☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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. ☐
If securities are registered pursuant to Section 12(b) of the Act,
indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to
previously issued financial statements. ☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant
has filed all documents and reports required to be fi led by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
The aggregate market value of the voting and
non-voting common equity held by non-affiliates as of June 30, 2022, the last business day of the registrant’s most recently
completed second fiscal quarter (based upon the closing sale price of the registrant’s common stock as of such date, as
reported by the NYSE American Exchange) was $19.2 million. 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 stock outstanding as of March 15, 2023 was 31,564,054.
Documents incorporated by reference: None.
This Annual Report on Form 10-K includes “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and
Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statement in this report other than
statements of historical fact may be a forward-looking statement for purposes of these provisions, including any statements of our plans
and objectives for future operations, our future financial condition or economic performance (including known or anticipated trends),
and the assumptions underlying or related to the foregoing. Statements that include the use of terminology such as “may,”
“will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,”
“projected,” “intends,” “believes,” or “continue,” or the negative thereof, or other
comparable terminology, are forward-looking statements.
Forward-looking statements in this report include
statements about the following matters, although this list is not exhaustive:
All of our forward-looking statements involve
risks and uncertainties that could cause our actual results to differ materially from those projected or assumed by such forward-looking
statements. Among others, the factors that could cause such differences include: the ability to develop a new staking as a service business;
acceptance by our customers using our staking as a service business model; the ongoing effects of the COVID-19 pandemic or any other
public health emergencies; our ability to raise debt or equity financing when needed on acceptable terms and in desired amounts, or at
all; any noncompliance by our customers, including payment obligations; any economic downturn or other financial crisis; any inability
to compete effectively with our better capitalized competitors; limited trading volume in our stock; potential changes in the legislative
and regulatory environment; the occurrence of any event, change or other circumstances that could affect our ability to continue successful
development of our digital assets staking business model; the possibility that we may not succeed in developing its new lines of businesses
due to, among other things, changes in the business environment, competition, changes in regulation, or other economic and policy factors;
and the possibility that the Company’s new lines of business may be adversely affected by other economic, business, and/or competitive
factors. In addition, we operate in a competitive and evolving industry in which new risks emerge from time to time, and
it is not possible for us to predict all of the risks it may face, nor can it assess the impact of all factors on its business or the
extent to which any factor or combination of factors could cause actual results to differ from expectations. As a result of these and
other potential risks and uncertainties, our forward-looking statements should not be relied on or viewed as predictions of future events.
This cautionary statement should be read as qualifying
all forward-looking statements included in this report, wherever they 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
descriptions of risks included in this report are made as of the date hereof based on information available to us as of the date hereof,
and except as required by applicable law, we assume no obligation to update any such forward-looking statement or risk for any reason.
You should, however, consult the risks and other disclosures described in the reports we file from time to time with the Securities and
Exchange Commission (“SEC”) after the date of this report for updated information.
On March 25, 2022, the Company changed its name
from “AeroCentury Corp” to “Mega Matrix Corp.” 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.
Except where the context otherwise requires
and for the purposes of this report only, references to:
Discrepancies in any
table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.
This annual report on
Form 10-K includes our audited consolidated financial statements for the fiscal years ended December 31, 2021 and 2022.
PART I
Item 1. Business.
Overview
We are a Delaware
corporation incorporated in 1997. Through our emergence from bankruptcy on September 30, 2021, and new investors and management, we
became a holding company located in Palo Alto, California, with the following subsidiaries: Mega Metaverse Corp., a California
corporation, JetFleet Management Corp, a California corporation and formerly known as JetFleet Holding Corporation, Saving Digital
Pte. Ltd., a Singapore corporation, and Marsprotocol, Inc., a Cayman Islands exempted company.
Previously, we have historically
provided leasing and financing services to regional airlines worldwide and have been principally engaged in leasing mid-life regional
aircraft to customers worldwide under operating leases and finance leases. In addition to leasing activities, we have also sold aircraft
from our operating lease portfolio to third parties, including other leasing companies, financial services companies, and airlines. Our
operating performance was driven by the composition of its aircraft portfolio, the terms of its leases, and the interest rate of its debt,
as well as asset sales.
Through Saving Digital
Pte. Ltd, our wholly-owned subsidiary, we are currently engaged in solo-staking and provide proof-of-stake technology tools in
Singapore for the Ethereum network. To a lesser extent, we are engaged in the provision of aircraft advisory and management services
since September 30, 2021. We are currently exploring other crypto-related business models
outside of the United States.
Recent Developments
On October
20, 2021, we set up Mega Metaverse Corp. (“Mega”), a wholly owned subsidiary incorporated in California. In December 2021,
we launched our NFT business in the metaverse ecosystem through Mega, and released our first NFT game “Mano” on March 25,
2022. Due to regulatory challenges, the Company decided to suspend the Mano game and the alSpace platform, and on November 4, 2022,
we discontinued the Mano game and the alSpace platform.
On January 1, 2022, JetFleet Management Corp.
(“JMC”), a wholly-owned subsidiary of JetfFleet Holding Corporation (“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 (“Jetfleet”).
Effective March 25, 2022, we changed our name from Aerocentury Corp.
to Mega Matrix Corp. (the “Name Change”) to better reflect our expansion into Metaverse and the NFT gaming business. In connection
with the Name Change, we changed our ticker symbol from “ACY” to “MTMT” on the NYSE American Exchange, which became
effective on March 28, 2022.
On August 31, 2022, we acquired all of the equity
interest in Saving Digital Pte, Ltd., a Singapore corporation (“SDP”) with no operations and approximately $3,800 in cash,
from our chairman Yucheng Hu for a nominal consideration of $10,000.
On
December 7, 2022, we entered into a definitive agreement and plan of merger (the “Merger Agreement”) related to a proposed
merger transaction with MarsProtocol Inc., an exempted company incorporated under the laws of the Cayman Islands and our wholly-owned
subsidiary (“MTMT Cayman”) for the purpose of
redomiciling the corporation from Delaware to the Cayman Islands. The Merger Agreement provides that, upon the terms and subject to the
conditions set forth therein, we will merge with and into MTMT Cayman (the “Redomicile Merger”), with MTMT Cayman being the
surviving company in the Redomicile Merger. Following the Redomicile Merger, MTMT Cayman, together with its subsidiaries, will own and
continue to conduct our business in substantially the same manner as is currently being conducted by us and our subsidiaries. The Merger
Agreement contains customary closing conditions, including, among others, approval of the Redomicile Merger by our stockholders, the effectiveness
of the registration statement on Form F-4 filed by MTMT Cayman related to the Redomicile Merger and receipt of required regulatory approvals.
Pursuant to the Merger Agreement, our Board of Directors (the “Board”) may exercise its discretion to terminate the Merger
Agreement, and therefore abandon the Redomicile Merger, at any time prior to the effective time, including after the adoption of the Merger
Agreement by the Company’s stockholders. As of the date of this report, the Merger Agreement has not been adopted by our stockholders
and we have not yet set a date for a special meeting of stockholders seeking such approval.
Effective February 6, 2023, we changed our ticker
symbol from “MTMT” to “MPU” on the NYSE American Exchange to more closely align with our MarsProtocol brand for
our digital assets staking business.
On March 1, 2023, in connection
with a newly formed joint venture, SDP and Bit Digital Singapore Pte. Ltd. (“Bit Digital”) entered into a shareholders’
agreement (the “Shareholders Agreement”) with Marsprotocol Technologies Pte. Ltd. (the “JV Company”), to provide
staking technology tools in digital assets through the staking platform “MarsProtocol,” an individual and institutional grade
designed staking platform (the “Joint Venture”). Pursuant to the Shareholders Agreement, SDP will own 60% and Bit Digital
will own 40% of the JV Company.
Business of the Company
Through SDP, we are engaged
in solo-staking and as a provider proof-of-stake technology tools in Singapore for the Ethereum network, and we plan to continue exploring
other crypto-related business models outside of the United States. In addition, to a lesser extent, we are engaged in the provision of
aircraft advisory and management services since September 30, 2021 through JetFleet.
On September 19, 2022, SDP purchased 37 Ether (ETH) for the purpose
of exploring Ethereum staking opportunities following the transition by Ethereum on September 15, 2022 from proof-of-work (PoW) to a proof-of-stake
(PoS) consensus mechanism referred to as the “Merge.” Prior to the Merge, Ethereum utilized a PoW validation method for digital
asset transactions. Following the Merge, Ethereum shifted to a PoS validation system where validators stake their ETH into a smart contract
on Ethereum to serve as collateral that can be destroyed if the validator behaves dishonestly or lazily. The validator (selected randomly)
is then responsible for processing the blockchain transactions, storing data and adding new blocks to the blockchain. Validators receives
a transaction fee on their staked coins in ETH as a reward for their active participation in the network. To become a validator on Ethereum,
a participant must stake 32 ETH. Till quarter ending December 31, 2022, SDP explored Solo-Staking by staking 160 ETH to become five (5)
validators to Ethereum to earn ETH rewards and yield. Solo-Staking enables SDP to utilize its ETH treasury to stake on the Ethereum beacon
chain and to earn ETH-denominated rewards directly from the Ethereum protocol.
Through MarsProtocol, the Joint Venture will seek
to provide non-custodial staking tools whereby users’ private keys are not stored in its database to ensure the safety of its users’
digital assets. As of the date of this report, such services will not be available to U.S. residents.
The following diagram summarizes our MarsProtocol StaaS Platform:
The Joint Venture will provide our customers with a right-of-way to access our MarsProtocol platform after they
have completed the registration process and the know-your-customer (KYC) verification process. Once registered, the customer can connect
their third-party trusted wallet with the nodes to stake their ETH on the Ethereum beacon chain to earn ETH-denominated rewards directly
from the Ethereum protocol. Customers can review their transactions and rewards each node produces through the asset dashboard. The Joint
Venture or the Marsprotocol platform will not have any access to the Customer’s digital wallet. All decisions to stake will be made
by the customer.
Our
belief that the ETH and other digital assets that we hold are not securities based
on a risk assessment and not a legal standard nor binding on the SEC or any other regulators. If USDC, USDT, or ETH are deemed to be securities
under the laws of any U.S. federal, state, or foreign jurisdiction, or in a proceeding in a court of law or otherwise, it may have adverse
consequences for such digital asset. See “Item 1A. Risk Factors – Risks Related to our Business – A particular
digital asset’s status, such as an ETH, as a “security” in any relevant jurisdiction is subject to a high degree of
uncertainty and if a regulator disagrees with our characterization of the ETH and other stable cryptocurrencies, we may be subject to
regulatory scrutiny, investigation, fines and penalties, which may adversely affect our business, operating results and financial condition.
A determination that an ETH or stable cryptocurrencies is a “security” may adversely affect the value of those ETH, stable
cryptocurrencies and our business.”
Competition
Staking as a Services
(StaaS) providers offer a convenient and accessible way for users to stake their ETH without having to go through the technical process
of running their own staking nodes. These providers typically charge a fee for their services, which can vary depending on the provider
and the level of service offered.
The market for Ethereum
StaaS is relatively new, but it is already competitive, with several providers vying for market share. Some of the larger competitors
in this space include Coinbase, Binance, Kraken, and Bitfinex, which may have better established names, have a broader range of crypto
related services, and have larger capital resources.
Competition in the StaaS
market is primarily driven by factors such as the fee structure, reliability and uptime of the staking nodes, the user interface and user
experience of the platform, and the level of customer support provided. Providers may also differentiate themselves by offering additional
features such as staking pools, which allow users to pool their Ethereum with other stakers to increase their chances of earning rewards.
