☒QUARTERLY 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

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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 comply 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November ~~13, 2019,~~6, 2020, there were 9,540,891 shares of the registrant’s common stock issued and outstanding. ~~This number reflects a reverse split in the ratio of 1 for 5 effective January 16, 2019.~~

For the Three-Month and Nine-Month Periods ~~Ended~~ended September 30, ~~2019~~2020 and ~~2018~~

For the Nine-Month Periods ~~Ended~~ended September 30, ~~2019~~2020 and ~~2018~~

Aerkomm Inc. (formerly Maple Tree Kids Inc.) (“Aerkomm”) was incorporated on August 14, 2013 in the State of Nevada. Aerkomm was a retail distribution company selling all of its products over the internet in the United States, operating in the infant and toddler products business market. ~~Aerkomm’s common stock is quoted for trading on the OTC Markets Group Inc. OTCQX Best Market under the symbol “AKOM.” On July 17, 2019, the French~~~~Autorité des Marchés Financiers~~ (the “AMF”) granted visa number 19-372 on the prospectus relating to the admission of Aerkomm’s common stock to list and trade on the Professional Segment of the regulated market of Euronext Paris (“Euronext Paris”). Aerkomm’s common stock began trading on Euronext Paris on July 23, 2019 under the symbol “AKOM” and is denominated in Euros on Euronext Paris. This listing did not alter Aerkomm’s share count, capital structure, or current common stock listing on the OTCQX, where it is also traded (in US dollars) under the symbol “AKOM.”

On December 28, 2016, Aircom Pacific Inc. (“Aircom”) purchased ~~140,000 shares of Aerkomm’s common stock, representing~~ approximately 86.3% of Aerkomm’s issued and outstanding common stock as of the closing date of purchase. As a result of the transaction, Aircom became the controlling shareholder of Aerkomm. Aircom was incorporated on September 29, 2014 under the laws of the State of California.

On February 13, 2017, Aerkomm entered into a share exchange agreement (“Exchange Agreement”) with Aircom and its shareholders, pursuant to which Aerkomm acquired 100% of the issued and outstanding capital stock of Aircom in exchange for approximately 99.7% of the issued and outstanding capital stock of ~~Aerkomm (or 87.81% on a fully-diluted basis).~~Aerkomm. As a result of the share exchange, Aircom became a wholly-owned subsidiary of Aerkomm, and the former shareholders of Aircom became the holders of approximately 99.7% of Aerkomm’s issued and outstanding capital stock.

On December 31, 2014, Aircom acquired a newly incorporated subsidiary, Aircom Pacific Ltd. (“Aircom Seychelles”), a corporation formed under the laws of the Republic of Seychelles. Aircom Seychelles was formed to facilitate Aircom’s global corporate structure for both business operations and tax planning. Presently, Aircom Seychelles has no operations. Aircom is working with corporate and tax advisers in finalizing its global corporate structure and has not yet concluded its final plan.

On October 17, 2016, Aircom acquired a wholly owned subsidiary, Aircom Pacific Inc. Limited (“Aircom HK”), a corporation formed under the laws of Hong Kong. The purpose of Aircom HK is to conduct Aircom’s business and operations in Hong Kong. Presently, its primary function is business development, both with respect to airlines as well as content providers and advertisement partners based in Hong Kong. Aircom HK is also actively seeking strategic partnerships whom Aircom may leverage in order to provide more and better services to its customers. Aircom also plans to provide local supports to Hong Kong-based airlines via Aircom HK and teleports located in Hong Kong.

On December 15, 2016, Aircom acquired a wholly owned subsidiary, Aircom Japan, Inc. (“Aircom Japan”), a corporation formed under the laws of Japan. The purpose of Aircom Japan is to conduct business development and operations located within Japan. Aircom Japan is in the process of applying for, and will be the holder of, Satellite Communication Blanket License in Japan, which is necessary for Aircom to provide services within Japan. Aircom Japan will also provide local supports to airlines operating within the territory of Japan.

Aircom Telecom LLC (“Aircom Taiwan”), which became a wholly owned subsidiary of Aircom in December 2017, was organized under the laws of Taiwan on June 29, 2016. Aircom Taiwan is responsible for Aircom’s business development efforts and general operations within Taiwan.

On June 13, 2018, Aerkomm established a new wholly owned subsidiary, Aerkomm Taiwan Inc. (“Aerkomm Taiwan”), a corporation formed under the laws of Taiwan. The purpose of Aerkomm Taiwan is to purchase a parcel of land and raise sufficient fund for ground station building and operate the ground station for data processing (although that cannot be guaranteed).

On November 15, 2018, Aircom Taiwan acquired a wholly owned subsidiary, Beijing Yatai Communication Co., Ltd. (“Aircom Beijing”), a corporation formed under the laws of China. The purpose of Aircom Beijing is to conduct Aircom’s business and operations in China. Presently, its primary function is business development, both with respect to airlines as well as content providers and advertisement partners based in China as most business conducted in China requires a local registered company. Aircom Beijing is also actively seeking strategic partnerships whom Aircom may leverage in order to provide more and better services to its customers. Aircom also plans to provide local supports to China-based airlines via Aircom Beijing and teleports located in China.

On October 31, 2019, Aircom Seychelles established a new a wholly owned subsidiary, Aerkomm Pacific Limited (“Aerkomm Malta”), a corporation formed under the laws of Malta. The purpose of Aerkomm Malta is to conduct Aircom’s business and operations and to engage with suppliers and potential airlines customers in the European Union.

~~Aircom~~Aerkomm and its subsidiaries (the “Company”) are full-service, development stage providers of in-flight entertainment and connectivity ~~(“IFEC”)~~ solutions with their initial market in the ~~Asia~~Asian Pacific region.

~~Aerkomm and its subsidiaries (the “Company”) have~~The Company has not generated significant revenues, excluding non-recurring revenues ~~from affiliates~~ in ~~the second quarter of fiscal~~ 2018 and 2019, and will incur additional expenses as a result of being a public reporting company. Currently, the Company has taken measures that management believes will improve its financial position by financing activities, including through ~~ongoing~~a public ~~offerings,~~offering, short-term borrowings and equity contributions. On April 23, 2019, the Company filed a post-effective amendment No. 2 (“POS AM No.2”) with the Securities and Exchange Commission (the “SEC”), to extend the public offering to attempt to raise the then remaining $16.44 million of the originally registered public offering amount, as well as the $9 million over-subscription option amount (see Note 11). On May 17, 2019, the Company filed a post-effective amendment No. 3 with the SEC to further amend POS AM No. 2 and which was declared effective by the SEC on May 23, 2019. Furthermore, twoTwo of the Company’s current shareholders (the “Lenders”) each committed to provide to the Company a $10 million bridge loan (together, the “Loans”) for an aggregate principal amount of $20 million, to bridge the Company’s cash flow needs prior to its obtaining a mortgage loan to be secured by a parcel of land (the “Land”) the Company ~~intends to purchase~~purchased in Taiwan. The Lenders also agreed to an earlier closing of up to 25% of the principal amounts of the Loans upon the Company’s request prior to the time that title to the Land is vested in the Company’s subsidiary, Aerkomm Taiwan, to pay ~~the~~down outstanding ~~payable~~payables to the Company’s vendors. ~~As of September 30, 2019,~~On April 16, 2020, the Company ~~completed two closings in~~signed a loan agreement with one of its business partners, EESquare Superstore Corp. (“EESquare”) for a working capital loan of up to $1.5 million (unaudited), with an interest rate at 3.25%. On July 29, 2020, the ~~aggregate gross amount~~Company filed an amendment to the Registration Statement on Form S-1, originally filed on April 30, 2020, with the Securities and Exchange Commission, or the SEC, pursuant to Section 5 of ~~$11,459,998, or net amount~~the Securities Act of ~~$10,715,758,~~1933 to issue and ~~issued 269,647~~sell up to 1,951,219 shares ~~of common stock. With the $4.98 million to be raised in the remainder~~(approximately $47,276,000) (unaudited) of the Company’s ~~ongoing public offering,~~common stock, at a per share price of €20.50 (approximately $24.23). The Form S-1 was subsequently amended on July 29, 2020, October 21, 2020 and November 5, 2020, and was declared effective on November 6, 2020. With the $20 million in Loans committed by the Lenders, the working capital loan from EESquare and expected future capital raising efforts, including the filing for upcoming registered public offering, the Company believes its working capital will be adequate to sustain its operations for the next twelve months.

On January 16, 2019, the Company completed a 1-for-5 reverse split of the Company’s authorized, issued and outstanding shares of common stock, which was completed by the filing of a Certificate of Change Pursuant to NRS 78.209 with the Nevada Secretary of State on December 26, 2018 (see Note ~~11)~~14). All of the references in these financial statements to authorized common stock and issued and outstanding common stock have been adjusted to reflect this reverse split.

The Company’s common stock is quoted for trading on the OTC Markets Group Inc. OTCQX Best Market under the symbol “AKOM.” On July 17, 2019, the French Autorité des Marchés Financiers (the “AMF”) granted visa number 19-372 on the prospectus relating to the admission of the Company’s common stock to list and trade on the Professional Segment of the regulated market of Euronext Paris (“Euronext Paris”). The Company’s common stock began trading on Euronext Paris on July 23, 2019 under the symbol “AKOM” and is denominated in Euros on Euronext Paris. This listing did not alter the Company’s share count, capital structure, or current common stock listing on the OTCQX, the Company’s primary trading market for its common stock.

On March 18, 2018, the Company’s Board of Directors approved a change in the Company’s fiscal year end from December 31 to March 31. On February 12, 2019, the Company’s Board of Directors approved a change in the Company’s fiscal year end from March 31 to December 31. Year-over-year quarterly financial data continue to be comparative to prior periods as the three months that comprise each fiscal quarter in the new fiscal year are the same as those in the Company’s historical financial statements.

The accompanying condensed consolidated balance sheet as of September 30, ~~2019,~~2020, and the condensed consolidated statements of operations and comprehensive loss ~~and cash flows~~ for the three and nine months ended September 30, 2020 and 2019 and ~~2018~~of changes in stockholders’ equity and cash flows for the nine months ended September 30, 2020 and 2019 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 30, ~~2019~~2020 and the results of its operations ~~and cash flows~~ for the three and nine months ended September 30, 2020 and 2019 and ~~2018.~~of its cash flows for the nine months ended September 30, 2020 and 2019. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to these ~~three-~~three-month and nine-month periods are unaudited. The results of operations for the nine months ended September 30, ~~2019~~2020 are not necessarily indicative of the results to be expected for the year ending December 31, ~~2019~~2020 or for any other interim period or other future year.

Aerkomm consolidates the accounts of its subsidiaries, Aircom, Aircom Seychelles, Aircom HK, Aircom Japan, Aircom Taiwan, Aerkomm Taiwan, Aircom Beijing and ~~Aircom Beijing.~~Aerkomm Malta. All significant intercompany accounts and transactions have been eliminated in consolidation.

Certain prior period balance sheet and income statement amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from these estimates.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash in banks. As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the total balance of cash in bank exceeding the amount insured by the Federal Deposit Insurance Corporation ~~(“FDIC”)~~(FDIC) for the Company was approximately ~~$2,060,000~~$0 (unaudited) and ~~$0,~~$233,000, respectively. The balance of cash deposited in foreign financial institutions exceeding the amount insured by local ~~deposit~~ insurance is approximately ~~$75,000.~~$0 and $37,000 as of September 30, 2020 and December 31, 2019, respectively.

The Company performs ongoing credit evaluation of its customers and requires no collateral. An allowance for doubtful accounts is provided based on a review of the collectability of accounts receivable. The Company determines the amount of allowance for doubtful accounts by examining its historical collection experience and current trends in the credit quality of its customers as well as its internal credit policies. Actual credit losses may differ from management’s estimates.

The Company’s short-term investment securities are classified as trading security. The securities are stated at fair value within current assets on the Company’s condensed balance sheets. Fair value is calculated based on publicly available market information or other estimates determined by the Company. Changes in fair value are recorded in current income.

Inventories are recorded at the lower of weighted-average cost or net realizable value. The Company assesses the impact of changing technology on its inventory on hand and writes off inventories that are considered obsolete. Estimated losses on scrap and slow-moving items are recognized in the allowance for losses.

Property and equipment are stated at cost less accumulated depreciation. When value impairment is determined, the related assets are stated at the lower of fair value or book value. Significant additions, renewals and betterments are capitalized. Maintenance and repairs are expensed as incurred.

Depreciation is computed by using the straight-line and double declining methods over the following estimated service lives: ground station equipment – 5 years, computer equipment - 3 to 5 years, furniture and fixtures - 5 years, satellite equipment – 5 years, vehicles – 5 years and lease improvement – 5 years.

Upon sale or disposal of property and equipment, the related cost and accumulated depreciation are removed from the corresponding accounts, with any gain or loss credited or charged to income in the period of sale or disposal.

The Company reviews the carrying amount of property and equipment for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. It determined that there was no impairment loss for the ~~three-month and~~ nine-month ~~periods~~period ended September 30, 2020 and for the year ended December 31, 2019.

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”), which modifies lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases and finance leases under previous accounting standards and disclosing key information about leasing arrangements.

A lessee should recognize the lease liability to make lease payments and the right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases and finance leases, a right-of-use asset and a lease liability are initially measured at the present value of the lease ~~payments.~~payments by discount rates. The ~~amortization of~~Company’s lease discount rates are generally based on its incremental borrowing rate, as the discount rates implicit in the Company’s leases is readily determinable. Operating leases are included in operating lease right-of-use ~~asset~~assets and lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment and lease liability in our consolidated balance sheets. Lease expense for operating expense payments is ~~allocated~~recognized on a straight-line basis over the lease ~~term generally~~term. Interest and amortization expenses are recognized for finance leases on a straight-line ~~basis.~~basis over the lease term.

For ~~the lease within~~leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The Company adopted ASU 2016-02 effective January 1, 2019.

The Company’s goodwill represents the amount by which the total purchase price paid exceeded the estimated fair value of net assets acquired from acquisition of subsidiaries. The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment.

Purchased intangible assets with finite life are amortized on the straight-line basis over the estimated useful lives of respective assets. Purchased intangible assets with indefinite life are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Purchased intangible asset consists of satellite system software and is amortized over 10 years.

The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:

Level 1 - Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 - Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.

Level 3 - Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions.

The carrying amounts of the Company’s cash, accounts receivable, other receivable, accounts payable, short-term ~~loan~~loans, accrued expense and other payable approximated their fair value due to the short-term nature of these financial instruments. The Company’s long-term loan and lease payable approximated the carrying amount as its interest rate is considered as approximate to the current rate for comparable ~~loans.~~loans and leases, respectively. There were no outstanding derivative financial instruments as of September 30, ~~2019.~~2020.

The Company recognizes revenue when performance obligations identified under the terms of contracts with its customers are satisfied, which generally occurs upon the transfer of control in accordance with the contractual terms and conditions of the sale. The Company’s ~~major~~ revenue for the ~~nine-month period~~nine months ended September 30, 2019 was the sales of compact adaptor for smartphone that allows users to turn their smartphone into a satellite smartphone to provide reliable connectivity beyond the coverage of traditional networks. The majority of the Company’s revenue is recognized at a point in time when product is shipped or service is provided to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods, which includes estimates for variable consideration. During 2019, the Company adopted the provisions of ASU 2014-09 Revenue from Contracts with Customers (Topic 606) and the principal versus agent guidance within the new revenue standard. The application of Topic 606 (versus prior U.S. GAAP) did not have a significant impact on the Company’s comparative financial statements as presented.

Research and development costs are charged to operating expenses as incurred. For the nine-month periods ended September 30, ~~2019~~2020 and ~~2018,~~2019, the Company incurred ~~$416,231~~$0 (unaudited) and ~~$765,750~~$416,231 (unaudited) of research and development costs, respectively.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Adjustments to prior period’s income tax liabilities are added to or deducted from the current period’s tax provision.

The Company follows FASB guidance on uncertain tax positions and has analyzed its filing positions in all the federal, state and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in those jurisdictions. The Company files income tax returns in the US federal, state and foreign jurisdictions where it conducts business. It is not subject to income tax examinations by US federal, state and local tax authorities for years before 2015. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on its consolidated financial position, results of operations, or cash flows. Therefore, no reserves for uncertain tax positions have been recorded. The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months.

The Company’s policy for recording interest and penalties associated with any uncertain tax positions is to record such items as a component of income before taxes. Penalties and interest paid or received, if any, are recorded as part of other operating expenses in the consolidated statement of operations.

Foreign currency transactions are recorded in U.S. dollars at the exchange rates in effect when the transactions occur. Exchange gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in current income. At the end of each period, assets and liabilities denominated in foreign currencies are revalued at the prevailing exchange rates with the resulting gains or losses recognized in income for the period.

If a foreign subsidiary’s functional currency is the local currency, translation adjustments will result from the process of translating the subsidiary’s financial statements into the reporting currency of the Company. Such adjustments are accumulated and reported under other comprehensive income (loss) as a separate component of stockholders’ equity.

Basic earnings (loss) per share is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include stock warrants and outstanding stock options, shares to be purchased by employees under the Company’s employee stock purchase plan.

The Company has evaluated events and transactions after the reported period up to November ~~11, 2019,~~7, 2020, the date on which these consolidated financial statements were available to be issued. All subsequent events requiring recognition as of September 30, ~~2019~~2020 have been included in these consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2021. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures, as well as the timing of adoption.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments. In February 2020, the FASB issued ASU 2020-02 and delayed the effective date of ASU 2016-13 ~~will be effective for~~until fiscal ~~years~~year beginning after December 15, ~~2019, including interim periods within those fiscal years.~~2022. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other” (Topic 350): Simplifying the Test for Goodwill Impairment, which goodwill shall be tested at least annually for impairment at a level of reporting referred to as a reporting unit. ASU 2017-04 will be effective for annual periods beginning after December 15, 2019. The Company is currently evaluating the impact of ~~adopting~~ ASU 2017-04 on its consolidated financial statements.

