Option Awards(3) ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||
| Siyuan Zhu(1) | 2021 | $ | 4,500 | - | $ | - | - | $ | 4,500 | |||||||||||||
| Jianan Jiang(1) | 2021 | $ | 4,500 | - | $ | - | - | $ | 4,500 | |||||||||||||
| Qin Yao (1) | 2021 | $ | 4,500 | - | $ | - | - | $ | 4,500 | |||||||||||||
| Roy E. Hahn(2) | 2021 | $ | 56,625 | - | $ | - | - | $ | 56,625 | |||||||||||||
| 2020 | $ | 75,500 | - | $ | - | - | $ | 75,500 | ||||||||||||||
| Toni M. Perazzo(2) | 2021 | $ | 74,250 | - | $ | - | - | $ | 74,250 | |||||||||||||
| 2020 | $ | 81,500 | - | $ | - | - | $ | 81,500 | ||||||||||||||
| Evan M. Wallach(2) | 2021 | $ | 52,500 | - | $ | - | - | $ | 52,500 | |||||||||||||
| 2020 | $ | 87,500 | - | $ | - | - | $ | 87,500 | ||||||||||||||
| David P. Wilson(2) | 2021 | $ | 56,625 | - | $ | - | - | $ | 56,625 | |||||||||||||
| 2020 | $ | 75,500 | - | $ | - | - | $ | 75,500 | ||||||||||||||
| (1) | Appointed on October 1, 2021. |
| (2) | Resigned on October 1, 2021. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information regarding the beneficial ownership of the Company’s Common Stock as of March 15, 2022 by: (i) each person or entity that is known to the Company to own beneficially more than five percent (5%) of the outstanding shares of the Company’s Common Stock; (ii) each director of the Company; (iii) each named executive officer; and (iv) all directors and named executive officers of the Company as a group.
| Name(1) | No. of | Percentage of Common Stock (3) | ||||||
| Yucheng Hu, Director, Chairman, President and Chief Executive Officer | 7,991,005 | 36.2 | % | |||||
| Florence Ng, Director and Chief Operating Officer (4) | 0 | * | ||||||
| Qin (Carol) Wang, Chief Financial Officer, Company Secretary and Treasurer | 0 | * | ||||||
| Jianan Jiang, Director | 0 | * | ||||||
| Siyuan Zhu, Director | 0 | * | ||||||
| Qin Yao, Director | 0 | * | ||||||
| All directors and executive officers as a group (6 persons) | 7,991,005 | 36.2 | % | |||||
| 5% or greater owners | ||||||||
| Toni M. Perazzo (5) | 1,636,870 | 7.4 | % | |||||
| * | Less than 1% |
| (1) | Unless otherwise indicated, the business address of each of the individuals is c/o Mega Matrix Corp., 3000 El Camino Real, Bldg. 4, Suite 200, Palo Alto, California 94306. |
| (2) | Except as indicated in the footnotes to this table, the stockholders named in the table are known to the Company to have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable. Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power, or of which a person has the right to acquire ownership within sixty (60) days after March 15, 2022. |
| (3) | For purposes of calculating percentages, 22,084,055 shares, consisting of all of the outstanding shares of Common Stock (excluding Company treasury stock) outstanding as of March 15, 2022. |
| (4) | Ms. Ng resigned as our Vice President of Operations and Business Development on March 25, 2022. On March 25, 2022, Ms. Ng was appointed as our Chief Operating Officer. |
| (5) | Ms. Perazzo is the former Chairperson of the Board of the Company who resigned on October 1, 2021. Includes (i) 80,035 shares of Common Stock held directly by Ms. Perazzo or as beneficiary of a 401(k) custodial account, (ii) 762,165 shares held by an irrevocable trust of which Ms. Perazzo is a beneficial owner; (iii) 762,170 shares held by an irrevocable trust of which a child of Ms. Perazzo is the beneficiary; and (iv) 32,500 shares held in a joint tenancy account with such child. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Board Independence. A majority of the Board of Directors of the Company, consisting of Ms. Zhu, Mr. Jiang and Ms. Yao, are independent directors, as defined in Section 803A of the NYSE American Company Guide. In addition, each of Ms. Zhu, Mr. Jiang and Ms. Yao are members of the Board’s audit, compensation and nominating and governance committees.
Item 14. Principal Accountant Fees and Services.
For the year ended December 31, 2021, the Company’s independent registered public accounting firm was Audit Alliance LLP (“AA”) and for the year ended December 31, 2020, the Company’s independent registered public accounting firm was BDO USA, LLP (“BDO”).
Fees Paid to Principal Independent Registered Public Accounting Firm
The aggregate fees billed by our independent registered public accounting firms, for the years ended December 31, 2021 and 2020 are as follows:
| 2021 | 2020 | |||||||
| Audit fees(1) | $ | 267,000 | $ | 374,950 | ||||
| Audit related fees(2) | - | - | ||||||
| Tax fees(3) | - | - | ||||||
| All other fees(4) | - | - | ||||||
| Total | $ | 267,000 | $ | 374,950 | ||||
| (1) | Audit fees represent fees for professional services provided in connection with the audit of our annual financial statements and the review of our quarterly financial statements and those services normally provided in connection with statutory or regulatory filings or engagements including comfort letters, consents and other services related to SEC matters. This information is presented as of the latest practicable date for this annual report. For the year ended December 31, 2021 and 2020, the aggregate fees for BDO related to audit services is $116,000 and $374,950. For the year ended December 31, 2021, the aggregate fees for AA related to audit services is $151,000. |
| (2) | Audit-related fees represent fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and not reported above under “Audit Fees.” No such fees were incurred during the fiscal year ended December 31, 2020 and 2021. |
| (3) | Our independent registered public accounting firms did not provide us with tax compliance, tax advice or tax planning services. No such fees were incurred during the fiscal years ended December 31, 2021 or 2020. |
| (4) | All other fees include fees billed by our independent registered public accounting firms for products or services other than as described in the immediately preceding three categories. No such fees were incurred during the fiscal years ended December 31, 2021 or 2020. |
Audit Committee Pre-Approval Policies and Procedures. The retainer agreements between the Company and the independent public accounting firms setting forth the terms and conditions of and estimated fees to be paid to the independent public accounting firms for audit and tax return preparation services were pre-approved by the Audit Committee at the beginning of the respective engagements. Pursuant to its charter, the Audit Committee’s policy is to pre-approve all audit and non-audit services provided by the independent public accounting firm, except as may be permitted by applicable law. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to its Chair when expedition of services is necessary. The independent public accounting firm and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. None of the services rendered by the independent public accounting firm in 2021 or 2020 were rendered pursuant to the de minimis exception established by the SEC, and all such services were pre-approved by the Audit Committee.
PART IV
Item 15. Exhibits, Financial Statements Schedules.
(a) Financial Statements and SchedulesFinancial Statement Schedules.
The following financial statements of the Company, and the Reports of Independent Registered Public Accounting Firms, are included at the end of this report:
Financial Statement Schedules: All schedules have been omitted because the required information is included in the financial statements or notes thereto or because they are not required.
