UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: SeptemberJune 30, 20202021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 000-55925
AERKOMM INC.
(Exact name of registrant as specified in its charter)
| Nevada | 46-3424568 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
923 Incline Way, #39, Incline Village, NV 8945144043 Fremont Blvd., Fremont, CA 94538
(Address of principal executive offices, Zip Code)
(877) 742-3094
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | N/A | N/A |
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.
| Large accelerated filer ☐ | Accelerated filer ☐ | ||
| Non-accelerated filer ☐ | Smaller reporting company ☒ | ||
| Emerging growth company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for 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 ☒
Securities registered pursuant to Section 12(b) of the Act:
As of November 6, 2020,August 19, 2021, there were 9,540,8919,637,051 shares of the registrant’s common stock issued and outstanding.
AERKOMM INC.
Quarterly Report on Form 10-Q
Period Ended SeptemberJune 30, 20202021
TABLE OF CONTENTS
| PART I FINANCIAL INFORMATION | ||
| Financial Statements | 1 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 4. | Controls and Procedures | |
| PART II OTHER INFORMATION | ||
| Legal Proceedings | 40 | |
| Item | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
| Item 3. | Defaults Upon Senior Securities | |
| Item 4. | Mine Safety Disclosures | |
| Item 5. | Other Information | |
| Item 6. | Exhibits | |
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AERKOMM INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AERKOMM INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
SeptemberJune 30, 20202021 and December 31, 20192020
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | 40,487 | $ | 584,591 | ||||
| Short-term investment | 60,493 | 87,154 | ||||||
| Inventories, net | 6,807,797 | 5,211,427 | ||||||
| Prepaid expenses and other current assets | 1,992,959 | 1,637,195 | ||||||
| Total Current Assets | 8,901,736 | 7,520,367 | ||||||
| Long-term Investment | 3,709,042 | 4,305,556 | ||||||
| Property and Equipment | ||||||||
| Cost | 2,787,510 | 2,806,420 | ||||||
| Accumulated depreciation | (1,681,178 | ) | (1,414,191 | ) | ||||
| 1,106,332 | 1,392,229 | |||||||
| Prepayment for land | 35,861,589 | 35,861,589 | ||||||
| Prepayment for equipment | 86,617 | 86,617 | ||||||
| Net Property and Equipment | 37,054,538 | 37,340,435 | ||||||
| Other Assets | ||||||||
| Restricted cash | 3,210,000 | 3,210,000 | ||||||
| Intangible asset, net | 2,145,000 | 2,392,500 | ||||||
| Goodwill | 1,475,334 | 1,475,334 | ||||||
| Right-of-use assets, net | 279,414 | 353,442 | ||||||
| Deposits | 117,914 | 119,436 | ||||||
| Total Other Assets | 7,227,662 | 7,550,712 | ||||||
| Total Assets | $ | 56,892,978 | $ | 56,717,070 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Short-term loans | $ | 1,544,759 | $ | 527,066 | ||||
| Accounts payable | 1,874,339 | 1,874,339 | ||||||
| Accrued expenses and other current liabilities | 6,621,781 | 4,695,000 | ||||||
| Prepayment from customer - current | 1,611,357 | - | ||||||
| Long-term loan - current | 10,732 | 10,171 | ||||||
| Lease liability – current | 417,437 | 357,880 | ||||||
| Total Current Liabilities | 12,080,405 | 7,464,456 | ||||||
| Long-term Liabilities | ||||||||
| Long-term bonds payable | 9,313,753 | 9,218,094 | ||||||
| Long-term loan – non-current | 23,713 | 29,034 | ||||||
| Lease liability – non-current | 112,409 | 210,443 | ||||||
| Prepayment from customer – non-current | 762,000 | 762,000 | ||||||
| Restricted stock deposit liability | 1,000 | 1,000 | ||||||
| Total Long-Term Liabilities | 10,212,875 | 10,220,571 | ||||||
| Total Liabilities | 22,293,280 | 17,685,027 | ||||||
| Commitments | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding as of June 30, 2021 and December 31, 2020 | - | - | ||||||
| Common stock, $0.001 par value, 90,000,000 shares authorized, 9,487,889 shares (excluding 149,162 unvested restricted shares) issued and outstanding as of June 30, 2021 and December 31, 2020 | 9,488 | 9,488 | ||||||
| Additional paid in capital | 74,622,712 | 73,160,616 | ||||||
| Accumulated deficits | (38,147,860 | ) | (32,383,833 | ) | ||||
| Accumulated other comprehensive loss | (1,884,642 | ) | (1,754,228 | ) | ||||
| Total Stockholders’ Equity | 34,599,698 | 39,032,043 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 56,892,978 | $ | 56,717,070 | ||||
