The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
During the six months ended June 30, 2022 and 2021, the
Company paid interest totaling $120,000 and $186,500, respectively. During the six months ended June 30, 2022 and 2021, the Company paid
income taxes totaling $nil and $4,000, respectively.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
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. (the “Company”,
formerly “AeroCentury Corp.” and “ACY”) is a Delaware corporation incorporated in 1997. Through the Company’s
emergence from bankruptcy on September 30, 2021, and new investors and management, the Company became a holding company located in Palo
Alto, California, with two subsidiaries: Mega Metaverse Corp., a California corporation (“Mega”) and JetFleet Holdings Corp.,
a California corporation (“JHC”). On January 1, 2022, JetFleet Management Corp. (“JMC”), a wholly-owned subsidiary
of JHC, was merged with and into JHC, with JHC being the surviving entity. As part of the merger, JHC changed its name to JetFleet Management
Corp. On March 25, 2022, the Company changed its name from “AeroCentury Corp” to “Mega Matrix Corp.” (“Name
Change”) to better reflect its expansion into Metaverse and GameFi business. In connection with the Name Change, the Company changed
its ticker symbol from “ACY” to “MTMT” on the NYSE American, effective on March 28, 2022. All references to the
“Company,” or “AeroCentury” refers to AeroCentury Corp. together with its consolidated subsidiaries prior to March
25, 2022 and renamed “Mega Matrix Corp.” commencing on March 25, 2022.
In August 2016, the Company formed two wholly-owned
subsidiaries, ACY 19002 Limited (“ACY 19002”) and ACY 19003 Limited (“ACY 19003”) for the purpose of acquiring
aircraft using a combination of cash and third-party financing (“UK LLC SPE Financing” or “special-purpose financing”)
separate from the Company’s credit facility (the “MUFG Credit Facility”). The UK LLC SPE Financing was repaid in full
in February 2019 as part of a refinancing involving new non-recourse term loans totaling approximately $44.3 million (“Nord Loans”)
made to ACY 19002, ACY 19003, and two other newly formed special-purpose subsidiaries of the Company, ACY SN 15129 LLC (“ACY 15129”)
and ACY E-175 LLC (“ACY E-175”), which were formed for the purpose of refinancing four of the Company’s aircraft using
the Nord Loans. The Company sold its membership interest in ACY E-175 in March 2021.
On October 20, 2021, the Company 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”
in late March of 2022. Mano is a competitive idle role-playing game (RPG) deploying the concept of GameFi in the innovative NFTs
(non-fungible token) on blockchain technology, with a “Play-to-earn” model that the players can earn while they play in
the Company’s metaverse universe “alSpace”. Our alSpace metaverse platform has been developed. It is our intent
that the alSpace universe will (i) support our NFT games to launch; and (ii) create a marketplace where players and users place
their in-game 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.
Chapter 11 Bankruptcy Emergence
On March 29, 2021 (the “Petition Date”),
the Company and certain of its subsidiaries in the U.S. (collectively, the “Debtors” and the “Debtors-in-Possession”)
filed voluntary petitions for relief (collectively, the “Petitions”) under Chapter 11 of Title 11 (“Chapter 11”)
of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy
Court”). The Chapter 11 cases (the “Chapter 11 Case”) are being jointly administered under the caption In re: AeroCentury
Corp., et al., Case No. 21-10636.
The Plan was confirmed by the Bankruptcy Court
on August 31, 2021, and the Company emerged from the bankruptcy proceedings on September 30, 2021 (“the Effective Date”).
Fresh Start Accounting
Upon emergence from bankruptcy, the Company 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.
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.
2. |
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES |
Basis of presentation
The accompanying unaudited condensed consolidated
financial statements are presented on a consolidated basis in accordance with accounting principles generally accepted in the United States
of America (“US GAAP”) for interim financial information, the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results
for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2022 or for any other period. All intercompany balances and transactions have been eliminated in consolidation.
Non-controlling interests
Non-controlling interests represent the equity
interests of JMC that are not attributable, either directly or indirectly, to the Company. As of June 30, 2022 and December 31, 2021,
non-controlling equity holders held 49% and 24.17% equity interest in JHC, respectively.
Liquidity
As of June 30, 2022, the Company had total net
assets of approximately $9.5 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 unaudited condensed consolidated financial statements for
the three and six months ended June 30, 2022. Accordingly, the accompanying unaudited condensed consolidated financial statements as of
and for the three and six months ended June 30, 2022, have been prepared assuming that the Company will continue as a going concern and
contemplate the realization of assets and the satisfaction of liabilities in the normal course business.