(b) Exhibits:
The following exhibits are filed as part of this Report
| * | These certificates are furnished to, but shall not be deemed to be filed with, the SEC. |
| § | Schedules and other similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K promulgated by the SEC. The signatory hereby undertakes to furnish supplemental copies of any of the omitted schedules and attachments upon request by the SEC. |
| + | Management contract or compensatory plan or arrangement. |
| † | In accordance with Item 601 of Regulation S-K, certain portions of this exhibit will be omitted because they are not material and would likely cause competitive harm to the registrant if disclosed. The registrant agrees to provide an unredacted copy of the exhibit on a supplemental basis to the SEC or its staff upon request. |
Item 16. Form 10-K Summary.
The Company has elected not to provide summary information.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Mega Matrix Corp. | ||
| Dated: March 30, 2022 | By: | /s/ Yucheng Hu |
| Yucheng Hu | ||
Chief Executive Officer (Principal Executive Officer) | ||
| Dated: March 30, 2022 | By: | /s/ Qin (Carol) Wang |
| Qin (Carol) Wang | ||
Chief Financial Officer (Principal Financial and Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
| Signature | Title | Date | ||
| /s/ Yucheng Hu | Chairman of the Board, Chief Executive Officer and President | March 30, 2022 | ||
| Yucheng Hu | ||||
| /s/ Florence Ng | Director and Vice President of Operations and Business Development | March 30, 2022 | ||
| Florence Ng | ||||
| /s/ Jianan Jiang | Director | March 30, 2022 | ||
| Jianan Jiang | ||||
| /s/ Qin Yao | Director | March 30, 2022 | ||
| Qin Yao | ||||
| /s/ Siyuan Zhu | Director | March 30, 2022 | ||
| Siyuan Zhu |
Report of Independent Registered Public Accounting Firm
To the shareholders and board of directors of Mega Matrix Corp. (formerly known as of December 31, 2017 and 2016
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Mega Matrix Corp. (formerly known as AeroCentury Corp.Corp). and subsidiaries (the "Company")Company) as of December 31, 20172021 (Successor Company) and 2016September 30, 2021 (Predecessor Company), and the related consolidated statements of operations, stockholders' equity (deficit) and other comprehensive income (loss), and cash flows for each of the two years in the periodthree months ended December 31, 2017 and2021 (Successor Company), the related notes (collectively referred to as the "consolidated financial statements")nine months ended September 30, 2021 (Predecessor Company). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company atas of December 31, 20172021 (Successor Company) and 2016,September 30, 2021 (Predecessor Company), and the results of its operations and its cash flows for each of the two years in the periodthree months ended December 31, 20172021 (Successor Company), the nine months ended September 30, 2021 (Predecessor Company), in conformity with accounting principlesU.S. generally accepted accounting principles.
The consolidated financial statements of the Company as of December 31, 2020 and for the year then ended (collectively referred to as the “2020 financial statements”), before the effects of the five for one forward stock split discussed in Note 1 to the United Statesfinancial statements, were audited by other auditors whose report, dated April 15, 2021, expressed an unqualified opinion on those statements. We have also audited the adjustments to the 2020 financial statements to retrospectively give effect to the five for one forward stock split, as discussed in Note 1 to the financial statements. In our opinion, such retrospective adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2020 financial statements of America.the Company other than with respect to the retrospective adjustments, and accordingly, we do not express an opinion or any other form of assurance on the 2020 financial statements taken as a whole.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.Basis of Accounting
As discussed in Note 1 and 3 to the consolidated
financial statements, the Company filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on March 29, 2021. The Company's plan of reorganization became effective and the Company emerged from bankruptcy protection on September 30, 2021. In connection with its emergence from bankruptcy, the Company adopted the guidance for fresh start accounting in conformity with FASB ASC Topic 852, Reorganizations, effective as of September 30, 2021. Accordingly, the Company's consolidated financial statements prior to September 30, 2021 are not comparable to its consolidated financial statements for periods after September 30, 2021.Critical Audit Matter
The critical audit matter communicated below is matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of goodwill for adopting fresh-start accounting
As described in Note 4 to the consolidated financial statements, on September 30, 2021, the Company adopted fresh start accounting, and recognized goodwill accordingly. Management, with the assistance of a third-party specialist, estimated the goodwill to be $4.7 million, as the difference between the cash payment by new shareholders, and fair value of net identifiable assets on September 30, 2021.
We identified the valuation of goodwill as a critical audit matter. Certain assumptions used in the Company’s estimate of the fair value of goodwill required significant management judgment. Auditing these assumptions involved subjective and challenging auditor judgments and increased audit effort, including the extent of specialized skills and knowledge needed.
The procedures we performed to address this critical audit matter, among others, included:
| ● | Evaluating the appropriateness of the valuation techniques. |
| ● | Testing the valuation, completeness, and accuracy of the underlying data used to determine the fair value of the goodwill. |
| ● | Utilizing personnel with specialized knowledge and skills in asset valuation to assist in assessing the reasonableness of the adjustments to comparable assets effecting the valuations. |
/s/ Audit Alliance LLP
Singapore, March 30, 2022
We have served as the Company’s auditor since 2021
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
AeroCentury Corp.
Burlingame, California
Opinion on the Consolidated Financial Statements
We have audited, before the effects of the five for one forward stock split discussed in Note 1 to the consolidated financial statements, the accompanying consolidated balance sheet of AeroCentury Corp. (the “Company”) as of December 31, 2020, the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements, before the effects of the five for one forward stock split discussed in Note 1 to the consolidated financial statements, present fairly, in all material respects, the financial position of the Company at December 31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the effects of the five for one forward stock split discussed in Note 1 to the consolidated financial statements, and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by Audit Alliance LLP.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, is in default of its debt obligations under the credit facility, has a net capital deficiency and has filed for protection under the bankruptcy code that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our auditsaudit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.
Our auditsaudit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company'sCompany’s auditor since 2006.from 2006 to 2021.