| September 30, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | 74,184 | $ | 751,329 | ||||
| Short-term investment | 121,460 | - | ||||||
| Accounts receivable | - | 451,130 | ||||||
| Inventories, net | 5,030,717 | 3,038,564 | ||||||
| Prepaid expenses and other current assets | 1,678,486 | 2,976,986 | ||||||
| Total Current Assets | 6,904,847 | 7,218,009 | ||||||
| Property and Equipment | ||||||||
| Cost | 2,806,068 | 2,777,144 | ||||||
| Accumulated depreciation | (1,279,468 | ) | (869,747 | ) | ||||
| Net | 1,526,600 | 1,907,397 | ||||||
| Prepayment for land | 35,861,589 | 35,861,589 | ||||||
| Total Property and Equipment | 37,388,189 | 37,768,986 | ||||||
| Other Assets | ||||||||
| Restricted cash | 41,350 | 225,500 | ||||||
| Intangible asset, net | 2,516,250 | 2,887,500 | ||||||
| Goodwill | 1,475,334 | 1,475,334 | ||||||
| Right-of-use assets, net | 424,119 | 302,602 | ||||||
| Deposits | 116,775 | 113,660 | ||||||
| Total Other Assets | 4,573,828 | 5,004,596 | ||||||
| Total Assets | $ | 48,866,864 | $ | 49,991,591 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Short-term bank loan | $ | 163,200 | $ | - | ||||
| Short-term loans | 1,314,162 | - | ||||||
| Accounts payable | 1,874,339 | 912,729 | ||||||
| Accrued expenses and other current liabilities | 4,220,478 | 2,077,220 | ||||||
| Long-term loan - current | 9,635 | 8,666 | ||||||
| Lease liability – current | 413,213 | 332,379 | ||||||
| Total Current Liabilities | 7,995,027 | 3,330,994 | ||||||
| Long-term Liabilities | ||||||||
| Long-term loan – non-current | 30,717 | 36,803 | ||||||
| Prepayment from customer | 762,000 | 762,000 | ||||||
| Lease liability – non-current | 256,299 | 45,199 | ||||||
| Restricted stock deposit liability | 1,000 | 1,000 | ||||||
| Total Long-Term Liabilities | 1,050,016 | 845,002 | ||||||
| Total Liabilities | 9,045,043 | 4,175,996 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding as of September 30, 2020 and December 31, 2019 | - | - | ||||||
| Common stock, $0.001 par value, 90,000,000 shares authorized, 9,391,729 shares (excluding 149,162 unvested restricted shares) issued and outstanding as of September 30, 2020 and December 31, 2019 | 9,392 | 9,392 | ||||||
| Additional paid in capital | 71,019,515 | 69,560,529 | ||||||
| Accumulated deficits | (30,129,350 | ) | (23,271,687 | ) | ||||
| Accumulated other comprehensive loss | (1,077,736 | ) | (482,639 | ) | ||||
| Total Stockholders’ Equity | 39,821,821 | 45,815,595 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 48,866,864 | $ | 49,991,591 | ||||
See accompanying notes to the condensed consolidated financial statements.
AERKOMM INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
For the Three-Month and Nine-MonthSix-Month Periods ended SeptemberJune 30, 20202021 and 20192020
| Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Net sales | $ | - | $ | - | $ | - | $ | 1,599,864 | ||||||||
| Cost of sales | - | - | - | 1,587,222 | ||||||||||||
| Gross profit | - | - | - | 12,642 | ||||||||||||
| Operating expenses | 1,556,729 | 2,733,350 | 6,199,323 | 6,356,161 | ||||||||||||
| Loss from Operations | (1,556,729 | ) | (2,733,350 | ) | (6,199,323 | ) | (6,343,519 | ) | ||||||||
| Net Non-Operating Loss | (813,222 | ) | (78,433 | ) | (655,065 | ) | (533,459 | ) | ||||||||
| Loss before Income Taxes | (2,369,951 | ) | (2,811,783 | ) | (6,854,388 | ) | (6,876,978 | ) | ||||||||
| Income Tax Expense | 12 | - | 3,275 | 3,235 | ||||||||||||
| Net Loss | (2,369,963 | ) | (2,811,783 | ) | (6,857,663 | ) | (6,880,213 | ) | ||||||||
| Other Comprehensive Income (Loss) | ||||||||||||||||
| Change in foreign currency translation adjustments | (367,280 | ) | 59,237 | (595,097 | ) | 524,531 | ||||||||||
| Total Comprehensive Loss | $ | (2,737,243 | ) | $ | (2,752,546 | ) | $ | (7,452,760 | ) | $ | (6,355,682 | ) | ||||
| Net Loss Per Common Share: | ||||||||||||||||
| Basic | $ | (0.2484 | ) | $ | (0.2967 | ) | $ | (0.7188 | ) | $ | (0.7377 | ) | ||||
| Diluted | $ | (0.2484 | ) | $ | (0.2967 | ) | $ | (0.7188 | ) | $ | (0.7377 | ) | ||||
| Weighted Average Shares Outstanding - Basic | 9,540,891 | 9,475,413 | 9,540,891 | 9,326,382 | ||||||||||||
| Weighted Average Shares Outstanding - Diluted | 9,540,891 | 9,475,413 | 9,540,891 | 9,326,382 | ||||||||||||
| Three-Month Period Ended June 30, | Six-Month Period Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Net Sales | $ | 72,000 | $ | - | $ | 72,000 | $ | - | ||||||||
| Cost of Sales | 43,878 | - | 43,878 | - | ||||||||||||
| Gross Profit | 28,122 | - | 28,122 | - | ||||||||||||