As the Ethereum network
continues to evolve and attract more users, it is likely that the StaaS market will become even more competitive, with new providers entering
the market and existing providers expanding their offerings to stay ahead of the competition.
Ethereum Rewards
From the inception of our
solo-staking business in October 2022 through December 31, 2022, we earned an aggregate of 1.5 ETH as rewards.
The following table presents our ETH activities for the year ended
December 31, 2022.
| |
Number of ETH | | |
Amount (1) | |
| |
| | |
| |
Balance at December 31, 2021 | |
| - | | |
$ | - | |
Receipt of ETH as staking reward | |
| 1.5 | | |
| 1,800 | |
Exchange of cash and stable coins into ETH | |
| 300.7 | | |
| 396,500 | |
Borrowings of ETH from a third party | |
| 32.0 | | |
| 41,600 | |
Payment of charges | |
| (0.0 | ) | |
| (100 | ) |
Impairment of ETH | |
| - | | |
| (70,600 | ) |
Balance at December 31, 2022 | |
| 334.2 | | |
$ | 369,200 | |
| (1) | Receipt
of digital assets from staking reward are the product of the number of ETH received multiplied by the ETH price obtained from Coinmarketcap,
calculated on a daily basis. Sales of digital assets are the actual amount received from sales. |
In addition, through our 51.0% ownership in JetFleet as of December
31, 2022, we will continue to focus on third-party management service contracts for aircraft operations. We believe that as passive investor
interest in aircraft assets has increased, there has been increasing demand from aircraft investors for professional third-party aircraft
leasing and portfolio management. We intend to take advantage of our reputation, experience and expertise in this aircraft management
area. JetFleet conducts all of its operations from its office located at 1818 Gilbreth Rd., Suite 243, Burlingame, California, United
States.
Bankruptcy
The Company and its then subsidiaries, JHC and JMC (collectively, the
“Debtors”), filed on March 29, 2021, a voluntary petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy
Code. The filing was made in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) Case No. 21-10636
(the “Chapter 11 Case”). 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 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 Cheng 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, 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 (adjusted for the Forward Stock Split) shares of our common stock
at $0.77 (adjusted for the Forward Stock Split) 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, the Company 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 the Company
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.
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 January 1, 2022, 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.
Change In Control
As a condition to the closing
of the Securities Purchase Agreement, 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. In connection with the resignations,
effective as on 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 Incoming Directors 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 StaaS Business
U.S Government Regulations
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 and ETH, including brokers
and custodians, can be subject to U.S. Treasury Department regulations as money services businesses as well as state money transmitter
licensing requirements. Non-security digital assets are subject to anti-fraud regulations under federal and state commodity laws, and
digital asset derivative instruments are substantively regulated by the U.S. Commodity Futures Trading Commission. Certain jurisdictions,
including, among others, New York and a number of countries outside the United States, have developed regulatory requirements specifically
for digital assets and companies that transact in them.
In addition, since transactions
in non-security digital assets such as Bitcoin and ETH provide a reasonable degree of pseudo anonymity, they are susceptible to misuse
for criminal activities, such as money laundering. This misuse, or the perception of such misuse (even if untrue), could lead to greater
regulatory oversight of non-security digital asset platforms, and there is the possibility that law enforcement agencies could close
such platforms or other related infrastructure with little or no notice and prevent users from accessing or retrieving non-security digital
assets via such platforms or infrastructure. For example, in her January 2021 nomination hearing before the Senate Finance Committee,
Treasury Secretary Janet Yellen noted that cryptocurrencies have the potential to improve the efficiency of the financial system but
that they can be used to finance terrorism, facilitate money laundering, and support malign activities that threaten U.S. national security
interests and the integrity of the U.S. and international financial systems. Accordingly, Secretary Yellen expressed her view that federal
regulators needed to look closely at how to encourage the use of cryptocurrencies for legitimate activities while curtailing their use
for malign and illegal activities. Furthermore, in December 2020, FinCEN proposed a new set of rules for cryptocurrency-based exchanges
aimed at reducing the use of cryptocurrencies for money laundering. These proposed rules would require filing reports with FinCEN regarding
cryptocurrency transactions in excess of $10,000 and also impose record-keeping requirements for cryptocurrency transactions in excess
of $3,000 involving users who manage their own private keys. In January 2021, the Biden Administration issued a memorandum freezing federal
rulemaking, including these proposed FinCEN rules, to provide additional time for the Biden Administration to review the rulemaking that
had been proposed by the Trump Administration. As a result, it remains unclear whether these proposed rules will take effect.
Digital assets that meet the definition of a
“security” under the federal securities laws (“digital assets security”) are regulated by federal securities
regulations such as the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment
Advisers Act of 1940.
In addition, businesses that provides a trading
platform or exchanges for digital assets that are deemed securities may be required to register with the SEC as a national securities
exchange unless an exemption is available. However, if such platform offers trading in digital assets that are not securities, it may
have to register as a money-transmission service (MTS) instead of a SEC-regulated national securities exchange. MTSs are money transfer
or payment operations that are mainly subject to state regulations, rather than federal regulations but may have to register with FinCEN
and face certain reporting requirements.
All of the Company solo-staking and StaaS activities
are conducted in Singapore, and the Company does not currently intend to make StaaS available to U.S. residents. In addition, the Company
does not consider its holdings of ETH and other digital assets as securities based on a risk assessment, but this is not a legally binding
standard recognized by the SEC or other regulators. If USDC, USDT, or ETH are deemed to be securities under the laws of any U.S.
federal, state, or foreign jurisdiction, or in a proceeding in a court of law or otherwise, it may have adverse consequences for such
digital asset. For additional discussion regarding our belief about the potential risks existing and future regulation pose to our business,
see “Item 1A. Risk Factors” in this report.
Singapore Government Regulations
Singapore has a robust regulatory framework for
financial services, which is overseen by the Monetary Authority of Singapore (“MAS”). The MAS is responsible for ensuring that
the financial services industry operates in a safe and sound manner and maintains the stability of the financial system.
In Singapore, based on legal advice received
from local counsel, ETH is considered a digital payment token (“DPT”) and regulated under the Payment Services Act 2019 (“PSA”).
Currently, the PSA regulates services dealing in DPTs or facilitating the exchange of DPTs. The StaaS business is not considered a regulated
activity under the PSA, as it does not involve buying or selling of DPTs or facilitating the exchange of DPTs.
However, the Payment Services (Amendment) Act
2021 (PSAA21) has been passed by Singapore’s parliament and may expand the scope of regulation for DPT services in the future, although
it has not yet come into effect.
In terms of Anti-Money Laundering (AML) and Know
Your Customer (KYC) requirements, financial institutions in Singapore are required to implement robust measures to prevent money laundering
and financing of terrorism. This includes conducting customer due diligence, ongoing monitoring of transactions, and reporting of suspicious
transactions to the relevant authorities. The MAS works closely with financial institutions to ensure compliance with AML and KYC requirements,
and has the power to impose penalties for non-compliance. As the StaaS business is currently not considered a regulated activity under
the PSA, these specific requirements for licensed institutions do not apply to SDP apart from the general duty to report suspicious transactions.
However, the regulatory landscape may change with the introduction of the PSAA21 and future amendments.
Related to our Aircraft Management Service
JHC is subject to compliance with federal, state
and local government regulations. As a company engaged in international trade, these regulations include the Foreign Corrupt Practices
Act, and various export control, money laundering, and anti-terrorism laws and regulations promulgated by the U.S. Department of Commerce
and the Department of Treasury.
Intellectual Property
The protection of our technology and intellectual
property is an important aspect of our business. We currently rely upon a combination of trademarks, trade secrets, copyrights, nondisclosure
contractual commitments, and other legal rights to establish and protect our intellectual property.
As of December 31, 2022, we held one (1) registered
trademark and six (6) pending trademark applications in the United States and two (2) in Singapore. We will evaluate our development
efforts to assess the existence and patentability of new intellectual property. To the extent that it is feasible, we will file new patent
applications with respect to our technology and trademark applications with respect to our brands.
Human
Capital Resources
As of March 15, 2023, we had 4 full-time employees,
including CEO, CFO, COO and CMO in Singapore. None of our employees are represented by labor unions or covered by collective bargaining
agreements. We consider our relationship with our employees to be good.
Corporate Office
Our headquarters are located at 3000 El Camino Real, Bldg. 4, Suite 200, Palo Alto, CA. Our main telephone number is (650) 340-1888.
Other Information
Our website is located at: https://www.megamatrix.io/.
We make available on our website our reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).
Other than the information expressly set forth in this annual report, the information contained, or referred to, on our website is not
part of this annual report. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers, such as us, that file electronically with the SEC.
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, 2022, 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
A particular digital
asset’s status, such as an ETH, as a “security” in any relevant jurisdiction is subject to a high degree of uncertainty
and if a regulator disagrees with our characterization of the ETH and other stable cryptocurrencies , we may be subject to regulatory
scrutiny, investigation, fines and penalties, which may adversely affect our business, operating results and financial condition. A determination
that an ETH or stable cryptocurrencies is a “security” may adversely affect the value of those ETH, stable cryptocurrencies
and the Company’s business.
The SEC and its staff have taken the position that certain digital
assets may fall within the definition of a “security” under 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 may evolve over time, and the outcome is difficult
to predict. The Company’s determination that ETH and other stable cryptocurrencies that the Company holds are not securities is
a risk-based assessment and not a legal standard or one binding on regulators. The SEC generally does not provide advance guidance or
confirmation on the status of any particular digital 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. It is also possible that a change in the
governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. For
example, Chair Gary Gensler has repeatedly remarked on the need for further regulatory oversight on crypto assets, crypto trading, and
lending platforms by the SEC. Public statements made in the past by senior officials at the SEC have indicated that the SEC does not intend
to take the position that Bitcoin or Ethereum are securities (in their current form). In May 2022, the Chair of the U.S. Commodity Futures
Trading Commission (the “CFTC”), Rostin Behnam, stated that Bitcoin and Ethereum are commodities. However, in June 2022, Mr.
Gensler suggested that Bitcoin is a commodity but did not opine on the status of other crypto assets. In September 2022, Mr. Gensler suggested
that he believes a vast majority of cryptocurrencies are securities. However, in March 2023, Mr. Behnam contradicted Mr. Gensler’s
position by stating his opinion in front of the Senate Agricultural Committee that Ethereum is a commodity. Such statements by officials
at the CFTC and SEC are not official policy statements by these agencies and reflect only the speakers’ views, which are not binding
on any agency or court and cannot be generalized to any other crypto asset.
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, trading, and clearing of such assets. For example, a digital asset that is a security may generally only be offered or sold 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 digital assets that are securities 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 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 (“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.
In addition, several foreign jurisdictions have taken a broad-based
approach to classifying crypto assets as “securities,” while other foreign jurisdictions, such as Switzerland, Malta, and
Singapore, have adopted a narrower approach. As a result, certain crypto assets may be deemed to be a “security” under the
laws of some jurisdictions but not others. Various foreign jurisdictions may, in the future, adopt additional laws, regulations, or directives
that affect the characterization of crypto assets as “securities.”
The Company analyzes
whether the ETH and other stable cryptocurrencies that it holds could be deemed to be a “security” under applicable laws.
The Company analysis does not constitute a legal standard, but rather represent its management’s assessment regarding the
likelihood that a particular digital asset could be deemed a “security” under applicable laws. Regardless of the Company’s
conclusions, the Company could be subject to legal or regulatory action in the event the SEC or a court were to determine that ETH and
other stable cryptocurrencies that it hold may be deemed a “security” under applicable laws.