San Francisco, California
April 15, 2021
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
CONSOLIDATED BALANCE SHEETS
(US Dollar, except for share and Supplementary Data.per share data, unless otherwise stated)
| Successor | Predecessor | |||||||||||
| December 31, | September 29, | December 31, | ||||||||||
| 2021 | 2021 | 2020 | ||||||||||
| ASSETS | ||||||||||||
| Cash and cash equivalents | $ | 7,380,700 | $ | 10,527,200 | $ | 2,408,700 | ||||||
| Accounts receivable | - | - | 256,600 | |||||||||
| Finance leases receivable, net | - | 450,000 | 2,547,000 | |||||||||
| Aircraft held for lease, net | - | - | 45,763,100 | |||||||||
| Property, equipment and furnishings, net | - | - | 14,900 | |||||||||
| Office lease right of use, net | - | - | 142,400 | |||||||||
| Deferred tax asset | - | - | 1,150,900 | |||||||||
| Taxes receivable | 1,235,200 | 1,234,500 | - | |||||||||
| Prepaid expenses and other assets | 645,100 | 1,884,400 | 255,300 | |||||||||
| Goodwill | 4,688,600 | - | - | |||||||||
| Deposit for intangible assets | 1,000,000 | - | - | |||||||||
| Assets held for sale | - | 31,149,300 | 40,838,900 | |||||||||
| Total assets | $ | 14,949,600 | $ | 45,245,400 | $ | 93,377,800 | ||||||
| LIABILITIES AND EQUITY (DEFICIT) | ||||||||||||
| Liabilities: | ||||||||||||
| Accounts payable and accrued expenses | $ | 2,961,300 | $ | 1,513,700 | $ | 367,700 | ||||||
| Accrued payroll | 161,300 | 232,100 | 190,100 | |||||||||
| Notes payable and accrued interest, net | - | - | 88,793,200 | |||||||||
| Derivative termination liability | - | - | 3,075,300 | |||||||||
| Lease liability | - | - | 172,000 | |||||||||
| Maintenance reserves | - | - | 2,000,600 | |||||||||
| Accrued maintenance costs | - | - | 46,100 | |||||||||
| Security deposits | - | - | 716,000 | |||||||||
| Unearned revenues | - | - | 1,027,400 | |||||||||
| Income taxes payable | 13,700 | 19,600 | 900 | |||||||||
| Deferred tax liabilities | - | 114,500 | - | |||||||||
| Subscription fee advanced from the Plan Sponsor | - | 10,953,100 | - | |||||||||
| Liabilities held for sale | - | - | 14,604,800 | |||||||||
| Liabilities subject to compromise | - | 42,029,100 | - | |||||||||
| Total liabilities | 3,136,300 | 54,862,100 | 110,994,100 | |||||||||
| Commitments and contingencies (Note 12) | ||||||||||||
| Equity (deficit): | ||||||||||||
| Preferred stock, $0.001 par value, 2,000,000 shares authorized, no shares issued and outstanding | - | - | - | |||||||||
| Common stock, $0.001 par value, 40,000,000, 13,000,000 and 10,000,000 shares authorized , 22,084,055, 7,729,420 and 7,729,420 shares outstanding at December 31, 2021, September 29, 2021 and December 31, 2020* | 22,100 | 7,700 | 7,700 | |||||||||
| Paid-in capital* | 16,982,700 | 16,811,900 | 16,776,900 | |||||||||
| Accumulated deficit | (4,954,400 | ) | (23,399,000 | ) | (31,361,600 | ) | ||||||
| Accumulated other comprehensive loss | - | - | (2,000 | ) | ||||||||
| 12,050,400 | (6,579,400 | ) | (14,579,000 | ) | ||||||||
| Treasury stock at cost, 0, 213,332 and 213,332 shares at December 31, 2021, September 29, 2021 and December 31, 2020 | - | (3,037,300 | ) | (3,037,300 | ) | |||||||
| Total Mega Matrix Corp. (formerly “AeroCentury Corp.”) stockholders’ equity (deficit) | 12,050,400 | (9,616,700 | ) | (17,616,300 | ) | |||||||
| Non-controlling interests | (237,100 | ) | - | - | ||||||||
| Total Equity (Deficit) | 11,813,300 | (9,616,700 | ) | (17,616,300 | ) | |||||||
| Total liabilities and equity (deficit) | $ | 14,949,600 | $ | 45,245,400 | $ | 93,377,800 | ||||||
| ASSETS | ||||||||
| December 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | 8,657,800 | $ | 2,194,400 | ||||
Accounts receivable, including deferred rent of $707,300 and $604,800 at December 31, 2017 and December 31, 2016, respectively | 3,825,100 | 4,046,100 | ||||||
| Finance leases receivable | 23,561,000 | 17,468,300 | ||||||
Aircraft and aircraft engines held for lease, net of accumulated depreciation of $33,234,200 and $32,639,600 at December 31, 2017 and December 31, 2016, respectively | 195,098,200 | 192,799,800 | ||||||
| Assets held for sale | 4,966,500 | 1,998,100 | ||||||
| Prepaid expenses and other | 301,300 | 229,400 | ||||||
| Total assets | $ | 236,409,900 | $ | 218,736,100 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 645,200 | $ | 1,218,100 | ||||
Notes payable and accrued interest, net of unamortized debt issuance costs of $2,216,000 and $1,999,900 at December 31, 2017 and December 31, 2016, respectively | 145,598,200 | 125,837,900 | ||||||
| Maintenance reserves | 26,942,800 | 29,424,100 | ||||||
| Accrued maintenance costs | 1,275,300 | 965,000 | ||||||
| Security deposits | 3,147,900 | 3,933,200 | ||||||
| Unearned revenues | 2,447,500 | 1,903,900 | ||||||
| Deferred income taxes | 8,533,700 | 12,830,500 | ||||||
| Income taxes payable | 452,600 | 123,200 | ||||||
| Total liabilities | 189,043,200 | 176,235,900 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity: | ||||||||
Preferred stock, $0.001 par value, 2,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||
Common stock, $0.001 par value, 10,000,000 shares authorized, 1,629,999 shares issued, 1,416,699 and 1,566,699 outstanding at December 31, 2017 and December 31, 2016, respectively | 1,600 | 1,600 | ||||||
| Paid-in capital | 14,780,100 | 14,780,100 | ||||||
| Retained earnings | 35,621,800 | 28,222,600 | ||||||
| 50,403,500 | 43,004,300 | |||||||
Treasury stock at cost, 213,300 and 63,300 shares at December 31, 2017 and December 31, 2016 | (3,036,800 | ) | (504,100 | ) | ||||
| Total stockholders' equity | 47,366,700 | 42,500,200 | ||||||
| Total liabilities and stockholders' equity | $ | 236,409,900 | $ | 218,736,100 | ||||
| * | Retrospectively restated to give effect to five for one forward stock split effective December 30, 2021. |
The accompanying notes are an integral part of these consolidated financial statements.