| Operating Expenses | 1,996,515 | 2,686,549 | 5,167,514 | 4,642,594 | ||||||||||||
| Loss from Operations | (1,968,393 | ) | (2,686,549 | ) | (5,139,392 | ) | (4,642,594 | ) | ||||||||
| Non-Operating Income (Loss) | ||||||||||||||||
| Foreign currency exchange gain | 512,418 | 536,461 | 141,914 | 215,760 | ||||||||||||
| Unrealized investment income (loss) | (18,742 | ) | 20,514 | (643,480 | ) | (60,170 | ) | |||||||||
| Other income (loss), net | (61,210 | ) | 8,379 | (119,800 | ) | 2,567 | ||||||||||
| Net Non-Operating Income (Loss) | 432,466 | 565,354 | (621,366 | ) | 158,157 | |||||||||||
| Loss before Income Taxes | (1,535,927 | ) | (2,121,195 | ) | (5,760,758 | ) | (4,484,437 | ) | ||||||||
| Income Tax Expense | (26 | ) | 11 | 3,269 | 3,263 | |||||||||||
| Net Loss | (1,535,901 | ) | (2,121,206 | ) | (5,764,027 | ) | (4,487,700 | ) | ||||||||
| Other Comprehensive Income (Loss) | ||||||||||||||||
| Change in foreign currency translation adjustments | (524,181 | ) | (571,592 | ) | (130,414 | ) | (227,817 | ) | ||||||||
| Total Comprehensive Loss | $ | (2,060,082 | ) | $ | (2,692,798 | ) | $ | (5,894,441 | ) | $ | (4,715,517 | ) | ||||
| Net Loss Per Common Share: | ||||||||||||||||
| Basic | $ | (0.1594 | ) | $ | (0.2223 | ) | $ | (0.5981 | ) | $ | (0.4704 | ) | ||||
| Diluted | $ | (0.1594 | ) | $ | (0.2223 | ) | $ | (0.5981 | ) | $ | (0.4704 | ) | ||||
| Weighted Average Shares Outstanding - Basic | 9,637,051 | 9,540,891 | 9,637,051 | 9,540,891 | ||||||||||||
| Weighted Average Shares Outstanding - Diluted | 9,637,051 | 9,540,891 | 9,637,051 | 9,540,891 | ||||||||||||
See accompanying notes to the condensed consolidated financial statements.
AERKOMM INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Nine-MonthThree-Month and Six-Month Periods ended SeptemberJune 30, 20202021 and 20192020
| Common Stock | Additional Paid in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficits | Income | Equity | |||||||||||||||||||
| Balance as of January 1, 2020 | 9,391,729 | $ | 9,392 | $ | 69,560,529 | $ | (23,271,687 | ) | $ | (482,639 | ) | $ | 45,815,595 | |||||||||||
| Stock compensation expense | - | - | 464,827 | - | - | 464,827 | ||||||||||||||||||
| Revaluation of stock warrant | - | - | (66,200 | ) | - | - | (66,200 | ) | ||||||||||||||||
| Other comprehensive income | - | - | - | - | 343,775 | 343,775 | ||||||||||||||||||
| Net loss for the period | - | - | - | (2,366,494 | ) | - | (2,366,494 | ) | ||||||||||||||||
| Balance as of March 31, 2020 (Unaudited) | 9,391,729 | $ | 9,392 | $ | 69,959,156 | $ | (25,638,181 | ) | $ | (138,864 | ) | $ | 44,191,503 | |||||||||||
| Stock compensation expense | - | - | 448,987 | - | - | 448,987 | ||||||||||||||||||
| Revaluation of stock warrant | - | - | 455,500 | - | - | 455,500 | ||||||||||||||||||
| Other comprehensive loss | - | - | - | - | (571,592 | ) | (571,592 | ) | ||||||||||||||||
| Net loss for the period | - | - | - | (2,121,206 | ) | - | (2,121,206 | ) | ||||||||||||||||
| Balance as of June 30, 2020 (unaudited) | 9,391,729 | $ | 9,392 | $ | 70,863,643 | $ | (27,759,387 | ) | $ | (710,456 | ) | $ | 42,403,192 | |||||||||||
| 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 | ||||||||||||
| Common Stock | Additional Paid in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficits | Income (Loss) | Equity | |||||||||||||||||||
| Balance as of January 1, 2021 | 9,487,889 | $ | 9,488 | $ | 73,160,616 | $ | (32,383,833 | ) | $ | (1,754,228 | ) | $ | 39,032,043 | |||||||||||
| Stock compensation expense | - | - | 1,680,365 | - | - | 1,680,365 | ||||||||||||||||||
| Revaluation of stock warrant | - | - | (355,600 | ) | - | - | (355,600 | ) | ||||||||||||||||
| Other comprehensive income | - | - | - | - | 393,767 | 393,767 | ||||||||||||||||||
| Net loss for the period | - | - | - | (4,228,126 | ) | - | (4,228,126 | ) | ||||||||||||||||
| Balance as of March 31, 2021 (Unaudited) | 9,487,889 | $ | 9,488 | $ | 74,485,381 | $ | (36,611,959 | ) | $ | (1,360,461 | ) | $ | 36,522,449 | |||||||||||
| Stock compensation expense | - | - | 179,331 | - | - | 179,331 | ||||||||||||||||||
| Revaluation of stock warrant | - | - | (42,000 | ) | - | - | (42,000 | ) | ||||||||||||||||
| Other comprehensive loss | - | - | - | - | (524,181 | ) | (524,181 | ) | ||||||||||||||||
| Net loss for the period | - | - | - | (1,535,901 | ) | - | (1,535,901 | ) | ||||||||||||||||
| Balance as of June 30, 2021 (Unaudited) | 9,487,889 | $ | 9,488 | $ | 74,622,712 | $ | (38,147,860 | ) | $ | (1,884,642 | ) | $ | 34,599,698 | |||||||||||