Impact of COVID-19
The Company’s business could be adversely
affected by the effects of epidemic. COVID-19, a novel strain of coronavirus, has spread around the world. The ongoing COVID-19 Pandemic
has had an overwhelming effect on all forms of transportation globally, but most acutely for the airline industry. The combined effect
of fear of infection during air travel and international and domestic travel restrictions has caused a dramatic decrease in passenger
loads in all areas of the world, not just in those countries with active clusters of COVID-19, but in airline ticket net bookings (i.e.
bookings made less bookings canceled) of flights as well. This has led to significant cash flow issues for airlines, including some of
the Company’s customers. The Predecessor provided lease payment reductions to customers, and also sold aircraft to the customers
who failed to make scheduled lease payments.
In the short term, the COVID-19 pandemic has created
uncertainties and risks. Based on the current situation, the Company does not expect a significant impact on the operations and financial
results in the long run. The extent to which COVID-19 impacts the results of operations will depend on the future development of the circumstances,
which is highly uncertain and cannot be predicted with confidence at this time.
Use of Estimates
The Company’s unaudited condensed consolidated
financial statements have been prepared in accordance with US GAAP. The preparation of consolidated financial statements in conformity
with US 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 regards to
these consolidated financial statements are accounting for realization of goodwill, the amount and timing of future cash flows associated
with each asset that are used to evaluate whether assets are impaired, accounting for income taxes, and the amounts recorded as allowances
for doubtful accounts.
Digital assets
Digital assets (including Binance Coin
(BNB), USD Coin (USDC) and Binance USD (BUSD) are included in current assets in the accompanying unaudited condensed consolidated
balance sheets. Digital assets purchased are recorded at cost and digital assets awarded to the Company through its GameFi business
are accounted for in connection with the Company’s revenue recognition policy disclosed below.
Digital assets held are accounted for as intangible
assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually,
or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived
asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the
digital assets at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a
qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more
likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is
required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost
basis of the asset. Subsequent reversal of impairment losses is not permitted.
Purchases of digital assets by the Company, if
any, will be included within investing activities in the accompanying unaudited condensed consolidated statements of cash flows, while
digital assets awarded to the Company through its GameFi are included within operating activities on the accompanying unaudited condensed
consolidated statements of cash flows. The sales of digital assets are included within investing activities in the accompanying unaudited
condensed consolidated statements of cash flows and any realized gains or losses from such sales are included in “realized gain
(loss) on exchange of digital assets” in the unaudited condensed consolidated statements of operations and comprehensive loss. The
Company accounts for its gains or losses in accordance with the first-in first-out method of accounting. As of June 30, 2022, the Company
did not sell its digital assets for cash.
Intangible assets
Purchased intangible assets primarily consist of software, which are
recognized and measured at fair value upon acquisition. Separately identifiable intangible assets that have determinable lives continue
to be amortized over their estimated useful lives using the straight-line method based on their estimated useful lives. The estimated
useful life of software is 3 years.
Impairment of long-lived assets
The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Impairment of $8,300 and $nil of digital assets was recognized
for the three and six months ended June 30, 2022 and 2021, respectively.
Revenue Recognition, Accounts Receivable
and Allowance for Doubtful Accounts
Revenue from GameFi business
In late March 2022, the Company released its first NFT game “Mano”
in the Mega’s metaverse universe platform“alSpace”. Mano is a competitive idle role-playing game (RPG) deploying the concept of GameFi in the innovative application
of NFTs (non-fungible token) based on blockchain technology, with a “Play-to-earn” business model that the players can earn
while they play in the alSpace.
The Company earns transaction fees from players
based on a fixed number of Binance Coin (BNB) of each transaction when they want to upgrade or reset their NFT in Mano. When a player
executes a game transaction through Binance Smart Chain (“BSC”), transaction fee is recognized upon the completion of this
game transaction. Only a single performance obligation is identified for each game transaction, and the performance obligation is satisfied
on the trade date because that is when the underlying game service is identified, the pricing of transaction fee is agreed upon and the
promised services are delivered to customers. All of the Company’s revenues from contracts with customers are recognized at a point
in time. The game service could not be cancelled once it’s executed and is not refundable, so returns and allowances are not applicable.
The Company recognizes revenues on a gross basis as the Company is determined to be the primary obligor in fulfilling the trade order
initiated by the player.
The revenue is in the form of BNB, which is a
cryptocurrency that is primarily used in payment of paying transactions and trading fees through BSC. BNB is convertible to cash
or other digital assets. The BNB is collected just in time in the accounts of MetaMask Wallet of the Company. As of June 30, 2022, the
Company had no accounts receivable due from players.
Revenue from leasing of aircraft assets
Revenue from leasing of aircraft assets pursuant
to operating leases is recognized on a straight-line basis over the terms of the applicable lease agreements. Deferred payments are recorded
as accrued rent when the cash rent received is lower than the straight-line revenue recognized. Such receivables decrease over the term
of the applicable leases. Interest income is recognized on finance leases based on the interest rate implicit in the lease and the outstanding
balance of the lease receivable.