| For the Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Revenues and other income: | ||||||||
| Operating lease revenue, net | $ | 29,002,700 | $ | 24,464,500 | ||||
| Maintenance reserves revenue, net | 3,886,900 | - | ||||||
| Finance lease revenue | 1,571,500 | 868,100 | ||||||
| Net gain on disposal of assets | 791,500 | 2,149,600 | ||||||
| Net gain on sales-type finance leases | 297,400 | 1,216,700 | ||||||
| Other income | 3,800 | 17,400 | ||||||
| 35,553,800 | 28,716,300 | |||||||
| Expenses: | ||||||||
| Depreciation | 12,025,600 | 9,139,700 | ||||||
| Interest | 7,753,200 | 5,339,700 | ||||||
| Management fees | 6,109,200 | 5,216,400 | ||||||
| Maintenance | 2,924,300 | 3,285,700 | ||||||
| Professional fees, general and administrative and other | 1,945,100 | 1,667,600 | ||||||
| Provision for impairment in value of aircraft | 1,002,100 | 1,226,800 | ||||||
| Bad debt expense | - | 835,800 | ||||||
| Insurance | 271,300 | 309,200 | ||||||
| Other taxes | 90,300 | (276,600 | ) | |||||
| 32,121,100 | 26,744,300 | |||||||
| Income before income tax provision | 3,432,700 | 1,972,000 | ||||||
| Income tax (benefit)/provision | (3,966,500 | ) | 750,300 | |||||
| Net income | $ | 7,399,200 | $ | 1,221,700 | ||||
| Earnings per share: | ||||||||
| Basic | $ | 5.10 | $ | 0.78 | ||||
| Diluted | $ | 5.10 | $ | 0.78 | ||||
| Weighted average shares used in earnings per share computations: | ||||||||
| Basic | 1,449,576 | 1,566,699 | ||||||
| Diluted | 1,449,576 | 1,566,699 | ||||||
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(US Dollar, except for share and per share data, unless otherwise stated)
| Successor | Predecessor | |||||||||||
| September 30, 2021 through December 31, 2021 | Period from January 1, 2021 through September 29, 2021 | Year ended December 31, 2020 | ||||||||||
| Revenues and other income: | ||||||||||||
| Operating lease revenue | $ | 540,000 | $ | 5,753,900 | $ | 15,468,100 | ||||||
| Maintenance reserves revenue, net | - | - | 221,400 | |||||||||
| Finance lease revenue | - | - | 56,200 | |||||||||
| Net (loss)/gain on disposal of assets | - | (194,900 | ) | 133,000 | ||||||||
| Other income | 900 | 2,700 | 278,000 | |||||||||
| 540,900 | 5,561,700 | 16,156,700 | ||||||||||
| Expenses: | ||||||||||||
| Impairment in value of aircraft | - | 4,204,400 | 28,751,800 | |||||||||
| Interest | 540,000 | 1,966,700 | 16,819,300 | |||||||||
| Professional fees, general and administrative and other | 3,204,600 | 3,708,500 | 4,617,300 | |||||||||
| Depreciation | - | 1,176,100 | 7,027,200 | |||||||||
| Bad debt expense | 300,000 | 1,147,000 | 1,503,000 | |||||||||
| Salaries and employee benefits | 713,600 | 1,441,900 | 2,043,700 | |||||||||
| Insurance | 86,200 | 661,600 | 797,600 | |||||||||
| PPP Loan forgiveness | - | (279,200 | ) | - | ||||||||
| Maintenance | - | 224,100 | 302,000 | |||||||||
| Other taxes | - | 76,700 | 103,200 | |||||||||
| Loss from operations | 4,844,400 | 14,327,800 | 61,965,100 | |||||||||
| Reorganization gains, net | - | 27,738,300 | - | |||||||||
| (Loss) Income before income tax provision/(benefit) | (4,303,500 | ) | 18,972,200 | (45,808,400 | ) | |||||||
| Income tax provision/(benefit) | (111,800 | ) | 129,800 | (3,564,700 | ) | |||||||
| Net (loss) income | $ | (4,191,700 | ) | $ | 18,842,400 | $ | (42,243,700 | ) | ||||
| Less: Net loss attributable to non-controlling interests | (237,100 | ) | - | - | ||||||||
| Net (loss) income attributable to Mega Matrix Corp. (formerly “AeroCentury Corp.”)’s shareholders | $ | (3,954,600 | ) | $ | 18,842,400 | $ | (42,243,700 | ) | ||||
| (Loss) earnings per share: | ||||||||||||
| Basic* | $ | (0.18 | ) | $ | 2.44 | $ | (5.47 | ) | ||||
| Diluted* | $ | (0.18 | ) | $ | 2.44 | $ | (5.47 | ) | ||||
| Weighted average shares used in (loss) earnings per share computations: | ||||||||||||
| Basic* | 22,084,055 | 7,729,420 | 7,729,420 | |||||||||
| Diluted* | 22,084,055 | 7,729,420 | 7,729,420 | |||||||||
| Net (loss) income | $ | (4,191,700 | ) | $ | 18,842,400 | $ | (42,243,700 | ) | ||||
| Other comprehensive income (loss): | ||||||||||||
| Unrealized losses on derivative instruments | - | - | (575,000 | ) | ||||||||
| Reclassification of net unrealized losses on derivative instruments to interest expense | - | 2,600 | 2,318,600 | |||||||||
| Tax expense related to items of other comprehensive loss | - | (600 | ) | (374,800 | ) | |||||||
| Other comprehensive income | - | 2,000 | 1,368,800 | |||||||||
| Total comprehensive (loss) income | (4,191,700 | ) | 18,844,400 | (40,874,900 | ) | |||||||
| Less: comprehensive loss attributable to non-controlling interests | (237,100 | ) | - | - | ||||||||
| Total comprehensive (loss) income attributable to Mega Matrix Corp. (formerly “AeroCentury Corp.”)’s shareholders | $ | (3,954,600 | ) | $ | 18,844,400 | $ | (40,874,900 | ) | ||||
| * | Retrospectively restated to give effect to five for one forward stock split effective December 30, 2021. |
The accompanying notes are an integral part of these consolidated financial statements.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
(US Dollar, except for share data, unless otherwise stated)
| Number of Common Stock Shares Outstanding | Common Stock | Paid-in Capital | Retained Earnings | Treasury Stock | Total | |||||||||||||||||||
| Balance, December 31, 2015 | 1,566,699 | $ | 1,600 | $ | 14,780,100 | $ | 27,000,900 | $ | (504,100 | ) | $ | 41,278,500 | ||||||||||||
| Net income | - | - | - | 1,221,700 | - | 1,221,700 | ||||||||||||||||||
| Balance, December 31, 2016 | 1,566,699 | 1,600 | 14,780,100 | 28,222,600 | (504,100 | ) | 42,500,200 | |||||||||||||||||
| Repurchase of shares | (150,000 | ) | - | - | - | (2,532,700 | ) | (2,532,700 | ) | |||||||||||||||
| Net income | - | - | - | 7,399,200 | 7,399,200 | |||||||||||||||||||
| Balance, December 31, 2017 | 1,416,699 | $ | 1,600 | $ | 14,780,100 | $ | 35,621,800 | $ | (3,036,800 | ) | $ | 47,366,700 | ||||||||||||
| Mega Matrix Corp. (formerly “AeroCentury Corp.”) Stockholder’s Equity | ||||||||||||||||||||||||||||||||
| Common Stock | Retained | Accumulated Other | Non- | |||||||||||||||||||||||||||||
| Number of Stocks* | Amount* | Paid-in Capital* | Earnings/ (Deficit) | Treasury Stock | Comprehensive Loss | Controlling Interests | Total | |||||||||||||||||||||||||
| Balance, December 31, 2019 | 7,729,420 | $ | 7,700 | $ | 16,776,900 | $ | 10,882,100 | $ | (3,037,300 | ) | $ | (1,370,800 | ) | $ | - | $ | 23,258,600 | |||||||||||||||
| Net loss | - | - | - | (42,243,700 | ) | - | - | - | (42,243,700 | ) | ||||||||||||||||||||||
| Accumulated other comprehensive income | - | - | - | - | - | 1,368,800 | - | 1,368,800 | ||||||||||||||||||||||||
| Balance, December 31, 2020 | 7,729,420 | 7,700 | 16,776,900 | (31,361,600 | ) | (3,037,300 | ) | (2,000 | ) | - | (17,616,300 | ) | ||||||||||||||||||||
| Net income | - | - | - | 7,962,600 | - | - | - | 7,962,600 | ||||||||||||||||||||||||
| Accumulated other comprehensive income | - | - | - | - | - | 2,000 | - | 2,000 | ||||||||||||||||||||||||
| Contribution into JetFleet Holding Corp. (“JHC”) | - | - | 35,000 | - | - | - | - | 35,000 | ||||||||||||||||||||||||
| Balance, September 29, 2021 (Predecessor) | 7,729,420 | 7,700 | 16,811,900 | (23,399,000 | ) | (3,037,300 | ) | - | - | (9,616,700 | ) | |||||||||||||||||||||
| Net income | - | - | - | 10,879,800 | - | - | - | 10,879,800 | ||||||||||||||||||||||||
| Cancellation of predecessor equity | - | - | (10,867,900 | ) | 12,519,200 | 3,037,300 | - | - | 4,668,600 | |||||||||||||||||||||||