| Common Stock | Additional Paid in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficits | Income (Loss) | Equity | |||||||||||||||||||
| Balance as of December 31, 2019 | 9,391,729 | $ | 9,392 | $ | 69,560,529 | $ | (23,271,687 | ) | $ | (482,639 | ) | $ | 45,815,595 | |||||||||||
| Stock compensation expense | - | - | 464,827 | - | - | 464,827 | ||||||||||||||||||
| Revaluation of stock warrant | - | - | (66,200 | ) | - | - | (66,200 | ) | ||||||||||||||||
| Other comprehensive income | - | - | - | - | 343,775 | 343,775 | ||||||||||||||||||
| Net loss for the period | - | - | - | (2,366,494 | ) | - | (2,366,494 | ) | ||||||||||||||||
| Balance as of March 31, 2020 (Unaudited) | 9,391,729 | 9,392 | 69,959,156 | (25,638,181 | ) | (138,864 | ) | 44,191,503 | ||||||||||||||||
| Stock compensation expense | - | - | 448,987 | - | - | 448,987 | ||||||||||||||||||
| Revaluation of stock warrant | - | - | 455,500 | - | - | 455,500 | ||||||||||||||||||
| Other comprehensive loss | - | - | - | - | (571,592 | ) | (571,592 | ) | ||||||||||||||||
| Net loss for the period | - | - | - | (2,121,206 | ) | - | (2,121,206 | ) | ||||||||||||||||
| Balance as of June 30, 2020 (Unaudited) | 9,391,729 | 9,392 | 70,863,643 | (27,759,387 | ) | (710,456 | ) | 42,403,192 | ||||||||||||||||
| Stock compensation expense | - | - | 282,572 | - | - | 282,572 | ||||||||||||||||||
| Revaluation of stock warrant | - | - | (126,700 | ) | - | - | (126,700 | ) | ||||||||||||||||
| Other comprehensive loss | - | - | - | - | (367,280 | ) | (367,280 | ) | ||||||||||||||||
| Net loss for the period | - | - | - | (2,369,963 | ) | - | (2,369,963 | ) | ||||||||||||||||
| Balance as of September 30, 2020 (Unaudited) | 9,391,729 | $ | 9,392 | $ | 71,019,515 | $ | (30,129,350 | ) | $ | (1,077,736 | ) | $ | 39,821,821 | |||||||||||
See accompanying notes to the condensed consolidated financial statements.
4
AERKOMM INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine-Month PeriodsSix-Month Period ended SeptemberJune 30, 20202021 and 20192020
Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | (6,857,663 | ) | $ | (6,880,213 | ) | ||
| Adjustments to reconcile net loss to net cash used for operating activities: | ||||||||
| Depreciation and amortization | 780,971 | 781,007 | ||||||
| Stock-based compensation expense | 1,196,386 | 1,394,669 | ||||||
| R&D expenses transferred from inventory and construction in progress | - | 416,231 | ||||||
| Consulting expense adjustment from change in fair value of warrants | 262,600 | 84,233 | ||||||
| Unrealized losses on trading security | 68,911 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 451,130 | 1,095,061 | ||||||
| Inventories | (1,992,153 | ) | (1,485,350 | ) | ||||
| Prepaid expenses and other current assets | 1,292,279 | (985,849 | ) | |||||
| Deposits | (3,115 | ) | (252 | ) | ||||
| Accounts payable | 961,610 | (840,092 | ) | |||||
| Accrued expenses and other current liabilities | 2,143,258 | (1,650,867 | ) | |||||
| Operating lease liability | 179,372 | 41,069 | ||||||
| Net Cash Used for Operating Activities | (1,516,414 | ) | (8,030,353 | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of trading security | (184,150 | ) | - | |||||
| Purchase of property and equipment | (28,924 | ) | (6,455 | ) | ||||
| Prepayment on land and satellite equipment | - | (624,462 | ) | |||||
| Net Cash Used for Investing Activities | (213,074 | ) | (630,917 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from short-term bank loan | 163,200 | - | ||||||
| Proceeds from short-term loans | 1,314,162 | - | ||||||
| Proceeds from long-term loan | - | 45,765 | ||||||
| Proceeds from issuance of common stock | - | 10,810,688 | ||||||
| Payment on loan-term loan | (5,117 | ) | - | |||||
| Payment on finance lease liability | (8,955 | ) | - | |||||
| Net Cash Provided by Financing Activities | 1,463,290 | 10,856,453 | ||||||
| Net Increase (Decrease) in Cash and Restricted Cash | (266,198 | ) | 2,195,183 | |||||
| Cash and Restricted Cash, Beginning of Period | 976,829 | 88,309 | ||||||
| Foreign Currency Translation Effect on Cash | (595,097 | ) | 524,531 | |||||
| Cash and Restricted Cash, End of Period | $ | 115,534 | $ | 2,808,023 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for income taxes | $ | 3,275 | $ | - | ||||
| Cash paid during the period for interest | $ | 4,593 | $ | 338 | ||||
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | (5,764,027 | ) | $ | (4,487,700 | ) | ||
| Adjustments to reconcile net loss to net cash used for operating activities: | ||||||||