There can be no assurances
that the Company will properly characterize any given digital asset as a security or non-security or that the SEC, or a court, if the
question was presented to it, would agree with our assessment. The Company could be subject to judicial or administrative sanctions for
failing to offer or sell digital assets in compliance with the registration requirements, or for acting as a broker or dealer without
appropriate registration. Such an action could result in injunctions, cease and desist orders, as well as civil monetary penalties, fines,
and disgorgement, criminal liability, and reputational harm. For instance, all transactions in such supported digital asset would have
to be registered with the SEC, or conducted in accordance with an exemption from registration, which could severely limit its liquidity,
usability and transactability. Further, it could draw negative publicity and a decline in the general acceptance of the digital asset.
Also, it may make it difficult for such digital asset to be traded, cleared, and custodied as compared to other digital assets that are
not considered to be securities. Due to regulatory challenges, the Company has discontinued the Mano game and the alSpace platform on
November 3, 2022. The Company is currently engaging in Solo-Staking in Singapore through SDP and provider of staking technology through
the JV Company. Both of these staking activities are conducted in Singapore and StaaS will currently not be made available to U.S. residents.
In addition, the Company plans to continue exploring other crypto-related business models outside of the United States.
The Company plans
to continue to explore other opportunities in the crypto-related business to expand our business model.
Due to regulatory challenges,
on November 3, 2022, we have decided to discontinue the Mano game and the alSpace platform. The Company is currently engaging in solo-staking
through SDP and a provider of staking technology through the JV Company. Both of these staking activities are conducted in Singapore
and StaaS will currently not be made available to U.S. residents. In addition, the Company plans to continue exploring and developing
other opportunities in the crypto-related business. However, the Company may not be successful in identifying a new crypto-related business
model that is acceptable to the Company, which will adversely affect the Company’s business objective.
Expansion of the
Company’s operations into new products, services and technologies, including content categories, is inherently risky and may subject
it to additional business, legal, financial and competitive risks.
Historically, the Company’s
operations have been focused on third-party management service contracts for aircraft operations. Further expansion of the Company’s
operations and its marketplace into additional products and services, such as crypto-related businesses involve 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 the Company’s existing
business model and cost structure and modifications to its infrastructure and may expose the Company to new regulatory and legal risks,
any of which may require expertise in areas in which the Company has little or no experience. There is no guarantee that the Company
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 the Company’s business may be adversely affected.
If the Company
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, the Company’s ability to grow our revenue could be impaired.
The Company’s
growth largely depends on its ability to innovate and add value to its existing creative platform and to provide its 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, PoS business require additional capital and resources. Without
improvements to the Company’s technology and infrastructure, our operations might suffer from unanticipated system disruptions,
slow performance or unreliable service levels, any of which could negatively affect its reputation and ability to attract and retain
customers and contributors. The Company is 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. The Company may not achieve the anticipated benefits, significant growth or increased market share from these
investments for several years, if at all. If the Company is unable to manage its investments successfully or in a cost-efficient
manner, our business and results of operations may be adversely affected.
We rely on systems
and services provided by third parties, primarily by Amazon Web Services(AMS), and any failures, errors, defects or disruptions in these
systems or services could diminish our brand and reputation, subject us to liability, disrupt our business and adversely affect our operating
results and growth prospects. The third-party platforms upon which these systems and software are made available could contain undetected
errors.
Our technology infrastructure
is critical to the performance of our services and to user satisfaction. We rely on Amazon Web Services(AWS) to provide cloud servers.
However, the systems provided by AWS, on which we rely, may not be adequately designed with the necessary reliability and redundancy
to avoid performance delays or outages that could be harmful to our business. We cannot assure you that the measures we take, in connection
with providing proof-of-stake technology tools, to prevent or hinder cyber-attacks and protect our systems, data and user information
and to prevent outages, data or information loss, fraud and to prevent or detect security breaches, including a disaster recovery strategy
for server and equipment failure and back-office systems and the use of third parties for certain cybersecurity services, will provide
absolute security. As our StaaS platform is new, we may in the future experience, website disruptions, outages and other performance
problems due to a variety of factors, including infrastructure changes, human or software errors and capacity constraints. Such disruptions
including, but not limited to, unauthorized access to, fraudulent manipulation of, or tampering with our computer systems and technological
infrastructure, or those of third parties, could result in a wide range of negative outcomes, each of which could materially adversely
affect our business, financial condition, results of operations and prospects.
Additionally, our platform or software provided by Tbit Global Limited, may contain errors, bugs, flaws or corrupted
data, and these defects may only become apparent after their launch. Furthermore, programming errors, defects and data corruption could
disrupt our operations, adversely affect the experience of our users, harm our reputation, cause our users to stop utilizing our services,
divert our resources and delay market acceptance of our services, any of which could result in legal liability to us or harm our business,
financial condition, results of operations and prospects.
We believe that if our
users have a negative experience with our staking service, or if our brand or reputation is negatively affected, users may be less inclined
to continue or resume utilizing our StaaS platform or to recommend our services to other potential users. As such, a failure or significant
interruption in our service could harm our reputation, business and operating results.
Information technology
and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions.
We receive, process,
store and use personal information and other customer data. There are numerous federal, state and local laws regarding privacy and the
storing, sharing, use, processing, disclosure and protection of personal information and other data. Any failure or perceived failure
by us to comply with our privacy policies, our privacy-related obligations to customers or other third parties, or our privacy-related
legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information
or other player data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy
groups or others and could cause our customers to lose trust in us which could have an adverse impact on our business. The costs of compliance
with these types of laws may increase in the future as a result of changes in interpretation or changes in law. Any failure on our part
to comply with these types of laws may subject us to significant liabilities.
Third parties we work
with may violate applicable laws or our policies, and such violations may also put our customers’ information at risk and could
in turn have an adverse impact on our business. We will also be subject to payment card association rules and obligations under each
association’s contracts with payment card processors. Under these rules and obligations, if information is compromised, we could
be liable to payment card issuers for the associated expense and penalties. If we fail to follow payment card industry security standards,
even if no customer information is compromised, we could incur significant fines or experience a significant increase in payment card
transaction costs.
Security breaches, computer
malware and computer hacking attacks have become more prevalent. Any security breach caused by hacking which involves efforts to gain
unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware
or other computer equipment, and the inadvertent transmission of computer viruses could harm our business. Though it is difficult to
determine what harm may directly result from any specific interruption or breach, any failure to maintain performance, reliability, security
and availability of our network infrastructure to the satisfaction of our players may harm our reputation and our ability to retain existing
players and attract new players.
Because the techniques
used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not recognized until
launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.
We are subject
to risks related to holding cryptocurrencies and accepting cryptocurrencies as a form of payment.
We accept Bitcoin, ETH
or other cryptocurrencies from our customers as a form of payment for our staking services.
Cryptocurrencies are
not considered legal tender or backed by any government and have experienced price volatility, technological glitches and various law
enforcement and regulatory interventions. The use of cryptocurrency such as Bitcoin has been prohibited or effectively prohibited in
some countries. If we fail to comply with any such prohibitions that may be applicable to us, we could face regulatory or other enforcement
actions and potential fines and other consequences.
Cryptocurrencies have
in the past and may in the future experience periods of extreme volatility. Fluctuations in the value of any cryptocurrencies that we
hold may also lead to fluctuations in the value of our common stock. In addition, there is substantial uncertainty regarding the future
legal and regulatory requirements relating to cryptocurrency or transactions utilizing cryptocurrency. For instance, governments may
in the near future curtail or outlaw the acquisition, use or redemption of cryptocurrencies. In such case, ownership of, holding or trading
in cryptocurrencies may then be considered illegal and subject to sanction. These uncertainties, as well as future accounting and tax
developments, or other requirements relating to cryptocurrency, could have a material adverse effect on our business.
The value of stablecoins
that we hold may be subject to volatility and risk of loss.
As
of December 31, 2022, we held approximately $2.97 million in USDC issued by Circle Internet Financial Public Limited Company (“Circle”)
and $0.09 million in USDT issued by Tether Limited Inc. (“Tether”). Stablecoins such as USDC are usually backed by the U.S.
Dollar and other short-dated U.S. government obligations, and are usually pegged to the U.S. dollar. On March 9, 2023, as a result of
the closure of Silicon Valley Bank (“SVB”), Circle announced that $3.3 billion of its roughly $40 billion USDC reserves were
held at SVB. As a result, Circle depegged the USDC from its $1.00 peg, trading as low as $0.87. This risk may result in the sell-off of
USDC and volatility as to the value of stablecoins, which would expose us to risk of potential loss and could have a material adverse
effect on our ability to raise new funding and on our business, financial condition, and results of operations and prospects.
We cannot be certain
that our StaaS platform and staking services will maintain regulatory approval, and without regulatory approval we may not be able to
market and grow our business around the world.
Our StaaS platform and
staking services are located in Singapore and are currently not subject to any licensing requirements in Singapore. However, future changes
to Singapore’s PSA may introduce new licensing requirements. Any license, permit, approval or finding of suitability may not be
granted, granted with delay, revoked, suspended or conditioned at any time. We may be unable to obtain or maintain all necessary registrations,
licenses, permits or approvals, and could incur fines or experience delays related to the licensing process which could adversely affect
our operations. The regulators in Singapore may refuse to issue or renew a registration or impose conditions which may adversely affect
our StaaS business.
While we do not believe
that we are required to obtain any license or permit in the United States and/or other jurisdictions, we currently plan to limit our
Marsprotocol platform to non-U.S. residents. If it is determined that a license, permit or approval is required in a jurisdiction in
which we do not have any license to operate, we will need to obtain such license, permit or approval, or block access from such jurisdiction
through IP address filtering. Violations of laws in one jurisdiction could result in disciplinary action and/or fines. Licenses, approvals
or findings of suitability may be revoked, suspended or conditioned. In sum, we may not be able to obtain or maintain all necessary registrations,
licenses, permits or approvals. The licensing process may result in delays or adversely affect our operations, and our efforts to comply
with any new licensing regulations will increase our costs.
We are subject
to various laws relating to foreign corrupt practices, the violation of which could adversely affect its operations, reputation, business,
prospects, operating results and financial condition.
We
are subject to risks associated with doing business outside of the United States, including exposure to complex foreign and U.S. regulations
such as the Foreign Corrupt Practices Act (the “FCPA”) and other anti-corruption laws which generally prohibit U.S. companies
and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. Violations
of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions and other penalties. It may be difficult
to oversee the conduct of any contractors, third-party partners, representatives or agents who are not our employees, potentially exposing
us to greater risk from their actions. If our employees or agents fail to comply with applicable laws or company policies governing our
international operations, we may face legal proceedings and actions which could result in civil penalties, administration actions and
criminal sanctions. Any determination that we have violated any anti-corruption laws could have a material adverse impact on our business.
Violations
of these laws and regulations could result in significant fines, criminal sanctions against us, our officers or our employees. Additionally,
any such violations could materially damage our reputation, brand, international expansion efforts, ability to attract and retain employees
and our business, prospects, operating results and financial condition.
Historically,
we have dealt with significant amounts of cash in our operations, which have subjected us to various reporting and anti-money laundering
regulations. Any violation of anti-money laundering laws or regulations by us could have a material adverse impact on our business.
Risks Related to Ethereum
Risks Associated
with Staking on Ethereum 2.0.
The Company has deposited
ETH to the Ethereum beacon chain with a view to earning an ETH-denominated return thereon. By running a validator node, the Company will
be exposed to the risk of loss of its staked ETH if it fails to operate the node in accordance with applicable protocol rules, as the
Company’s digital assets may be “slashed” or inactivity penalties may be applied if the validator node “double
signs” or is offline for a prescribed period of time. The Company intends to mitigate this risk by monitoring the staking activities.