| Balance, September 29, 2021 (Predecessor) | 7,729,420 | 7,700 | 5,944,000 | - | - | - | - | 5,951,700 | ||||||||||||||||||||||||
| Issuance of common stocks to the Plan Sponsor | 14,354,635 | 14,400 | 11,038,700 | - | - | - | - | 11,053,100 | ||||||||||||||||||||||||
| Declaration and payment of dividends | - | - | - | (999,800 | ) | - | - | - | (999,800 | ) | ||||||||||||||||||||||
| Net loss | - | - | - | (3,954,600 | ) | - | - | (237,100 | ) | (4,191,700 | ) | |||||||||||||||||||||
| Balance, December 31, 2021 (Successor) | 22,084,055 | $ | 22,100 | $ | 16,982,700 | $ | (4,954,400 | ) | $ | - | $ | - | $ | (237,100 | ) | $ | 11,813,300 | |||||||||||||||
| * | Retrospectively restated to give effect to five for one forward stock split effective December 30, 2021. |
The accompanying notes are an integral part of these consolidated financial statements.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US Dollar, unless otherwise stated)
| Successor | Predecessor | |||||||||||
| September 30, 2021 through December 31, 2021 | Period from January 1, 2021 through September 29, 2021 | Year ended December 31, 2020 | ||||||||||
| Operating activities: | ||||||||||||
| Net income (loss) | $ | (4,191,700 | ) | $ | 18,844,400 | $ | (42,243,700 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||||||
| Net (gain) loss on disposal of assets | - | 194,900 | (133,000 | ) | ||||||||
| Depreciation | - | 1,176,100 | 7,027,200 | |||||||||
| Provision for impairment in value of aircraft | - | 4,204,400 | 28,751,800 | |||||||||
| Provision for bad debts | 300,000 | 1,147,000 | 1,503,000 | |||||||||
| Non-cash interest | - | 2,669,600 | 4,583,500 | |||||||||
| Deferred income taxes | (114,500 | ) | 1,265,400 | (3,537,300 | ) | |||||||
| PPP loans forgiveness | - | (279,200 | ) | - | ||||||||
| Reorganization gains | - | (27,738,300 | ) | - | ||||||||
| Derivative valuations | - | 2,600 | 1,743,100 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | - | (1,570,500 | ) | 800,100 | ||||||||
| Finance leases receivable | 150,000 | - | (12,100 | ) | ||||||||
| Office lease right of use | - | 142,400 | 805,900 | |||||||||
| Prepaid expenses and other current assets | 1,239,300 | (287,000 | ) | (12,400 | ) | |||||||
| Taxes receivable | (700 | ) | (1,169,300 | ) | (53,800 | ) | ||||||
| Accounts payable and accrued expenses | 1,547,600 | 275,000 | (360,400 | ) | ||||||||
| Accrued payroll | (70,800 | ) | 42,000 | 25,900 | ||||||||
| Accrued interest on notes payable | - | 2,600 | 5,971,900 | |||||||||
| Derivative liability | - | (106,700 | ) | (1,056,600 | ) | |||||||
| Swap termination liability | - | 33,200 | 3,075,300 | |||||||||
| Office lease liability | - | (172,000 | ) | (164,400 | ) | |||||||
| Maintenance reserves and accrued costs | - | 60,600 | (752,600 | ) | ||||||||
| Security deposits | - | - | 200,000 | |||||||||
| Unearned revenue | - | - | (2,011,800 | ) | ||||||||
| Income taxes payable | (5,900 | ) | (39,600 | ) | (174,100 | ) | ||||||
| Net cash (used in) provided by operating activities | (1,146,700 | ) | (1,304,400 | ) | 3,975,500 | |||||||
| Investing activities: | ||||||||||||
| Prepayments for intangible assets | (1,000,000 | ) | - | - | ||||||||
| Proceeds from sale of aircraft held for lease, net of re-sale fees | - | - | 13,851,800 | |||||||||
| Proceeds from sale of assets held for sale, net of re-sale fees | - | 12,046,100 | 3,265,200 | |||||||||
| Net cash (used in) provided by investing activities | (1,000,000 | ) | 12,046,100 | 17,117,000 | ||||||||
| Financing activities: | ||||||||||||
| Payments of dividends | (999,800 | ) | - | - | ||||||||
| Subscription fee advanced from the Plan Sponsor | - | 10,953,100 | - | |||||||||
| Capital contribution into JHC | - | 35,000 | - | |||||||||
| Repayment of notes payable – MUFG Credit Facility | - | (11,011,700 | ) | (1,165,000 | ) | |||||||
| Repayment of notes payable – Drake debt | - | (4,753,500 | ) | - | ||||||||
| Repayment of notes payable – Nord Term Loans | - | (703,100 | ) | (16,823,100 | ) | |||||||
| Issuance of notes payable – PPP Loan | - | 170,000 | 276,400 | |||||||||
| Debt issuance costs | - | (5,200 | ) | (1,707,000 | ) | |||||||
| Net cash used in financing activities | (999,800 | ) | (5,315,400 | ) | (19,418,700 | ) | ||||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (3,146,500 | ) | 5,426,300 | 1,673,800 | ||||||||
| Cash, cash equivalents and restricted cash, beginning of period/year | 10,527,200 | 5,100,900 | 3,427,100 | |||||||||
| Cash, cash equivalents and restricted cash, end of period/year | $ | 7,380,700 | $ | 10,527,200 | $ | 5,100,900 | ||||||
The components of Cash Flows
| For the Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Operating activities: | ||||||||
| Net income | $ | 7,399,200 | $ | 1,221,700 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Net gain on disposal of assets | (791,500 | ) | (2,149,600 | ) | ||||
| Net gain on sales-type finance leases | (297,400 | ) | (1,216,700 | ) | ||||
| Depreciation | 12,025,600 | 9,139,700 | ||||||
| Provision for impairment in value of aircraft | 1,002,100 | 1,226,800 | ||||||
| Non-cash interest | 1,012,300 | 879,000 | ||||||
| Deferred income taxes | (4,296,800 | ) | 626,300 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 1,000,700 | 400,100 | ||||||
| Finance leases receivable | (510,700 | ) | (668,200 | ) | ||||
| Prepaid expenses and other | (123,500 | ) | (10,200 | ) | ||||
| Accounts payable and accrued expenses | (572,000 | ) | (152,400 | ) | ||||
| Accrued interest on notes payable | 188,100 | (35,400 | ) | |||||
| Maintenance reserves and accrued costs | (2,171,000 | ) | 698,700 | |||||
| Security deposits | (232,300 | ) | 780,500 | |||||
| Unearned revenue | 608,500 | 481,000 | ||||||
| Income taxes payable | 329,400 | 123,200 | ||||||
| Net cash provided by operating activities | 14,570,700 | 11,344,500 | ||||||
| Investing activities: | ||||||||
Proceeds from sale of aircraft and aircraft engines held for lease, net of re-sale fees | 12,741,200 | 2,918,400 | ||||||
| Proceeds from sale of assets held for sale, net of re-sale fees | 193,000 | 3,422,800 | ||||||
| Proceeds from insurance | - | 18,886,700 | ||||||
| Investment in direct financing leases | (7,614,200 | ) | - | |||||
| Purchases of aircraft and aircraft engines | (32,063,100 | ) | (54,357,600 | ) | ||||
| Net cash used in investing activities | (26,743,100 | ) | (29,129,700 | ) | ||||
| Financing activities: | ||||||||
| Issuance of notes payable – Credit Facility | 35,900,000 | 31,300,000 | ||||||
| Repayment of notes payable – Credit Facility | (12,000,000 | ) | (31,600,000 | ) | ||||
| Debt issuance costs | (1,152,500 | ) | (65,000 | ) | ||||
| Issuance of notes payable – special purpose financing | - | 19,609,900 | ||||||
| Repayment of notes payable – special purpose financing | (4,111,700 | ) | (1,986,300 | ) | ||||
| Net cash provided by financing activities | 18,635,800 | 17,258,600 | ||||||
| Net increase/(decrease) in cash and cash equivalents | 6,463,400 | (526,600 | ) | |||||
| Cash and cash equivalents, beginning of year | 2,194,400 | 2,721,000 | ||||||
| Cash and cash equivalents, end of year | $ | 8,657,800 | $ | 2,194,400 | ||||
| Successor | Predecessor | |||||||||||
| December 31, | September 29, | December 31, | ||||||||||
| 2021 | 2021 | 2020 | ||||||||||
| Cash and cash equivalents | $ | 7,380,700 | $ | 10,527,200 | $ | 2,408,700 | ||||||
| Cash and cash equivalents held for sale | - | - | 345,900 | |||||||||
| Restricted cash held for sale | - | - | 2,346,300 | |||||||||