| Depreciation and amortization | 515,984 | 521,126 | ||||||
| Stock-based compensation | 1,859,696 | 913,814 | ||||||
| Consulting expense adjustment from change in fair value of warrants | (397,600 | ) | 389,300 | |||||
| Unrealized losses on trading security | 643,480 | 60,170 | ||||||
| Amortization of bonds issuance costs | 95,659 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | - | 451,130 | ||||||
| Inventories | (1,575,436 | ) | (1,811,443 | ) | ||||
| Prepaid expenses and other current assets | (355,764 | ) | 90,401 | |||||
| Deposits | 1,522 | (200 | ) | |||||
| Accounts payable | - | 961,610 | ||||||
| Accrued expenses and other current liabilities | 1,908,033 | 1,280,837 | ||||||
| Prepayment from customer | 1,611,357 | - | ||||||
| Operating lease liability | 38,715 | 107,020 | ||||||
| Net Cash Used for Operating Activities | (1,418,381 | ) | (1,523,935 | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of trading security | (877 | ) | (157,756 | ) | ||||
| Purchase of property and equipment | (3,521 | ) | (28,924 | ) | ||||
| Purchase of long-term investment | (680 | ) | - | |||||
| Net Cash Used for Investing Activities | (5,078 | ) | (186,680 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from short-term loans | 1,017,693 | 1,385,411 | ||||||
| Payment on long-term loan | (4,760 | ) | (3,568 | ) | ||||
| Payment on finance lease liability | (3,164 | ) | (5,926 | ) | ||||
| Net Cash Provided by Financing Activities | 1,009,769 | 1,375,917 | ||||||
| Net Decrease in Cash and Restricted Cash | (413,690 | ) | (334,698 | ) | ||||
| Cash and Restricted Cash, Beginning of Period | 3,794,591 | 976,829 | ||||||
| Foreign Currency Translation Effect on Cash | (130,414 | ) | (227,817 | ) | ||||
| Cash and Restricted Cash, End of Period | $ | 3,250,487 | $ | 414,314 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for income taxes | $ | 3,269 | $ | 1,651 | ||||
| Cash paid during the period for interest | $ | 18,679 | $ | 3,373 | ||||
| Cash and Restricted Cash: | ||||||||
| Cash | $ | 40,487 | $ | 346,570 | ||||
| Restricted cash | 3,210,000 | 67,744 | ||||||
| Total | $ | 3,250,487 | $ | 414,314 | ||||
See accompanying notes to the condensed consolidated financial statements.
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1 - Organization
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.
On December 28, 2016, Aircom Pacific Inc. (“Aircom”) purchased 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. 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”Beijing Yatai”), a corporation formed under the laws of China. The purpose of Aircom Beijing Yatai 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 Yatai 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 Yatai and teleports located in China. On November 6, 2020, 100% ownership of Beijing Yatai was transferred from Aircom Taiwan to Aerkomm Taiwan.
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.
Aerkomm and its subsidiaries (the “Company”) are full-service, development stage providers of in-flight entertainment and connectivity solutions with their initial market in the Asian Pacific region.
6
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1 - Organization - Continued
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.
The Company’s organization structure is as following:
Aerkomm and its subsidiaries (the “Company”) are full-service, development stage providers of in-flight entertainment and connectivity solutions with their initial market in the Asian Pacific region.
The Company has not generated significant revenues, excluding non-recurring revenues, in 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 aongoing public offering,offerings, short-term borrowings and equity contributions. Two 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 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 downthe outstanding payablespayable to the Company’s vendors. 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%.
On July 29, 2020, the 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 the Securities Act of 1933 to issue and sell up to 1,951,219 shares (approximately $47,276,000) (unaudited) of the Company’s common stock, at a per share price of €20.50 (approximately $24.23). The Form S-1 wasis subsequently amended on July 29, 2020, October 21, 2020 and November 5, 2020, and was declared effective on November 6, 2020. As of December 31, 2020, the Company closed a public offering with net proceeds of $1,667,080.