Maintenance reserves retained by the Company at
lease-end are recognized as maintenance reserves revenue.
In instances where collectability is not reasonably
assured, the Company recognizes revenue as cash payments are received. The Company estimates and charges to income a provision for bad
debts based on its experience with each specific customer, the amount and length of payment arrearages, and its analysis of the lessee’s
overall financial condition. If the financial condition of any of the Company’s customers deteriorates, it could result in actual
losses exceeding any estimated allowances.
The Company had an allowance for doubtful accounts
of $nil and $300,000 at June 30, 2022 and December 31, 2021, respectively.
Comprehensive 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.
Taxes
As part of the process of preparing the Company’s consolidated
financial statements, management estimates income taxes in each of the jurisdictions in which the Company operates. This process involves
estimating the Company’s current tax exposure under the most recent tax laws and assessing temporary differences resulting from
differing treatment of items for tax and US GAAP purposes. These differences result in deferred tax assets and liabilities, which are
included in the balance sheet. In assessing the valuation of deferred tax assets, the Company considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income or availability to carryback the losses to taxable income during periods in which those temporary
differences become deductible. The Company considered several factors when analyzing the need for a valuation allowance including the
Company's current three-year cumulative loss through June 30, 2022, the operation forecast, the Company’s
recent filing for protection under Chapter 11 of the bankruptcy code, the operation uncertainty of the Company's new business. Based on
this 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 full
valuation allowance on its deferred tax assets.
Interest Rate Hedging
During the first quarter of 2019, the Company
entered into certain derivative instruments to mitigate its exposure to variable interest rates under the Nord Loan debt and a portion
of the MUFG Indebtedness. Hedge accounting is applied to such a transaction only if specific criteria have been met, the transaction is
deemed to be “highly effective” and the transaction has been designated as a hedge at its inception. Under hedge accounting
treatment, generally, the effects of derivative transactions are recorded in earnings for the period in which the hedge transaction affects
earnings. A change in value of a hedging instrument is reported as a component of other comprehensive income/(loss) and is reclassified
into earnings in the period in which the transaction being hedged affects earnings.
If at any time after designation of a cash flow
hedge, such as those entered into by the Company, it is no longer probable that the forecasted cash flows will occur, hedge accounting
is no longer permitted and a hedge is “de-designated.” After de-designation, if it is still considered reasonably possible
that the forecasted cash flows will occur, the amount previously recognized in other comprehensive income/(loss) will continue to be reversed
as the forecasted transactions affect earnings. However, if after de-designation it is probable that the forecasted transactions will
not occur, amounts deferred in accumulated other comprehensive income/(loss) will be recognized in earnings immediately.
In October 2019, the Company became aware that,
as a result of certain defaults under its MUFG Credit Facility, certain of the forecasted transactions related to its MUFG Credit Facility
interest rate swaps were no longer probable of occurring, hence, those swaps were de-designated from hedge accounting at that time. The
two swaps related to the MUFG Credit Facility were terminated in March 2020 and the Company incurred a $3.1 million obligation in connection
with such termination, payment of which was due no later than the June 30, 2021 maturity of the Drake Loan. As a result of the forecasted
transaction being not probable to occur, accumulated other comprehensive loss of $1,167,700 related to the MUFG Swaps was recognized as
interest expense in the first quarter of 2020.
In March 2020, the Company determined that the
future hedged interest payments related to its five remaining Nord Loan interest rate hedges (the “Nord Swaps”) were no longer
probable of occurring, and consequently de-designated all five swaps from hedge accounting. Additionally, in December 2020, the Company
determined that the interest cash flows that were associated with its three remaining swaps were probable of not occurring after February
2021.
Reclassifications
Certain prior period amounts have been reclassified
to conform with the current period presentation. These reclassifications had no impact on previously reported net income or cash flows.
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 US 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.
3. |
EMERGENCE FROM THE CHAPTER 11 CASES |
On March 29, 2021, the Company and certain of
its subsidiaries in the U.S. filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy
Court. The Chapter 11 Cases are being jointly administered under the caption In re: AeroCentury Corp., et al., Case No. 21-10636.