| Total cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | 7,380,700 | $ | 10,527,200 | $ | 5,100,900 | ||||||
| Successor | Predecessor | |||||||||||
| September 30, 2021 through December 31, 2021 | Period from January 1, 2021 through September 29, 2021 | Year ended December 31, 2020 | ||||||||||
| Payment of interest expenses | $ | - | $ | 186,500 | $ | 3,514,100 | ||||||
| Payment of income tax expenses | $ | 8,600 | $ | 4,000 | $ | 222,900 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
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, typically acquires used regional aircraft1997. All references to the “Company,” or “AeroCentury” refers to AeroCentury Corp. together with its consolidated subsidiaries prior to March 25, 2022, and engines for lease to foreignrenamed “Mega Matrix Corp.” commencing on March 25, 2022, and, domestic regional carriers. except where expressly noted otherwise or the context otherwise requires, its consolidated subsidiaries.
In August 2016, AeroCentury Corp.the Company formed two wholly-owned subsidiaries, ACY 19002 Limited ("(“ACY 19002"19002”) and ACY 19003 Limited ("(“ACY 19003"19003”) for the purpose of acquiring aircraft using a combination of cash and third-party financing ("(“UK LLC SPE Financing"Financing” or “special-purpose financing”) separate from the parent'sCompany’s credit facility. Financial informationfacility (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., ACY 19002et al., Case No. 21-10636.
The Plan was confirmed by the Bankruptcy Court on August 31, 2021, and ACY 19003 (collectively, the "Company") is presentedCompany emerged from the bankruptcy proceedings on a consolidated basisSeptember 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 ("GAAP"(“US GAAP”) based upon.
The accompanying consolidated financial statements have been prepared assuming that the continuationCompany 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 businessCompany’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. All intercompany balancesThe Company had suffered recurring losses from operations, was in default of its debt obligations under the credit facility, and transactionshad 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 eliminatedprepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in consolidation. Certain prior year amounts have been reclassifiedthe 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 conformsignificant 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 year's presentation. These changes didsituation, the Company does not expect a significant impact on the previously reported revenue, net income, stockholders' equity or cash flows.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'sCompany’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 residual values and useful livesapplication of fresh start accounting, realization of goodwill, current value of the Company's long livedCompany’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, accrued maintenance costs, 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 cash equivalentsRestricted 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'sCompany’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'sCompany’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. As discussed in (e) Fair Value Measurements above, the
The Company recorded impairment provisionslosses totaling $1,002,100$4.2 million and $1,226,800$28.8 million in 20172021 and 2016, respectively. 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 or, in certain instances where the differences are not material, using the straight-line method. Costs incurred in connection with the Company's Credit FacilityNord Loans are deferred and amortized using the straight-lineeffective interest method. Commitment fees for unused funds areunder the MUFG Credit Facility were expensed as incurred.
Security Deposits
The Company'sCompany’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'slessee’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'sCompany’s consolidated financial statements, management estimates income taxes in each of the jurisdictions in which the Company operates. This process involves estimating the Company'sCompany’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. Management also assessesIn assessing the likelihood that the Company'svaluation of deferred tax assets, will be recovered from future taxable income, and, to the extent management believesCompany considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized,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 establishes a valuation allowance. Toconsidered several factors when analyzing the extent the Company establishesneed for a valuation allowance or changesincluding the allowance in a period,Company’s current three-year cumulative loss through December 31, 2021, the Company reflectsimpacts of COVID-19 pandemic on the corresponding increase or decrease withinworldwide airline industry and the tax provision inCompany’s recent filing for and emergence from protection under Chapter 11 of the statement of operations.bankruptcy code. Significant management judgment is required in determining the Company'sCompany’s future taxable income for purposes of assessing the Company'sCompany’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 taxestax as other tax expense in the statementsconsolidated 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'slessee’s overall financial condition. If the financial condition of any of the Company'sCompany’s customers deteriorates, it could result in actual losses exceeding any estimated allowances.
The Company had noan allowance for doubtful accounts of $300,000 and $1,503,000 at December 31, 20172021 and 2016.
Maintenance Reserves and Accrued Maintenance Costs
Maintenance costs under the Company'sCompany’s triple net leases are generally the responsibility of the lessees. Some of the Company'sCompany’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'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 endlease-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 ended March 31, 2017of 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 determined that none of its acquired assets qualifiesbeen designated as a business,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 gain, loss or adjustmentlonger 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 carrying value of assets was requiredMUFG Credit Facility were terminated in March 2020 and the Company incurred a $3.1 million obligation in connection with such adoption.
December 31, 2017 | December 31, 2016 | |||||||
| Gross minimum lease payments receivable | $ | 27,074,400 | $ | 20,829,200 | ||||
| Less unearned interest | (3,513,400 | ) | (3,360,900 | ) | ||||
| Finance leases receivable | $ | 23,561,000 | $ | 17,468,300 | ||||
| Years ending | ||||
| 2018 | $ | 6,262,200 | ||
| 2019 | 7,087,600 | |||
| 2020 | 5,036,600 | |||
| 2021 | 5,381,000 | |||
| 2022 | 3,307,000 | |||
| $ | 27,074,400 | |||
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Type | Number owned | % of net book value | Number owned | % of net book value | ||||||||||||
| Regional jet aircraft | 13 | 82 | % | 12 | 73 | % | ||||||||||
| Turboprop aircraft | 10 | 17 | % | 12 | 23 | % | ||||||||||
| Engines | 1 | 1 | % | 4 | 4 | % | ||||||||||
In March 2020, the Company used cashdetermined that the future hedged interest payments related to its five remaining Nord Loan interest rate hedges were no longer probable of $32,063,100occurring, and $54,357,600, respectively, for the purchase and capital improvement of aircraft.