With the $20 million in Loans committed by the Lenders and the working capital loan from EESquare and expected future capital raising efforts,remaining amount of €38 million (not including the filing for upcoming registered public offering,15% over-subscription) to be raised from the effective S-1 and future fund raising, the Company believes its working capital will be adequate to sustain its operations for the next twelve months.
On January 16, 2019,However, there is no assurance that management will be successful in furthering the Company’s business plan, especially if the Company completedis not able to raise additional capital in its registered public offering or from other sources. There are a 1-for-5 reverse splitnumber of additional factors that could potentially arise that could result in shortfalls in the Company’s business plan, such as general worldwide economic conditions, competitive pricing in the connectivity industry, the continuing impact 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 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 ofCOVID 19 pandemic, the Company’s common stockoperating results continuing to listdeteriorate 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.banks and shareholders not being able to provide continued financial support.
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheet as of SeptemberJune 30, 2020,2021, and the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2020 and 2019 and of changes in stockholders’ equity and cash flows for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 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 SeptemberJune 30, 20202021 and the results of its operations for the three and nine months ended September 30, 2020 and 2019 and of its cash flows for the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to these three-month and nine-month periods are unaudited. The results of operations for the ninesix months ended SeptemberJune 30, 20202021 are not necessarily indicative of the results to be expected for the year ending December 31, 20202021 or for any other interim period or other future year.
Principle of Consolidation
Aerkomm consolidates the accounts of its subsidiaries, Aircom, Aircom Seychelles, Aircom HK, Aircom Japan, Aircom Taiwan, Aerkomm Taiwan, Aircom Beijing Yatai and Aerkomm Malta. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
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.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash in banks. As of June 30, 2021 and December 31, 2020, the total balance of cash in bank was fully insured by the Federal Deposit Insurance Corporation (FDIC). The balance of cash deposited in foreign financial institutions exceeding the amount insured by local insurance is approximately $3,107,000 and $3,514,000 as of June 30, 2021 and December 31, 2020, respectively.
Short-term investment
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
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.
Long-term Investment
7Long-term investment includes holdings of marketable equity securities with less than 20% of ownership of the investee. Marketable equity securities include equity securities which are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Changes in fair value from subsequent remeasurement are reported under non-operating income in the Company’s statement of income. The cost of the securities sold is based on the weighted average cost method. Stock dividends from the investment are included to recalculate the cost basis of the investment based on the total number of shares.
Investments are considered to be impaired when a decline in fair value is judged to be other than temporary. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, as well as its intent and ability to hold the investment, for recording an impairment loss.
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
Use of Estimates
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.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash in banks. As of September 30, 2020 and December 31, 2019, the total balance of cash in bank exceeding the amount insured by the Federal Deposit Insurance Corporation (FDIC) for the Company was approximately $0 (unaudited) and $233,000, respectively. The balance of cash deposited in foreign financial institutions exceeding the amount insured by local insurance is approximately $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.
Short-term investment
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
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
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 nine-monthsix-month period ended SeptemberJune 30, 20202021 and for the year ended December 31, 2019.2020.
8
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
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 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 by discount rates. The 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 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 recognized on a straight-line basis over the lease term. Interest and amortization expenses are recognized for finance leases on a straight-line basis over the lease term.
For the 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.
Goodwill and Purchased Intangible Assets
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.
Fair Value of Financial Instruments
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.
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
Fair Value of Financial Instruments-Continued
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,and restricted cash, accounts payable, short-term loans, accrued expenseloan and other payable approximated their fair value due to the short-term nature of these financial instruments. The Company’s short-term investment and long-term investment are classified within Level 1 of the fair value hierarchy on June 30, 2021. The Company’s long-term bonds payable, 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 and leases, respectively. There were no outstanding derivative financial instruments as of SeptemberJune 30, 2020.2021.
9
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
Revenue Recognition
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 revenue for the 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 ContractsContract 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
Research and development costs are charged to operating expenses as incurred. For the nine-month periods ended September 30, 2020 and 2019,As such, the Company incurred $0 (unaudited)identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and $416,231 (unaudited) of research and development costs, respectively.recognizes revenue when (or as) the Company satisfies a performance obligation.
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. It is not subject to income tax examinations by US federal, state and local tax authorities for years before 2015.2016. 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
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.
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 the Company. Such adjustments are accumulated and reported under other comprehensive income (loss) as a separate component of stockholders’ equity.
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
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.
Subsequent Events
The Company has evaluated events and transactions after the reported period up to November 7, 2020,August [*], 2021, the date on which these consolidated financial statements were available to be issued. All subsequent events requiring recognition as of SeptemberJune 30, 20202021 have been included in these consolidated financial statements.
NOTE 3 - Recent Accounting Pronouncements
Simplifying the Accounting for Debt with Conversion and Other Options.