Speculative and
Volatile Nature of ETH.
To
date, the Company has deployed a small portion of its capital into
ETH. The price of ETH is subject to significant volatility. In addition, there is no guarantee that the Company will be able to sell its
ETH at prices quoted on various cryptocurrency trading platforms or at all if it determines to do so. In addition, the supply of ETH is
currently controlled by the source code of the Ethereum platform, and there is a risk that the developers of the code and the participants
in the Ethereum network could develop and/or adopt new versions of the Ethereum software that significantly increase the supply of ETH
in circulation, negatively impacting the trading price of ETH. Any significant
decrease in the price of ETH may materially and adversely affect
the value of the Company’s securities and, in turn, the Company’s business and financial condition.
The ETH markets are
sensitive to new developments, and since volumes are still maturing, any significant changes in market sentiment (by way of sensationalism
in the media or otherwise) can induce large swings in volume and subsequent price changes. Such volatility can adversely affect the business
and financial condition of the Company.
Momentum pricing typically
is associated with growth stocks and other assets whose valuation, as determined by the public, accounts for anticipated future appreciation
in value. The Company believes that momentum pricing of ETH has resulted, and may continue to result, in speculation regarding future
appreciation in the value of ETH, inflating and making more volatile the value of ETH. As a result, ETH may be more likely to fluctuate
in value due to changing investor confidence in future appreciation, which could adversely affect the business and financial condition
of the Company.
Underlying Value
Risk.
ETH represents a new
form of digital value that is still being digested by society. Its underlying value is driven by its utility as a store of value, means
of exchange, and unit of account, and notably, the demand for ETH within various use cases of the Ethereum network. Just as oil is priced
by the supply and demand of global markets, as a function of its utility to, for instance, power machines and create plastics, so too
is ETH priced by the supply and demand of global markets for its own utility within Ethereum’s use cases.
Development of
the Ethereum Platform.
The Ethereum platform
is an open-source project being developed by a network of software developers, including Vitalik Buterin, a founder of Ethereum. Mr.
Buterin or another key participant within the core development group could cease to be involved with the Ethereum platform. Factions
could form within the Ethereum community, resulting in different and competing versions of Ethereum being adopted by network participants.
Furthermore, network participants running the Ethereum software may choose not to update their versions of the software, resulting in
different versions of the Ethereum software running on the network. Any of the foregoing developments could have a significant negative
impact on the viability and overall health of the Ethereum platform, the value of ETH and the Company’s business model and assets.
Uncertainty Regarding
the Growth of Blockchain and Web 3 Technologies
The further development
and use of blockchain, Web 3 technologies and digital assets are subject to a variety of factors that are difficult to evaluate and predict,
many of which are beyond the Company’s control. The slowing of or stopping of the development or acceptance of blockchain networks,
specifically Ethereum, and blockchain assets would be expected to have a material adverse effect on the Company. Furthermore, blockchain
and Web 3 technologies, including Ethereum, may never be implemented to a scale that provides identifiable economic benefit to blockchain-based
businesses, including the Company.
The Ethereum network
and ETH as digital asset have a limited history. Due to this short history, it is not clear how all elements of ETH will unfold over
time, specifically with regard to governance between miners, developers and users, as well as the long-term security model as the rate
of inflation of ETH decreases. Since the ETH community has successfully navigated a considerable number of technical and political challenges
since its inception, the Company believes that it will continue to engineer its way around future challenges. The history of open-source
software development would indicate that vibrant communities are able to change the software under development at a pace sufficient to
stay relevant. The continuation of such vibrant communities is not guaranteed, and insufficient software development or any other unforeseen
challenges that the community is not able to navigate could have an adverse impact on the business of the Company.
Smart Contract
Risk
The Ethereum network
is based upon the development and deployment of smart contracts, which are self-executing contracts with the terms of the agreement written
into software code. There are thousands of smart contracts currently running on Ethereum network. Like all software code, smart contracts
are exposed to risk that the code contains a bug or other security vulnerability, which can lead to loss of assets that are held on or
transacted through the contract. The smart contract deployed on Ethereum and, as such, may contain a bug or other vulnerability that
may lead to the loss of digital assets held in the wallet. The Ethereum developer community audits widely used smart contracts frequently
and publishes the results of such audits on public forums. Nevertheless, there is no guarantee against a bug or other vulnerability leading
to a loss of digital assets.
Dependence on
Ethereum Network Developers
While many contributors
to the Ethereum network’s open-source software are employed by companies in the industry, most of them are not directly compensated
for helping to maintain the protocol. As a result, there are no contracts or guarantees that they will continue to contribute to the
Ethereum network’s software (https://github.com/ether and https://github.com/orgs/ether/people).
Issues with the
Cryptography Underlying the Ethereum Network
Although the Ethereum
network is one of the world’s most established digital asset networks, the Ethereum network and other cryptographic and algorithmic
protocols governing the issuance of digital assets represent a new and rapidly evolving industry that is subject to a variety of factors
that are difficult to evaluate. In the past, flaws in the source code for digital assets have been exposed and exploited, including flaws
that disabled some functionality for users, exposed users’ personal information and/or resulted in the theft of users’ digital
assets. The cryptography underlying ETH could prove to be flawed or ineffective, or developments in mathematics and/or technology, including
advances in digital computing, algebraic geometry and quantum computing, could result in such cryptography becoming ineffective. In any
of these circumstances, a malicious actor may be able to take the ETH held by the Company. Moreover, functionality of the Ethereum network
may be negatively affected such that it is no longer attractive to users, thereby dampening demand for ETH. Even if digital assets other
than ETH were affected by similar circumstances, any reduction in confidence in the source code or cryptography underlying digital assets
generally could negatively affect the demand for digital assets and therefore adversely affect the business of the Company.
Disputes on the
Development of the Ethereum Network may lead to Delays in the Development of the Network
There can be disputes
between contributors on the best paths forward in building and maintaining the Ethereum network’s software. Furthermore, the miners
and/or stakers supporting the network and other developers and users of the network can disagree with the contributors as well, creating
greater debate. Therefore, the Ethereum community often iterates slowly upon contentious protocol issues, which many perceive as prudently
conservative, while others worry that it inhibits innovation. It will be important for the community to continue to develop at a pace
that meets the demand for transacting in ETH, otherwise users may become frustrated and lose faith in the network. As a decentralized
network, strong consensus and unity is particularly important to respond to potential growth and scalability challenges.
The Ethereum Blockchain
may Temporarily or Permanently Fork and/or Split
The Ethereum network’s
software and protocol are open source. When a modification is released by the developers and a substantial majority of participants consent
to the modification, the change is implemented and the Ethereum network continues uninterrupted. However, if a change were activated
with less than a substantial majority consenting to the proposed modification, and the modification is not compatible with the software
prior to its modification, the consequence would be what is known as a “hard fork” (i.e., a split) of the Ethereum network
(and the blockchain). One blockchain would be maintained by the pre-modification software and the other by the post-modification software.
The effect is that both blockchain algorithms would be running parallel to one another, but each would be building an independent blockchain
with independent native assets.
A hard fork could present
problems such as two copies of a token for the same NFT. It could also present a problem for a customer having to choose to provide services
with respect to digital assets resulting from a fork. In addition, digital asset loan agreements often dictate when and how each of the
lender or the borrower of a digital asset pledging a certain digital asset gets the benefit of forked coins in the event of a hard fork.
Similarly, derivative counterparties using ISDA-based contractual documentation may be subject to hard fork-related termination events.
Although forks are likely to be addressed
by a community-led effort to merge the two groups, such a fork could still adversely affect ETH’s viability.
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:
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suppliers, vendors or other
contract counterparties may require additional financial assurances or enhanced performance from us; |
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our ability to compete
for new business may be adversely affected; |
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our ability to attract,
motivate and retain key executives and employees may be adversely affected; |
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our employees may be distracted
from performance of their duties or more easily attracted to other employment opportunities; and |
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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 providing
staking services 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 StaaS platform is new service, to which we have no experience
and will rely upon our third party developers to develop and maintain the StaaS platform.
We will need to
raise additional capital or financing to continue to execute and expand our business.
We will need to raise
additional capital to support our new operations and execute on our business plan by issuing equity or convertible debt securities. In
the event we are required to obtain additional funds, there is no guarantee that additional funds will be available on a timely basis
or on acceptable terms. To the extent that we raise additional funds by issuing equity or convertible debt securities, our shareholders
may experience additional dilution and such financing may involve restrictive covenants. Newly issued securities may include preferences,
superior voting rights, and the issuance of warrants or other convertible securities that will have additional dilutive effects. We cannot
assure that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable
to us. Further, we may incur substantial costs in pursuing future capital and/or financing. We may also be required to recognize non-cash
expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our
financial condition and results of operations. Our ability to obtain needed financing may be impaired by such factors as the weakness
of capital markets, and the fact that we have not been profitable, which could impact the availability and cost of future financings.
If such funds are not available when required, management will be required to curtail investments in additional sales and marketing and
product development, which may have a material adverse effect on future cash flows and results of operations.
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, 2022. If we cannot effectively maintain our controls and procedures, we could
suffer material misstatements in our financial statements and other information we report which would likely cause investors to lose
confidence. This lack of confidence could lead to a decline in the trading price of our common stock.
Compliance with the Sarbanes-Oxley Act
of 2002 will require substantial financial and management resources and may increase the time and costs of completing an acquisition.
Section 404 of the Sarbanes-Oxley Act of 2002
requires that we evaluate and report on our system of internal controls and may require us to have such system audited by an independent
registered public accounting firm. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny,
civil or criminal penalties and/or shareholder litigation. Any inability to provide reliable financial reports could harm our business.
Furthermore, any failure to implement required new or improved controls, or difficulties encountered in the implementation of adequate
controls over our financial processes and reporting in the future, could harm our operating results or cause us to fail to meet our reporting
obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could
have a negative effect on the trading price of our securities.
The trading prices of our common stock
could be volatile, which could result in substantial losses to our shareholders and investors.
The trading prices of our common stock could
be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors,
like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other similarly
situated companies that have listed their securities in the U.S. in recent years. The securities of some of these companies have experienced
significant volatility including, in some cases, substantial price declines in the trading prices of their securities. In addition, securities
markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance,
such as the large decline in share prices in the United States and other jurisdictions.
In addition to market and industry factors, the
price and trading volume for our common stock may be highly volatile for factors specific to our own operations including the following:
|
● |
variations in our revenues,
earnings and cash flow; |
|
● |
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.
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.
If we acquire
digital securities, even unintentionally, we may violate the Investment Company Act of 1940 and incur potential third-party liabilities.
As
of December 31, 2022, we held approximately $3.1 million stable cryptocurrencies, which is primarily USDC and $0.4 million in ETH. The
Company intends to comply with the 1940 Act in all respects. To that end, if holdings of cryptocurrencies are determined to constitute
investment securities of a kind that subject the Company to registration and reporting under the Investment Company Act of 1940 (the
“1940 Act”), the Company will limit its holdings to less than 40% of its assets. Section 3(a)(1)(C) of the 1940 Act defines
“investment company” to mean any issuer that is engaged or proposes to engage in the business of investing, reinvesting,
owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40% of the
value of such issuer’s total assets (exclusive of Government securities and cash items) on an unconsolidated basis. Section 3(a)(2)
of the 1940 Act defines “investment securities” to include all securities except (A) Government securities, (B) securities
issued by employees’ securities companies, and (C) securities issued by majority-owned subsidiaries which (i) are not investment
companies and (ii) are not relying on the exception from the definition of investment company in section 3(c)(1) or 3(c)(7) of the 1940
Act. As noted above, the SEC has not stated whether stable cryptocurrencies such as USDC and USDT and other cryptocurrency such as ETH
is an investment security, as defined in the 1940 Act.