On July 14, 2021, the Debtors filed the Combined
Disclosure Statement and Joint Chapter 11 Plan of Reorganization of AeroCentury Corp, and Its Affiliated Debtors Docket
No. 0282, with the Bankruptcy Court (the “Combined Plan Statement”). On August 16, 2021, the Company filed the Notice
of Filing of Plan Supplement to the Combined Disclosure Statement and Joint Chapter 11 Plan of AeroCentury Corp., and its Affiliated Debtors,
Docket No. 0266, with the Bankruptcy Court (as may be later amended or supplemented, the “Plan Supplement”). On August
30, 2021, the Company filed the Second Plan Supplement to the Combined Disclosure Statement and Joint Chapter 11 Plan of AeroCentury
Corp., and its Affiliated Debtors, Docket No. 0288, with the Bankruptcy Court. On August 31, 2021, the Bankruptcy Court entered an
order, Docket No. 282 (the “Confirmation Order”), confirming the Plan as set forth in the Combined Plan Statement
and Plan Supplement.
The principal terms of the Plan Sponsor Agreement
were below:
● | Plan Sponsor Equity Investment. The Plan Sponsor Agreement provided for the issuance by the Company of 2,870,927 of Common Stock (“New ACY Shares”) at a purchase price equal to $3.85 per share, for an aggregate purchase price of US$11 million. The New ACY Shares issuance resulted in post-issuance pro forma ownership percentages of the Company common stock of (a) 65% held by the Plan Sponsor, and (b) 35% held by existing shareholders of the Company on the Effective Date (the “Legacy ACY Shareholders”). |
● | New Capital Structure for JetFleet Holding Corp. (“JHC”). On the Effective Date, the following transactions relating to JHC equity ownership was executed: |
|
a) |
Cancellation of the Company’s Equity in JHC. All outstanding stock of JetFleet Holding Corp. (“JHC”) currently held 100% by the Company, was canceled. |
|
b) |
JHC Common Stock Issuance to Plan Sponsor and JHC Management. Plan Sponsor acquired 35,000 shares of common stock of JHC, and certain employees of JHC (“JHC Management”) who would be appointed to continue the legacy aircraft leasing business of the Company through JHC shall acquire 65,000 shares of common stock of JHC. All shares of common stock of JHC would be purchased at a price of $1 per share. |
|
c) |
JHC Series A Preferred Stock Issuance to the Company. The Company used $2 million of its proceeds from the Plan Sponsor’s purchase of New ACY Shares to purchase new JHC Series A Preferred Stock from JHC. The JHC Series A Preferred Stock shall carry a dividend rate of 7.5% per annum, shall be non-convertible and non-transferable, should be redeemable by JHC at any time, but shall only be redeemable by the Company after 7 years. The JHC Series A Preferred Stockholders shall in the aggregate constitute 74.83% of the voting equity of JHC, voting as a single class together with the outstanding JHC Common Stock. |
|
d) |
Distribution of Trust Interest in JHC Series B to Legacy ACY Shareholders. A trust (“Legacy Trust”) was established for the benefit of the Legacy ACY Shareholders, and JHC issued new JHC Series B Preferred Stock to the Legacy Trust. The JHC Series B Preferred Stock issued to the Legacy Trust will have an aggregate liquidation preference of $1, non-convertible, non-transferable, non-voting, will not pay a dividend, and will contain a mandatory, redeemable provision. The JHC Series B Preferred Stock was redeemable for an aggregate amount equal to (i) $1,000,000, if the JHC Series B Preferred Stock is redeemed after the first fiscal year for which JHC reports positive EBITDA for the preceding 12-month period, or (ii) $0.001 per share, if the JHC Series B Preferred Stock is redeemed prior the first fiscal year for which JHC reports positive EBITDA for the preceding 12-month period. |
On September 30, 2021 (“Effective Date”) and pursuant to
the Plan Sponsor Agreement, the Company entered into and consummated (the “Closing”) the transactions contemplated by a Securities
Purchase Agreement (the “Securities Purchase Agreement”) with the Plan Sponsor, and Yucheng Hu, in the capacity as the representative
for the Plan Sponsor thereunder, pursuant to which the Company issued and sold, and the Plan Sponsor purchased, 14,354,635
shares of common stock (given effect to five for one forward stock split), par value $0.001 per share, of the Company (the “ACY
Common Stock”) at $0.77 (given effect to five for one forward stock split) for each share of Common Stock, for an aggregate purchase
price of approximately $11,053,100 (the “Purchase Price”). The Securities Purchase Agreement contained customary representations,
warranties and covenants by the parties to such agreement.
On the Effective Date, the Debtors satisfied all
conditions precedent required for consummation of the Plan as set forth in the Plan, the Plan became effective in accordance with its
terms and the Debtors emerged from the Chapter 11 Cases without any need for further action or order of the Bankruptcy Court.
4. |
GOODWILL FROM FRESH START ACCOUNTING |
In connection with our emergence from bankruptcy
and in accordance with ASC Topic 852, the Company 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. The excess of enterprise value of the
Successor over the fair value of net assets was recorded as goodwill.