As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, inventories consisted of the following:

~~As of December 31, 2018, the Company transferred inventories in the amount of $11,029 to R&D expenses.~~

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 5 - Property and Equipment

As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the balances of property and equipment were as follows:

September 30,
2019 December 31,
2018
(Unaudited)
Ground station equipment $ 1,854,027 $ 1,854,027
Computer software and equipment 324,487 321,070
Satellite equipment 275,410 275,410
Vehicle 141,971 141,971
Leasehold improvement 83,721 84,721
Furniture and fixture 36,382 33,344
2,715,998 2,710,543
Accumulated depreciation (731,806 ) (322,049 )
Net 1,984,192 2,388,494
Prepayments - land 35,861,589 35,237,127
Construction in progress - 416,231
Net $ 37,845,781 $ 38,041,852

~~As of September 30, 2019, the balance of construction in progress was $0 after the Company transferred $416,231 (unaudited) to R&D expenses.~~

	September 30, 2020			December 31, 2019
	(Unaudited)
Ground station equipment	$	1,854,027		$	1,854,027
Computer software and equipment		335,709			328,863
Satellite equipment		275,410			275,410
Vehicle		220,819			198,741
Leasehold improvement		83,721			83,721
Furniture and fixture		36,382			36,382
		2,806,068			2,777,144
Accumulated depreciation		(1,279,468	)		(869,747	)
Net		1,526,600			1,907,397
Prepayments - land		35,861,589			35,861,589
Net	$	37,388,189		$	37,768,986

On May 1, 2018, the Company and Aerkomm Taiwan entered into a binding memorandum of understanding with Tsai Ming-Yin (the “Seller”) with respect to the acquisition by Aerkomm Taiwan of a parcel of land located in Taiwan. The land is expected to be used to build a satellite ground station and data center. On July 10, 2018, the Company, Aerkomm Taiwan and the Seller entered into a certain real estate sales contract regarding this acquisition. Pursuant to the terms of the contract, and subsequent amendments on July 30, 2018, September 4, 2018, November 2, 2018 and January 3, 2019, the Company paid to the seller in installments refundable ~~prepayment~~prepayments of ~~$33.85 million~~$33,850,000 as of December 31, 2018. On July 2, 2019, the Company paid the remaining purchase price balance of $624,462. Under the terms of the real estate sales contract, these purchase price payments are no longer refundable as of September 30, 2020. The Company is currently negotiating with the Seller to allow for a refund of the full purchase price if licenses and approvals needed to transfer land title to Aerkomm Taiwan are not granted by a certain date. There can be no assurances, however, that it will be successful in these negotiations or that the required licenses and approvals will be granted by a certain date, if at all. As of September 30, 2020 and December 31, 2019, the estimated commission payable for the land purchase in the amount of ~~$1,360,770 (unaudited)~~$1,387,127 was recorded to the cost of land and the payment to be paid ~~after the full payment of the Land acquisition price until~~ no later than December 31, ~~2020.~~2021.

Depreciation expense was ~~$136,449~~$136,095 (unaudited) and ~~$42,895~~$136,449 (unaudited) for the three-month periods ended September 30, 2020 and 2019, respectively, and ~~2018~~$409,721 (unaudited) and $409,757 ~~(unaudited) and $87,030~~ (unaudited) for the nine-month periods ended September 30, 2020 and 2019, ~~and 2018,~~ respectively.

NOTE 6 - Intangible Asset, Net

As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the cost and accumulated amortization for intangible asset were as follows:

	September 30, 2019			December 31, 2018			September 30, 2020			December 31, 2019
	(Unaudited)						(Unaudited)
Satellite system software	$	4,950,000		$	4,950,000		$	4,950,000		$	4,950,000
Accumulated amortization		(1,938,750	)		(1,567,500	)		(2,433,750	)		(2,062,500	)
Net	$	3,011,250		$	3,382,500		$	2,516,250		$	2,887,500

Amortization expense was $123,750 (unaudited) and $123,750 (unaudited) for the three-month periods ended September 30, 2020 and 2019, ~~and 2018~~respectively, and $371,250 (unaudited) and $371,250 (unaudited) for the nine-month periods ended September 30, 2020 and 2019, ~~and 2018,~~ respectively.

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 7 - ~~Operating Lease Right-of-Use Asset~~Short-term Investment and Restricted Cash

On September 9, 2019, the Company entered into a liquidity agreement with a security company (“the Liquidity Provider”) in France, which is consistent with customary practice in the French securities market. The liquidity agreement complies with applicable laws and regulations in France and authorizes the Liquidity Provider to carry out market purchases and sales of shares of the Company’s common stock on the Euronext Paris market. To enable the Liquidity Provider to carry out the interventions provided for in the contract, the Company contributed approximately $225,500 (€200,000) into the account. The transaction was initiated from the beginning of 2020, and the Company will pay the compensation of 20,000 euros in advance by semi-annual installments at the beginning of the semi-annual period of the agreement. The liquidity agreement has a term of one year and will be renewed automatically unless otherwise terminated by either party. As of September 30, ~~2019,~~2020, the ~~cost~~Company purchased 7,732 shares (unaudited) of its common stock with the fair value of $121,460 (unaudited). The securities were recorded as short-term investment with unrealized loss of $68,911 (unaudited). The remaining cash balance was $41,350 (€35,290) (unaudited).

NOTE 8 - Operating and ~~accumulated amortization for operating~~Finance Leases

Lease term and discount rate:

The weighted-average remaining lease ~~right-of-use asset~~term (in years) and discount rate related to the leases were as follows:

September 30,
2019

(Unaudited)
Right-of-use asset $ 669,602
Accumulated amortization (304,770 )
Net $ 364,832

	Unaudited
Weighted-average remaining lease term
Operating lease		2.08 Years
Finance lease		4.10 Years
Weighted-average discount rate
Operating lease		6.00	%
Finance lease		3.82	%

The balances of the operating and finance leases are presented as follows within the balance sheets as of September 30, 2020 and December 31, 2019:

~~Amortization expense of right-of-use asset was $101,088 (unaudited) and $345,083 (unaudited) for the three months and nine months ended September 30, 2019.~~Operating Leases

	September 30, 2020		December 31, 2019
	(Unaudited)
Right-of-use assets	$	424,119	$	302,602
Lease liability - current	$	402,636	$	322,430
Lease liability – non-current	$	217,571	$	-

~~On June 15, 2019, the lease agreement in Aircom Taiwan was terminated, so the Company disposed the fully amortized right-of-use asset $40,313 (unaudited).~~

Finance Leases

	September 30, 2020			December 31, 2019
	(Unaudited)
Property and equipment, at cost	$	56,770		$	56,770
Accumulated depreciation		(10,398	)		(1,569	)
Property and equipment, net	$	46,372		$	55,201

Lease liability - current	$	10,577		$	9,949
Lease liability – non-current		38,728			45,199
Total finance lease liabilities	$	49,305		$	55,148

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 8 - Operating and Finance Leases - Continued

The components of lease expense are as follows within the condensed consolidated statements of operations and comprehensive loss for the three-month and nine-month periods ended September 30, 2020 and 2019:

Operating Leases

	Three Months Ended					Nine Months Ended
	September 30, 2020			September 30, 2019		September 30, 2020			September 30, 2019
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
Lease expense	$	126,396		$	101,088	$	346,741		$	345,083
Sublease rental income		(2,827	)		-		(8,372	)		-
Net lease expense	$	123,569		$	101,088	$	338,369		$	345,083

Finance Leases

	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Amortization of right-of-use asset	$	2,897	$	-	$	8,829	$	-
Interest on lease liabilities		481		-		1,493		-
Total finance lease cost	$	3,378	$	-	$	10,322	$	-

Supplemental cash flow information related to leases for the nine-month periods ended September 30, 2020 and 2019 is as follows:

	September 30, 2020		September 30, 2019
	(Unaudited)		(Unaudited)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	151,360	$	304,014
Operating cash outflows from finance lease	$	7,462	$	-
Financing cash outflows from finance lease	$	1,493	$	-
Leased assets obtained in exchange for lease liabilities:
Operating leases	$	453,049	$	722,423

Maturity of lease liabilities:

Operating Leases

	(Unaudited)
October 1, 2020 – September 30, 2021	$	421,637
October 1, 2021 – September 30, 2022		167,555
October 1, 2022 – September 30, 2023		59,504
Total lease payments		648,696
Less: Imputed interest		(28,489	)
Present value of lease liabilities		620,207
Current portion		(402,636	)
Non-current portion	$	217,571

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 8 - Operating and Finance Leases - Continued

Finance Leases

	(Unaudited)
October 1, 2020 – September 30, 2021	$	12,277
October 1, 2021 – September 30, 2022		12,277
October 1, 2022 – September 30, 2023		12,277
October 1, 2023 – September 30, 2024		12,277
October 1, 2024 – September 30, 2025		4,478
Total lease payments		53,586
Less: Imputed interest		(4,281	)
Present value of lease liabilities		49,305
Current portion		(10,577	)
Non-current portion	$	38,728

NOTE 9 - Short-term Bank Loan

On April 16, 2020, the Company received loan proceeds in the amount of $163,200 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. According to PPP, borrowers may be eligible for loan forgiveness if the funds were used for eligible payroll costs, payments on business mortgage interest payments, rent, or utilities during either the 8- or 24-week period after disbursement. A borrower can apply for forgiveness once it has used all loan proceeds for which the borrower is requesting forgiveness. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred. The Company has applied for the forgiveness of the loan within the maturity date and is waiting for the approval.

NOTE 10 - Short-term Loan

On April 16, 2020, the Company signed a loan agreement with one of its business partners, EESquare Superstore Corp. (“EESquare”) for a working capital loan of up to $1.5 million (unaudited), with an interest rate at 3.25% (unaudited). The agreement will expire on April 15, 2022. Each advance shall be due and payable in full no later than one year from the date of such advance or the termination of the agreement, whichever comes first. As of September 30, 2020, the Company has drawn down $1,100,000 (unaudited) under this loan agreement.

NOTE 11 - Long-term Loan

The Company has a car loan credit line of NT$1,500,000 (approximately US$48,371), which matures on May 21, 2024, from a Taiwan financing company with annual interest rate of 9.7%. The installment payment plan is 60 months to pay off the balance on the 21^st21st of each month. Future installment payments as of September 30, ~~2019~~2020 are as follows:

				(Unaudited)
Twelve months ending September 30,	(Unaudited)
2020	$	12,232
2021		12,232		$	13,119
2022		12,232			13,119
2023		12,232			13,119
2024		8,154			8,746
Total installment payments		57,082			48,103
Less: Imputed interest		(11,317	)		(7,751	)
Present value of long-term loan		45,765			40,352
Current portion		8,150			(9,635	)
Non-current portion	$	37,615		$	30,717

NOTE 912 - ~~Lease Liability~~Prepayment from Customer

~~Lease term and discount rate~~

On March 9, 2015, the Company entered into a 10-year purchase agreement with Klingon Aerospace, Inc. (“Klingon”), which was formerly named as Luxe Electronic Co., Ltd. In accordance with the terms of this agreement, Klingon agreed to purchase from the Company an initial order of onboard equipment comprising an onboard system for a purchase price of $909,000, with payments to be made in accordance with a specific milestones schedule. As of September 30, 2020 and December 31, 2019, the Company received $762,000 from Klingon in milestone payments towards the equipment purchase price. As of November 7, 2020, the project is still ongoing.

~~The weighted-average remaining lease term (in years) and discount rate related to the operating leases were as follows:~~

	~~Nine Months~~ ~~Ended~~ ~~September 30,~~ ~~2019~~
	~~(Unaudited)~~
~~Weighted-average remaining lease term~~		~~0.58 year~~
~~Weighted-average discount rate~~		~~6.00~~	%

~~As most of our leases do not provide an implicit rate, we use the prime rate based on the information available at the lease commencement date to determine the present value of lease payments.~~

~~Maturity of lease liabilities~~

Related Party Others Total
(Unaudited) (Unaudited) (Unaudited)
10/1/2019-9/30/2020 $ 34,321 $ 363,265 $ 397,586
10/1/2020-9/30/2021 - 20,000 20,000
Total lease payments 34,321 383,265 417,586
Less: Imputed interest (843 ) (10,842 ) (11,685 )
Present value of lease liabilities 33,478 372,423 405,901
Current portion 33,478 352,523 386,001
Non-current portion $ - $ 19,900 $ 19,900

1115

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 1013 - Income Taxes

Income tax expense for the three-month and nine-month periods ended September 30, ~~2019~~2020 and ~~2018~~2019 consisted of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Current:	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Federal	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
State		-		-		1,600		2,400		-		-		1,600		1,600
Foreign		-		-		1,635		1,662		12		-		1,675		1,635
Total	$	-	$	-	$	3,235	$	4,062	$	12	$	-	$	3,275	$	3,235

The following table presents a reconciliation of the Company’s income tax at statutory tax rate and income tax at effective tax rate for the three-month and nine-month periods ended September 30, ~~2019~~2020 and ~~2018.~~2019.

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2020			2019			2020			2019
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Tax benefit at statutory rate	$	(688,749	)	$	(524,572	)	$	(1,703,699	)	$	(1,266,726	)	$	(240,895	)	$	(688,749	)	$	(1,244,715	)	$	(1,703,699	)
Net operating loss carryforwards (NOLs)		543,562			574,508			1,235,409			1,287,325
Foreign investment losses		107,200			34,551			290,900			49,200
Valuation allowance on net operating loss carryforwards														183,521			531,909			752,812			1,136,489
Unrealized investment losses (gains)														(8,487	)		107,200			89,803			290,900
Stock-based compensation expense		154,400			84,574			292,900			223,019			59,300			154,400			251,200			292,900
Amortization expense		58,700			(62,700	)		33,100			(66,100	)
Accrued R&D expense		-			-			-			(168,000	)
Amortization and depreciation expense														(22,013	)		58,700			3,320			33,100
Accrued payroll		900			-			(40,900	)		-			98,900			900			174,800			(40,900	)
Accrued professional expense		-			(47,900	)		-			(47,900	)
Unrealized exchange losses (gains)														(76,526	)		11,653			(104,720	)		98,920
Accrued consulting expense		(122,300	)		-			(122,300	)		-			-			(122,300	)		-			(122,300	)
Others		(53,713	)		(58,461	)		17,825			(6,756	)		6,212			(53,713	)		80,775			17,825
Tax expense at effective tax rate	$	-		$	-		$	3,235		$	4,062		$	12		$	-		$	3,275		$	3,235

Deferred tax assets ~~(liability)~~(liabilities) as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 consist approximately of:

	September 30, 2019			December 31, 2018			September 30, 2020			December 31, 2019
	(Unaudited)						(Unaudited)
Net operating loss carryforwards (NOLs)	$	6,234,000		$	5,632,000		$	7,688,000		$	6,388,000
Stock-based compensation expense		1,283,000			893,000			1,884,000			1,549,000
Accrued expenses and unpaid expense payable		52,000			184,000			312,000			53,000
Tax credit carryforwards		68,000			68,000			68,000			68,000
Excess of tax amortization over book amortization		(629,000	)		(818,000	)		(587,000	)		(619,000	)
Unrealized exchange gain								(230,000	)		(106,000	)
Others		357,000			131,000			(151,000	)		(104,000	)
Gross		7,365,000			6,090,000			8,984,000			7,229,000
Valuation allowance		(7,365,000	)		(6,090,000	)		(8,984,000	)		(7,229,000	)
Net	$	-		$	-		$	-		$	-

Management does not believe the deferred tax assets will be utilized in the near future; therefore, a full valuation allowance is provided. The net change in deferred tax assets valuation allowance was an increase of approximately ~~$1,275,000~~$ 1,755,000 (unaudited) for the nine months ended September 30, ~~2019.~~2020.

As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had federal NOLs of approximately $8,243,000 available to reduce future federal taxable income, expiring in 2037, and additional federal NOLs of approximately ~~$10,443,000~~$ 14,514,000 (unaudited) and ~~$5,743,000,~~$11,314,000, respectively, were generated and will be carried forward indefinitely to reduce future federal taxable income. As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had State NOLs of approximately ~~$24,328,000~~$ 25,144,000 (unaudited) and ~~$21,049,000~~$21,117,000 respectively, available to reduce future state taxable income, expiring in ~~2039.~~2040 and 2039, respectively.

As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company has Japan NOLs of approximately ~~$337,000~~$367,000 (unaudited) and ~~$319,000,~~$350,000, respectively, available to reduce future Japan taxable income, expiring ~~in 2029.~~through 2031.

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 1013 - Income Taxes - Continued

As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company has Taiwan NOLs of approximately ~~$2,189,000~~$2,701,000 (unaudited) and ~~$879,000,~~$1,898,000, respectively, available to reduce future Taiwan taxable income, expiring in ~~2029.~~2030 and 2029, respectively.

As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had approximately $37,000 (unaudited) and $37,000 of federal research and development tax credit, available to offset future federal income tax. The credit begins to expire in 2034 if not utilized. As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had approximately $39,000 (unaudited) and $39,000 of California state research and development tax credit available to offset future California state income tax. The credit can be carried forward indefinitely.

The Company’s ability to utilize its federal and state NOLs to offset future income taxes is subject to restrictions resulting from its prior change in ownership as defined by Internal Revenue Code Section 382. The Company does not expect to incur the limitation on NOLs utilization in future annual usage.

NOTE 1114 - Capital Stock

Preferred Stock:

The Company is authorized to issue 50,000,000 shares of preferred stock, with par value of $0.001. As of September 30, ~~2019,~~2020, there were no preferred stock shares outstanding. The Board of Directors has the authority to issue preferred stock in one or more series, and in connection with the creation of any such series, by resolutions providing for the issuance of the shares thereof, to determine dividends, voting rights, conversion rights, redemption privileges and liquidation preferences.

Common Stock:

The Company is authorized to issue 90,000,000 shares of common stock, reflecting a reverse split in the ratio of 1 for 5 effective January 16, 2019, with par value of $0.001.