Item 1B. Unresolved
Staff Comments.
None.
Item 2.
Properties.
As of December 31, 2021, the Company did not
own any real property, plant or materially important physical properties. The Company leases its principal executive office space at
3000 El Camino Real, Building 4, Suite 200 Palo Alto, California 94306 on a month to month basis. JHC conducts all of its operations
from its office located at 1818 Gilbreth Rd., Suite 243, Burlingame, California, United States under a lease agreement that expires on
November 30, 2023 The Company leases its Singapore office at 103, Tampines Street 86, #03-06, the ALPS Residences, Singapore
528576 on a month to month basis. The Company considers it office space suitable and adequate for the purpose for which they are used
for.
Item 3. Legal
Proceedings.
The Company from time to time engages in ordinary
course litigation incidental to the business. Although the Company cannot predict the impact or outcome of any of these proceedings, including,
among other things, the amount or timing of any liabilities or other costs it may incur, none of the pending legal proceedings to which
the Company is a party or any of its property is subject is anticipated to have a material effect on the Company’s business, financial
condition or results of operations.
Item 4. Mine Safety
Disclosures.
Not applicable.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred 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. Effective on February 6, 2023, the Company changed
its ticker symbol from “MTMT” to “MPU” on the NYSE American.
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 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”. Due to regulatory challenges, the Company decided to suspend the Mano game and the alSpace
platform, and on November 4, 2022, we discontinued the Mano game and the alSpace platform. The Company is currently exploring other
crypto-related business models outside of the United States.
On
August 31, 2022, we acquired all of the equity interest in Saving Digital Pte, Ltd., a Singapore corporation (“SDP”)
with no operations and approximately $3,800 in cash, from our chairman Yucheng Hu for a nominal consideration of $10,000. We intend
to use SDP to explore other crypto related business in Singapore. On September
19, 2022, through SDP, we purchased 37 Ether (ETH) for the purpose of exploring Ethereum staking opportunities following the
transition by Ethereum on September 15, 2022 from proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism referred to as
the “Merge.” Prior to the Merge, Ethereum utilized a PoW validation method for digital asset transactions. Following the
Merge, Ethereum shifted to a PoS validation system where validators stake their ETH into a smart contract on Ethereum to serve as
collateral that can be destroyed if the validator behaves dishonestly or lazily. The validator (selected randomly) is then
responsible for processing the blockchain transactions, storing data and adding new blocks to the blockchain. Validators receives a
transaction fee on their staked coins in ETH as a reward for their active participation in the network. To become a validator on
Ethereum, a participant must stake 32 ETH. Till quarter ending
December 31, 2022, SDP explored Solo-Staking by staking 160
ETH to become five (5) validators to Ethereum to earn ETH rewards and yield. Solo-Staking enables SDP to utilize its ETH treasury to
stake on the Ethereum beacon chain and to earn ETH-denominated rewards directly from the Ethereum protocol.
In
addition, on March 3, 2023, in connection with a newly formed joint venture, SDP and Bit Digital Singapore Pte. Ltd. (“Bit Digital”),
entered into a shareholders’ agreement (the “Shareholders Agreement”) with Marsprotocol Technologies Pte. Ltd. (the
“JV Company”), to provide proof-of-stake technology tools for digital assets through the staking platform “MarsProtocol”,
an institutional grade non-custodial staking technology (the “Joint Venture”). Through MarsProtocol, the Joint Venture will
seek to provide non-custodial staking tools whereby users’ private keys are not stored in its database to ensure the safety of its
users’ digital assets. Currently the services will not be available to U.S. residents. Pursuant to the Shareholders Agreement, SDP
will own 60% and Bit Digital will own 40% of the JV Company.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest
Hundred US Dollar, except for share data and per share data, unless otherwise stated)
| 1. | ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED) |
Chapter 11 Bankruptcy Emergence
On March 29, 2021 (the “Petition Date”),
the Company and certain of its subsidiaries in the U.S. (collectively, the “Debtors” and the “Debtors-in-Possession”)
filed voluntary petitions for relief (collectively, the “Petitions”) under Chapter 11 of Title 11 (“Chapter 11”)
of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy
Court”). The Chapter 11 cases (the “Chapter 11 Case”) are being jointly administered under the caption In re: AeroCentury
Corp., et al., Case No. 21-10636.
The Plan was confirmed by the Bankruptcy Court
on August 31, 2021, and the Company emerged from the bankruptcy proceedings on September 30, 2021 (“the Effective Date”).
Fresh Start Accounting
Upon emergence from bankruptcy, we adopted fresh
start accounting in accordance with Accounting Standards Codification (ASC) Topic 852 – Reorganizations (ASC 852) and became a new
entity for financial reporting purposes. As a result, the consolidated financial statements after the Effective Date are not comparable
with the consolidated financial statements on or before that date as indicated by the “black line” division in the financial
statements and footnote tables, which emphasizes the lack of comparability between amounts presented. References to “Successor”
relate to our financial position and results of operations after the Effective Date. References to “Predecessor” refer to
the financial position and results of operations of the Company and its subsidiaries on or before the Effective Date. See Note 4 for additional
information related to fresh start accounting.
During the Predecessor period, ASC 852 was applied
in preparing the consolidated financial statements. ASC 852 requires the financial statements, for periods subsequent to the commencement
of the Chapter 11 Cases, to distinguish transactions and events that are directly associated with the reorganization from the ongoing
operations of the business. ASC 852 requires certain additional reporting for financial statements prepared between the bankruptcy filing
date and the date of emergence from bankruptcy, including: (i) Reclassification of pre-petition liabilities that are unsecured, under-secured
or where it cannot be determined that the liabilities are fully secured, to a separate line item on the consolidated balance sheet called,
“Liabilities subject to compromise”; and (ii) Segregation of “Reorganization items, net” as a separate line on
the consolidated statements of comprehensive loss, included within income from continuing operations.
Upon application of fresh start accounting, we
allocated the reorganization value to our individual assets and liabilities, except for deferred income taxes, based on their estimated
fair values in conformity with ASC Topic 805, Business Combinations. The amount of deferred taxes was determined in accordance with ASC
Topic 740, Income Taxes. The Effective Date fair values of our assets and liabilities differed materially from their recorded values as
reflected on the historical balance sheets, see Note 4.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except for share data
and per share data, unless otherwise stated)
| 2. | SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES |
Basis of presentation
The accompanying consolidated financial statements
of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US
GAAP”).
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of
business are dependent on, among other things, the Company’s ability to generate cash flows from operations, and the Company’s
ability to arrange adequate financing arrangements to support its working capital requirements.
Non-controlling interests
Non-controlling
interests represent the equity interests of JMC that are not attributable, either directly or indirectly, to the Company. As of December
31, 2022 and 2021, non-controlling equity holders held 45.81% and 24.17% equity interest in JMC, respectively.
Going
concern
On
September 30, 2021, the Company emerged from bankruptcy with a restructured balance sheet. Since its emergence through December 31, 2022,
the Company incurred recurring net losses. For the year ended December 31, 2022, the Company reported net losses of $9.3 million and
cash outflows from operating activities of $5.9 million. These conditions raised substantial doubt about the Company’s ability
to continue as a going concern.
The Company’s liquidity is based on its
ability to generate cash from operating activities and obtain financing from investors to fund its general operations and capital expansion
needs. The Company’s ability to continue as a going concern is dependent on management’s ability to successfully execute its
business plan, which includes increasing revenue while controlling operating cost and expenses to generate positive operating cash flows
and obtain financing from outside sources.
As of December 31, 2022, the Company had working
capital of $7.0 million, among which the Company held cash of $7.3 million, stable coins of $3.1 million and digital assets of 0.4 million,
which were highly liquid and easily convertible into cash over the market. On the other hand, the Company had current liabilities of $5.6
million, which comprised of a non-cash item of $5.2 million, representing advance of subscription fees from investors. The advance was
classified to equity upon closing of private placements in January and February 2023. Given the financial condition of the Company and
its operating performance, and the advance of subscription receivable mentioned above, the Company assesses current working capital is
sufficient to meet its obligations for the next 12 months from the issuance date of this report. Accordingly, management continues to
prepare the Company’s consolidated financial statements on going concern basis.
Impact of COVID-19
The Company’s business could be adversely
affected by the effects of epidemics. COVID-19, a novel strain of coronavirus, has spread around the world. The ongoing COVID-19 Pandemic
has had an overwhelming effect on all forms of transportation globally, but most acutely for the airline industry. The combined effect
of fear of infection during air travel and international and domestic travel restrictions has caused a dramatic decrease in passenger
loads in all areas of the world, not just in those countries with active clusters of COVID-19, but in airline ticket net bookings (i.e.
bookings made less bookings canceled) of flights as well. This has led to significant cash flow issues for airlines, including some of
the Company’s customers. The Predecessor provided lease payment reductions to customers, and also sold aircraft to the customers
who failed to make scheduled lease payments.
In the short term, the COVID-19 pandemic has created
uncertainties and risks. Based on the current situation, the Company does not expect a significant impact on the operations and financial
results in the long run. The extent to which COVID-19 impacts the results of operations will depend on the future development of the circumstances,
which is highly uncertain and cannot be predicted with confidence at this time.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar,
except for share data and per share data, unless otherwise stated)
| 2. | SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED) |
Use of Estimates
The Company’s consolidated financial statements
have been prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable for making judgments that are not readily apparent from other sources.
The most significant estimates with regard to
these consolidated financial statements are accounting for the application of fresh start accounting, realization of goodwill, current
value of the Company’s assets held for sale, the amount and timing of future cash flows associated with each asset that are used
to evaluate whether assets are impaired, accounting for income taxes, and the amounts recorded as allowances for doubtful accounts.
Comprehensive Income (Loss)
The Company accounts for former interest rate
cash flow hedges by reclassifying accumulated other comprehensive income into earnings in the periods in which the expected transactions
occur or when it is probable that the hedged transactions will no longer occur, and are included in interest expense.
Cash and Cash Equivalents
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.
Stable coins
Stable coins, primarily consisting of USD Coin
(“USDC”) and Tether USD (“USDT”), are accounted for as financial instruments; one USDC or USDT can be redeemed
for one U.S. dollar on demand from the issuer.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 2. | SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED) |
Digital
assets
Digital assets (including Ethereum (ETH)) are
included in current assets in the accompanying consolidated balance sheets. Digital assets purchased are recorded at cost and digital
assets awarded to the Company through its GameFi and Solo-Staking business are accounted for in connection with the Company’s revenue
recognition policy disclosed below.
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. Digital assets are
measured on a first-in-first-out (“FIFO”) basis and measured for impairment whenever indicators of impairment are identified
based on the intraday low quoted price of digital assets. To the extent an impairment loss is recognized, the loss establishes the new
cost basis of the digital assets. Subsequent reversal of impairment losses is not permitted. Digital assets are classified on our balance
sheet as a current asset due to the Company’s ability to sell it in a highly liquid marketplace and its intent to liquidate its
digital assets to support operations when needed. Impairment of $78,900 and $nil of digital assets was recognized for the years
ended December 31, 2022 and 2021, respectively.