Reclassifications
Certain prior period amounts have been reclassified to conform with the year ended December 31, 2016.current period presentation. These reclassifications had no impact on previously reported net income or cash flows.
Concentration risks
| Years ending | ||||
| 2018 | $ | 24,743,000 | ||
| 2019 | 24,641,300 | |||
| 2020 | 23,003,000 | |||
| 2021 | 15,901,600 | |||
| 2022 | 13,944,000 | |||
| Thereafter | 29,447,400 | |||
| $ | 131,680,300 | |||
| For the Years Ended December 31, | ||||||||
| Operating Lease Revenue | 2017 | 2016 | ||||||
| Europe and United Kingdom | $ | 14,941,100 | $ | 9,999,900 | ||||
| North America | 8,506,700 | 6,840,500 | ||||||
| Africa | 3,306,100 | 4,430,300 | ||||||
| Asia | 1,251,300 | 1,800,400 | ||||||
| Australia | 997,500 | 1,140,000 | ||||||
| Central and South America | - | 253,400 | ||||||
| $ | 29,002,700 | $ | 24,464,500 | |||||
| December 31, | ||||||||
| Net Book Value of Aircraft and Aircraft Engines Held for Lease | 2017 | 2016 | ||||||
| Europe and United Kingdom | $ | 92,108,500 | $ | 105,088,300 | ||||
| North America | 72,270,700 | 42,824,300 | ||||||
| Off lease | 24,636,900 | 13,113,200 | ||||||
| Asia | 6,082,100 | 6,463,700 | ||||||
| Africa | - | 21,724.400 | ||||||
| Australia | - | 3,585,900 | ||||||
| $ | 195,098,200 | $ | 192,799,800 | |||||
| For the Years Ended December 31, | ||||||||
| Finance Lease Revenue | 2017 | 2016 | ||||||
| Africa | $ | 1,180,600 | $ | 868,100 | ||||
| United Kingdom | 390,900 | - | ||||||
| $ | 1,571,500 | $ | 868,100 | |||||
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, 20172020, the Company had five6 significant customers, four5 of which individually accounted for 28%27%, 20%23%, 14%19%, 15% and 11%14%, respectively, of operating lease revenue, and one of which accounted for 75% of finance lease revenue. For the year ended December 31, 2016 the Company had four significant customers, three of which individually accounted for 21%, 17% and 17%, respectively, of operating lease revenue and one1 of which accounted for 100% of finance lease revenue.
At December 31, 2017,2020, the Company had receivables from four2 customers totaling $2,959,200$179,700 related to maintenance reserves for 2020, representing 77%70% of the Company'sCompany’s total accounts receivable,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, andIts 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.
| 4. | FRESH START ACCOUNTING |
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 receivablesfair 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 |
| 5. | AIRCRAFT LEASE ASSETS |
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, 3 and nil, respectively, of the Company’s operating lease assets were subject to manufacturer residual value guarantees totaling $779,700approximately $13.7 million at the end of their lease terms in the second quarter of 2027. The Company considers the best market for parts sales relatedre-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 1 regional jet aircraft held for lease. As of December 31, 2020, the Company had 4 regional jet aircrafts and 2 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 1 and 2 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. In early 2018,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 payments totaling $3,147,600$391,800 in cash and accrued $34,400 in receivables related to these receivables.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.
| 7. | OPERATING SEGMENTS |
For the year ended December 31, 2021, the Company had 2 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 1 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:
| Operating Lease Revenue |
| 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, 2016,2020, the Company had receivables from two customers totaling $2,663,400 representing 78% of the Company's total accounts receivable. The Company received payment for these receivables during 2017.
| 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.
December 31, 2017 | December 31, 2016 | |||||||
| Credit Facility: | ||||||||
| Principal | $ | 134,000,000 | $ | 110,100,000 | ||||
| Unamortized debt issuance costs | (2,216,000 | ) | (1,999,900 | ) | ||||
| Accrued interest | 278,900 | 83,600 | ||||||
| SPE Financing: | ||||||||
| Principal | 13,511,900 | 17,623,600 | ||||||
| Accrued interest | 23,400 | 30,600 | ||||||
| $ | 145,598,200 | $ | 125,837,900 | |||||
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 December 31, 2017, principalthe 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 Company's notes payable were as follows:
| Years ending | ||||
| 2018 | $ | 4,300,700 | ||
| 2019 | 138,498,300 | |||
| 2020 | 4,712,900 | |||
| $ | 147,511,900 | |||
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 acquiredde-designated the two regional jet aircraft using cashrelated 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 financing separaterelated 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 its Credit Facility. The separate SPE Financing resultedhedge accounting in note obligations totaling $19,609,900, which are being paid fromMarch 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 portionresult of the rentCompany’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 related aircraft leases through October 3,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 and November 7, 2020, respectively, and which bear interest at the rate of 4.455% per annum. The borrower under each note obligation is the special purpose entity that owns each aircraft. The notes are collateralizedissued by the aircraftPPP Borrower and are recourse only tois included in the special purpose entity borrower and its aircraft asset, subject to standard exceptions for this type of financing. Payments due under the notes consist of quarterly principal and interest. The combined balance of theCompany's notes payable and accrued interest, matures on theseApril 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, 2017 and2021.
At December 31, 2016 was $13,535,3002021 and $17,654,200, respectively. 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 | ||||
| 9. | DERIVATIVE INSTRUMENTS |
In the first quarter of Management Company
The Company estimates the fair value of derivative instruments using a discounted cash flow technique and Planuses creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’ risk of Merger (the "Merger Agreement")non-performance. Valuation of the derivative instruments requires certain assumptions for underlying variables and the acquisitionuse of JHCdifferent 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 in a reverse triangular merger ("Merger"(the “MUFG Swaps”) for consideration of $3.5were intended to protect against the exposure to interest rate increases on $50 million in cash and 129,286 shares of common stock 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 adjustmenthedge accounting and changes in fair market value thereafter were recognized in earnings as providedthey 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 Merger Agreement.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 submittedhas 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 applicationinvestment 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 Statesurrendered office space and a proportionate amount of California Departmentthe liability associated with its future lease obligations. In January 2020, the Company recorded a loss of Business Oversight (the "DBO")$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 permit ("Permit")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 issue securities to JHC's shareholders inreflect only the Merger, which Permit was issued on February 22, 2018 after a hearing with the DBO. It is anticipated that the closing will occur earlythree remaining rent payments in the second quarter of 2018, upon2020.