On February 13, 2017, all of Aircom’s 5,513,334 restricted shares were converted to 2,055,947 shares of Aerkomm’s restricted stock at the ratio of 2.681651 to 1, pursuant to the Exchange Agreement (see Note 1). As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the restricted shares consisted of the following:

	September 30, 2019		December 31, 2018		September 30, 2020		December 31, 2019
	(Unaudited)				(Unaudited)
Restricted stock - vested		1,802,373		1,802,373		1,802,373		1,802,373
Restricted stock - unvested		149,162		149,162		149,162		149,162
Total restricted stock		1,951,535		1,951,535		1,951,535		1,951,535

The unvested shares of restricted stock were recorded under a deposit liability account awaiting future conversion to common stock when they become vested. ~~On December 21, 2018, the Company repurchased and cancelled an aggregate of104,413unvested shares of restricted common stock for a purchase price of $0.0067 per share.~~

On May 14, 2018, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Boustead Securities, LLC (“Boustead”) in connection with the public offering (the “Offering”), issuance and sale of up to 1,411,782 shares of the Company’s common stock on a best efforts basis, with a minimum requirement of 117,647 shares, at the public offering price of $42.50 per share (originally $8.5 per share before the 1-to-5 reverse split), less underwriting discounts, for minimum gross proceeds of $5,000,000 and up to a maximum of $60,000,000. As of December 31, 2018, pursuant to the Underwriting Agreement, the Company had issued an aggregate of 1,024,980 shares of common stock (including 19 shares that were added as a result of rounding in connection with the one-for-five reverse split concluded on January 16, 2019) for gross proceeds of $43,560,894, or net proceeds of $39,810,204. On April 23, 2019, the Company filed a post-effective amendment No. 2 with the Securities and Exchange Commission (the “SEC”) to extend the Offering to attempt to raise the then remaining $16.44 million of the amount that was originally registered in the Offering, as well as a $9 million over-subscription option amount. On May 17, 2019, the Company filed a post-effective amendment No. 3 with the Securities and Exchange Commission (the “SEC”) to extend the Offering subsequently and which was declared effective by the SEC on May 23. 2019. As of September 30, 2019, the Company completed two closings in the aggregate gross amount of $11,459,998, or net amount of $10,715,758, and issued 269,647 shares of common stock.

On July 2, 2019, the board of directors approved a supplement to the engagement agreement with one of the Company’s service providers pursuant to which the Company agreed to issue to the service provider 23,972 restricted shares of the Company’s common stock in consideration of that service provider’s agreement to defer the receipt of payment of certain accrued fees due to the service provider.

~~AERKOMM INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~NOTE 11 - Capital Stock - Continued~~

Stock Warrant:

The Company has entered into a service agreement which provides for the issuance of warrants to purchase shares of its common stock to a service provider as payment for services. The warrants allow the service provider to purchase a number of shares of Aerkomm common stock equal to the service fee value divided by 85% of the share price paid by investors for Aerkomm’s common stock in the first subsequent qualifying equity financing event, at an exercise price of $0.05 per share. For the nine-month periods ended September 30, ~~2019~~2020 and ~~2018,~~2019, Aerkomm has not issued additional stock warrants ~~exercisable for $0 and $26,667, respectively, in value of Aerkomm common stock~~ to the service provider as payment for additional services. As of ~~June~~September 28, 2019, these warrants are equivalent to 4,891 shares of the Company’s common stock. On ~~June~~September 29, 2019, the Company settled with the service provider to cancel all these warrants with $75,000 in three installments payable on July 3, August 1, and September 1, 2019 and all three installments were paid on schedule.

In connection with the Underwriting Agreement with Boustead Securities, LLC, or Boustead, the Company agreed to issue to Boustead warrants to purchase a number of the Company’s shares equal to 6% of the gross proceeds of the public offering, which shall be exercisable, in whole or in part, commencing on April 13, 2018 and expiring on the five-year anniversary at an initial exercise price of $53.125 per share, which is equal to 125% of the offering price paid by investors. As of ~~September 30,~~December 31, 2019, ~~and 2018,~~ the Company ~~has~~ issued total warrants to Boustead to purchase 77,680 ~~and 61,498~~ shares ~~respectively,~~ of the Company’s ~~stock and the total warrant value is $454,600 (unaudited) and $849,500, respectively.~~stock. For the nine-month ~~period~~periods ended September 30, ~~2019~~2020 and ~~2018,~~2019, the Company recorded ~~$260,900 (unaudited)~~an increase of $262,600 and ~~$171,300 (unaudited),~~$84,233, respectively, ~~of consulting fee with the corresponding account of~~in additional paid-in capital as ~~the~~ adjustment for the issuance costs of these stock warrants.

~~NOTE 12 - Major Customer~~AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

The Company has one major customer, which represents 10% or more of the total sales of the Company for the period. Sales to and account receivable from the customer for the nine months ended and as of September 30, 2019 were $1,599,864 (unaudited) and $649,939 (unaudited), respectively.

NOTE 1315 - ~~Major Vendor~~

The Company has one major vendor, which represents 10% or more of the total purchases of the Company for the period. Purchases from and account payable to the vendor for the nine months ended and as of September 30, 2019 were $1,587,222 (unaudited) and $506,308 (unaudited), respectively.

~~NOTE 14 -~~Significant Related Party Transactions

Name of related parties and relationships with the Company:

Related Party		Relationship
Dmedia Holding LP (“Dmedia”)		Major stockholder
~~Bummy Wu~~		~~Shareholder~~
~~Jeffrey Wun~~		~~Shareholder and CEO of Aerkomm and Aircom~~
~~Yih Lieh (Giretsu) Shih~~		~~President of Aircom Japan~~
~~Chien Ming Tseng~~		~~President of Aircom Taiwan~~
~~Hao Wei Peng~~		~~Employee of Aircom Taiwan and founding owner of Aircom Taiwan prior to 12/19/2017~~
~~Louis Giordimaina~~		~~COO - Aviation of Aircom~~
~~Wealth Wide Int’l Ltd.~~Well Thrive Limited (“~~WWI”~~WTL”)		~~Bummy Wu,~~Major stockholder; Sheng-Chun Chang is the President
Yuan Jiu Inc. (“Yuan Jiu”)		Stockholder; Albert Hsu, a ~~shareholder,~~Director of Aerkomm, is the Chairman
~~WISD Intellectual Property Agency,~~AA Twin Associates Ltd. (“~~WISD”~~AATWIN”)		~~Patrick Li, Director~~Georges Caldironi, COO of ~~Aircom,~~Aerkomm, is ~~the Chairman; Chih-Ming (Albert) Hsu, Director of the Company, is a Director~~ sole owner

~~AERKOMM INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~NOTE 14 - Related Party Transactions - Continued~~

Significant related party transactions:

The Company has extensive transactions with its related parties. It is possible that the terms of these transactions are not the same as those which would result from transactions among wholly unrelated parties.

As of September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

September 30,
2019 December 31,
2018
(Unaudited)
Other receivable from Chien Ming Tseng¹ $ 111,111 $ -
Temporary deposit to Bummy Wu² $ - $ 100,067
Operating lease liability to WWI³ $ 33,478 $ -
Other payable to:
Hao Wei Peng⁴ $ 47,201 $ -
WWI³ 39,179 39,224
Jeffrey Wun⁴ 12,807 46,236
Louis Giordimaina⁴ 3,019 6,071
Yih Lieh (Giretsu) Shih⁴ - 15,497
Others⁴ 9,986 66,826
Total $ 112,192 $ 173,854

	September 30, 2020		December 31, 2019
	(Unaudited)
Inventory prepayment to:
Yuan Jiu¹	$	361,420	$	-

Loans from WTL²	$	214,162	$	-
Interest payable to WTL²	$	12,326	$	-
Other payable to:
AATWIN³	$	150,777	$	-
Others⁴		196,322		30,971
Total	$	347,099	$	30,971

Represents ~~temporary advances~~inventory prepayment paid to ~~employees for payments~~Yuan Jiu. On May 11, 2020, the Company entered into a product purchase agreement with Yuan Jiu to purchase 100 sets of ~~previously accrued expenses for regular operating activities,~~the AirCinema Cube to be ~~offset~~installed on aircraft of commercial airline customers. The total purchase amount under this agreement was $1,807,100 (unaudited) and the Company paid 10% of the total amount as an initial deposit of $180,710 (unaudited). On July 15, 2020, the Company signed a second product purchase agreement of $1,807,100 (unaudited) with Yuan Jiu for an additional 100 sets of the ~~Company’s accrued expenses pending official receipts.~~AirCinema Cube for the same purchase amount and paid a 10% initial deposit of $180,710 (unaudited) on this agreement as well.

The Company has a short-term loan from WTL due to operational needs under the Loans (note 1). The loan amount was up to $172,712 (NTD 5,000,000). The loan agreement, bears an interest rate of 5% per annum, will terminate on December 31, 2020. The Company has drawn down $158,895 (NTD 4,600,000) (unaudited) and has repaid $82,902 (NTD 2,400,000) (unaudited) of the outstanding loan as of September 30, 2020. As of November 7, 2020, the Company borrowed additional $138,169 (NTD 4,000,000) (unaudited) from WTL.

	2.	~~In November 2018, Aircom HK’s bank account was temporarily frozen by its local bank in Hong Kong (the “HK bank”)~~ The Company has another loan from WTL due to ~~Aircom HK’s failure to timely submit to~~operational needs under the ~~HK bank corporate documentation relating to~~Loans (note 1). The original loan amount was approximately $2.64M (NTD 80,000,000). The loan agreement, bears an interest rate of 5% per annum, will terminate on December 31, 2021. The Company has repaid $2.53M (NTD 76,000,000) of the ~~corporate organization and goodstanding~~outstanding loan amount as of ~~Aircom HK’s parent company, Aircom, and Aircom’s parent company, Aerkomm. To avoid a potential cash flow issue resulting~~September 30, 2020. As of November 7, 2020, the Company borrowed additional $37,997 (NTD 1,100,000) (unaudited) from WTL under this ~~temporary account freeze, Aircom HK withdrew $100,067 in cash~~loan.

	As of September 30, 2020, the total outstanding loan balance from ~~the HK bank and temporarily deposited it in an existing related party’s bank account at a different bank for safe keeping. The Aircom HK’s bank account with the HK bank~~WTL was ~~reactivated by the HK bank subsequently and the cash that was transferred to the related party’s account was redeposited into Aircom HK’s bank account at the HK bank in February 2019.~~$214,162 (NTD 6,200,000) (unaudited).

Represents ~~rent for a warehouse in Hong Kong~~payable to ~~store the Company’s hardware, which ended in May 2018,~~AATWIN due to consulting agreement on January 1, 2019. The monthly consulting fee is €15,120 (approximately $17,000) and ~~rent for another Hong Kong office starting June 28, 2018.~~will be expired December 31, 2021.

Represents payable to employees as a result of regular operating activities.

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 15 - Significant Related Party Transactions - Continued

For the three-month and nine-month periods ended September 30, ~~2019~~2020 and ~~2018:~~2019:

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Consulting expense paid to Louis Giordimaina $ - $ - $ - $ 222,246
Legal expense paid to WISD - 9,387 - 10,779
Amortization expense of right-of-use asset charged by WWI 11,456 - 34,328 -
Rental expense charged by WWI - 14,706 - 17,840
Interest expense charged by Dmedia - - 1,744 3,116

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Consulting expense charged by AATWIN	$	53,669	$	-	$	153,890	$	-
Interest expense charged by WTL		2,921		-		11,988		-
Interest expense charged by Dmedia		-		1,446		-		1,744

~~On May 25, 2018, Mr. Louis Giordimaina was converted~~Aerkomm had short-term loans from ~~a consultant to a full-time employee and was appointed as Chief Operating Officer – Aviation. The consulting expense paid for~~Dmedia with an annual interest rate of 3% during the nine-month period ended September 30, ~~2018 in the amount of $222,246 represents the consulting services provided prior to the conversion.~~

~~AERKOMM INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~NOTE 14 - Related Party Transactions - Continued~~

~~Aircom engaged WISD to handle its filing of patent and trademark applications.~~

2019. The Company ~~had a lease agreement with WWI with a monthly rental cost of $450 that expired~~repaid the short-term loan in full on May 31, 2018 and was not renewed. The Company has another lease agreement with WWI for its office space in Hong Kong with a monthly rental cost of HKD 30,000. The lease term is from June 28, 2018 to June 27, 2020. Effective JanuaryJuly 1, ~~2019, the Company adopted ASU2016-02, “Leases” (Topic 842) (“ASU 2016-02”), and accounted for these leases under amortization of the lease payment under Note 9, Lease Liabilities.~~2019.

NOTE 1516 - Stock Based Compensation

In March 2014, Aircom’s Board of Directors adopted the 2014 Stock Option Plan (the “Aircom 2014 Plan”). The Aircom 2014 Plan provided for the granting of incentive stock options and non-statutory stock options to employees, consultants and outside directors of Aircom. On February 13, 2017, pursuant to the Exchange Agreement, Aerkomm assumed the options of Aircom 2014 Plan and agreed to ~~grant~~issue options ~~to purchase~~for an aggregate of 1,088,882 shares ~~of the Company’s common stock~~ to Aircom’s stock option holders.

One-third of stock option shares will be vested onas of the first anniversary of the ~~grant date~~time the option shares are granted or the employee’s acceptance to serve the Company, and ~~the remainder~~1/36th of the ~~grant~~shares will be vested ~~and will vest in 36 equal monthly installments thereafter, subject to the grantee’s continuous service through the applicable vesting date.~~each month thereafter. Option ~~prices for such options were~~price is determined by ~~Aircom’s~~the Board of Directors. The Aircom 2014 Plan became effective upon its adoption by the Board and shall continue in effect for a term of 10 years unless sooner terminated under the terms of Aircom 2014 Plan.

On May 5, 2017, the Board of Directors of Aerkomm adopted the Aerkomm Inc. 2017 Equity Incentive Plan (the “Aerkomm 2017 Plan” and together with the Aircom 2015 Plan, the “Plans”)) and the reservation of 1,000,000 shares of ~~the Company’s~~ common stock for ~~future grant or~~ issuance under the Aerkomm 2017 Plan. On June 23, 2017, the Board of Directors voted to increase the number of shares of common stock reserved for ~~future grant or~~ issuance under the Aerkomm 2017 Plan to 2,000,000 shares. The Aerkomm 2017 Plan provides for the granting of incentive stock options and non-statutory stock options to employees, consultants and outside directors of the Company, as determined by the Compensation Committee of the Board of Directors (or, prior to the establishment of the Compensation Committee on January 23, 2018, the Board of Directors).

On June 23, 2017, the Board of Directors ~~approved the grant of~~agreed to issue options ~~to purchase~~for an aggregate of 291,000 shares under the Aerkomm 2017 Plan to certain officers and directors of the Company. The option agreements are classified into three types of vesting ~~schedules,~~schedule, which ~~include,~~includes, 1) 1/6 of the shares subject to the option shall vest commencing on the vesting start date and the remaining shares shall vest at the rate of 1/60 for the next 60 months on the same day of the month as the vesting start date; 2) 1/4 of the shares subject to the option shall vest commencing on the vesting start date and the remaining shares shall vest at the rate of 1/36 for the next 36 months on the same day of the month as the vesting start date; 3) 1/3 of the shares subject to the option shall vest commencing on the first anniversary of vesting start date and the remaining shares shall vest at the rate of 50% each year for the next two years on the same day of the month as the vesting start date.

On July 31, 2017, the Board of Directors approved the grant of options to purchase an aggregate of 109,000 shares under the Aerkomm 2017 Plan to 11 of its employees. One-third of these shares subject to the options vested on the first anniversary of the grant date, one-third of the shares vested on the second anniversary of the grant date, and the remaining shares shall vest on the third anniversary of the grant date.

On December 29, 2017, the Board of Directors approved the grant of options to purchase 4,000 shares under the Aerkomm 2017 Plan to each of three of the Company’s independent directors for an aggregate of 12,000 shares. All of these options vested immediately upon grant.

On June 19, 2018, the Compensation Committee approved the grant of options to purchase 32,000 and 30,000 shares under the Aerkomm 2017 Plan to two of the Company executives. One-fourth of the 32,000 shares subject to the option vested on May 1, 2019, and the remaining shares shall vest in three equal yearly installments thereafter. One-third of the 30,000 shares subject to the option vested on May 29, 2019, and the remaining shares shall vest in two equal yearly installments thereafter.

On September 16, 2018 and December 29, 2018, the Compensation Committee approved the grant of options to purchase 4,000 shares under the Aerkomm 2017 Plan to each of four of the Company’s independent directors for an aggregate of 16,000 shares. All of these options vested immediately upon grant.

On July 2, 2019, the Board of Directors approved the grant of options to purchase an aggregate of 339,000 shares under the Aerkomm 2017 Plan to 22 of its directors, officers and employees. 25% of the shares vested on the grant date, 25% of the shares vested on July 17, 2019, 25% of the shares will vest on the first anniversary of the grant date, and 25% of the shares will vest upon the second anniversary of the grant date.

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 1516 - Stock Based Compensation - Continued

On July 31, 2017, the Board of Directors approved to issue options for an aggregate of 109,000 shares under the Aerkomm 2017 Plan to 11 of its employees. 1/3 of these shares subject to the option shall vest commencing on the first anniversary of vesting start date and the remaining shares shall vest at the rate of 50% each year for the next two years on the same day of the month as the vesting start date.

On December 29, 2017, the Board of Directors approved to issue options for an aggregate of 12,000 shares under the Aerkomm 2017 Plan to three of the Company’s independent directors, 4,000 shares each. All of these options were vested immediately upon issuance.

On June 19, 2018, the Compensation Committee approved to issue options for 32,000 and 30,000 shares under the Aerkomm 2017 Plan to two of the Company executives. One-fourth of the 32,000 shares subject to the option shall vest on May 1, 2019, 2020, 2021 and 2022, respectively. One-third of the 30,000 shares subject to the option shall vest on May 29, 2019, 2020 and 2021, respectively.

On December 29, 2018, the Compensation Committee approved to issue options for an aggregate of 12,000 shares under the Aerkomm 2017 Plan to three of the Company’s independent directors, 4,000 shares each. All of these options were vested immediately upon issuance.

On October 4, 2019, the Board of Directors approved the grant of options to purchase an aggregate of 85,400 shares under the Aerkomm 2017 Plan to three (3) of its employees. 25% of the shares vested on the grant date, and 25% of the shares will vest on each of October 4, 2020, October 4, 2021 and October 4, 2022, respectively.

On December 29, 2019, the Board of Directors approved to issue options for an aggregate of 12,000 shares under the Aerkomm 2017 Plan to three of the Company’s independent directors, 4,000 shares each. All of these options shall vest at the date of 1/12th each month for the next 12 months on the same day of December 2019.

On September 17, 2020, the Board of Directors approved to issue options for in the amount of 4,000 shares under the Aerkomm 2017 Plan to one of the Company’s independent directors. These options shall vest at the date of 1/12th each month for the next 12 months on the same day of September 2020.

Option price is determined by the Compensation Committee. The Aerkomm 2017 Plan has been adopted by the Board and shall continue in effect for a term of 10 years unless sooner terminated under the terms of Aerkomm 2017 Plan. The Aerkomm 2017 Plan was approved by the Company’s stockholders on March 28, 2018.

Valuation and Expense Information

Measurement and recognition of compensation expense based on estimated fair values is required for all share-based payment awards made to its employees and directors including employee stock options. The Company recognized compensation expense of ~~$1,394,670~~$1,196,386 and ~~$1,062,140~~$1,394,670 for the nine-month periods ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, related to such employee stock options.