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 fair value of net assets as of the Effective Date:
| |
September 30, 2021 | |
Enterprise value | |
$ | 18,883,100 | |
| |
| | |
Cash and cash equivalents | |
$ | 10,625,600 | |
Accounts receivable | |
| 450,000 | |
Finance leases receivable, net | |
| 1,234,500 | |
Taxes receivable | |
| 1,884,400 | |
Fair value of net assets | |
$ | 14,194,500 | |
Goodwill | |
$ | 4,688,600 | |
Digital asset holdings were comprised of the following:
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
USDC | |
$ | 297,400 | | |
$ | - | |
BNB | |
| 6,900 | | |
| - | |
BUSD | |
| 10,200 | | |
| - | |
| |
$ | 314,500 | | |
$ | - | |
Additional information about digital assets
For the six months ended June 30, 2022, the Company received BNB primarily
through GameFi business. The Company generated USDC and BUSD from the exchange of BNB. The following table presents additional information
about digital assets for the six months ended June 30, 2022:
| |
June 30, | |
| |
2022 | |
| |
| |
Opening balance | |
$ | - | |
Receipt of BNB from GameFi business | |
| 326,800 | |
Exchange of BNB into USDC | |
| (297,400 | ) |
Exchange of BNB into BUSD | |
| (10,200 | ) |
Payment of services and charges | |
| (4,000 | ) |
Impairment of BNB | |
| (8,300 | ) |
| |
$ | 6,900 | |
6. |
FINANCE LEASE RECEIVABLE |
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.
For the three months ended June 30, 2022 and 2021,
the Company recorded impairment losses totaling $nil and $2,264,000, respectively, for nil and five of its aircraft held for sale that
were written down to their sales prices, less cost of sale. For the six months ended June 30, 2022 and 2021, the Company recorded impairment
losses totaling $nil and $4,204,400, respectively, for nil and 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 June 30, 2022, the Company had no regional jet aircraft held
for lease. At December 31, 2021, the Company had one regional jet aircraft held for lease.
The Company did not purchase or sell any aircraft
held for lease during the three and six months ended June 30, 2022 and 2021. As a result of its Chapter 11 filing in March 2021 and the
Company’s consequent lack of authority to sell certain assets without the approval of the Bankruptcy Court, as of June 30, 2021,
the Company reclassified all of its off-lease aircraft, comprised of four regional jet aircraft and two turboprop aircraft, from held
for sale to held for lease.
(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 did 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 had two sales-type leases, which were
substantially modified in January 2020 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 has 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.
The Company recorded a bad debt allowance of $821,000 related to one of the two sales-type finance leases as a result of its May 2021
agreement to sell the aircraft to the customer (“Sale Order”), and recorded a bad debt
allowance of $326,000 related to the second sales-type finance lease as a result of its July 2021 agreement to sell the aircraft
to the customer.
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 June 30, 2022 and December 31, 2021, the
net investment included in sales-type leases and direct financing leases receivable were as follows:
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Gross minimum lease payments receivable | |
$ | - | | |
$ | 300,000 | |
Allowance for doubtful accounts | |
| - | | |
| (300,000 | ) |
Finance leases receivable | |
$ | - | | |
$ | - | |
As of June 30, 2022 and December 31, 2021, there were no minimum
future payments receivable under finance leases.
Intangible assets were comprised of the following:
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Software | |
$ | 1,000,000 | | |
$ | - | |
Less: Accumulated amortization | |
| (111,100 | ) | |
| - | |
| |
$ | 888,900 | | |
$ | - | |
For the three months ended June 30, 2022 and 2021, the amortization
expenses were $27,800 and $nil, respectively. For the six months ended June 30, 2022 and 2021, the amortization expenses were $111,100
and $nil, respectively. The amortization was charged to the cost of revenues.
ASC 280, “Segment Reporting,” establishes
standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure
as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s
business segments. The Company uses the “management approach” in determining reportable operating segments. The management
approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating
decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief
operating decision maker, reviews operation results by the revenue of different services.
For the three and six months ended June 30, 2022,
the Company had two business segments which were comprised of 1) the leasing of regional aircraft to foreign and domestic regional airlines,
and 2) the newly launched GameFi business. For the three and six months ended June 30, 2021, the Company had one business segment which
was the leasing of regional aircraft to foreign and domestic regional airlines.