Purchases of digital assets by the Company, if
any, will be included within investing activities in the accompanying consolidated statements of cash flows, while digital assets awarded
to the Company through its GameFi and Solo-staking business are included within operating activities on the accompanying consolidated
statements of cash flows. The sales of digital assets are included within investing activities in the accompanying 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 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 December 31, 2022, the Company did not sell its digital assets for cash.
ASC 820 defines “principal market”
as the market with the greatest volume and level of activity for the asset or liability. The determination of the principal market (and,
as a result, the market participants in the principal market) is made from the perspective of the reporting entity. The Company determines
CoinMarketCap as its principal market, as it is one of the earliest and the most trusted sources by users, institutions, and media for
comparing thousands of crypto assets and selected by the U.S. government.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 2. | SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED) |
Aircraft Capitalization and Depreciation
The Company’s interests in aircraft and
aircraft engines are recorded at cost, which includes acquisition costs. Since inception, the Company has typically purchased only used
aircraft and aircraft engines. It is the Company’s policy to hold aircraft for approximately twelve years unless market conditions
dictate otherwise. Therefore, depreciation of aircraft is initially computed using the straight-line method over the anticipated holding
period to an estimated residual value based on appraisal. For an aircraft engine held for lease as a spare, the Company estimates the
length of time that it will hold the aircraft engine based upon estimated usage, repair costs and other factors, and depreciates it to
the appraised residual value over such period using the straight-line method.
The Company periodically reviews plans for lease
or sale of its aircraft and aircraft engines and changes, as appropriate, the remaining expected holding period for such assets. Estimated
residual values are reviewed and adjusted periodically, based upon updated estimates obtained from an independent appraiser. Decreases
in the fair value of aircraft could affect not only the current value, discussed below, but also the estimated residual value.
Assets that are held for sale are not subject
to depreciation and are separately classified on the balance sheet. Such assets are carried at the lower of their carrying value or estimated
fair values, less costs to sell.
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.
Impairment of Long-lived Assets
The Company reviews assets for impairment when
there has been an event or a change in circumstances indicating that the carrying amount of a long-lived asset may not be recoverable.
In addition, the Company routinely reviews all long-lived assets for impairment semi-annually. Recoverability of an asset is measured
by comparison of its carrying amount to the future estimated undiscounted cash flows (without interest charges) that the asset is expected
to generate. Estimates are based on currently available market data and independent appraisals and are subject to fluctuation from time
to time. If these estimated future cash flows are less than the carrying value of an asset at the time of evaluation, any impairment to
be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Fair value is determined
by reference to independent appraisals and other factors considered relevant by management. Significant management judgment is required
in the forecasting of future operating results that are used in the preparation of estimated future undiscounted cash flows and, if different
conditions prevail in the future, material write-downs may occur.
The Company recorded impairment losses of $0.9
million in 2022, as a result of the Company’s determination that the carrying value for intangible assets were not recoverable.
The Company recorded impairment losses totaling
$4.2 million in 2021, 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.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 2. | SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED) |
Revenue Recognition, Accounts Receivable
and Allowance for Doubtful Accounts
Revenue from Solo-Staking business
The Company
generates revenue through staking rewards.
The Company has entered into network-based smart
contracts by running its own digital assets validating nodes. Through these contracts, the Company provides Ethereum (“ETH”)
to stake on a node for the purpose of validating transactions and adding blocks to a respective blockchain network. The term of a smart
contract can vary based on the rules of the respective blockchain and typically last a few weeks to months after it is canceled by the
operator and requires that the ETH staked remain locked up during the duration of the smart contract. In exchange for staking the ETH
and validating transactions on blockchain networks, the Company is entitled to all of the fixed ETH award for running the Company’s
own node, for successfully validating or adding a block to the blockchain.
The provision of validating blockchain transactions
is an output of the Company’s ordinary activities. Each separate block creation or validation under a smart contract with a network
represents a performance obligation. The transaction consideration the Company receives - the ETH awards - is a non-cash consideration,
which the Company measures at fair value on the date received. The fair value of the ETH award received is determined using the quoted
price of the related cryptocurrency at the time of receipt. The satisfaction of the performance obligation for transaction verification
services occurs at a point in time when confirmation is received from the network indicating that the validation is complete, and the
awards are available for transfer. At that point, revenue is recognized.
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 December 31, 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 as at December 31, 2022 and 2021, respectively.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 2. | SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED) |
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 both permanent and temporary
differences resulting from differing treatment of items for tax and US GAAP purposes. The temporary 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 three-year book cumulative loss through December 31, 2022, the financial 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.
Maintenance Reserves and Accrued Maintenance
Costs
Maintenance costs under the Company’s triple
net leases are generally the responsibility of the lessees. Some of the Company’s leases require payment of maintenance reserves,
which are based upon lessee-reported usage and billed monthly, and are intended to accumulate and be applied by the Company toward reimbursement
of most or all of the cost of the lessees’ performance of certain maintenance obligations under the leases. Such reimbursements
reduce the associated maintenance reserve liability.
Maintenance reserves are characterized as either
refundable or non-refundable depending on their disposition at lease-end. The Company retains non-refundable maintenance reserves at lease-end,
even if the lessee has met all of its obligations under the lease, including any return conditions applicable to the leased asset, while
refundable reserves are returned to the lessee under such circumstances. Any reserves retained by the Company at lease-end are recorded
as revenue at that time.
Accrued maintenance costs include (i) maintenance
for work performed for off-lease aircraft, which is not related to the release of maintenance reserves received from lessees and which
is expensed as incurred, and (ii) lessor maintenance obligations assumed and recognized as a liability upon acquisition of aircraft subject
to a lease with such provisions.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 2. | SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED) |
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 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.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 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. |
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 3. | EMERGENCE FROM THE CHAPTER 11 CASES (CONTINUED) |
| 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.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
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.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 4. | FRESH
START ACCOUNTING (CONTINUED) |
The GTM approach is similar to the GPCM, in that
it relies on EV/EBITDA multiples but rather than of publicly traded companies, the multiples are based on precedent transactions. A range
of multiples was derived by analyzing the operating and financial attributes of the acquired companies and the implied EV/EBITDA multiples.
This range of multiples were then applied to the forecasted EBITDA of the Company to arrive an enterprise value.
The following table reconciles the enterprise
value to the estimated fair value of the Successor common stock as of the Effective Date:
Enterprise value | |
$ | 18,883,100 | |
Less: Fair value of accounts payable and accrued expenses | |
| (1,512,100 | ) |
Less: Accrued payroll | |
| (232,100 | ) |
Less: Income tax payable | |
| (19,600 | ) |
Less: Deferred tax liabilities | |
| (114,500 | ) |
Fair value of successor shareholders’ equity | |
$ | 17,004,800 | |
Shares issued and outstanding upon emergence* | |
| 22,084,055 | |
Per share value* | |
$ | 0.77 | |
| * | Retrospectively restated to give effect to five for one forward stock split effective December 30, 2021. |
The adjustments set forth in the following Consolidated
Balance Sheet reflect the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”)
as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”).
|
|
Predecessor |
|
|
|
|
|
|
|
|
Successor |
|
|
|
September 29,
2021 |
|
|
Reorganization
adjustments |
|
|
Fresh start
adjustments |
|
|
September 30,
2021 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
10,527,200 |
|
|
$ |
98,400 |
a |
|
|
- |
|
|
|
10,625,600 |
|
Accounts receivable |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Finance leases receivable, net |
|
|
450,000 |
|
|
|
- |
|
|
|
- |
|
|
|
450,000 |
|
Taxes receivable |
|
|
1,234,500 |
|
|
|
- |
|
|
|
- |
|
|
|
1,234,500 |
|
Prepaid expenses and other assets |
|
|
1,884,400 |
|
|
|
- |
|
|
|
- |
|
|
|
1,884,400 |
|
Goodwill |
|
|
- |
|
|
|
- |
|
|
|
4,688,600 |
a |
|
|
4,688,600 |
|
Assets held for sale |
|
|
31,149,300 |
|
|
|
(31,149,300 |
)b |
|
|
- |
|
|
|
- |
|
Total assets |
|
$ |
45,245,400 |
|
|
$ |
(31,050,900 |
) |
|
$ |
4,688,600 |
|
|
$ |
18,883,100 |
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
1,513,700 |
|
|
$ |
(1,600 |
)a |
|
$ |
- |
|
|
$ |
1,512,100 |
|
Accrued payroll |
|
|
232,100 |
|
|
|
- |
|
|
|
- |
|
|
|
232,100 |
|
Notes payable and accrued interest, net |
|
|
38,675,300 |
|
|
|
(38,675,300 |
)b |
|
|
- |
|
|
|
- |
|
Lease liability |
|
|
780,500 |
|
|
|
(780,500 |
)b |
|
|
- |
|
|
|
- |
|
Maintenance reserves |
|
|
2,061,200 |
|
|
|
(2,061,200 |
)b |
|
|
- |
|
|
|
- |
|
Accrued maintenance costs |
|
|
46,100 |
|
|
|
(46,100 |
)b |
|
|
- |
|
|
|
- |
|
Security deposits |
|
|
466,000 |
|
|
|
(466,000 |
)b |
|
|
- |
|
|
|
- |
|
Unearned revenues |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Income taxes payable |
|
|
19,600 |
|
|
|
- |
|
|
|
- |
|
|
|
19,600 |
|
Deferred tax liabilities |
|
|
114,500 |
|
|
|
- |
|
|
|
- |
|
|
|
114,500 |
|
Subscription fee advanced from the Plan Sponsor |
|
|
10,953,100 |
|
|
|
(10,953,100 |
)c |
|
|
- |
|
|
|
- |
|
Total liabilities |
|
|
54,862,100 |
|
|
|
(52,983,800 |
) |
|
|
- |
|
|
|
1,878,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity (Deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common stock |
|
|
7,700 |
|
|
|
14,400 |
c |
|
|
- |
|
|
|
22,100 |
|
Paid-in capital |
|
|
16,811,900 |
|
|
|
170,800 |
cd |
|
|
- |
|
|
|
16,982,700 |
|
Accumulated deficit |
|
|
(23,399,000 |
) |
|
|
18,710,400 |
e |
|
|
4,688,600 |
a |
|
|
- |
|
|
|
|
(6,579,400 |
) |
|
|
18,895,600 |
|
|
|
4,688,600 |
|
|
|
17,004,800 |
|
Treasury stock |
|
|
(3,037,300 |
) |
|
|
3,037,300 |
d |
|
|
- |
|
|
|
- |
|
Total Mega Matrix Corp. (formerly “AeroCentury Corp.”) stockholders’ equity (deficit) |
|
|
(9,616,700 |
) |
|
|
21,932,900 |
|
|
|
4,688,600 |
|
|
|
17,004,800 |
|
Total liabilities and Equity (Deficit) |
|
$ |
45,245,400 |
|
|
$ |
(31,050,900 |
) |
|
$ |
4,688,600 |
|
|
$ |
18,883,100 |
|
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 4. | FRESH
START ACCOUNTING (CONTINUED) |
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. |
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 4. | FRESH
START ACCOUNTING (CONTINUED) |
Reorganization adjustment
(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 |
|
For the year ended December 31, 2022,
the Company provided full impairment of $4.7 million against goodwill due to underperformance of aircraft leasing business.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
Stable coins were comprised of the following:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
USDC | |
$ | 2,972,000 | | |
$ | - | |
USDT | |
| 90,100 | | |
| - | |
| |
$ | 3,062,100 | | |
$ | - | |
The following table presents additional information
about USDC for the year ended December 31, 2022:
| |
December 31, | |
| |
2022 | |
Opening balance | |
$ | - | |
Exchange from BNB and USDT | |
| 446,600 | |
Collection of USDC from subscription fee from investors | |
| 3,093,000 | |
Payment of service fees | |
| (567,600 | ) |
| |
$ | 2,972,000 | |
The
following table presents additional information about USDT for the year ended December 31, 2022:
| |
December 31, | |
| |
2022 | |
Opening balance | |
$ | - | |
Exchange from BNB | |
| 10,200 | |
Exchange into ETH | |
| (350,200 | ) |
Exchange into USDC | |
| (149,000 | ) |
Collection of USDC from subscription fee from investors | |
| 700,000 | |
Payment of service fees | |
| (120,900 | ) |
| |
$ | 90,100 | |
Digital asset holdings were comprised of the following:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
ETH | |
$ | 369,200 | | |
$ | - | |
For the year ended December 31, 2022, the Company
recognized impairment loss of $78,900 on digital assets, representing impairment of $70,600 on ETH and $8,300 on BNB, respectively.