Determining Fair Value

Valuation and amortization method

The Company uses the Black-Scholes option-pricing-model to estimate the fair value of stock options granted on the date of grant or modification and amortizes the fair value of stock-based compensation at the date of grant on a straight-line basis for recognizing stock compensation expense over the vesting period of the option.

Expected term

The expected term is the period of time that granted options are expected to be outstanding. The Company uses the SEC’s simplified method for determining the option expected term based on the Company’s historical data to estimate employee termination and options exercised.

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 16 - Stock Based Compensation - Continued

Expected dividends

The Company does not plan to pay cash dividends before the options are expired. Therefore, the expected dividend yield used in the Black-Scholes option valuation model is zero.

Expected volatility

Since the Company has no historical volatility, it used the calculated value method which substitutes the historical volatility of a public company in the same industry to estimate the expected volatility of the Company’s share price to measure the fair value of options granted under the Plans.

Risk-free interest rate

The Company based the risk-free interest rate used in the Black-Scholes option valuation model on the market yield in effect at the time of option grant provided in the Federal Reserve Board’s Statistical Releases and historical publications on the Treasury constant maturities rates for the equivalent remaining terms for the Plans.

Forfeitures

The Company is required to estimate forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate option forfeitures and records share-based compensation expense only for those awards that are expected to vest.

~~AERKOMM INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~NOTE 15 - Stock Based Compensation - Continued~~

The Company used the following assumptions to estimate the fair value of options granted in ~~2018~~nine-month period ended September 30, 2020 and year ended December 31, 2019 under the Plans as follows:

Assumptions
Expected term	105-10 years
Expected volatility		~~59.83% - 61.91~~45.81 – 72.22	%
Expected dividends		0	%
Risk-free interest rate		~~1.98%~~0.69 - 2.99	%
Forfeiture rate		0%0 - 105	%

Aircom 2014 Plan

~~A summary of the number of shares, weighted average exercise price and estimated fair value of~~Activities related to options for the Aircom 2014 Plan for the nine months ended September 30, 2020 and the year ended December 31, 2019 are as follows:

	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Fair Value Per Share
Options outstanding at January 1, 2019		932,262	$	0.4081	$	0.1282
Granted		-		-		-
Exercised		-		-		-
Forfeited/Cancelled		-		-		-
Options outstanding at December 31, 2019		932,262		0.4081		0.1282
Granted		-		-		-
Exercised		-		-		-
Forfeited/Cancelled		-		-		-
Options outstanding at September 30, 2020 (unaudited)		932,262		0.4081		0.1282

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 16 - Stock Based Compensation - Continued

Activities related to unvested stock awards under Aircom 2014 Plan for the nine-month period ended September 30, 2020 and the year ended December 31, 2019 are as follows:

	Number of Shares			Weighted Average Fair Value Per Share
Options unvested at January 1, 2019		85,975		$	0.4963
Granted		-			-
Vested		(85,975	)		0.4963
Forfeited/Cancelled		-			-
Options unvested at December 31, 2019		-			-
Granted		-			-
Vested		-			-
Forfeited/Cancelled		-			-
Options unvested at September 30, 2020 (unaudited)		-			-

Of the shares covered by options outstanding as of ~~December 31, 2018 and~~ September 30, ~~2019~~2020, 932,262 shares of stock option under 2014 Plan are now exercisable. Information related to stock options outstanding and exercisable at September 30, 2020, is as follows:

Number of Shares Weighted Average Exercise Price Per Share Weighted Average Fair Value Per Share
Options outstanding at January 1, 2018 932,262 $ 0.4081 $ 0.1282
Granted - - -
Exercised - - -
Forfeited/Cancelled - - -
Options outstanding at December 31, 2018 932,262 0.4081 0.1282
Granted - - -
Exercised - - -
Forfeited/Cancelled - - -
Options outstanding at September 30, 2019 932,262 0.4081 0.1282

Options exercisable at December 31, 2018 846,287 0.2892 0.0908

Options exercisable at September 30, 2019 932,262 0.4081 0.1282

		Options Outstanding (Unaudited)						Options Exercisable (Unaudited)
Range of Exercise Prices		Shares Outstanding at 9/30/2020		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Shares Exercisable at 9/30/2020		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price
$	0.0067		820,391		4.42	$	0.0067		820,391		4.42	$	0.0067
$	3.3521		111,871		5.75		3.3521		111,871		5.75		3.3521
			932,262		4.58		0.4081		932,262		4.58		0.4081

~~A summary~~As of September 30, 2020, there was no unrecognized stock-based compensation expense for the ~~status of nonvested shares under~~ Aircom 2014 Plan. No option was exercised during the nine-month periods ended September 30, 2020 and 2019.

Aerkomm 2017 Plan

Activities related to options outstanding under Aerkomm 2017 Plan for the nine months ended September 30, 2020 and the year ended December 31, 2019 are as follows:

	Number of Shares			Weighted Average Exercise Price Per Share		Weighted Average Fair Value Per Share
Options outstanding at January 1, 2019		283,000		$	28.3867	$	17.5668
Granted		436,400			5.4763		3.8452
Exercised		-			-		-
Forfeited/Cancelled		-			-		-
Options outstanding at December 31, 2019		719,400			14.4889		9.2431
Granted		6,000			12.7267		9.3328
Exercised		-			-		-
Forfeited/Cancelled		(18,000	)		11.8067		7.3457
Options outstanding at September 30, 2020 (unaudited)		707,400			14.5422		9.2921

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 16 - Stock Based Compensation - Continued

Activities related to unvested stock awards under Aerkomm 2017 Plan for the nine-month period ended September 30, 2020 and the year ended December 31, 2019 are as follows:

	Number of Shares			Weighted Average Fair Value Per Share
Options unvested at January 1, 2019		171,411		$	17.5341
Granted		436,400			3.8452
Vested		(267,683	)		7.5460
Forfeited/Cancelled		-			-
Options unvested at December 31, 2019		340,128			7.8313
Granted		6,000			9.3328
Vested		(160,859	)		9.5923
Forfeited/Cancelled		(6,625	)		4.0800
Options unvested at September 30, 2020 (unaudited)		178,644			6.4352

Of the shares covered by options outstanding under the Aircom 2017 Plan as of ~~December 31, 2018 and~~ September 30, ~~2019~~2020, 528,756 shares are now exercisable; 127,944 shares will be exercisable for the twelve-month period ending September 30, 2021; 29,350 shares will be exercisable for the twelve-month period ending September 30, 2022; and 21,350 shares will be exercisable for the twelve-month period ending September 30, 2023. Information related to stock options outstanding and exercisable at September 30, 2020, is as follows:

Number of Shares Weighted
Average
Exercise Price Per
Share
Options nonvested at January 1, 2018 302,467 $ 0.8315
Granted - -
Vested (216,492 ) 0.5349
Forfeited/Cancelled - -
Options nonvested at December 31, 2018 85,975 1.5786
Granted - -
Vested (85,975 )
1.5715

Forfeited/Cancelled - -
Options nonvested at September 30, 2019 - -

		Options Outstanding (Unaudited)						Options Exercisable (Unaudited)
Range of Exercise Prices		Shares Outstanding at 9/30/2020		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Shares Exercisable at 9/30/2020		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price
$	3.96		327,000		8.76	$	3.9600		242,250		8.76	$	3.9600
$	9.00		12,000		9.25		9.0000		9,000		9.25		9.0000
$	11.00 – 14.20		103,400		8.97		11.4426		35,506		8.78		12.1816
$	20.50 – 27.50		141,000		7.16		24.3638		115,000		7.05		25.2374
$	30.00 – 35.00		124,000		6.75		34.4012		124,000		6.75		34.4012
			707,400		8.12		14.5422		528,756		7.92		16.3644

As of September 30, 2020, total unrecognized stock-based compensation expense related to stock options was approximately $800,000, which is expected to be recognized on a straight-line basis over a weighted average period of approximately 1.47 years. No option was exercised during the nine-month period ended September 30, 2020 and the year ended December 31, 2019.

1823

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE ~~15 - Stock Based Compensation - Continued~~

~~Aerkomm 2017 Plan~~

~~A summary of the number of shares, weighted average exercise price~~17 – Commitments and ~~estimated fair value of options under Aerkomm 2017 Plan as of December 31, 2018 and September 30, 2019 is as follows:~~

Number of Shares Weighted Average Exercise Price Per Share Weighted Average Fair Value Per Share
Options outstanding at January 1, 2018 253,000 $ 30.8824 $ 18.4796
Granted 78,000 19.7462 9.2500
Exercised - - -
Forfeited/Cancelled (48,000 ) 27.5000 16.4610
Options outstanding at December 31, 2018 283,000 28.3867 16.2781
Granted 339,000 3.9600 2.0301
Exercised - - -
Forfeited/Cancelled - - -
Options outstanding at September 30, 2019 (unaudited) 622,000 15.0738 8.5127

Options exercisable at December 31, 2018 111,589 28.7052 16.5968

Options exercisable at September 30, 2019 (unaudited) 353,797 17.0242 9.6884

~~A summary of the status of nonvested shares under Aerkomm 2017 Plan as of September 30, 2019 and December 31, 2018 is as follows:~~

Number of Shares Weighted
Average
Exercise Price Per
Share
Options nonvested at January 1, 2018 168,250 $ 32.4079
Granted 78,000 19.7462
Vested (74,839 ) 28.8962
Forfeited/Cancelled - -
Options nonvested at December 31, 2018 171,411 28.1794
Granted 339,000 3.9600
Vested (242,208 ) 11.6426
Forfeited/Cancelled - -
Options nonvested at September 30, 2019 (unaudited) 268,203 12.5008

As of September 30, 2019 and December 31, 2018, there were approximately $1,519,000 (unaudited) and $2,174,000, respectively, of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Company expects to recognize that cost over a weighted average period of 1 - 5 years.

~~AERKOMM INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~NOTE 16 - Commitments~~Contingencies

As of September 30, ~~2019,~~2020, the Company’s significant commitment is summarized as follows:

		~~Yihe Culture Media Agreement~~:On June 20, 2018, the Company entered into a Cooperation Framework Agreement with Shenzhen Yihe Culture Media Co., Ltd. (“Yihe”), the authorized agent of Guangdong Tengnan Internet, pursuant to which Yihe will promote the development of strategic cooperation between the Company and Guangdong Tengnan Internet. Specifically, Yihe agreed to assist the Company with public relations and advertising, such as market and brand promotion, as well as brand recognition in China (excluding Hong Kong, Macao and Taiwan), including but not limited to news dissemination, creative planning and support of campaigns, financial public relations and internet advertising. More specifically, Yihe will help the Company develop a working application of the WeChat Pay payment solution as well as WeChat applets applicable for Chinese users and relating to cell phone and WiFi connectivity on airplanes, and Yihe will assist the Company in integrating other Tencent internet-based original product offerings. As compensation, the Company agreed to pay Yihe RMB 8 million (approximately US$1.2 million), RMB 2,000,000 (approximately US$309,000) of which the Company paid on June 29, 2018 and the remaining RMB 6,000,000 (approximately US$927,000) of which was to be paid by August 15, 2018. On July 19, 2019, Yihe and the Company agreed to extend the expiration date of the agreement to June 20, 2022. The Company had paid the remaining RMB 6,000,000 on August 12, 2019.

		~~Airbus SAS Agreement~~: On November 30, 2018, in furtherance of a memorandum of understanding signed in March 2018, the Company entered into an agreement with Airbus SAS (“Airbus”), pursuant to which Airbus will develop and certify a complete solution allowing the installation of our “AERKOMM K++” system on Airbus’ single aisle aircraft family including the Airbus A319/320/321, for both Current Engine Option (CEO) and New Engine Option (NEO) models. Airbus will also apply for and obtain on our behalf a Supplemental Type Certificate (STC) from the European Aviation Safety Agency, or EASA, as well as from the U.S. Federal Aviation Administration or FAA, for the retrofit system. It is anticipated that the Bilateral Aviation Safety Agreement between EASA and the Civil Aviation Administration of China, or CAAC, will be finalized and go into effect in 2019. Pursuant to the terms of our Airbus agreement, The Company agreed to pay the service fees that Airbus provides the Company with the retrofit solution which will include the Service Bulletin and the material kits including the update of technical and operating manuals pertaining to the aircraft and provision of aircraft configuration control. The timeframe for the completion and testing of this retrofit solution, including the certification, is approximately 16 months from the purchase order issued in August 2018, although there is no guarantee that the project will be successfully completed in the projected timeframe.

Airbus SAS Agreement: On November 30, 2018, in furtherance of a memorandum of understanding signed in March 2018, the Company entered into an agreement with Airbus SAS (“Airbus”), pursuant to which Airbus will develop and certify a complete solution allowing the installation of our “AERKOMM K++” system on Airbus’ single aisle aircraft family including the Airbus A319/320/321, for both Current Engine Option (CEO) and New Engine Option (NEO) models. Airbus will also apply for and obtain on our behalf a Supplemental Type Certificate (STC) from the European Aviation Safety Agency, or EASA, as well as from the U.S. Federal Aviation Administration or FAA, for the retrofit system. It is anticipated that the Bilateral Aviation Safety Agreement between EASA and the Civil Aviation Administration of China, or CAAC, will be finalized and go into effect in 2019. Pursuant to the terms of our Airbus agreement, The Company agreed to pay the service fees that Airbus provides the Company with the retrofit solution which will include the Service Bulletin and the material kits including the update of technical and operating manuals pertaining to the aircraft and provision of aircraft configuration control. The timeframe for the completion and testing of this retrofit solution, including the certification, is approximately 16 months from the purchase order issued in August 2018, although there is no guarantee that the project will be successfully completed in the projected timeframe.

20Hong Kong Airlines Agreement: On January 30, 2020, Aircom signed an agreement with Hong Kong Airlines Ltd. (HKA) to provide to Hong Kong Airlines both of its Aerkomm AirCinema and AERKOMM K++ IFEC solutions. Under the terms of this new agreement, Aircom will provide HKA its Ka-band AERKOMM K++ IFEC system and its AERKOMM AirCinema system. HKA will become the first commercial airliner launch customer for Aircom.

Republic Engineers Complaint: On October 15, 2018, Aircom Telecom entered into a product purchase agreement, or the October 15th PPA, with Republic Engineers Maldives Pte. Ltd., a company affiliated with Republic Engineers Pte. Ltd., or Republic Engineers, a Singapore based, private construction and contracting company. On November 30, 2018, the October 15th PPA was re-executed with Republic Engineers Pte. Ltd. as the signing party. The Company refers to this new agreement as the November 30th PPA and, together with the October 15th PPA, the PPA. Under the terms of the PPA, Republic Engineers committed to the purchase of a minimum of 10 shipsets of the AERKOMM K++ system at an aggregate purchase price of $10 million. Additionally, under the terms of the PPA, the Executive Director of Republic Engineers, C. A. Raja, agreed to sign an agreement, or the Guarantee, to guarantee all of the obligations of Republic Engineers under the PPA. Republic Engineers had submitted a purchase order, or PO, dated October 15, 2018 for the 10 shipsets and was supposed to have made payments to Aircom Telecom against the purchase order shortly thereafter. To date, Republic Engineers has made no payments against the purchase order and the Company has not begun any work on the ordered shipsets. On July 7, 2020, Republic Engineers and Mr. Raja filed a complaint against Aerkomm, Aircom and Aircom Telecom in the Superior Court of the State of California for the County of Almeda, or the Court, seeking declaratory relief only and no money damages, alleging that the PPA and the PO were not executed or authorized by Republic Engineers and that the Guarantee was not executed or authorized by Mr. Raja. Republic Engineers and C. A. Raja have requested from the Court (i) orders that the PPA, the PO and the Guarantee be declared null and void and (ii) the payment of their reasonable attorney’s fees. On July 29, 2020, Aircom Telecom provided notice to Republic Engineers that the PPA and the PO have been terminated according to their terms as a result of the non-performance of Republic Engineers and the Failure of Mr. Raja to provide the Guarantee. Aerkomm denies the allegations in the complaint and believes that the claims filed by Republic Engineers and Mr. Raja have no merit. Aerkomm has retained special litigation counsel and intends to vigorously defend against the claims. Aerkomm does not expect that this proceeding will have a material adverse effect on its results of operations or cash flows.

Shenzhen Yihe: On June 20, 2018, the Company entered into the Cooperation Framework Agreement, as supplemented on July 19, 2019, with Shenzhen Yihe Culture Media Co., Ltd., or Yihe, the authorized agent of Guangdong Tengnan Internet, or Tencent Group, pursuant to which Yihe agreed to assist the Company with public relations, advertising, market and brand promotion, as well as with the development of a working application of the Tencent Group WeChat Pay payment solution and WeChat applets applicable for Chinese users and relating to cell phone and WiFi connectivity on airplanes. As compensation under this Yihe agreement, the Company paid Yihe RMB 8 million (approximately US$1.2 million). On October 16, 2020, in accordance with the provisions of the agreement with Yihe, as supplemented, the Company filed an arbitration action with the Shenzhen International Arbitration Court, or the Arbitration Court, claiming that Yihe failed to perform under the terms of the supplemented agreement and seeking a complete refund of our RMB 8 million payment to Yihe. The Company received notice from the Arbitration Court on October 16, 2020 of receipt of our arbitration filing and the requirement to pay the Arbitration Court RMB 190,000 in fees relating to the arbitration and the fees were paid on October 28, 2020. The Company intend to aggressively pursue this matter. As of September 30, 2020, the Company reclassified this prepayment to Other Receivable and provided an allowance for the full amount of $1,155,623 (unaudited) against non-operating loss.

The COVID – 19 Pandemic:In December 2019, a novel strain of coronavirus (COVID-19) surfaced. The spread of COVID-19 around the world in 2020 has caused significant volatility in U.S. and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies. The company in the process of evaluating if the pandemic will have a material impact on its operations.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Use of Terms

Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our,” or “our company” are to the combined business of Aerkomm Inc., a Nevada corporation, and its consolidated subsidiaries, including Aircom Pacific, Inc., a California corporation and wholly-owned subsidiary, or Aircom; ~~Aerkomm Taiwan Inc., a Taiwanese company and wholly-owned subsidiary, or Aerkomm Taiwan;~~ Aircom Pacific Ltd., a Republic of Seychelles company and wholly-owned subsidiary of Aircom; Aerkomm Pacific Limited, a Malta company and wholly owned subsidiary of Aircom ~~or Aircom Seychelles;~~Pacific Ltd.; Aircom Pacific Inc. Limited, a Hong Kong company and wholly-owned subsidiary of Aircom; Aircom Japan, Inc., a Japanese company and wholly-owned subsidiary of Aircom; and Aircom Telecom LLC, a Taiwanese company and wholly-owned subsidiary of Aircom, ~~or Aircom Taiwan; Beijing Yatai Communication Co., Ltd., a corporation formed under the laws of China and wholly-owned subsidiary of~~ Aircom Taiwan, or Aircom ~~Beijing; and Aerkomm Pacific Limited, a corporation formed under the laws of Malta and wholly-owned subsidiary of Aircom Seychelles.~~Beijing.