In July 2020, the fulfillmentlease for the Company’s office lease was extended for one month to July 31, 2020 at a rate of several conditions, including votes$10,000. The Company signed a lease for a smaller office suite in favorthe 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 Merger by certain specified constituencieslease, and a discount rate of JHC shareholders. 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 is evaluating the accounting for the Merger.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, 2017,2020, $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 accrued $619,400believes that the carrying value of expenses relatedan 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 proposed Merger transaction. Such expenses areaircraft included in professional fees, generalthe assets held for sale, and administrativeno 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 statementsCompany’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 operations.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 conductcourse of the Company'sCompany’s business, the Company ismay 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'sCompany’s business, financial condition, liquidity or results of operations.
| 13. | INCOME TAXES |
Income tax provision/(benefit) were comprised of the Company's common stock outstanding as of December 18, 2009 and the Company entered into a rights agreement dated December 1, 2009 in connection therewith. The rights become exercisable only upon the occurrence of certain events specified in the rights agreement, including the acquisition of 15% of the Company's outstanding common stock by a person or group in certain circumstances. Each right allows the holder, other than an "acquiring person," to purchase one one-hundredth of a share (a unit) of Series A Preferred Stock at an initial purchase price of $97.00 under circumstances described in the rights agreement. The purchase price, the number of units of preferred stock and the type of securities issuable upon exercise of the rights are subject to adjustment. The rights expire at the close of business December 1, 2019 unless earlier redeemed or exchanged. Until a right is exercised, the holder thereof, as such, has no rights as a stockholder of the Company, including the right to vote or to receive dividends.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 are as follows:
| For the Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Current tax provision: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | 800 | 800 | ||||||
| Foreign | 329,500 | 123,200 | ||||||
| Current tax provision | 330,300 | 124,000 | ||||||
| Deferred tax provision/(benefit): | ||||||||
| Federal | 1,159,700 | 626,700 | ||||||
| State | 35,100 | 45,100 | ||||||
| Foreign | (111,300 | ) | (45,500 | ) | ||||
| Net legislative change in corporate tax rate | (5,380,300 | ) | - | |||||
| Deferred tax (benefit)/provision | (4,296,800 | ) | 626,300 | |||||
| Total income tax (benefit)/provision | $ | (3,966,500 | ) | $ | 750,300 | |||
| For the Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Income tax provision at statutory federal income tax rate | $ | 1,167,100 | $ | 670,500 | ||||
| State tax provision, net of federal benefit | 33,100 | 45,200 | ||||||
| Non-deductible expenses | 213,500 | 34,600 | ||||||
| Net legislative change in corporate tax rate | (5,380,200 | ) | - | |||||
| Total income tax (benefit)/provision | $ | (3,966,500 | ) | $ | 750,300 | |||
| 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, 20172021 and 20162020 were as follows:
| Successor | Predecessor | |||||||||||||||||||
| December 31, | December 31, | September 29, | December 31, | |||||||||||||||||
| 2017 | 2016 | 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 | $ | 2,810,200 | $ | 6,846,800 | - | - | 390,500 | |||||||||||||
| Current and prior year tax losses | 3,362,100 | 4,016,000 | ||||||||||||||||||
| Foreign tax credit | 295,800 | 77,700 | ||||||||||||||||||
| Alternative minimum tax credit | 45,500 | 45,500 | ||||||||||||||||||
| Deferred derivative losses | - | - | 81,100 | |||||||||||||||||
| Deferred maintenance, bad debt allowance and other | 38,800 | 62,100 | - | - | 59,900 | |||||||||||||||
| Deferred tax assets | 6,552,400 | 11,048,100 | ||||||||||||||||||
| 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 | (14,591,000 | ) | (23,012,800 | ) | $ | (6,556,600 | ) | $ | (6,581,300 | ) | $ | (5,654,700 | ) | |||||||
| Deferred income | (495,100 | ) | (865,800 | ) | (2,421,700 | ) | (2,421,700 | ) | (58,000 | ) | ||||||||||
| Net deferred tax liabilities | $ | (8,533,700 | ) | $ | (12,830,500 | ) | ||||||||||||||
| 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. As of December 31, 2016, the Company measured its deferred tax items at an effective federal tax rate of 34%. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law. Among other things, the Act reduced the Company's corporate federal tax rate to a flat 21% for years after 2017. As a result, the Company'sThe Company’s deferred tax items are measured at an effective federal tax rate of 21%21.47% as of December 31, 2017. Although realization2021 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 assured, management believes it is more likely than not that the entire deferred federalallocable to its trade or business; (2) business interest income or expense; (3) net operating loss deduction; and (4) depreciation, amortization or depletion for tax asset will be realized.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 federal income tax assets considered realizable could be reduced in the near term if estimates of future taxable income are reduced.interest balance.
The current year federal operating loss carryovers of approximately $16$2.3 million will be available to offset 80% of annual taxable income in future yearsyears. Approximately $16 million of federal net operating loss carryovers may be carried forward through 2037 (and wouldand the remaining $23.0 million federal net operating loss carryovers may be available in the two preceding years if the Company had taxable income in such years).carried forward indefinitely. The current year state operating loss carryovers of approximately $62,000$0.9 million will be available to offset taxable income in the two preceding years and in future years through 2037. The2041. As discussed below, the Company expectsdoes not expect to utilize the net operating loss carryovers remaining at December 31, 20172021 in future years.
During the year ended December 31, 2017,2021, the Company had pre-tax incomeprofits from domestic sources of approximately $2.2$5.6 million and pre-tax incomeprofits from foreign sources of approximately $1.2$3.0 million. The Company had pre-tax incomeloss from domestic sources of approximately $1.6$6.8 million and pre-tax incomeloss from foreign sources of approximately $388,000$39 million for the year ended December 31, 2016.2020. 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 2027.2030.
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 Act repealsnet 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 corporate alternative minimumU.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 tax years beginning afterbefore 2017. In addition, beginning in 2018, the Company's alternative minimum tax credit ("MTC") will be available to offset federal tax expense and is refundable in an amount equal to 50% of the excess MTC for the tax year over the amount of the credit allowable for the year against regular tax liability. In 2021, any remaining MTC will be fully refundable.
| 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.
| 14. | SUBSEQUENT EVENTS |
| 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 Company's tax years remain open to examination other than as barred in the various jurisdictions by statutes of limitation.
For the Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Net income | $ | 7,399,200 | $ | 1,221,700 | ||||
| Weighted average shares outstanding for the period | 1,449,576 | 1,566,699 | ||||||
| Basic earnings per share | $ | 5.10 | $ | 0.78 | ||||
| Diluted earnings per share | $ | 5.10 | $ | 0.78 | ||||
As a result of JHC and JMC and hold significant ownership positions in both JHC andmanagement’s efforts, on March 11, 2022, the Company.
| 2) | Change of company name and ticker symbol |
On March 25, 2022, the assets under management. JMC also receives an acquisition fee for locating assets for the Company. Acquisition fees are included in the cost basis of the asset purchased. JMC may receive a remarketing fee inCompany 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 re-lease or sale of the Company's assets. Remarketing fees are amortized over the applicable lease term or included in the gain or loss on sale. If the Merger is consummated, then the current JMC management fee structure will cease, but the costs previously borne by JMC in managing the Company's assets will be borne byName Change, the Company and will not be limitedchanged 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 fee amount, as was the case when the Management Agreement was in place.
For the Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Management fees | $ | 6,109,200 | $ | 5,204,500 | ||||
| Acquisition fees | 850,500 | 1,124,200 | ||||||
| Remarketing fees | 51,100 | 284,500 | ||||||
F-35