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Fresh Start Accounting

9 Months Ended

Sep. 30, 2021

3. Fresh Start Accounting

In connection with our emergence from bankruptcy and in accordance with ASC Topic 852, we qualified for and adopted fresh start accounting on the Effective Date. We were required to adopt fresh start accounting because (i) the holders of existing voting shares of the Predecessor received less than 50% of the voting shares of the Successor, and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims.

The adoption of fresh start accounting resulted in a new reporting entity for financial reporting purposes with no beginning retained earnings or deficit. The issuance of new shares of common stock of the Successor caused a related change of control of the Company under ASC 852.

Upon the application of fresh start accounting, AeroCentury 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 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 ACY relative to the comparable publicly traded companies. The selected range of multiples were applied to the Company’s forecasted EBITDA to estimate the enterprise value of the Company.

The GTM approach is similar to the GPCM, in that it relies on EV/EBITDA multiples but rather than of publicly traded companies, the multiples are based on precedent transactions. A range of multiples was derived by analyzing the operating and financial attributes of the acquired companies and the implied EV/EBITDA multiples. This range of multiples were then applied to the forecasted EBITDA of the Company to arrive an enterprise value.

The following table reconciles the enterprise value to the estimated fair value of the Successor common stock as of the Effective Date:

Enterprise value	$	18,883,200
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	$	17,004,900
Shares issued and outstanding upon emergence		4,416,811
Per share value	$	3.85

The adjustments set forth in the following unaudited 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 30, 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
Stockholders’ deficit:
Preferred stock		-			-				-		-
Common stock		1,800			2,900		c		-		4,700
Paid-in capital		16,817,800			182,300		cd		-		17,000,100
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 stockholders’ deficit		(9,616,700	)		21,932,900				4,688,600		17,004,800
Total liabilities and stockholders’ deficit	$	45,245,400		$	(31,050,900	)		$	4,688,600		$18,883,100

Reorganization adjustment

In accordance with the Plan of Reorganization, the following adjustments were made:

(a)	Reflects final instalment of subscription fees of $100,000 for 2,870,927 common stocks 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
Aircrafts 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 aircrafts before it filed Petitions under Chapter 11 in March 2021, and continued the sales of aircrafts 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 $22.6 million, and the proceeds from the sales were settled against the liabilities subject to compromise of $41.6 million, and the Company recognized reorganization gains of $19.3 million.

(c)

Reflects issuance of 2,870,927 common stocks to the Plan Sponsor, at per share of $3.85, 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.

Gain on settlement of liabilities subject to compromise	$	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

(d)

Reflects the elimination of predecessor accumulated deficits.