Special Note Regarding Forward Looking Statements

Certain information contained in this report includes forward-looking statements. The statements herein which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our interpretation of what is believed to be significant factors affecting the businesses, including many assumptions regarding future events. The following factors, among others, may affect our forward-looking statements:

●

our future financial and operating results;

●

our intentions, expectations and beliefs regarding anticipated growth, market penetration and trends in our business;

●

the impact and effects of the global outbreak of the coronavirus (COVID-19) pandemic, and other potential pandemics or contagious diseases or fear of such outbreaks, on the global airline and tourist industries, especially in the Asia Pacific region;

●

our ability to attract and retain customers;

●

our dependence on growth in our customers’ businesses;

●

the effects of changing customer needs in our market;

●

the effects of market conditions on our stock price and operating results;

●

our ability to successfully complete the development, testing and initial implementation of our product offerings;

●

our ability to maintain our competitive advantages against competitors in our industry;

●

our ability to timely and effectively adapt our existing technology and have our technology solutions gain market acceptance;

●

our ability to introduce new product offerings and bring them to market in a timely manner;

●

our ability to obtain required telecommunications, aviation and other licenses and approvals necessary for our operations

●

our ability to maintain, protect and enhance our intellectual property;

●

the effects of increased competition in our market and our ability to compete effectively;

●

our expectations concerning relationship with customers and other third parties;

●

the attraction and retention of qualified employees and key personnel;

●

future acquisitions of our investments in complementary companies or technologies; and

●

our ability to comply with evolving legal standards and regulations.

Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors, including the ability to raise sufficient capital to continue our operations. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” included in our Annual Report on Form 10-K for the ~~prospectus contained in our Post-Effective Amendment No. 3 to Form S-1 as filed with the Securities and Exchange Commission, or the SEC, on May 17,~~year ended December 31, 2019, and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur.

Potential investors should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.

The specific discussions herein about our company include financial projections and future estimates and expectations about our business. The projections, estimates and expectations are presented in this report only as a guide about future possibilities and do not represent actual amounts or assured events. All the projections and estimates are based exclusively on our management’s own assessment of our business, the industry in which we work and the economy at large and other operational factors, including capital resources and liquidity, financial condition, fulfillment of contracts and opportunities. The actual results may differ significantly from the projections.

Potential investors should not make an investment decision based solely on our company’s projections, estimates or expectations.

~~Recent Developments~~Overview

~~On July 3, 2019, we paid Tsai Ming-Yin (the “~~~~Seller~~”)We are a ~~final installment in the amount~~full-service development stage provider of ~~US$624,462 of the purchase price for the acquisition by our wholly owned subsidiary, Aerkomm Taiwan, of a 6.36 acre parcel of land (the “~~~~Land~~”) located at the Taishui Grottoes in the Xinyi District of Keelung City, Taiwan, which is expected to be used by Aerkomm Taiwan and us to build Aerkomm’s first satellite ground station and data center. On July 16, 2019, the Seller provided us with a letter of undertaking (i) not to exercise his right to cancel and terminate our definitive agreement to purchase the Land and (ii) to proceed with the transfer of ownership of the Land to Aerkomm Taiwan. A copy of this letter of undertaking is referenced in the description of exhibits herein as Exhibit 10.2. As of the date of this report, the transfer of the ownership is still in progress.

~~On July 17, 2019, the French~~~~Autorité des Marchés Financiers~~ ~~(the “~~~~AMF~~~~”) granted visa number 19-372 on the prospectus relating to the admission of our common stock to list and trade on the Professional Segment of the regulated market of Euronext Paris (“~~~~Euronext Paris~~”). Our common stock began trading on Euronext Paris in November 2019 under the symbol “AKOM” and is denominated in Euros on Euronext Paris. This listing did not alter our outstanding share count, capital structure, or current common stock listing on the OTCQX, where our common stock also trades (in US dollars) under the symbol “AKOM.”

On October 31, 2019, Aircom Seychelles established a new a wholly owned subsidiary, Aerkomm Pacific Limited (“Aerkomm Malta”), a corporation formed under the laws of Malta. The purpose of Aerkomm Malta is to conduct Aircom’s business and operations to engage with suppliers and potential airlines customers in the European Union.

~~Overview~~

IFEC solutions. With advanced technologies and a unique business model, we, as a ~~development stage~~ service provider of IFEC solutions, intend to provide airline passengers with a broadband in-flight experience that encompasses a wide range of service options. Such options include Wi-Fi, cellular, movies, gaming, live TV, and music. We plan to offer these core services, which we are currently still developing, through both built-in in-flight entertainment systems, such as ain seat-back ~~display,~~displays, as well as on passengers’ ~~own~~ personal devices. We also expect to provide content management services and e-commerce solutions related to our IFEC solutions.

We plan to partner with airlines and offer airline passengers free IFEC services. We expect to generate revenue through advertising and in-flight transactions. We believe that this is an innovative approach that differentiates us from existing market players.

To complement and facilitate our planned IFEC service offerings, we intend to build satellite ground stations and related data centers within the geographic regions where we expect to be providing IFEC airline services.

~~Additionally,~~ We have purchased an approximately 6.3-acre parcel of land in Taiwan where we have developed and begun to market two internet connectivity systems, one for hotels primarily located in remote regions and the other for maritime use. Both systems operate through a Ku/Ku high throughput satellite, or HTS. We also expect to ~~develop~~build our first ground station. We are currently in the process of having the certificate of title to this Taiwan land parcel transferred to us. Because this process involves filing a ~~remote connectivity system that will be applicable to~~plan of usage with the ~~highspeed rail industry.~~

~~MJet GMBH General Terms Agreement~~

~~On March 6, 2019,~~local authorities and obtaining a required license and authorization for our intended land usage, we signed a General Terms Agreement (GTA) with MJet GMBH, or MJet, an Airbus Corporate Jets (“ACJ”) customer and an ACJ A319 corporate jet owner and operator based in Vienna, Austria. The GTA provided for the provision, installation, testing and certification of our Aerkomm K++ system equipment, including the Airbus Service Bulletin and associated material kit and related connectivity services, on an MJet ACJ A319 aircraft under the supervision of Airbus. On June 11, 2019 the GTA was converted into a definitive agreement with MJet (the “~~MJet Definitive Agreement~~”), and on June 12, 2019 MJet placed a Purchase Order with Aircom. MJet will be our launch customer for the first planned installation of our AERKOMM K++ system equipment by the end of 2019 or first quarter of 2020. Assuming the installation, testing and certification of our AERKOMM K++ system on the MJet A319 is successful, something we cannot guaranteeare not sure at this time ~~MJet~~when we will ~~pay us a one-time fee for our equipment and a monthly fee for our connectivity services, at which point~~receive the official certificate of title to the land. Once that title transfer process is completed, we ~~would also begin charging MJet for~~intend to mortgage the ~~bandwidth required~~property to ~~use~~finance the ~~AERKOMM K++ system services. Assuming the success~~cost of ~~this installation, MJet would become~~ the first ~~recurring payment customer of our IFEC AERKOMM K++ system as well as being the launch customer of our Aerkomm K++ solution.~~

~~Cooperation Framework Agreement with Shenzhen Yihe Culture Media Co., Ltd. (“Yihe”)~~

On June 20, 2018, the Company entered into a Cooperation Framework Agreement with Yihe, the authorized agent of Guangdong Tengnan Internet, pursuant to which Yihe will promote the development of strategic cooperation between the Company and Guangdong Tengnan Internet. Specifically, Yihe agreed to assist the Company with public relations and advertising, such as market and brand promotion, as well as brand recognition in China (excluding Hong Kong, Macao and Taiwan), including but not limited to news dissemination, creative planning and support of campaigns, financial public relations and internet advertising. More specifically, Yihe will help the Company develop a working application of the WeChat Pay payment solution as well as WeChat applets applicable for Chinese users and relating to cell phone and WiFi connectivity on airplanes, and Yihe will assist the Company in integrating other Tencent internet-based original product offerings. As compensation, the Company agreed to pay Yihe RMB 8 million (approximately US$1.2 million), RMB 2,000,000 (approximately US$309,000) of which the Company paid on June 29, 2018 and the remaining RMB 6,000,000 (approximately US$927,000) of which was to be paid by August 15, 2018. On July 19, 2019, Yihe and the Company agreed to extend the agreement to expire June 20, 2022 and to extend the date by which the Company must pay the remaining RMB 6,000,000 to August 12, 2019. As of September 30, 2019, the remaining balance was fully paid.ground station construction.

Business ~~Development~~Development.

We are actively working with prospective airline customers to provide services to their passengers utilizing the Airbus ~~to-be~~ certified ~~AERKOMM~~ AERKOMM®K++ system. We have entered into non-binding memoranda of understanding with a number of airlines, including Air Malta Airlines ~~of Malta, PanAfriqiyah~~ of Malta and Onur Air of Turkey. There can be no assurances, however, that these will lead to actual purchase agreements.

In view of the increasing demand by the airlines for a bigger data throughput, during the course of discussions between us and Airbus, we have revised our strategy to focus primarily on Ka-band IFEC solutions for airlines and have suspended work on our dual band (Ka/Ku) satellite inflight connectivity solution. The Ku-band system will, however, still be retained for other product applications such as remote locations and maritime use.

In connection with the Airbus project, we also identified owners of ACJ aircraft, as potential customers of our ~~AERKOMM~~ AERKOMM®K++ system. ACJ customers, however, would not generate enough internet traffic to make our free-service business model viable. To capitalize on this additional market, we plan to sell our ~~AERKOMM~~ AERKOMM®K++ system hardware for installation on ACJ corporate jets and provide connectivity through subscription-based plans. This new corporate jet market would generate additional revenue and income for our company. We are currently in advanced discussions with a number of ACJ customers, some of whom have more than one aircraft in their fleets.

Our ~~AERKOMM~~ AERKOMM®K++ System

Following the course of discussions between us and Airbus and in view of the increasing demand by the airlines for a bigger data throughput, we have revised our strategy to focus primarily on Ka-band satellite connectivity solutions for aviation customers and have suspended work on our dual band satellite connectivity solution. Our ~~AERKOMM~~ AERKOMM®K++ system will operate through Ka/Ka High Throughput Satellites. The Ku-band system will, however, still be retained for the other applications such as remote locations and maritime use.

Our ~~AERKOMM~~ AERKOMM®K++ system will contain a low profile radome (that is, a dome or similar structure protecting our radio equipment) containing two Ka-band antennas, one for transmitting and the other for receiving, and will comply with the ARINC 791 standard of Aeronautical Radio, Incorporated. Our ~~AERKOMM~~ AERKOMM®K++ system also meets Airbus Design Organization Approval.

GEO (Geostationary Earth Orbiting) and LEO (Low Earth Orbiting) Ka-band Satellites

Our initial ~~AERKOMM~~ AERKOMM®K++ system will work only with geostationary earth orbiting, or GEO, Ka-band satellites. Performance of GEO satellites diminishes greatly in the areas near the Earth’s poles. Only low earth orbiting, or LEO, satellites can collect high quality data over the North and South poles. We are developing technologies to work with LEO satellites and plans to partner with Airbus to develop aircraft installation solutions. As new GEO and LEO Ka-band satellites are being regularly launched over the next few years, which, we expect, will enable the provision of worldwide aircraft coverage, we plan to have the necessary technology ready to take advantage of this new trend in Ka-band aviation connectivity, although weit cannot assure you that weit will be successful in this new area of endeavor.

Ground-based Satellite System Sales

Since our acquisition of Aircom Taiwan in December 2017, this wholly owned subsidiary has been developing ground-based satellite connectivity components which have an application in remote regions that lack regular affordable ground-based communications. In September 2018, Aircom Taiwan consummated its first sale of such a component, a small cell server terminal, in the amount of $1,730,000. This server terminal will be utilized by the purchaser in the construction of a satellite-based ground communication system which will act as a multicast service extension of existing networks. The system is designed to extend local existing networks, such as ISPs and mobile operators, into rural areas and create better coverage and affordable connectivity in these areas. Aircom Taiwan expects to sell additional satellite connectivity components, systems and services to be used in ground mobile units in the future, although there can be no assurances that it will be successful in these endeavors.

In addition, in September 2018, Aircom Taiwan provided installation and testing services of a satellite-based ground connectivity system to a remote island resort and received service income related to this project in the amount of $15,000. Upon the completion of this system’s testing phase, and assuming that the system operates satisfactorily, Aircom Taiwan expects to begin to sell this system to multiple, remotely located resorts. We can make no assurances at this time however, that this system will operate satisfactorily, ~~and~~that we will be successful in introducing this system as a viable product offering or that we will be able to generate any additional revenue from the sale and deployment of this system.

Recent Events

On April 16, 2020, we received loan proceeds in the amount of $163,200 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. According to PPP, borrowers may be eligible for loan forgiveness if the funds were used for eligible payroll costs, payments on business mortgage interest payments, rent, or utilities during either the 8- or 24-week period after disbursement. A borrower can apply for forgiveness once it has used all loan proceeds for which the borrower is requesting forgiveness. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred. We has applied for the forgiveness of the loan within the maturity date and is waiting for the approval. While we currently believe that its use of the loan proceeds will meet the conditions for forgiveness of the loan, we cannot assure you that we will not take actions that could cause us to be ineligible for forgiveness of the loan, in whole or in part.

On April 16, 2020, we signed a loan agreement with one of our business partners, EESquare Superstore Corp. for a working capital loan of up to $1.5 million, with an interest rate at 3.25% and expires on April 15, 2022. Each advance shall be due and payable in full no later than one year from the date of such advance or the termination of the agreement, whichever comes first. As of November 7, 2020, we have drawn down $1,100,000 under this loan agreement.

2327

On April 30, 2020, we filed a Registration Statement on Form S-1with the Securities and Exchange Commission, or the SEC, pursuant to Section 5 of the Securities Act of 1933, or the Securities Act, to register for sale of up to 1,951,219 shares (approximately €40 million or $43,192,000) of our common stock, at a per share price of €20.50 (approximately $24.23). On July 29, October 20, and November 5, 2020, we filed amendments to the Registration Statement to respond to certain SEC comments. The Form S-1 was declared effective on November 6, 2020.

On June 23, 2020, Aircom entered into a cooperation agreement with Telesat Leo Inc., or Telesat, a wholly owned subsidiary of Telesat Canada. Telesat is one of the world’s largest and most successful satellite operators providing critical connectivity solutions that tackle complex communications challenges. Through this agreement, Aircom and Telesat will jointly collaborate to develop a test program for the Telesat low-Earth-orbit (LEO) Network, Telesat’s network of low-earth orbit satellites for aircraft connectivity, to assess the technical and commercial viability of incorporating the Telesat LEO Network capacity into Aircom’s IFEC product portfolio and network. Aircom and Telesat will collaborate in both technical and commercial activity. The two parties’ technical collaboration is expected to include testing network performance, leveraging Telesat’s Phase 1 LEO satellite which has been in polar orbit since 2018, ensuring compatibility with existing Aircom IFEC solutions and future user terminal solutions, and end-to-end implementation within regulatory guidelines. Commercial collaboration will include optimizing business and operating models, joint presentations and information sessions with key customers and partners, and exploring a long-term joint development plan. This cooperation agreement between Aircom and Telesat is preliminary and nonbinding and subject to the negotiation and execution of a definitive agreement. Aerkomm expects that a definitive agreement will be signed, although there can be no assurance when this will happen, if at all.

On July 24, 2020, our wholly owned subsidiary in Malta, Aerkomm Pacific Ltd., or Aerkomm Malta, entered into an agreement with Airbus Interior Services relating to the Aerkomm K++ Connectivity Solution Installation on the Airbus A320 family of aircraft. This new agreement between Aerkomm Malta and Airbus Interior Services follows an agreement Aircom signed with Airbus ACJ in November 2018 pursuant to which Airbus agreed to develop, install and certify the Aerkomm K++ System on a prototype A320 aircraft to EASA and FAA certification standards. Under the new agreement, Aerkomm Malta and Airbus Interior Services have agreed that Airbus Interior Services will provide and certify, in accordance with Airbus Design Organization Approval, a complete retrofit solution to develop EASA/FAA certified Service Bulletins, to supply related Aircraft Modification Kits, and to install the Aerkomm K++ Connectivity solution on the A320 family of commercial aircraft. This new agreement also includes Airbus support for the integration of the Aerkomm K++ System components on the aircraft, including ARINC 791 structural reinforcements and related engineering work. Additionally, Airbus Interior Services will provide support for National Airworthiness Authorities (NAA) certification as required in addition to the EASA certification, as well as on-site technical support at the Maintenance Repair Organization (MRO) base for the aircraft retrofit.

On October 15, 2018, Aircom Telecom LLC, or Aircom Telecom, a Taiwanese limited liability company and a wholly owned subsidiary of Aircom, entered into a product purchase agreement, or the October 15^th PPA, with Republic Engineers Maldives Pte. Ltd., a company affiliated with Republic Engineers Pte. Ltd., or Republic Engineers, a Singapore based, private construction and contracting company. On November 30, 2018, the October 15^th PPA was re-executed with Republic Engineers Pte. Ltd. as the signing party. We refer to this new agreement as the November 30^th PPA and, together with the October 15^th PPA, the PPA. Under the terms of the PPA, Republic Engineers committed to the purchase of a minimum of 10 shipsets of the AERKOMM K++ system at an aggregate purchase price of $10 million. Additionally, under the terms of the PPA, the Executive Director of Republic Engineers, C. A. Raja, agreed to sign an agreement, or the Guarantee, to guarantee all of the obligations of Republic Engineers under the PPA. Republic Engineers had submitted a purchase order, or PO, dated October 15, 2018 for the 10 shipsets and was supposed to have made payments to Aircom Telecom against the purchase order shortly thereafter. To date, Republic Engineers has made no payments against the purchase order and the Company has not begun any work on the ordered shipsets. On July 7, 2020, Republic Engineers and Mr. Raja filed a complaint against Aerkomm, Aircom and Aircom Telecom in the Superior Court of the State of California for the County of Almeda, or the Court, seeking declaratory relief only and no money damages, alleging that the PPA and the PO were not executed or authorized by Republic Engineers and that the Guarantee was not executed or authorized by Mr. Raja. Republic Engineers and C. A. Raja have requested from the Court (i) orders that the PPA, the PO and the Guarantee be declared null and void and (ii) the payment of their reasonable attorney’s fees. On July 29, 2020, Aircom Telecom provided notice to Republic Engineers that the PPA and the PO have been terminated according to their terms as a result of the non-performance of Republic Engineers and the Failure of Mr. Raja to provide the Guarantee. Aerkomm denies the allegations in the complaint and believes that the claims filed by Republic Engineers and Mr. Raja have no merit. Aerkomm has retained special litigation counsel and intends to vigorously defend against the claims. Aerkomm does not expect that this proceeding will have a material adverse effect on its results of operations or cashflow.