The following tables present summary information
of operations by segment for the three and months ended June 30, 2022 and 2021, respectively:
| |
For the Three Months Ended June 30, 2022 (Successor) | |
| |
GameFi | | |
Leasing | | |
| |
| |
Business | | |
Business | | |
Total | |
Revenue | |
$ | 3,200 | | |
$ | - | | |
$ | 3,200 | |
Gross loss | |
$ | (530,100 | ) | |
$ | - | | |
$ | (530,100 | ) |
Expenses | |
$ | (547,400 | ) | |
$ | (617,500 | ) | |
$ | (1,164,900 | ) |
Loss before income tax provision | |
$ | (1,077,500 | ) | |
$ | (617,500 | ) | |
$ | (1,695,000 | ) |
Net loss | |
$ | (1,077,900 | ) | |
$ | (619,700 | ) | |
$ | (1,697,600 | ) |
| |
For the Three Months Ended June 30, 2021 (Predecessor) | |
| |
GameFi | | |
Leasing | | |
| |
| |
Business | | |
Business | | |
Total | |
Revenue | |
$ | - | | |
$ | 1,480,700 | | |
$ | 1,480,700 | |
Gross profit | |
$ | - | | |
$ | 1,480,700 | | |
$ | 1,480,700 | |
Expenses | |
$ | - | | |
$ | (4,674,800 | ) | |
$ | (4,674,800 | ) |
Loss before income tax provision | |
$ | - | | |
$ | (3,194,100 | ) | |
$ | (3,194,100 | ) |
Net loss | |
$ | - | | |
$ | (3,197,800 | ) | |
$ | (3,197,800 | ) |
| |
For the Six Months Ended June 30, 2022 (Successor) | |
| |
GameFi | | |
Leasing | | |
| |
| |
Business | | |
Business | | |
Total | |
Revenue | |
$ | 326,800 | | |
$ | 120,000 | | |
$ | 446,800 | |
Gross (loss)/profit | |
$ | (234,300 | ) | |
$ | 120,000 | | |
$ | (114,300 | ) |
Expenses | |
$ | (1,026,000 | ) | |
$ | (1,229,500 | ) | |
$ | (2,255,500 | ) |
Loss before income tax provision | |
$ | (1,260,300 | ) | |
$ | (1,109,500 | ) | |
$ | (2,369,800 | ) |
Net loss | |
$ | (1,261,100 | ) | |
$ | (1,112,800 | ) | |
$ | (2,373,900 | ) |
| |
For the Six Months Ended June 30, 2021 (Predecessor) | |
| |
GameFi | | |
Leasing | | |
| |
| |
Business | | |
Business | | |
Total | |
Revenue | |
$ | - | | |
$ | 4,014,900 | | |
$ | 4,014,900 | |
Gross profit | |
$ | - | | |
$ | 4,014,900 | | |
$ | 4,014,900 | |
Expenses | |
$ | - | | |
$ | (12,570,100 | ) | |
$ | (12,570,100 | ) |
Loss before income tax provision | |
$ | - | | |
$ | (8,555,200 | ) | |
$ | (8,555,200 | ) |
Net loss | |
$ | - | | |
$ | (8,608,100 | ) | |
$ | (8,608,100 | ) |
The following tables present total assets by segment
for as of June 30, 2022 and December 31, 2021:
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
GameFi Business | |
$ | 4,458,500 | | |
$ | 6,788,900 | |
Lease Business | |
| 2,311,800 | | |
| 3,472,100 | |
Unallocated | |
| 4,688,600 | | |
| 4,688,600 | |
| |
$ | 11,458,900 | | |
$ | 14,949,600 | |
9. |
DERIVATIVE INSTRUMENTS |
In the first quarter of 2019, the Company entered
into eight fixed pay/receive variable interest rate swaps. The Company entered into the interest rate swaps in order to reduce its exposure
to the risk of increased interest rates.
The Company estimates the fair value of derivative
instruments using a discounted cash flow technique and uses creditworthiness inputs that corroborate observable market data evaluating
the Company’s and counterparties’ risk of non-performance. Valuation of the derivative instruments requires certain assumptions
for underlying variables and the use of different assumptions would result in a different valuation. Management believes it has applied
assumptions consistently during the period.
The Company designated seven of its interest rate
swaps as cash flow hedges upon entering into the swaps. Changes in the fair value of the hedged swaps were included in other comprehensive
income/(loss), which amounts are reclassified into earnings in the period in which the transaction being hedged affected earnings (i.e.,
with future settlements of the interest rate swaps). One of the interest rate swaps was not eligible under its terms for hedge treatment
and was terminated in 2019 when the associated asset was sold and the related debt was paid off. Changes in fair value of non-hedge derivatives
are reflected in earnings in the periods in which they occur.
(a) MUFG Swaps
The two interest rate swaps entered into by AeroCentury
(the “MUFG Swaps”) were intended to protect against the exposure to interest rate increases on $50 million of the Company’s
MUFG Credit Facility debt prior to its sale to Drake during the fourth quarter of 2020. The MUFG Swaps had notional amounts totaling $50
million and were to extend through the maturity of the MUFG Credit Facility in February 2023. Under the ISDA agreement for these interest
rate swaps, defaults under the MUFG Credit Facility give the swap counterparty the right to terminate the interest rate swaps with any
breakage costs being the liability of the Company.