In June 2020, the FASB issued ASU 2020-06 to simplify the accounting in ASC 470, Debt with Conversion and Other Options and ASC 815, Contracts in Equity’s Own Entity. The guidance simplifies the current guidance for convertible instruments and the derivatives scope exception for contracts in an entity’s own equity. Additionally, the amendments affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2022. Early adoption is permitted. The amendments in this update must be applied on either full retrospective basis or modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements and related disclosures, as well as the timing of adoption.
Financial Instruments
In June 2016, the FASB issued ASU 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 until fiscal year beginning after December 15, 2022. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting in ASC 740, Income“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 evaluatingadoption of ASU 2019-12 does not have a significant impact on the impact this ASU will have on itsCompany’s consolidated financial statements as of and related disclosures, as well asfor the timing of adoption.six-month period ended June 30, 2021.
Earnings Per Share
Financial Instruments
In June 2016,April 2021, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement2021-04, which included Topic 260 “Earnings Per Share”. This guidance clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of Credit Losses on Financial Instruments” (“ASU 2016-13”), which modifies the measurementfreestanding equity-classified written call options due to a lack of expected credit losses of certain financial instruments. In February 2020,explicit guidance in the FASB issuedCodification. The ASU 2020-02 and delayed the2021-04 is effective date of ASU 2016-13 untilfor all entities for fiscal yearyears beginning after December 15, 2022.2021. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2016-132021-04 on its 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. The Company is currently evaluating the impact of ASU 2017-04 on its consolidated financial statements.
NOTE 4 - Inventories
As of September 30, 2020 and December 31, 2019, inventories consisted of the following:
| September 30, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| Satellite equipment for sale under construction | $ | 4,669,297 | $ | 3,038,564 | ||||
| Supplies | 5,284 | 5,230 | ||||||
| 4,674,581 | 3,043,794 | |||||||
| Allowance for inventory loss | (5,284 | ) | (5,230 | ) | ||||
| Net | 4,669,297 | 3,038,564 | ||||||
| Prepayment for inventory | 361,420 | - | ||||||
| Total | $ | 5,030,717 | $ | 3,038,564 | ||||
11
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 4 – Short-term Investment
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 euros) into the account. The transaction was initiated in the beginning of 2020, and the Company pays annual compensation of 20,000 euros to the Liquidity Provider in advance by semi-annual installments at the beginning of each semi-annual period under the agreement. The liquidity agreement had an initial term of one year and is being renewed automatically unless otherwise terminated by either party. As of June 30, 2021, the Company had purchased 11,604 shares (unaudited) of its common stock with the fair value of $60,493 (unaudited). The securities were recorded as short-term investment with an accumulated unrealized loss of $168,767.
NOTE 5 - Inventories
As of June 30, 2021 and December 31, 2020, inventories consisted of the following:
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Satellite equipment for sale under construction | $ | 6,476,397 | $ | 4,669,297 | ||||
| Supplies | 5,192 | 5,317 | ||||||
| 6,481,589 | 4,674,614 | |||||||
| Allowance for inventory loss | (5,192 | ) | (5,317 | ) | ||||
| Net | 6,476,397 | 4,669,297 | ||||||
| Prepayment for inventory | 331,400 | 542,130 | ||||||
| Total | $ | 6,807,797 | $ | 5,211,427 | ||||
NOTE 56 - Property and Equipment
As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the balances of property and equipment were as follows:
| 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 | ||||
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Ground station equipment | $ | 1,854,027 | $ | 1,876,458 | ||||
| Computer software and equipment | 339,229 | 335,708 | ||||||
| Satellite equipment | 275,410 | 275,410 | ||||||
| Vehicle | 198,741 | 198,741 | ||||||
| Leasehold improvement | 83,721 | 83,721 | ||||||
| Furniture and fixture | 36,382 | 36,382 | ||||||
| 2,787,510 | 2,806,420 | |||||||
| Accumulated depreciation | (1,681,178 | ) | (1,414,191 | ) | ||||
| Net | 1,106,332 | 1,392,229 | ||||||
| Prepayments - land | 35,861,589 | 35,861,589 | ||||||
| Prepaid equipment | 86,617 | 86,617 | ||||||
| Net | $ | 37,054,538 | $ | 37,340,435 | ||||
On May 1,July 10, 2018, the Company and Aerkomm Taiwan entered into a binding memorandum of understandingreal estate sale contract (the “Land Purchase Contract”) 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,Land Purchase 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 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$34,474,462 in these negotiations or that the required licenses and approvals will be granted by a certain date, if at all.total. As of SeptemberJune 30, 20202021 and December 31, 2019,2020, 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 after the full payment of the Land acquisition price no later than December 31, 2021. According to the amended Land Purchase Contract dated on November 10, 2020, the transaction may be terminated at any time by both the buyer and the seller and agreed by all parties if the Company is unable to obtain the qualified satellite license issued by Taiwan authority before July 31, 2021. As of August 20, 2021, the license applications are still in progress.
Depreciation expense was $136,095$133,919 (unaudited) and $136,449$136,587 (unaudited) for the three-month periods ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $409,721$268,484 (unaudited) and $409,757$273,626 (unaudited) for the nine-monthsix-month periods ended SeptemberJune 30, 2021 and 2020, respectively.