Principal Factors Affecting Financial Performance

We believe that our operating and business performance is driven by various factors that affect the commercial airline industry, including trends affecting the travel industry and trends affecting the customer bases that we target, as well as factors that affect wireless Internet service providers and general macroeconomic factors. Key factors that may affect our future performance include:

●

our ability to enter into and maintain long-term business arrangements with airline partners, which depends on numerous factors including the real or perceived availability, quality and price of our services and product offerings as compared to those offered by our competitors;

●

the extent of the adoption of our products and services by airline partners and customers;

●

costs associated with implementing, and our ability to implement on a timely basis, our technology, upgrades and installation technologies;

●

costs associated with and our ability to execute our expansion, including modification to our network to accommodate satellite technology, development and implementation of new satellite-based technologies, the availability of satellite capacity, costs of satellite capacity to which we may have to commit well in advance, and compliance with regulations;

●

costs associated with managing a rapidly growing company;

●

the number of aircraft in service in our markets, including consolidation of the airline industry or changes in fleet size by one or more of our commercial airline partners;

●

the economic environment and other trends that affect both business and leisure travel;

●

continued demand for connectivity and proliferation of Wi-Fi enabled devices, including smartphones, tablets and laptops;

●

our ability to obtain required telecommunications, aviation and other licenses and approvals necessary for our operations; and

●

changes in laws, regulations and interpretations affecting telecommunications services and aviation, including, in particular, changes that impact the design of our equipment and our ability to obtain required certifications for our equipment.

Emerging Growth Company

We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

●

have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

●

comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

●

submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and

●

disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards.

In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our shares of common stock that are held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

Impact of the COVID-19 Coronavirus Pandemic

The coronavirus has a particular adverse impact on the airline industry. The outbreak in China and throughout the world since December 2019 has led to a precipitous decrease in the number of daily departures and arrivals for domestic and international flights.

Recent Market Information

In the IATA (International Air Transportation Association) Airlines Financial Monitor dated April - May 2020, published on May 20, 2020, the following key points were highlighted:

●

The Q1 2020 financial results reflected the initial industry-wide deterioration in profitability following the impact of the COVID-19 outbreak on air travel. The adverse outcome was widespread across all regions even though some markets were locked down relatively later in the quarter. All regions posted negative net income figures in Q1.

●

Global airline share prices moved lower in Q1, before rallying in April, driven by government support to the industry and the restart of airline operations.

●

Oil and jet fuel prices also recovered somewhat in May being that the demand for fuel is expected to increase with the ease of lockdown measures. Sharp production cuts from both OPEC and Russia also provided price support.

●

In April, air passenger demand posted its largest decline on record due to the widespread lockdowns and border closures. Air cargo demand was relatively more resilient but still saw volumes fall by 27.7% year-on-year on the disruption in global manufacturing activity. While the passenger load factor declined by 41 ppts versus last year, the cargo load factor rose by 11.2 percentage points as a result of the decline in available capacity with the grounding of the passenger fleet.

●

In May 2020, airlines started to return aircraft to service with the relaxation of lockdown measures. An additional 2,444 aircraft re-joined the in-service fleets in the same month. As a result, total seat capacity improved by 25% compared to the previous month. However, total seat capacity was still 49% below the level of a year ago.

●

New global aircraft deliveries were limited (16 aircraft) in May as airlines have been postponing or cancelling future deliveries in response to the COVID-19 crisis. As travel demand is expected to recover only gradually, airlines will likely remain cautious regarding capacity increases.

Additionally, on June 5, 2020, the IATA issued its Economics’ Chart of the Week for flights on domestic markets indicating improving demand in May for all markets including in the Asia Pacific region. Although this May improvement in demand is a good sign, the Economics’ Chart of the Week for June 19, 2020 indicates, that airlines have little visibility for demand for the northern winter season which begins in October.

In general, because the progress of the COVID-19 pandemic is so unpredictable, the future of airline and air traffic recovery is extremely unpredictable as well.

2430

The COVID-19 Pandemic Impact on Aerkomm’s Business

We do not expect that the COVID-19 pandemic will have a material effect on our business in 2020, in view of the fact that Aerkomm is a development stage company. Consequently, we do not have any contractual agreements with airlines that would result in a decrease or complete halt in revenue generation due to the grounding of aircraft and reduction in aircraft fleets and new aircraft purchases. Additionally, because we do not currently have any operational IFEC systems, we are not generating any recurrent operational expenses with satellite companies which provide bandwidth connectivity for operational IFEC systems. We expect that we will acquire certification of our Aerkomm K++ System towards the end of the fourth quarter of 2020, and we are targeting the commencement of the initial installations of our Aerkomm K++ System by the end of the first quarter of 2021. While according to the current IATA data, the recovery in 2021 is expected to be slow, this could work to our advantage as it will provide us with an opportunity to have more aircraft on the ground available for the retrofit installation of our Aerkomm K++ System equipment. That is, we will not have to wait for a prospective airline customer to cycle through its scheduled grounding of aircraft for major maintenance checks to be able to install our K++ System retrofit solution.

With respect to our AirCinema Cube, which we are developing exclusively for installation on Hong Kong Airlines aircraft and which is expected to be ready for installation by September 2020, we believe we will still be able to begin installations on schedule. However, due to the COVID-19 pandemic, even if we can install the AirCinema Cube on schedule, revenue from the AirCinema Cube will, most likely, be delayed until the fleet of Hong Kong Airlines re-commences its full schedule by late in the fourth quarter of 2020 or early in 2021.

In any case, because of the unpredictability of the future developments of the COVID-19 pandemic, we cannot be sure that any of our development, certification, installation or revenue generation expectations, with respect to timing or otherwise, will be met.

Results of Operations

Comparison of Three Months Ended September 30, ~~2019~~2020 and ~~2018~~2019

The following table sets forth key components of our results of operations during the three-month periods ended September 30, ~~2019~~2020 and ~~2018.~~2019.

Three Months Ended
September 30,
Change
2019 2018 $ %
Sales $ - $ 1,745,000 $ (1,745,000 ) (100.0 )%
Cost of sales - 1,650,000 (1,650,000 ) (100.0 )%
Operating expenses 2,733,350 2,594,500 138,850 5.4 %
Loss from operations (2,733,350 ) (2,499,500 ) (233,850 ) 9.4 %
Net non-operating income (expense) (78,433 ) 1,427 (79,860 ) (5,596.4 )%
Loss before income taxes (2,811,783 ) (2,498,073 ) (313,710 ) 12.6 %
Net Loss (2,811,783 ) (2,498,073 ) (313,710 ) 12.6 %
Other comprehensive income (loss) 59,237 2,474 56,763 2,294.4 %
Total comprehensive loss $ (2,752,546 ) $ (2,495,599 ) $ (256,947 ) 10.3 %

	Three Months Ended September 30,						Change
	2020			2019			$			%
Sales	$	-		$	-		$	-			-	%
Cost of sales		-			-			-			-	%
Operating expenses		1,556,729			2,733,350			(1,176,621	)		(43.0	)%
Loss from operations		(1,556,729	)		(2,733,350	)		(1,176,621	)		(43.0	)%
Net non-operating income (expense)		(813,222	)		(78,433	)		(734,789	)		936.8	%
Loss before income taxes		(2,369,951	)		(2,811,783	)		441,832			(15.7	)%
Income tax expense		12			-			12			0.0	%
Net Loss		(2,369,963	)		(2,811,783	)		441,820			(15.7	)%
Other comprehensive income (loss)		(367,280	)		59,237			(426,517	)		(720.0	)%
Total comprehensive loss	$	(2,737,243	)		(2,752,546	)		15,303			(0.6	)%

Revenue.Our total revenue was $0 for each of the three-month periods ended September 30, 2020 and 2019 as we are still developing our core business in in-flight entertainment and connectivity and there was no non-recurring sale of equipment to related parties during the period.

Cost of sales. Our cost of sales was $0 for the each of three-month periods ended September 30, 2020 and 2019 as we did not have any sales during both periods.

Operating expenses. Our operating expenses consist primarily of compensation and benefits, professional advisor fees, research and development expenses, cost of promotion, business development, business travel, transportation costs, and other expenses incurred in connection with general operations. Our operating expenses decreased by $1,176,621 to $1,556,729 for the three-month period ended September 30, 2020, from $2,733,350 for the three-month period ended September 30, 2019. Such decrease was mainly due to the decrease in consulting expense as the result of the warrant re-valuation, non-cash stock-based compensation expense, legal expense and stock transfer and public filing fee of $560,915, $452,507, $234,357 and 28,238, respectively, which was offset by the increase in insurance expense, outside services, amortization expense and travel expense of $56,890, $23,562, $17,870 and $15,728, respectively. The increase in insurance expense was mainly related to the amortization of D&O insurance during the period.

Net non-operating expense. We had $813,222 in net non-operating income for the three-month period ended September 30, 2020, as compared to net non-operating expense of $78,433 for the three-month period ended September 30, 2019. Net non-operating income in the three-month period ended September 30, 2020 represents a loss from allowance for other receivable, as explained under the Legal Proceedings section below, net interest expense and unrealized loss from the transactions of our liquidity contract of $1,155,623, $13,262 and $8,741, respectively, which was offset by the gain on foreign exchange translation of $335,831 and Covid-19 subsidy Aircom Japan received from Japanese government of $21,029, while net non-operating expense in the three-month period ended September 30, 2019 mainly due to the loss on foreign exchange translation of $77,033 and interest expense of $1,412.

Loss before income taxes. Our loss before income taxes decreased by $441,832 to $2,369,963 for the three-month period ended September 30, 2020, from a loss of $2,811,783 for the three-month period ended September 30, 2019, as a result of the factors described above.

Total comprehensive loss. As a result of the cumulative effect of the factors described above and a loss in foreign currency translation adjustment of $367,280, our total comprehensive loss decreased by $15,303 to $2,737,243 for the three-month period ended September 30, 2020, from $2,752,546 for the three-month period ended September 30, 2019.

Comparison of Nine Months Ended September 30, 2020 and 2019

The following table sets forth key components of our results of operations during the three-month periods ended September 30, 2020 and 2019.

	Nine Months Ended September 30,						Change
	2020			2019			$			%
Sales	$	-		$	1,599,864		$	(1,599,864	)		(100.0	)%
Cost of sales		-			1,587,222			(1,587,222	)		(100.0	)%
Operating expenses		6,199,323			6,356,161			(156,838	)		(2.5	)%
Loss from operations		(6,199,323	)		(6,343,519	)		144,196			(2.3	)%
Net non-operating income (expense)		(655,065	)		(533,459	)		(121,606	)		22.8	%
Loss before income taxes		(6,854,388	)		(6,876,978	)		22,590			(0.3	)%
Income tax expense		3,275			3,235			40			1.2	%
Net Loss		(6,857,663	)		(6,880,213	)		22,550			(0.3	)%
Other comprehensive income (loss)		(595,097	)		524,531			(1,119,628	)		(213.5	)%
Total comprehensive loss	$	(7,452,760	)		(6,355,682	)		(1,097,078	)		17.3	%

Revenue. Our total revenue was $0 and ~~$1,745,000~~$1,599,864 for the ~~three-month~~nine-month periods ended September 30, ~~2019~~2020 and ~~2018, respectively.~~2019. Our total revenue was $0 for the nine-month period ended September 30, 2020 as we are still developing our core business in in-flight entertainment and connectivity and there was no non-recurring sale of equipment to related parties during the period. Our total revenue of ~~$1,745,000~~$1,599,864 for the ~~three-month~~nine-month period ended September 30, ~~2018 represents sales~~2019 was a non-recurring sale of ~~computer server module~~compact adaptor for smartphone that allows users to turn their smartphone into a satellite smartphone to provide reliable connectivity beyond the coverage of traditional networks as we are still developing our core business in ~~the amount of $1,730,000~~in-flight entertainment and ~~remote island resort ground antenna connectivity service income in the amount of $15,000.~~connectivity.

Cost of sales. Our cost of sales was $0 and ~~$1,650,000~~$1,587,222 for the ~~three-month~~nine-month periods ended September 30, ~~2019~~2020 and ~~2018, respectively.~~2019. The cost of sales for the nine-month period ended September 30, 2020 was $0 as we did not have any sales during the periods. The cost of sales of ~~$1,650,000~~$1,587,222 for the ~~three-month~~nine-month period ended September 30, ~~2018 represents~~2019 was the cost of ~~computer server module sold by our subsidiary Aircom Taiwan.~~non-recurring sales of satellite-based mobile communication units.

Operating expenses. Our operating expenses consist primarily of compensation and benefits, professional advisor fees, research and development expenses, cost of promotion, business development, business travel, transportation costs, and other expenses incurred in connection with general operations. Our operating expenses ~~increased~~decreased by ~~$138,850~~$156,838 to $2,733,350 for the three-month period ended September 30, 2019, from $2,594,500 for the three-month period ended September 30, 2018. Such increase was mainly due to the increase in stock-based compensation expenses, legal fee, amortization expense and depreciation expense of $332,201, $158,097, $101,088 and $93,519, respectively, which was offset by the decrease in research and development, marketing and rent expenses of $469,770, $83,428 and $69,878, respectively. The increase in legal fee was mainly related to our dual listing in the Compartment C of Euronext-Paris.

~~Net non-operating expense~~. We had $78,433 in net non-operating expense for the three-month period ended September 30, 2019, as compared to net non-operating income of $1,427 for the three-month period ended September 30, 2018. Net non-operating expense in the three-month period ended September 30, 2019 mainly due to the loss on foreign exchange translation of $77,033 and interest expense of $1,412, while net non-operating income in the three-month period ended September 30, 2018 is due to a foreign exchange translation gain of $1,425.

~~Loss before income taxes~~. Our loss before income taxes increased by $313,710 to $2,811,783 for the three-month period ended September 30, 2019, from a loss of $2,498,073 for the three-month period ended September 30, 2018, as a result of the factors described above.

~~Total comprehensive loss~~. As a result of the cumulative effect of the factors described above, our total comprehensive loss increased by $256,947 to $2,752,546 for the three-month period ended September 30, 2019, from $2,495,599 for the three-month period ended September 30, 2018.

~~Comparison of Nine Months Ended September 30, 2019 and 2018~~

~~The following table sets forth key components of our results of operations during the nine-month periods ended September 30, 2019 and 2018.~~

Nine Months Ended
September 30,
Change
2019 2018 $ %
Sales $ 1,599,864 $ 1,745,000 $ (145,136 ) (8.3 )%
Cost of sales 1,587,222 1,650,000 (62,778 ) (3.8 )%
Operating expenses 6,365,161 6,180,984 175,177 2.8 %
Loss from operations (6,343,519 ) (6,085,984 ) (257,535 ) 4.2 %
Net non-operating income (expense) (533,459 ) 2,659 (536,118 ) (20,162.4 )%
Loss before income taxes (6,876,978 ) (6,083,325 ) (793,653 ) 13.0 %
Income tax expense 3,235 4,062 (827 ) (20.4 )%
Net Loss (6,880,213 ) (6,087,387 ) (792,826 ) 13.0 %
Other comprehensive income (loss) 524,531 (1,208 ) 525,739 (43,516.4 )%
Total comprehensive loss $ (6,355,682 ) $ (6,088,595 ) $ (267,087 ) 4.4 %

~~Revenue~~.~~Our total revenue was $1,599,864 and $1,745,000 for the nine-month periods ended September 30, 2019 and 2018, respectively. Our total revenue of $1,599,864~~$6,199,323 for the nine-month period ended September 30, 2019 was a non-recurring sale of compact adaptors for smartphone that allows users to turn their smartphone into a satellite smartphone to provide reliable connectivity beyond the coverage of traditional networks as we are still developing our core business in in-flight entertainment and connectivity. Our total revenue of $1,745,000 for the nine-month period ended September 30, 2018 represents sales of computer server module in the amount of $1,730,000 and remote island resort ground antenna connectivity service income in the amount of $15,000.

~~Cost of sales~~. Our cost of sales was $1,587,222 and $1,650,000 for the nine-month periods ended September 30, 2019 and 2018, respectively. The cost of sales of $1,587,222 for the nine-month period ended September 30, 2019 was the cost of non-recurring sales of satellite-based mobile communication units, while the cost of sales of $1,650,000 for the nine-month period ended September 30, 2018 represents the cost of computer server module sold by our subsidiary Aircom Taiwan.

~~Operating expenses~~. Our operating expenses consist primarily of compensation and benefits, professional advisor fees, research and development expenses, cost of promotion, business development, business travel, transportation costs, and other expenses incurred in connection with general operations. Our operating expenses increased by $175,177 to2020, from $6,365,161 for the nine-month period ended September 30, ~~2019, from $6,180,984 for the nine-month period ended September 30, 2018.~~2019. Such ~~increase~~decrease was mainly due to the ~~increase~~decrease in ~~payroll and related~~R&D expense, ~~amortization expense, depreciation expense,~~non-cash stock-based compensation expense, legal ~~fee~~expense and ~~accounting~~stock transfer and filing fee of ~~$346,539, $345,083, $322,727, $332,530, $254,021~~$416,230, $198,284, $172,247 and ~~$214,849,~~$79,223, respectively, which was offset by the ~~decrease~~increase in consulting ~~fee, research~~as the result of warrant re-valuation, non-cash stock-based compensation expense, insurance expense, outside services, travel expense, payroll and ~~development expense, investor relation and public listing~~ related expense and ~~rent expense~~accounting and audit fees of ~~$926,218, $291,190, $277,916~~$187,707, $164,191, $137,044, $97,145, $74,274 and ~~$182,272,~~$60,767, respectively. The ~~decrease~~increase in ~~consulting fee~~insurance expense was mainly related to the ~~decrease in fair value~~amortization of ~~warrants issued to our underwriter for~~D&O insurance during the ~~public offering and termination of one consulting agreement.~~period.