In October 2019, the Company determined that it was no longer probable
that forecasted cash flows for its two interest rate swaps with a nominal value of $50 million would occur as scheduled as a result of
the Company’s defaults under the MUFG Credit Facility. Therefore, those swaps were no longer subject to hedge accounting and changes
in fair market value thereafter were recognized in earnings as they occurred. As a result of the forecasted transaction being not probable
to occur, accumulated other comprehensive loss of $1,167,700 related to the MUFG Swaps was recognized as interest expense in the first
quarter of 2020. The two swaps related to the MUFG Credit Facility were terminated in March 2020 and the Company incurred a $3.1 million
obligation, recorded as interest expense and derivative termination liability, in connection with such termination, payment of which was
due no later than the March 31, 2021 maturity of the Drake Indebtedness.
The derivative termination liability was included in the liabilities
subject to compromise. As part of the Plan of Reorganization, the Bankruptcy Court approved the settlement of claims reported within Liabilities
subject to compromise in the Company’s consolidated balance sheet at their respective allowed claim amounts. Accordingly,
the Company did not have derivative termination liability as of June 30, 2022 and 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 LLC 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 were used to service
the Nord Loans associated with the swaps. 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 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. Accumulated other comprehensive income of $2,600 related to the Nord
Swaps was recognized as an expense in the six months ended June 30, 2021, respectively.
| |
Successor | | |
Predecessor | | |
Successor | | |
Predecessor | |
| |
Three Months
Ended
June 30, 2022 | | |
Three Months
Ended
June 30, 2021 | | |
Six Months
Ended
June 30, 2022 | | |
Six Months
Ended
June 30, 2021 | |
| |
| | |
| | |
| | |
| |
Change in value of undesignated interest rate swaps | |
$ | - | | |
$ |
- | | |
$ | - | | |
$ | (48,700 | ) |
Reclassification from other comprehensive income to interest expense | |
| - | | |
| - | | |
| - | | |
| 2,600 | |
Included in interest expense | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | (46,100 | ) |
| |
Successor | | |
Predecessor | | |
Successor | | |
Predecessor | |
| |
Three Months
Ended
June 30, 2022 | | |
Three Months
Ended
June 30, 2021 | | |
Six Months
Ended
June 30, 2022 | | |
Six Months
Ended
June 30, 2021 | |
| |
| | |
| | |
| | |
| |
Reclassification from other comprehensive income to interest expense | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 2,600 | |
Change in accumulated other comprehensive income | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 2,600 | |
At June 30, 2022 and December 31, 2021,
the Company had no interest rate swaps.
10. |
LEASE LIABILITIES AND RIGHT OF USE ASSETS |
The Company was a lessee under a lease of the
office space it occupies in Burlingame, California, which expired in June 2020. The lease also provided for two, successive
one-year lease extension options for amounts that were substantially below the market rent for the property. The lease provided for monthly
rental payments according to a fixed schedule of increasing rent payments. As a result of the below-market extension options, the Company
determined that it was reasonably certain that it would extend the lease and, therefore, included such extended term in its calculation
of the right of use asset (“ROU Asset”) and lease liability recognized in connection with the lease.
In addition to a fixed monthly payment schedule,
the office lease also included an obligation for the Company to make future variable payments for certain common areas and building operating
and lessor costs, which were recognized as expense in the periods in which they are incurred. As a direct pass-through of applicable expense,
such costs were not allocated as a component of the lease.
Effective January 1, 2020, the Company reduced
both the size of the office space leased and the amount of rent payable in the future. As such, the Company recognized a reduction in
both the capitalized amount related to the surrendered office space and a proportionate amount of the liability associated with its future
lease obligations. In January 2020, the Company recorded a loss of $160,000 related to the reduction in its ROU Asset, net of the reduction
in its operating lease liability.
In March 2020, the Company elected not to exercise
the extension options for its office lease. The lease liability associated with the office lease was calculated at June 30, 2020 by discounting
the fixed, minimum lease payments over the remaining lease term, including the below-market extension periods, at a discount rate of 7.25%,
which represents the Company’s estimate of the incremental borrowing rate for a collateralized loan for the type of underlying asset
that was the subject of the office lease at the time the lease liability was evaluated. As a result of non-exercise of its extension option,
the Company reduced the lease liability to reflect only the three remaining rent payments in the second quarter of 2020.
In July 2020, the lease for the Company’s
office lease was extended for one month to July 31, 2020 at a rate of $10,000. The Company signed a lease for a smaller office suite in
the same building effective August 1, 2020. The lease provided for a term of 30 months expiring on January 31, 2023, at a monthly base
rate of approximately $7,400, with no rent due during the first six months. The Company recognized an ROU asset and lease liability of
$169,800, both of which were non-cash items and are not reflected in the consolidated statement of cash flows. No cash was paid at the
inception of the lease, and a discount rate of 3% was used, based on the interest rates available on secured commercial real estate loans
available at the time. Upon emergence from bankruptcy on September 30, 2021, the Company terminated the office lease agreement, and the
Company had no right of use assets or lease liabilities as of June 30, 2022 and December 31, 2021.