Additional information about digital assets
The following table presents additional information
about ETH for the year ended December 31, 2022:
| |
December 31, | |
| |
2022 | |
| |
| |
Opening balance | |
$ | - | |
Addition of ETH staking reward | |
| 1,800 | |
Purchase of ETH | |
| 46,300 | |
Exchange of stable coins to ETH | |
| 350,200 | |
Borrowings of ETH from a third party | |
| 41,600 | |
Charges | |
| (100 | ) |
Impairment of ETH | |
| (70,600 | ) |
| |
$ | 369,200 | |
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 7. | 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 years ended December 31, 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
As of December 31, 2022 and 2021, the Company
had nil and one regional jet aircraft held for lease, respectively.
The Company did not purchase or sell any aircraft
held for lease during the years ended December 31, 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 September 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.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 7. | FINANCE LEASE RECEIVABLE (CONTINUED) |
(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.
As of December 31, 2022 and 2021, the net investment
included in sales-type leases and direct financing leases receivable were as follows:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Gross minimum lease payments receivable | |
$ | - | | |
$ | 300,000 | |
Allowance for doubtful accounts | |
| - | | |
| (300,000 | ) |
Finance leases receivable | |
$ | - | | |
$ | - | |
As of December 31, 2022 and 2021, there were
no minimum future payments receivable under finance leases.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
Intangible assets were comprised of the following:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Software | |
$ | 1,000,000 | | |
$ | - | |
Less: Accumulated amortization | |
| (111,100 | ) | |
| - | |
Less: Impairment | |
| (888,900 | ) | |
| - | |
| |
$ | - | | |
$ | - | |
Due to regulatory challenges, the Company decided
to suspend the Mano game and the alSpace platform, and on November 4, 2022, the Company discontinued the Mano game and the alSpace platform.
For the year ended December 31, 2022, the Company provided impairment of $888,900 against the software.
For the year ended December 31, 2022 and 2021,
the amortization expenses were $111,100 and $nil, respectively.
| 9. | ASSETS
AND LIABILITIES HELD FOR SALE |
Assets held for sale as of September 29,
2021 represented aircraft and part-out assets of $31.1 million.
As a result of the Sale Order approved by
the Bankruptcy Court in May 2021, the Company, with the exception of one aircraft that is collateral for a sales-type lease receivable,
reclassified all of its remaining aircraft to held for sale. On the Effective date, pursuant to the Plan of Reorganization, the Company
settled the liabilities subject to compromise by these assets held for sale. See Note 4 – reorganization adjustment (b). Accordingly,
the Company did not have assets or liabilities held for sale as of December 31, 2021.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
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 year ended December 31, 2022, the Company
had three business segments which were comprised of 1) the newly launched ETH staking business, 2) the newly launched GameFi business,
and 3) the leasing of regional aircraft to foreign and domestic regional airlines. For the year ended December 31, 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 year ended December 31, 2022.
| |
For the Year Ended December 31, 2022 (Successor) | |
| |
Staking | | |
GameFi | | |
Leasing | | |
| |
| |
Business | | |
Business | | |
Business | | |
Total | |
Revenue and other income | |
$ | 1,800 | | |
$ | 326,800 | | |
$ | 1,598,800 | | |
$ | 1,927,400 | |
Gross profit | |
$ | (219,700 | ) | |
$ | (234,300 | ) | |
$ | 1,598,800 | | |
$ | 1,144,800 | |
Total operating expenses | |
$ | (1,455,600 | ) | |
$ | (2,407,100 | ) | |
$ | (1,940,600 | ) | |
$ | (5,803,300 | ) |
Loss before income tax provision | |
$ | (1,675,300 | ) | |
$ | (2,641,400 | ) | |
$ | (5,030,400 | ) | |
$ | (9,347,100 | ) |
Net loss | |
$ | (1,675,700 | ) | |
$ | (2,642,600 | ) | |
$ | (4,979,900 | ) | |
$ | (9,298,200 | ) |
The following tables present total assets by segment
as of December 31, 2022 and 2021:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
ETH Staking Business | |
$ | 11,130,300 | | |
$ | - | |
GameFi Business | |
| - | | |
| 6,788,900 | |
Lease Business | |
| 1,431,700 | | |
| 3,472,100 | |
Unallocated | |
| - | | |
| 4,688,600 | |
| |
$ | 12,562,000 | | |
$ | 14,949,600 | |
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 11. | NOTES
PAYABLE AND ACCRUED INTEREST |
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, 2022 and 2021.
At December 31, 2022, 2021 and September 29, 2021,
the Company’s notes payable and accrued interest subject to compromise consisted of the following.
| |
Successor | | |
Successor | | |
Predecessor | |
| |
December 31, | | |
December 31, | | |
September 29, | |
| |
2022 | | |
2021 | | |
2021 | |
Drake Indebtedness, subject to compromise: | |
| | |
| | |
| |
Principal | |
$ | - | | |
$ | - | | |
$ | 38,675,300 | |
| 12. | 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.
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.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 12. | DERIVATIVE
INSTRUMENTS (CONTINUED) |
Nord Swaps (continued)
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 period from January 1, 2021 through September 29, 2021.
| |
Successor | | |
Successor | | |
Predecessor | |
| |
Year ended
December 31,
2022 | | |
September 30, 2021 through December 31, 2021 | | |
Period from January 1, 2021 through September 29, 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 | | |
Successor | | |
Predecessor | |
| |
Year ended
December 31,
2022 | | |
September 30, 2021 through December 31, 2021 | | |
Period from January 1, 2021 through September 29, 2021 | |
Reclassification from other comprehensive income to interest expense | |
$ | - | | |
$ | - | | |
$ | 2,600 | |
Change in accumulated other comprehensive income | |
$ | - | | |
$ | - | | |
$ | 2,600 | |
At December 31, 2022 and 2021, the Company had no interest
rate swaps.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 13. | LEASE
RIGHT OF USE ASSETS AND LIABILITIES |
The Company was a lessee under a lease of the
office space it occupies in Burlingame, California, which expired in June 2020. The lease also provided for two, successive
one-year lease extension options for amounts that were substantially below the market rent for the property. The lease provided for monthly
rental payments according to a fixed schedule of increasing rent payments. As a result of the below-market extension options, the Company
determined that it was reasonably certain that it would extend the lease and, therefore, included such extended term in its calculation
of the right of use asset (“ROU Asset”) and lease liability recognized in connection with the lease.
In addition to a fixed monthly payment schedule,
the office lease also included an obligation for the Company to make future variable payments for certain common areas and building operating
and lessor costs, which were recognized as expense in the periods in which they are incurred. As a direct pass-through of applicable expense,
such costs were not allocated as a component of the lease.
Effective January 1, 2020, the Company reduced
both the size of the office space leased and the amount of rent payable in the future. As such, the Company recognized a reduction in
both the capitalized amount related to the surrendered office space and a proportionate amount of the liability associated with its future
lease obligations. In January 2020, the Company recorded a loss of $160,000 related to the reduction in its ROU Asset, net of the reduction
in its operating lease liability.
In March 2020, the Company elected not to exercise
the extension options for its office lease. The lease liability associated with the office lease was calculated at March 31, 2020 by discounting
the fixed, minimum lease payments over the remaining lease term, including the below-market extension periods, at a discount rate of 7.25%,
which represents the Company’s estimate of the incremental borrowing rate for a collateralized loan for the type of underlying asset
that was the subject of the office lease at the time the lease liability was evaluated. As a result of non-exercise of its extension option,
the Company reduced the lease liability to reflect only the three remaining rent payments in the second quarter of 2020.
In July 2020, the lease for the Company’s
office lease was extended for one month to July 31, 2020 at a rate of $10,000. The Company signed a lease for a smaller office suite
in the same building effective August 1, 2020. The lease provided for a term of 30 months expiring on January 31, 2023, at a monthly
base rate of approximately $7,400, with no rent due during the first six months. The Company recognized an ROU asset and lease liability
of $169,800, both of which were non-cash items and are not reflected in the consolidated statement of cash flows. No cash was paid at
the inception of the lease, and a discount rate of 3% was used, based on the interest rates available on secured commercial real estate
loans available at the time. Upon emergence from bankruptcy on September 30, 2021, the Company terminated the office lease agreement,
and the Company had no right of use assets or lease liabilities as of September 29, 2021, December 31, 2021 and December
31, 2022.
The Company recognized rental expenses as follows:
| |
Successor | | |
Successor | | |
Predecessor | |
| |
Year Ended December 31, 2022 | | |
September 30, 2021 through December 31, 2021 | | |
Period from January 1, 2021 through September 29, 2021 | |
Fixed rental expense during the year | |
$ | 147,600 | | |
$ | 20,500 | | |
$ | 172,200 | |
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
As of December 31, 2021, the Company authorized
40,000,000 shares of common stocks, and had 22,084,055 shares issued and outstanding.
On October
18, 2022, the Company completed a private placement to certain accredited investors, of an aggregate of 4,400,000 shares of the Company’s
common stock, $0.001 par value per share, at a price of $1.00 per share for aggregate gross proceeds to the Company of approximately $4.4
million.
As of December 31, 2022, the Company authorized
40,000,000 shares of common stocks, and had 26,484,055 shares issued and outstanding.
| 15. | 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 Measured and Recorded at Fair Value
on a Nonrecurring Basis
The Company determines fair value of long-lived
assets held and used, such as aircraft and aircraft engines held for lease and these and other assets held for sale, by reference to independent
appraisals, quoted market prices (e.g., offers to purchase) and other factors. The independent appraisals utilized the market approach
which uses recent sales of comparable assets, making appropriate adjustments to reflect differences between them and the subject property
being analyzed. Certain assumptions are used in the management’s estimate of the fair value of aircraft including the adjustments
made to comparable assets, identifying market data of similar assets, and estimating cost to sell. These are considered Level 3 within
the fair value hierarchy. An impairment charge is recorded when the Company believes that the carrying value of an asset will not be recovered
through future net cash flows and that the asset’s carrying value exceeds its fair value.
During the period from July 1 through September
29, 2021, the Predecessor of the Company settled the liabilities subject to compromise by the aircraft included in the assets held for
sale, and no impairment losses were recorded. See Note 4 - reorganization adjustment (b). For the period from January 1, 2021 through
September 29, 2021, the Company recorded impairment losses of $4.2 million on five assets held for sale, based on appraised values or
expected sales proceeds, which had an aggregate fair value of $29.3 million.