Net non-operating expense. We had ~~$533,459~~$655,065 in net non-operating expense for the nine-month period ended September 30, ~~2019,~~2020, as compared to net non-operating ~~income~~expense of ~~$2,659~~$533,459 for the nine-month period ended September 30, ~~2018.~~2019. Net non-operating expense in the nine-month period ended September 30, 2020 represents a loss from allowance for other receivable, as explained under the Legal Proceedings section below, net interest expense and unrealized loss from the transactions of our liquidity contract of $1,155,623, $31,690 and $68,912, respectively, which was offset by a gain on foreign exchange translation of $551,591 and Covid-19 subsidy Aircom Japan received from Japanese government of $39,513. Net non-operating expense in the nine-month period ended September 30, 2019 mainly due to the loss on foreign exchange translation of $528,734 and ~~net~~ interest expense of ~~$4,741, while net non-operating income in the nine-month period ended September 30, 2018 includes a foreign exchange translation gain of $5,846 and net interest expense of $3,286.~~$4,741.

Loss before income taxes. Our loss before income taxes ~~increased~~decreased by ~~$793,653~~$22,590 to $6,854,388 for the nine-month period ended September 30, 2020, from a loss of $6,876,978 for the nine-month period ended September 30, 2019, ~~from a loss of $6,083,325 for the nine-month period ended September 30, 2018,~~ as a result of the factors described above.

Income tax expense. Income tax expense was ~~$3,235~~$3,275 and ~~$4,062~~$3,235 for the nine-month period ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, mainly due to California franchise tax and foreign subsidiary’s income tax expenses.

Total comprehensive loss. As a result of the cumulative effect of the factors described above and a loss in foreign currency translation adjustment of $595,097, our total comprehensive loss increased by ~~$267,087~~$1,097,078 to $7,452,760 for the nine-month period ended September 30, 2020, from $6,355,682 for the nine-month period ended September 30, ~~2019, from $6,088,595 for the nine-month period ended September 30, 2018.~~2019.

Liquidity and Capital Resources

As of September 30, ~~2019,~~2020, we had cash and cash equivalents of ~~$2,808,023.~~$115,534. To date, we have financed our operations primarily through cash proceeds from financing activities, including through our ~~ongoing~~completed public offering, short-term borrowings and equity contributions by our stockholders.

The following table provides detailed information about our net cash flow:

Cash Flow

	Nine Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2020			2019
Net cash used for operating activities	$	(8,035,353	)	$	(7,247,420	)
Net cash provided by (used for) operating activities							$	(1,516,414	)	$	(8,035,353	)
Net cash used for investing activity		(630,917	)		(34,091,169	)		(213,074	)		(630,917	)
Net cash provided by financing activity		10,861,453			42,215,066			1,463,290			10,861,453
Net increase (decrease) in cash and cash equivalents		2,195,183			876,477			(266,198	)		2,195,183
Cash at beginning of year		88,309			21,504			976,829			88,309
Foreign currency translation effect on cash		524,531			(1,208	)		(595,097	)		524,531
Cash at end of year	$	2,808,023		$	896,773
Cash at end of the periods							$	115,534		$	2,808,023

Operating Activities

Net cash used for operating activities was ~~$8,035,353~~$1,516,414 for the nine months ended September 30, ~~2019,~~2020, as compared to ~~$7,247,420~~$8,030,353 for the nine months ended September 30, ~~2018.~~2019. In addition to the net loss of $6,857,663, the increase in net cash used for operating activities during the nine-month period ended September 30, 2020 was mainly due to increase in inventory of $1,992,153, which was offset by the decrease in accounts receivable and prepaid expenses and other current assets of $451,130 and 1,292,279, respectively, and increase in accounts payable, accrued expense and other current liabilities and operating lease liability of $961,610, $2,143,258 and $179,372, respectively. In addition to the net loss of $6,880,213, the increase in net cash used for operating activities during the nine-month period ended September 30, 2019 was mainly due to increase in inventory and prepaid expenses of $1,485,350 and ~~$973,321,~~$985,849, respectively, and decrease in accounts payable, accrued expenses and other ~~payable – others~~current liabilities and operating lease liability of $840,092, ~~$1,577,838~~$1,650,867 and ~~$304,014,~~$41,069, respectively, offset by the decrease in accounts receivable of $1,095,061. In addition to the net loss of $6,087,387, the decrease in net cash used for operating activities during the nine-month period ended September 30, 2018 was mainly due to increase in accounts receivable and prepaid expenses of $1,745,000 and $1,205,910, respectively,~~and decrease in other payable - others of $1,253,797, offset by the increase in accounts payable of $1,650,000.~~

Investing Activities

Net cash used for investing activities for the nine months ended September 30, ~~2019~~2020 was ~~$630,917~~$213,074 as compared to ~~$34,091,169~~$630,917 for the nine months ended September 30, ~~2018.~~2019. The net cash used for investing activities for the nine months ended September 30, 2020 was mainly for the purchase of trading securities of $184,150 and the purchase of property and equipment of $28,924. The net cash used for investing activities for the nine months ended September 30, 2019 was mainly for the purchase of property and equipment and the final payment of $624,462 toward the purchase of the Land to build our first satellite ground station and data center. ~~The net cash used for investing activities for the nine months ended September 30, 2018 was mainly due to the $35.2 million deposits paid toward the Land.~~

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2020 and 2019 was $1,463,290 and ~~2018 was $10,861,453 and $42,215,066,~~$10,856,453, respectively. Net cash provided by financing activities for the nine months ended September 30, 2020 was mainly attributable to net proceeds from the borrowing of a short-term bank loan under the PPP program in the amount of $163,200 and short-term loans of $1,314,162. Net cash provided by financing activities for the nine months ended September 30, 2019 ~~were~~was mainly attributable to net proceeds from the issuance of common stock from ongoing public offering and the borrowing of a long-term loan in the amounts of $10,810,688 and $45,765, respectively. Net cash provided by financing activities for the nine months ended September 30, 2018 were mainly attributable to proceeds from the issuance of common stock from public offering, issuance of stock warrants related to the public offering and increase in subscribed capital in the amounts of $41,262,899, $906,167 and $56,000, respectively, offset by the repayment of short-term bank loan of $10,000.

On May 14, 2018, we entered into an underwriting agreement with Boustead Securities, LLC in connection with the public offering, issuance and sale of up to 1,411,765 shares of our common stock on a best efforts basis, with a minimum requirement of 117,647 shares, at the public offering price of $42.50 per share, less underwriting discounts, for minimum gross proceeds $5,000,000 and up to a maximum of $60,000,000. We also granted Boustead Securities, LLC an over-subscription option, exercisable on or prior to the offering termination date to extend the offering for an additional 45 days, pursuant to which we may sell up to 211,764 additional shares of the common stock at the public offering price, less underwriting discounts. The material terms of this offering are described in the prospectus, dated May 14, 2018, filed by us with the SEC, on May 14, 2018 pursuant to Rule 424(b) under the Securities Act. This offering is registered with the SEC pursuant to a Registration Statement on Form S-1, as amended and supplemented to date (File No. 333-222208), initially filed by us on December 20, 2017.

As of September 30, 2019, we held 13 closings of this offering, pursuant to which we issued and sold an aggregate of 1,294,627 shares of common stock for gross proceeds of approximately $55.02 million, or net proceeds of approximately $50.83 million after underwriting discounts, commissions and offering expenses payable by us. The offering period for this public offering expired on January 4, 2019 and we filed a post-effective amendment No. 2 with the SEC on April 23, 2019 to extend the public offering to attempt to raise the remaining $16.44 million that had not yet been sold. On May 17, 2019, the Company filed a post-effective amendment No. 3 with the SEC to extend the Offering to expire on November 23, 2019, and which was declared effective by the SEC on May 23. 2019.

On May 9, 2019, two of our current shareholders (the “Lenders”) each committed to provide us a $10 million bridge loan (the “Loans”) for an aggregate principal amount of $20 million, to bridge our cash flow needs prior to our obtaining a mortgage loan to be secured by a parcel of land (the “Land”) we intend to purchase. The Land consists of approximately 6.36 acres of undeveloped land located at the Taishui Grottoes in the Xinyi District of Keelung City, Taiwan. Aerkomm Taiwan has contracted to purchase the Land for NT$1,056,297,507, or US$34,474,462, and as of July 3, 2019 we have paid the purchase price for the Land in full. The Loans will be secured by the Land with the initial closing date of the Loans to be a date, designated by us, within 30 days following the date that the title for the Land is fully transferred to and vested in our subsidiary, Aerkomm Taiwan. The Loans shall bear interest, non-compounding, at the Bank of America Prime Rate plus 1%, annually, calculated on the actual number of days the Loans are outstanding and based on a 365-day year and shall be due and payable upon the earlier of (1) the date of our (or our subsidiary, Aerkomm Taiwan) obtaining a mortgage loan secured by the Land with a principal amount of not less than $20 million and (2) one year following the initial closing date of the Loans. The Lenders also agreed to an earlier closing of up to 25% of the principal amounts of the Loans upon our request prior to the time that title to the Land is vested in our subsidiary, Aerkomm Taiwan, provided that we provide adequate evidence to the Lenders that the proceeds of such an earlier closing would be applied to pay our vendors. We, of course, cannot provide any assurances that we will be able to raise sufficient additional finds in our public offering to complete our acquisition of the Land or to obtain a mortgage on the Land if and when it is acquired.

On July 10, 2018, in conjunction with the Land acquisition, we entered into a binding letter of commitment with Metro Investment Group Limited, or MIGL, pursuant to which we agreed to pay MIGL an agent commission of four percent (4%) of the full purchase price of the Land, equivalent to approximately US$1,387,127, for MIGL’s services provided with respect to the acquisition. The commission must be paid to MIGL no later than 90 days following payment in full of the purchase price. If there is a delay in payment, we shall be responsible for punitive liquidated damages at the rate of one tenth of one percent (0.1%) of the commission per day of delay with a maximum cap to these damages of five percent (5%). Under applicable Taiwanese law, the commission is due and payable upon signing of the letter of commitment even if the contract is cancelled for any reason and the acquisition is not completed. We have recorded the estimated commission to the cost of land and will be paying the amount no later than 90 days following full payment of the purchase price. On May 9, 2019, we amended the binding letter of commitment with MIGL to extend the payment to be paid after the full payment of the Land acquisition price until no later than December 31, 2020.

With the $9.98 million to be raised in the remainder of our ongoing public offering (assuming we are successfully able to complete the public offering) and the $20 million in Loans committed to us by the Lenders, we believe our available working capital will be sufficient to sustain our current financial obligations for the next twelve months. However, even if we successfully raise sufficient capital to satisfy our needs over the next twelve months, following that period we will require additional cash resources for the implementation of our strategy to expand our business or for other investments or acquisitions we may decide to pursue. If our internal financial resources are insufficient to satisfy our capital requirements, we will need seek to sell additional equity or debt securities or obtain additional credit facilities, although there can be no assurances that we will be successful in these efforts. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

The Company has not generated significant revenues, excluding non-recurring revenues from affiliates in the second quarter of fiscal 2018, and will incur additional expenses as a result of being a public reporting company. For the nine-month period ended September 30, ~~2019,~~2020, the Company incurred a comprehensive loss of ~~$6,355,682~~$7,452,760 and had negative working capital of ~~$4,606,799~~$1,090,180 as of September 30, ~~2019.~~2020. Currently, ~~the Company has~~we have taken measures ~~as discussed above,~~ that management believes will improve ~~its~~our financial position by financing activities, including through our ~~ongoing~~2018/2019 public offering, short-term borrowings and ~~equity contributions.~~other private loan commitments, including the Loans from our investors and a business partner, discussed below. With our current available cash, the $20 million in loan commitments from the Lenders, of which $5 million is immediately available while the remaining $15 million will become available only upon completion of the transfer to us of the Taiwan land parcel certificate of title, and our expectations for our ability to raise funds in the near term, we believe our working capital will be adequate to sustain our operations for the next twelve months.

Shareholders’ Loans

Two of our current shareholders (the “Lenders”) each committed to provide to the Company a $10 million bridge loan (together, the “Loans”) for an aggregate principal amount of $20 million, to bridge our cash flow needs prior to our obtaining a mortgage loan to be secured by the parcel of land (the “Land”) we purchased in Taiwan. The Lenders also agreed to an earlier closing of up to 25% of the principal amounts of the Loans upon our request prior to the time that title to the Land is vested in our subsidiary, Aerkomm Taiwan, to pay down outstanding payables to our vendors. As of November 7, 2002, we have borrowed approximately $390,328 (NTD 11,300,000) from one of the Lenders under the Loans.

Paycheck Protection Program Loan

On April 16, 2020, we received loan proceeds in the amount of $163,200 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. According to PPP, borrowers may be eligible for loan forgiveness if the funds were used for eligible payroll costs, payments on business mortgage interest payments, rent, or utilities during either the 8- or 24-week period after disbursement. A borrower can apply for forgiveness once it has used all loan proceeds for which the borrower is requesting forgiveness. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred. The Company has applied for the forgiveness of the loan within the maturity date and is waiting for the approval.

EESquare Loan

On April 16, 2020, we signed a loan agreement with one of our business partners, EESquare Superstore Corp. for a working capital loan of up to $1.5 million, with an interest rate at 3.25% and expires on April 15, 2022. Each advance shall be due and payable in full no later than one year from the date of such advance or the termination of the agreement, whichever comes first. As of November 6, 2020, we have drawn down $1,100,000 under this loan agreement.

€40 Million Public Offering

On April 30, 2020, we filed a Registration Statement on Form S-1with the SEC pursuant to Section 5 of the Securities Act to register for sale of up to 1,951,219 shares (approximately €40 million or $47,276,000) of our common stock, at a per share price of €20.50 (approximately $24.23). On July 29, October 21 and November 5, 2020, we filed amendments to the Registration Statement to respond to certain SEC comments. The Form S-1 was declared effective on November 6, 2020. We cannot provide any assurance, however, we will be able to raise any funds under the registered offering.

Capital Expenditures

Our operations continue to require significant capital expenditures primarily for technology development, equipment and capacity expansion. Capital expenditures are associated with the supply of airborne equipment to our prospective airline partners, which correlates directly to the roll out and/or upgrade of service to our prospective airline partners’ fleets. Capital spending is also associated with the expansion of our network, ground stations and data centers and includes design, permitting, network equipment and installation costs.

Capital expenditures for the nine months ended September 30, 2020 and 2019 were $213,074 and $630,917, respectively.

On May 1, 2018, ~~were $630,917~~the Company and ~~$34,091,169, respectively.~~Aerkomm Taiwan entered into a binding memorandum of understanding with Tsai Ming-Yin (the “Seller”) with respect to the acquisition by Aerkomm Taiwan of a parcel of land located in Taiwan. The land is expected to be used to build a satellite ground station and data center. On July 10, 2018, the Company, Aerkomm Taiwan and the Seller entered into a certain real estate sales contract regarding this acquisition. Pursuant to the terms of the contract, and subsequent amendments on July 30, 2018, September 4, 2018, November 2, 2018 and January 3, 2019, the Company paid to the seller in installments refundable prepayments of $33,850,000 as of December 31, 2018. On July 2, 2019, the Company paid the remaining purchase price balance of $624,462. Under the terms of the real estate sales contract, these purchase price payments are no longer refundable. The Company is currently negotiating with the Seller to allow for a refund of the full purchase price if licenses and approvals needed to transfer land title to Aerkomm Taiwan are not granted by a certain date. There can be no assurances, however, that it will be successful in these negotiations or that the required licenses and approvals will be granted by a certain date, if at all. As of September 30, 2020, the estimated commission payable for the land purchase in the amount of $1,387,127 was recorded to the cost of land and the payment to be paid no later than December 31, 2021.

We anticipate an increase in capital spending in our fiscal year ended December 31, ~~2019~~2020 and estimate that capital expenditures will range from $6 million to ~~$60~~$40 million as we begin airborne equipment installations and continue to execute our expansion strategy. We expect to raise these funds through our planned public offering, the registration statement for which is currently under review by the SEC, and/or through other sources of equity or debt financings. There can be no assurance, however, that our planned public offering will proceed successfully, if at all, or that we will be able to raise the required funds through other means on acceptable terms to us, if at all.

Inflation

Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in our industry and continually maintain effective cost control in operations.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.

Seasonality

Our operating results and operating cash flows historically have not been subject to significant seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:

~~Right-of-Use Asset and Lease Liability.~~In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”), which modifies lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements.

For the lease within a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The Company adopted ASU 2016-02 effective January 1, 2019.

~~Income Taxes.~~ Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Adjustments to prior period’s income tax liabilities are added to or deducted from the current period’s tax provision.

The Company follows FASB guidance on uncertain tax positions and has analyzed its filing positions in all the federal, state and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in those jurisdictions. The Company files income tax returns in the US federal, state and foreign jurisdictions where it conducts business. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on its consolidated financial position, results of operations, or cash flows. Therefore, no reserves for uncertain tax positions have been recorded. The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months.

~~Foreign Currency Transactions~~. Foreign currency transactions are recorded in U.S. dollars at the exchange rates in effect when the transactions occur. Exchange gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in current income. At the end of each period, assets and liabilities denominated in foreign currencies are revalued at the prevailing exchange rates with the resulting gains or losses recognized in income for the period.

~~Earnings (Loss) Per Share.~~ Basic earnings (loss) per share is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include stock warrants and outstanding stock options, shares to be purchased by employees under the Company’s employee stock purchase plan.

Revenue Recognition. We recognize revenue when performance obligations identified under the terms of contracts with our customers are satisfied, which generally occurs upon the transfer of control in accordance with the contractual terms and conditions of the sale. Our major revenue for the three-month ~~and nine-month periods~~period ended ~~September 30, 2019~~March 31, 2020 was the ~~sales~~development of ~~compact adaptor for smartphone that allows users to turn their smartphone into~~ a ~~satellite smartphone to provide reliable~~small cell server terminal which will be utilized in the construction of a satellite-based ground communication system networks. We also had minor revenue from providing installation and testing services of a satellite-based ground connectivity ~~beyond the coverage of traditional networks.~~system. The majority of our revenue is recognized at a point in time when product is shipped, or service is provided to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods, which includes estimates for variable consideration.