The Company recognized rental expenses as follows:
| |
Successor | | |
Predecessor | | |
Successor | | |
Predecessor | |
| |
Three Months
Ended
June 30, 2022 | | |
Three Months
Ended
June 30, 2021 | | |
Six Months
Ended
June 30, 2022 | | |
Six Months
Ended
June 30, 2021 | |
| |
| | |
| | |
| | |
| |
Fixed rental expense during the year | |
$ | 41,500 | | |
$ | 17,800 | | |
$ | 84,000 | | |
$ | 35,500 | |
Variable lease expense | |
| - | | |
| 4,500 | | |
| - | | |
| 11,000 | |
Lease expenses | |
$ | 41,500 | | |
$ | 22,300 | | |
$ | 84,000 | | |
$ | 46,500 | |
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 US 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 June 30, 2022 and December 31, 2021. For the three and six months ended June 30, 2021, the Predecessor of the Company reversed
$48,700 as realized through the income statement as a result of sale of interest rate swaps. For the six months ended June 30, 2021, the
Predecessor of the Company recorded no realized income or loss as a change in interest expense.
There were no transfers into or out of Level 3
during the three and six months ended June 30, 2022.
Assets Measured and Recorded at Fair Value
on a Non-recurring Basis
The Company determines fair value of long-lived assets held and used,
such as aircraft and aircraft engines held for lease and other assets held for sale, by reference to independent appraisals, quoted market
prices (e.g., offers to purchase) and other factors. The independent appraisals utilized the market approach which uses recent sales of
comparable assets, making appropriate adjustments to reflect differences between them and the subject property being analyzed.
Certain assumptions are used in the management’s estimate of the fair value of aircraft including the adjustments made to
comparable assets, identifying market data of similar assets, and estimating cost to sell. These are considered Level 3 within the
fair value hierarchy. An impairment charge is recorded when the Company believes that the carrying value of an asset will not be recovered
through future net cash flows and that the asset’s carrying value exceeds its fair value.
For the
three months ended June 30, 2021, the Company recorded impairment losses totaling $2,264,000 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 the six months ended June
30, 2021, the Predecessor of the Company recorded an impairment loss of $4,204,400 on its five assets held for sale, based on expected
sales proceeds, which had an aggregate fair value of $29,333,100.
The Successor of the Company did not record impairment
against assets held for sale for the three and six months ended June 30, 2022.
There were no transfers into or out of Level 3
during the three and six months ended June 30, 2022.
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 $80,060,900 at June 30, 2021 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 US GAAP fair value hierarchy.
As part of the Plan of Reorganization, the Bankruptcy
Court approved the settlement of claims reported within Liabilities subject to compromise in the Company’s Consolidated balance
sheet at their respective allowed claim amounts. Accordingly, the Company did not have finance leases receivable, amounts borrowed under
the MUFG Credit Facility and Drake Loan, notes payable under special-purpose financing, its derivative termination liability and its derivative
instruments as of June 30, 2022 and December 31, 2021.
There were no transfers in or out of assets or
liabilities measured at fair value under Level 3 during the three and six months ended June 30, 2022 or 2021.
12. |
COMMITMENTS AND CONTINGENCIES |
In the ordinary course of the Company’s
business, the Company may be subject to lawsuits, arbitrations and administrative proceedings from time to time. The Company believes
that the outcome of any existing or known threatened proceedings, even if determined adversely, should not have a material adverse effect
on the Company’s business, financial condition, liquidity or results of operations.
The Company recorded income tax expense of $2,600 and $4,100 in the
three and six months ended June 30, 2022, or negative 0.15% and 0.17%, respectively of pre-tax loss, compared to $3,600 and
$52,800 income tax expense, or negative 0.12% and 0.62% of pre-tax loss in the three and six months ended June 30, 2021. The difference in the effective federal income tax rate from the normal statutory rate in the three and six months ended June 30, 2022
was primarily related to the discontinued operation of the Company's foreign aircraft leasing business.
In assessing the valuation of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income or availability to carryback the losses to taxable income during periods in which those temporary differences become deductible.
The Company considered several factors when analyzing the need for a valuation allowance including the Company's current three-year cumulative
loss through June 30, 2022, the operation forecast, the Company’s recent filing for protection under Chapter 11 of the bankruptcy
code, the operation uncertainty of the Company's new business. Based on this 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 full valuation allowance on its deferred tax assets.
None