The Successor of the Company did not record impairment
against assets held for sale for the year ended December 31, 2022. There were no transfers in or out of assets or liabilities measured
at fair value under Level 3 during the year ended December 31, 2022 or 2021.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 15. | FAIR
VALUE MEASUREMENT (CONTINUED) |
Fair Value of Other Financial Instruments
As part of the Plan of Reorganization, the Bankruptcy
Court approved the settlement of claims reported within Liabilities subject to compromise in the Company’s Consolidated balance
sheet at their respective allowed claim amounts. Accordingly, the Company did not have finance leases receivable, amounts borrowed under
the MUFG Credit Facility and Drake Loan, notes payable under special-purpose financing, its derivative termination liability and its derivative
instruments as of December 31, 2021.
As a result of payment delinquencies by the Company’s
two customers of aircraft subject to sales-type finance leases, the Company recorded a bad debt allowance of $1.3 million during 2021.
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 2022 or 2021.
| 16. | COMMITMENTS
AND CONTINGENCIES |
In the ordinary course of the Company’s
business, the Company may be subject to lawsuits, arbitrations and administrative proceedings from time to time. The Company believes
that the outcome of any existing or known threatened proceedings, even if determined adversely, should not have a material adverse effect
on the Company’s business, financial condition, liquidity or results of operations.
Income tax (benefit) provision were comprised
of the following:
| |
Successor | | |
Successor | | |
Predecessor | |
| |
Year Ended December 31, 2022 | | |
September 30, 2021 through December 31, 2021 | | |
Period from January 1, 2021 through September 29, 2021 | |
Current income tax provision | |
| | |
| | |
| |
Federal | |
$ | - | | |
$ | - | | |
$ | 16,900 | |
State | |
| 4,800 | | |
| 3,200 | | |
| 4,000 | |
Foreign | |
| (53,700 | ) | |
| (500 | ) | |
| 50,000 | |
| |
| (48,900 | ) | |
| 2,700 | | |
| 70,900 | |
Deferred income tax provision (benefits) | |
| | | |
| | | |
| | |
Federal | |
$ | 1,692,300 | | |
| (2,027,100 | ) | |
| (1,640,000 | ) |
State | |
| (283,800 | ) | |
| (28,200 | ) | |
| (103,800 | ) |
Foreign | |
| - | | |
| 11,400 | | |
| (1,700 | ) |
Valuation allowance | |
| (1,408,400 | ) | |
| 1,929,400 | | |
| 1,804,400 | |
| |
| - | | |
| (114,500 | ) | |
| 58,900 | |
Income tax (benefits) provision | |
$ | (48,900 | ) | |
$ | (111,800 | ) | |
$ | 129,800 | |
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 17. | INCOME
TAXES (CONTINUED) |
Total income tax (benefit) provision differs from
the amount that would be provided by applying the statutory federal income tax rate to pretax earnings as illustrated below:
| |
Successor | | |
Successor | | |
Predecessor | |
| |
Year Ended December 31, 2022 | | |
September 30, 2021 through December 31, 2021 | | |
Period from January 1, 2021 through September 29, 2021 | |
Income tax provision (benefit) at statutory federal income tax rate | |
$ | (1,290,800 | ) | |
$ | (880,300 | ) | |
$ | 1,711,500 | |
State tax expense (benefit), net of federal benefit | |
| 4,800 | | |
| (200 | ) | |
| 80,200 | |
Foreign tax (benefit) expenses | |
| (38,900 | ) | |
| 581,900 | | |
| 200,800 | |
Non-deductible management and acquisition fees | |
| - | | |
| - | | |
| 593,500 | |
Impairment of intangible assets | |
| 13,300 | | |
| - | | |
| - | |
PPP loan forgiveness | |
| - | | |
| (59,900 | ) | |
| - | |
Non-taxable income | |
| - | | |
| (4,037,200 | ) | |
| (4,260,600 | ) |
Other non-deductible expenses | |
| (35,100 | ) | |
| 187,600 | | |
| - | |
Valuation allowance | |
| 1,297,800 | | |
| 4,096,300 | | |
| 1,804,400 | |
Income tax (benefits) provision | |
$ | (48,900 | ) | |
$ | (111,800 | ) | |
$ | 129,800 | |
Temporary differences and carry-forwards that give rise to a significant
portion of deferred tax assets and liabilities as of December 31, 2022 and 2021 were as follows:
| |
Successor | | |
Successor | | |
Predecessor | |
| |
December 31, | | |
December 31, | | |
September 29, | |
| |
2022 | | |
2021 | | |
2021 | |
Deferred tax assets: | |
| | |
| | |
| |
Debt basis differences | |
$ | - | | |
$ | 8,560,700 | | |
$ | 8,560,700 | |
Current and prior year tax losses | |
| 6,169,300 | | |
| 7,970,100 | | |
| 4,093,400 | |
Deferred interest expense | |
| 3,991,300 | | |
| 4,110,900 | | |
| 4,136,200 | |
Foreign tax credit | |
| 705,600 | | |
| 705,600 | | |
| 705,600 | |
Accrued vacation and others | |
| 28,500 | | |
| 40,500 | | |
| 51,200 | |
| |
| 10,894,700 | | |
| 21,387,800 | | |
| 17,547,100 | |
Valuation allowance | |
| (10,889,000 | ) | |
| (12,409,500 | ) | |
| (8,637,800 | ) |
Deferred tax assets, net of valuation allowance | |
$ | 5,700 | | |
$ | 8,978,300 | | |
$ | 8,909,300 | |
| |
| | | |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | | |
| | |
Accumulated depreciation on aircraft and aircraft engines | |
$ | - | | |
$ | (6,556,600 | ) | |
$ | (6,581,300 | ) |
Deferred income | |
| - | | |
| (2,421,700 | ) | |
| (2,421,700 | ) |
Unrealized foreign exchange gain | |
| - | | |
| - | | |
| (20,800 | ) |
Others | |
| (5,700 | ) | |
| - | | |
| - | |
Deferred tax liabilities | |
| (5,700 | ) | |
| (8,978,300 | ) | |
| (9,023,800 | ) |
Net deferred tax assets/(liabilities), net of valuation allowance and deferred tax liabilities | |
$ | - | | |
$ | - | | |
$ | (114,500 | ) |
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 17. | INCOME
TAXES (CONTINUED) |
Reported as:
| |
Successor | | |
Successor | | |
Predecessor | |
| |
December 31, | | |
December 31, | | |
September 29, | |
| |
2022 | | |
2021 | | |
2021 | |
Deferred tax assets | |
$ | 10,894,700 | | |
$ | 12,409,500 | | |
$ | 8,523,300 | |
Deferred tax liabilities | |
| (5,700 | ) | |
| - | | |
| - | |
Valuation allowance | |
| (10,889,000 | ) | |
| (12,409,500 | ) | |
| (8,637,800 | ) |
Net deferred tax assets/(liabilities) | |
$ | - | | |
$ | - | | |
$ | (114,500 | ) |
Consolidated deferred federal income taxes arise
from temporary differences between the valuation of assets and liabilities as determined for financial reporting purposes and federal
income tax purposes and are measured at enacted tax rates. The Company’s deferred tax items are measured at an effective tax rate
(federal and state blended rate net of federal benefit) of 21.05% and 21.47% respectively as of December 31, 2022 and December 31, 2021.
The current year federal operating loss carryovers
of approximately $4.7 million will be available to offset 80% of annual taxable income in future years. Approximately $3.2 million of
federal net operating loss carryovers may be carried forward through 2037 and the remaining $25.0 million federal net operating loss
carryovers may be carried forward indefinitely. The current year California operating loss carryovers of approximately $1.9 million will
be available to offset taxable income in future years through 2042. As discussed below, the Company does not expect to utilize the net
operating loss carryovers remaining at December 31, 2022 in future years.
During
the year ended December 31, 2022, the Company had pre-tax loss from domestic sources of approximately $9.0 million and
pre-tax loss from foreign sources of approximately $0.4 million. The
Company had pre-tax loss from domestic sources of approximately $5.6 million and pre-tax loss from foreign sources of approximately $3.0
millions for the year ended December 31, 2021. The year-over-year decrease in profit before taxes is mostly driven by the reduction in
Company’s restructuring costs and employee salaries. The Company’s foreign tax credit carryover will be available to offset
federal tax expense in future years through 2030.
As of December 31, 2022, the Company has a full
valuation allowance of approximately $10.9 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
taxable loss occurred in recent years, scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning
strategies, and past financial performance. Recent negative operating result has caused the Company to be in a cumulative loss position
as of December 31, 2022.
As of December 31, 2021, the Company had a valuation
allowance of approximately $12.4 million, which fully offsets its net deferred tax assets.
MEGA MATRIX CORP.
(formerly “AeroCentury Corp.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Rounded to the Nearest Hundred US Dollar, except
for share data and per share data, unless otherwise stated)
| 17. | INCOME
TAXES (CONTINUED) |
The Company and its subsidiaries file income
tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer
subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2017. At December 31,
2022 and 2021, the Company had a balance of accrued tax, penalties and interest totaling $56,100 and $66,200 related to unrecognized
tax benefits on its non-U.S. operations included in the Company’s accounts and taxes payable. The Company anticipates decreases
of approximately $14,100 to the unrecognized tax benefits within twelve months of this reporting date. A reconciliation of the beginning
and ending amount of unrecognized tax benefits is as follows:
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Balance at January 1 | |
$ | 66,200 | | |
$ | 74,000 | |
Additions for prior years’ tax positions | |
| 2,700 | | |
| 800 | |
Reductions from expiration of statute of limitations | |
| (12,800 | ) | |
| (8,600 | ) |
Balance at December 31 | |
$ | 56,100 | | |
$ | 66,200 | |
The Company accounts for interest related to uncertain
tax positions as interest expense, and for income tax penalties as tax expense
Marsprotocol Technologies
Pte. Ltd. (the “JV Company”)
On March 3, 2023, in
connection with a newly formed joint venture, SDP and Bit Digital Singapore Pte. Ltd. (“Bit Digital”), entered into a shareholders’
agreement (the “Shareholders Agreement”) with Marsprotocol Technologies Pte. Ltd., to provide proof-of-stake technology tools
for digital assets through the staking platform “MarsProtocol”, an institutional grade non-custodial staking technology (the
“Joint Venture”). Through MarsProtocol, the Joint Venture will seek to provide non-custodial staking tools whereby users’
private keys are not stored in its database to ensure the safety of its users’ digital assets. Currently the services will not be
available to U.S. residents. Pursuant to the Shareholders Agreement, SDP will own 60% and Bit Digital will own 40% of the JV Company.
Close of a private
placement of 5,280,000 shares of common stock
On December 23,
2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain accredited investors
named in the Purchase Agreement (collectively, the “Purchasers”), pursuant to which the Company agreed to sell up to an aggregate
of 5,280,000 shares of the Company’s common stock, $0.001 par value per share (the “Common Stock”) at a purchase price
of $1.30 per share, or $6.9 million (the “Private Placement”).
On January 20, 2023,
the Company completed an initial sale of 4,314,615 shares of Common Stock pursuant to the Private Placement to certain Purchasers for
an aggregate purchase price of $5.6 million, or $1.30 per share.
On February 15, 2023,
the Company completed the final sale of 765,384 shares of Common Stock pursuant to the Private Placement to a Purchaser for an aggregate
purchase price of $1.0 million, or $1.30 per share, for combined total issuance of 5,079,999 shares of Common Stock for gross proceeds
of approximately $6.6 million to the Company under the Private Placement, before deducting estimated offering expenses payable by the
Company.
Change of ticker
Effective February 6,
2023, we changed our ticker symbol from “MTMT” to “MPU” on the NYSE American to more closely align with our MarsProtocol
brand for our digital assets staking business.
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