Inventories. Inventories are recorded at the lower of weighted-average cost or net realizable value. We assess the impact of changing technology on our inventory on hand and writes off inventories that are considered obsolete. Estimated losses on scrap and slow-moving items are recognized in the allowance for losses.

Research and Development Costs. Research and development costs are charged to operating expenses as incurred. For the nine-month periods ended September 30, ~~2019~~2020 and ~~2018,~~2019, we incurred approximately ~~$416,230~~$0 (unaudited) and ~~$707,420~~$416,231 (unaudited) of research and development costs, respectively.

Property and Equipment. Property and equipment are stated at cost less accumulated depreciation. When value impairment is determined, the related assets are stated at the lower of fair value or book value. Significant additions, renewals and betterments are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed by using the straight-line and double declining method over the following estimated service lives: computer equipment - 3 to 5 years, furniture and fixtures - 5 years, satellite equipment – 5 years, vehicles – 5 years and lease improvement – 5 years. Construction costs for on-flight entertainment equipment not yet in service are recorded under construction in progress. Upon sale or disposal of property and equipment, the related cost and accumulated depreciation are removed from the corresponding accounts, with any gain or loss credited or charged to income in the period of sale or disposal. We review the carrying amount of property and equipment for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We determined that there was no impairment loss for the ~~nine-month~~three-month periods ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

Goodwill and Purchased Intangible Assets. Goodwill represents the amount by which the total purchase price paid exceeded the estimated fair value of net assets acquired from acquisition of subsidiaries. We test goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. Purchased intangible assets with finite life are amortized on the straight-line basis over the estimated useful lives of respective assets. Purchased intangible assets with indefinite life are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Purchased intangible asset consists of satellite system software and is amortized over 10 years.

Fair Value of Financial Instruments. We utilize the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:

Level 1 - Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

The carrying amounts of our cash, accounts receivable, other receivable, short-term loans, accounts payable, and other payable approximated their fair value due to the short-term nature of these financial instruments.

Translation Adjustments. If a foreign subsidiary’s functional currency is the local currency, translation adjustments will result from the process of translating the subsidiary’s financial statements into the reporting currency of our company. Such adjustments are accumulated and reported under other comprehensive income (loss) as a separate component of stockholder’s equity.

Recent Accounting Pronouncements

Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.

Intangibles. In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other” (Topic 350): Simplifying the Test for Goodwill Impairment, which goodwill shall be tested at least annually for impairment at a level of reporting referred to as a reporting unit. ASU 2017-04 will be effective for annual periods beginning after December 15, 2019. We are currently evaluating the impact of adopting ASU 2017-04 on our consolidated financial statements.

Leases. In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842), which modifies lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the timing of adoption and the impact of adopting ASU 2016-02 on our consolidated financial statements.

Income Statement. In February 2018, FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income” (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which required deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with effect included in income from continuing operations in the reporting period that includes the enactment date of Tax Cut and Jobs Act. ASU 2018-02 will be effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We are currently evaluating the timing of adoption and the impact of adopting ASU 2018-02 on our consolidated financial statements.

Stock Compensation. In June 2018, FASB issued ASU 2018-07, “Compensation-Stock Compensation” (Topic 718): Improvement of Nonemployee Share-Based Payment Accounting, which amends the accounting for nonemployee share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 will be effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within the fiscal year. We are currently evaluating the timing of adoption and the impact of adopting ASU 2018-07 on our consolidated financial statements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(e) of the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of September 30, ~~2019.~~2020.

Based upon, and as of the date of this evaluation, our chief executive officer and chief financial officer determined that, because of the material weaknesses described in Item 9A “Controls and Procedures” of our ~~Transition~~Annual Report on Form ~~10-KT filed on April 1, 2019~~10-K for the ~~transition period from March 1, 2018 through~~fiscal year ended December 31, ~~2018~~2019, filed with the SEC on March 20, 2020, and further referenced below, which we are still in the process of remediating as of September 30, ~~2019,~~2020, our disclosure controls and procedures were not effective.

Changes in Internal Control Over Financial Reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

During its evaluation of the effectiveness of our internal control over financial reporting as of September 30, ~~2019,~~2020, our management identified the following material weaknesses:

●

We do not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of accounting principles generally accepted in the United States commensurate with our financial reporting requirements. To mitigate the current limited resources and limited employees, we rely heavily on the use of external legal and accounting professionals.

In order to cure the foregoing material weakness, we have taken or plan to take the following remediation measures:

●

On November 5, 2018, we added a staff accountant with a CPA and technical accounting expertise to further support our current accounting personnel. As necessary, we will continue to engage consultants or outside accounting firms in order to ensure proper accounting for our consolidated financial statements.

We intend to complete the remediation of the material weakness discussed above as soon as practicable, but we can give no assurance that we will be able to do so. Designing and implementing an effective disclosure controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to devote significant resources to maintain a financial reporting system that adequately satisfies our reporting obligations. The remedial measures that we have taken and intend to take may not fully address the material weakness that we have identified, and material weaknesses in our disclosure controls and procedures may be identified in the future. Should we discover such conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Other than in connection with the implementation of the remedial measures described above, there were no changes in our internal controls over financial reporting during quarter ended September 30, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

There were no material developments during the quarter ended September 30, ~~2019~~2020 to the legal proceedings previously disclosed in Item 3 “Legal Proceedings” of our ~~Transition~~Annual Report on Form ~~10-KT~~10-K filed on ~~April 1, 2019.~~March 30, 2020.

ITEM 1A.

RISK FACTORS.

For information regarding risk factors relating to us, please refer to our ~~prospectus contained in our Post-Effective~~ Amendment No. 3 to our Registration Statement on Form S-1 as filed with the SEC on ~~May 17, 2019.~~November 5, 2020.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

We have not sold any equity securities during the quarter ended September 30, ~~2019~~2020 that were not previously disclosed in a current report on Form 8-K that was filed during the quarter.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.

OTHER INFORMATION.

~~Subsequent Events~~

On March 20, 2020, Aircom Pacific, Inc. signed a nonbinding memorandum of understanding, or MOU, with Yuan Jiu Inc., or Yuan Jiu, a Taiwanese company, with respect to the development, manufacture and purchase of AERKOMM K++, AirCinema Cube equipment for installation on the aircraft of Hong Kong Airlines. On May 11, 2020, the Company entered into a product purchase agreement with Yuan Jiu, replacing the MOU, to purchase 100 sets of the AirCinema Cube. The total purchase amount under this agreement was $1,807,100 and the Company paid 10% ($180,710) of the total amount as an initial deposit. On July ~~2, 2019, our board of directors approved~~15, 2020, the Company signed a ~~supplement to our engagement~~second product purchase agreement with ~~one~~Yuan Jiu for an additional 100 sets of ~~our service providers pursuant to which we agreed to issue to~~ the ~~service provider 23,972 restricted shares of our common stock in consideration of that service provider’s~~AirCinema Cube for the same purchase amount and paid a 10% initial deposit ($180,710) on this agreement ~~to defer the receipt of payment of certain accrued fees due to the service provider.~~as well.

WeOther than disclosed above, we have no information to disclose that was required to be in a report on Form 8-K during the quarter ended September 30, ~~2019~~2020 but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6.

EXHIBITS.

Exhibit No.		Description
2.1		Agreement and Plan of Merger, dated September 26, 2013, between Aerkomm Inc. and Maple Tree Kids LLC (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-1 filed on November 5, 2013)
2.2		Form of Share Exchange Agreement, dated February 13, 2017, among Aerkomm Inc., Aircom Pacific, Inc. and the shareholders of Aircom Pacific, Inc. (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed on February 14, 2017)
3.1		Restated Articles of Incorporation of the registrant (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed on May 4, 2017)
3.2		Certificate of Change Pursuant to NRS 78.209 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on January 16, 2019)
~~3.3~~3.2		Amended and Restated Bylaws of the registrant (incorporated by reference to Exhibit ~~3.2~~3.3 to the Form ~~8A-12G~~10-K filed on ~~April 19, 2018)~~
~~4.1~~		~~Form of Underwriter Warrant (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to Registration Statement on Form S-1/A filed on February 2, 2018)~~
~~10.1~~		Amendment No. 3 to Underwriting Agreement between Aerkomm Inc. and Boustead Securities, LLC dated June 27, 2019 (incorporated by reference to Exhibit 1.1 to Amendment No. 1 to the Current Report on Form 8-K filed on June 28, 2019)
~~10.2~~		~~Letter of Undertaking dated July 6, 2019 (incorporated by reference to Exhibit 99.1 to Amendment No. 1 to the Current Report on Form 8-K filed on July 18, 2019)~~
~~10.3~~		~~Definitive Agreement between the Registrant and MJet GMBH dated June 11, 2019 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed on August 14, 2019)~~March 30, 2020)
31.1*		Certifications of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certifications of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		C~~Certification~~ertification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November ~~14, 2019~~9, 2020	AERKOMM INC.

	/s/ ~~Jeffrey Wun~~Louis Giordimaina
	Name: ~~Jeffrey Wun~~	Louis Giordimaina
	Title:	Chief Executive Officer
		(Principal Executive Officer)

	/s/ Y. Tristan Kuo
	Name:	Y. Tristan Kuo
	Title:	Chief Financial Officer
		(Principal Financial and Accounting Officer)

3440

Nevada		46-3424568
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

	Large accelerated filer ☐		Accelerated filer ☐
	Non-accelerated filer ☒☐		Smaller reporting company ☒
			Emerging growth company ☒

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Not applicable.

PART I
FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2125
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3137
Item 4.	Controls and Procedures	3137
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	3238
Item 1A.	Risk Factors	3238
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3238
Item 3.	Defaults Upon Senior Securities	3238
Item 4.	Mine Safety Disclosures	3238
Item 5.	Other Information	3238
Item 6.	Exhibits	3339

	Page

Condensed Consolidated Balance Sheets as of September 30, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019	2

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three-Month and Nine-Month Periods Ended September 30, ~~2019~~2020 (unaudited) and ~~2018~~2019 (unaudited)	3

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine-Month Periods Ended September 30, 2020 (unaudited) and 2019 (unaudited)	4

Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, ~~2019~~2020 (unaudited) and ~~2018~~2019 (unaudited)	45

Notes to Condensed Consolidated Financial Statements (unaudited)	56

	September 30, 2019			December 31, 2018
Assets
Current Assets
Cash	$	2,808,023		$	88,309
Accounts receivable		649,939			1,745,000
Inventories		2,380,364			895,014
Prepaid expenses		2,507,069			1,533,748
Other receivable – related party		111,111			-
Other receivable – others		1,461			2,616
Temporary deposit – related party		-			100,067
Other current assets		13,975			11,336
Total Current Assets		8,471,942			4,376,090
Property and Equipment
Cost		2,715,998			2,710,543
Accumulated depreciation		(731,806	)		(322,049	)
		1,984,192			2,388,494
Prepayment for land		35,861,589			35,237,127
Construction in progress		-			416,231
Net Property and Equipment		37,845,781			38,041,852
Other Assets
Intangible asset, net		3,011,250			3,382,500
Goodwill		1,475,334			1,475,334
Operating lease right-of-use assets, net		364,832			-
Deposits		108,161			107,909
Total Other Assets		4,959,577			4,965,743
Total Assets	$	51,277,300		$	47,383,685

Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	809,908		$	1,650,000
Accrued expenses		345,864			412,165
Other payable – related parties		112,192			173,854
Other payable – others		2,203,028			3,726,932
Long-term loan – current		8,150			-
Operating lease liability – current – related party		33,478			-
Operating lease liability – current - others		352,523			-
Total Current Liabilities		3,865,143			5,962,951
Long-term Liabilities
Long-term loan – non-current		37,615			-
Operating lease liability – non-current		19,900			-
Restricted stock deposit liability		1,000			1,000
Total Liabilities		3,923,658			5,963,951
Commitments
Stockholders’ Equity
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding as of September 30, 2019 and December 31, 2018		-			-
Common stock, $0.001 par value, 90,000,000 shares authorized, 9,391,709 shares (excluding 149,162 unvested restricted shares) issued and outstanding as of September 30, 2019; 9,098,090 shares (excluding 149,162 unvested restricted shares) issued and outstanding as of December 31, 2018		9,392			9,098
Additional paid in capital		68,872,096			56,582,800
Accumulated deficits		(22,172,341	)		(15,292,128	)
Accumulated other comprehensive income		644,495			119,964
Total Stockholders’ Equity		47,353,642			41,419,734
Total Liabilities and Stockholders’ Equity	$	51,277,300		$	47,383,685

	Three Month Period Ended September 30,						Nine Month Period Ended September 30,						Three-Month Period Ended September 30,						Nine-Month Period Ended September 30,
	2019			2018			2019			2018			2020			2019			2020			2019
													(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Net sales	$	-		$	1,730,000		$	1,599,864		$	1,730,000		$	-		$	-		$	-		$	1,599,864
Service income		-			15,000			-			15,000
Cost of sales														-			-			-			1,587,222

Total revenue		-			1,745,000			1,599,864			1,745,000
Gross profit														-			-			-			12,642

Cost of sales		-			1,650,000			1,587,222			1,650,000
Operating expenses		2,733,350			2,594,500			6,356,161			6,180,984			1,556,729			2,733,350			6,199,323			6,356,161

Total Cost and Expenses		2,733,350			4,244,500			7,943,383			7,830,984

Loss from Operations		(2,733,350	)		(2,499,500	)		(6,343,519	)		(6,085,984	)		(1,556,729	)		(2,733,350	)		(6,199,323	)		(6,343,519	)

Non-Operating Income (Loss)
Foreign currency exchange gain (loss)		(77,047	)		1,425			(528,748	)		5,847
Other income (loss), net		(1,386	)		2			(4,711	)		(3,188	)

Net Non-Operating Income (Loss)		(78,433	)		1,427			(533,459	)		2,659
Net Non-Operating Loss														(813,222	)		(78,433	)		(655,065	)		(533,459	)

Loss before Income Taxes		(2,811,783	)		(2,498,073	)		(6,876,978	)		(6,083,325	)		(2,369,951	)		(2,811,783	)		(6,854,388	)		(6,876,978	)

Income Tax Expense		-			-			3,235			4,062			12			-			3,275			3,235

Net Loss		(2,811,783	)		(2,498,073	)		(6,880,213	)		(6,087,387	)		(2,369,963	)		(2,811,783	)		(6,857,663	)		(6,880,213	)

Other Comprehensive Income (Loss)
Change in foreign currency translation adjustments		59,237			2,474			524,531			(1,208	)		(367,280	)		59,237			(595,097	)		524,531

Total Comprehensive Loss	$	(2,752,546	)	$	(2,495,599	)	$	(6,355,682	)	$	(6,088,595	)	$	(2,737,243	)	$	(2,752,546	)	$	(7,452,760	)	$	(6,355,682	)

Net Loss Per Common Share:

Basic	$	(0.2967	)	$	(0.2691	)	$	(0.7377	)	$	(0.7007	)	$	(0.2484	)	$	(0.2967	)	$	(0.7188	)	$	(0.7377	)
Diluted	$	(0.2967	)	$	(0.2691	)	$	(0.7377	)	$	(0.7007	)	$	(0.2484	)	$	(0.2967	)	$	(0.7188	)	$	(0.7377	)

Weighted Average Shares Outstanding - Basic		9,475,413			9,284,047			9,326,382			8,687,947			9,540,891			9,475,413			9,540,891			9,326,382
Weighted Average Shares Outstanding - Diluted		9,475,413			9,284,047			9,326,382			8,687,947			9,540,891			9,475,413			9,540,891			9,326,382

	Common Stock				Additional Paid in			Accumulated			Accumulated Other Comprehensive		Total Stockholders’
	Shares		Amount		Capital			Deficits			Income		Equity
Balance as of December 31, 2018		9,098,090	$	9,098	$	56,582,800		$	(15,292,128	)	$	119,964	$	41,419,734
Stock compensation expense		-		-		313,042			-			-		313,042
Revaluation of stock warrant		-		-		(68,200	)		-			-		(68,200	)
Other comprehensive income		-		-		-			-			343,596		343,598
Net loss for the period		-		-		-			(2,382,992	)		-		(2,382,992	)
Balance as of March 31, 2019 (unaudited)		9,098,090		9,098		56,827,642			(17,675,120	)		463,560		39,625,180
Issuance of common stock		152,000		152		6,047,478			-			-		6,047,630
Issuance of stock warrant		-		-		5,000			-			-		5,000
Stock compensation expense		-		-		346,549			-			-		346,549
Revaluation of stock warrant		-		-		(268,367	)		-			-		(268,367	)
Other comprehensive income		-		-		-			-			121,698		121,698
Net loss for the period		-		-		-			(1,685,438	)		-		(1,685,438	)
Balance as of June 30, 2019 (unaudited)		9,250,090		9,250		62,958,302			(19,360,558	)		585,258		44,192,252
Issuance of common stock		141,619		142		4,762,916			-			-		4,763,058
Stock compensation expense		-		-		735,078			-			-		735,078
Revaluation of stock warrant		-		-		415,800			-			-		415,800
Other comprehensive income		-		-		-			-			59,237		59,237
Net loss for the period		-		-		-			(2,811,783	)		-		(2,811,783	)
Balance as of September 30, 2019 (unaudited)		9,391,709	$	9,392	$	68,872,096		$	(22,172,341	)	$	644,495	$	47,353,642

	September 30, 2019
	(Unaudited)
Right-of-use asset	$	669,602
Accumulated amortization		(304,770	)
Net	$	364,832

	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Fair Value Per Share
Options outstanding at January 1, 2018		932,262	$	0.4081	$	0.1282
Granted		-		-		-
Exercised		-		-		-
Forfeited/Cancelled		-		-		-
Options outstanding at December 31, 2018		932,262		0.4081		0.1282
Granted		-		-		-
Exercised		-		-		-
Forfeited/Cancelled		-		-		-
Options outstanding at September 30, 2019		932,262		0.4081		0.1282

Options exercisable at December 31, 2018		846,287		0.2892		0.0908

Options exercisable at September 30, 2019		932,262		0.4081		0.1282

	Number of Shares			Weighted Average Exercise Price Per Share
Options nonvested at January 1, 2018		302,467		$	0.8315
Granted		-			-
Vested		(216,492	)		0.5349
Forfeited/Cancelled		-			-
Options nonvested at December 31, 2018		85,975			1.5786
Granted		-			-
Vested		(85,975	)		1.5715
Forfeited/Cancelled		-			-
Options nonvested at September 30, 2019		-			-