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 7 – Long-term Investment
On December 3, 2020, the Company entered into three separate stock purchase agreements (or “Stock Purchase Agreement”) from three individuals to purchase an aggregate of 6,000,000 restricted shares of one of the Company’s related parties, YuanJiu Inc. (YuanJiu) in a total amount of NT$141,175,000. YuanJiu is a listed company in Taiwan Stock Exchange and 2019, respectively.the stock title transfer is subject to certain restrictions. Albert Hsu, a member of the Company’s board of directors, is the Chairman of YuanJiu. On July 19, 2021, YuanJiu Inc. changed its name to “EJECTT INC.”
In the Stock Purchase Agreement, there was a restriction on the stock title transfer until May 13, 2021. As of August 12, 2021, this restriction on the stock transfer was released and the stock title transfer process has been completed. As of June 30, 2021 and December 31, 2020, this investment totaled approximately a 10% ownership of YuanJiu. The Company intends to hold this investment for long-term purposes.
On March 24, 2021, the Company purchased additional 1,000 shares of YuanJiu’s common stock for a total amount of $694 (unaudited) from a related party.
As of June 30, 2021 and December 31, 2020, the fair value of the investment was as follows:
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Investment cost | $ | 5,058,917 | $ | 5,027,600 | ||||
| Less: Allowance for value decline | (1,349,875 | ) | (722,044 | ) | ||||
| Net | $ | 3,709,042 | $ | 4,305,556 | ||||
NOTE 68 - Intangible Asset, Net
As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the cost and accumulated amortization for intangible asset were as follows:
| September 30, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| Satellite system software | $ | 4,950,000 | $ | 4,950,000 | ||||
| Accumulated amortization | (2,433,750 | ) | (2,062,500 | ) | ||||
| Net | $ | 2,516,250 | $ | 2,887,500 | ||||
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Satellite system software | $ | 4,950,000 | $ | 4,950,000 | ||||
| Accumulated amortization | (2,805,000 | ) | (2,557,500 | ) | ||||
| Net | $ | 2,145,000 | $ | 2,392,500 | ||||
Amortization expense was $123,750 (unaudited) and $123,750 (unaudited) for the three-month periods ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $371,250$247,500 (unaudited) and $371,250$247,500 (unaudited) for the nine-monthsix-month periods ended SeptemberJune 30, 2021 and 2020, and 2019, respectively.
12
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 7 - 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, 2020, the 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 89 - Operating and Finance Leases
| A. | Lease term and discount rate: |
The weighted-average remaining lease term (in years) and discount rate related to the leases were as follows:
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 | $ | - | ||||
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 | ||||
| 2021 | 2020 | |||||||
| Weighted-average remaining lease term | (Unaudited) | |||||||
| Operating lease | 1.03 Years | 2.01 Years | ||||||
| Finance lease | 3.35 Years | 3.84 Years | ||||||
| Weighted-average discount rate | ||||||||
| Operating lease | 6.00 | % | 6.00 | % | ||||
| Finance lease | 3.82 | % | 3.82 | % | ||||
13
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 89 - Operating and Finance Leases - Continued
| B. | The balances for the operating and finance leases are presented as follows within the consolidated balance sheets as of June 30, 2021 and December 31, 2020: |
Operating Leases
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Right-of-use assets | $ | 279,414 | $ | 353,442 | ||||
| Lease liability – current | $ | 406,146 | $ | 346,870 | ||||
| Lease liability – non-current | 80,746 | 173,308 | ||||||
| Total operating lease liabilities | $ | 486,892 | $ | 520,178 | ||||
Finance Leases
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Property and equipment, at cost | $ | 56,770 | $ | 56,770 | ||||
| Accumulated depreciation | (19,156 | ) | (13,098 | ) | ||||
| Property and equipment, net | $ | 37,615 | $ | 43,672 | ||||
| Lease liability - current | $ | 11,291 | $ | 11,010 | ||||
| Lease liability – non-current | 31,663 | 37,135 | ||||||
| Total finance lease liabilities | $ | 42,954 | $ | 48,145 | ||||
The components of lease expense are as follows within the condensed consolidated statements of operations and comprehensive loss for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20202021 and 2019:2020:
Operating Leases
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Lease expense | $ | 54,658 | $ | 108,348 | $ | 112,590 | $ | 220,345 | ||||||||
| Sublease rental income | (2,737 | ) | (2,791 | ) | (5,563 | ) | (5,545 | ) | ||||||||
| Net lease expense | $ | 51,921 | $ | 105,557 | $ | 107,027 | $ | 214,800 | ||||||||
Finance Leases
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Amortization of right-of-use asset | $ | 3,034 | $ | 2,841 | $ | 6,057 | $ | 5,932 | ||||||||
| Interest on lease liabilities | 429 | 496 | 880 | 1,012 | ||||||||||||
| Total finance lease cost | $ | 3,463 | $ | 3,337 | $ | 6,937 | $ | 6,944 | ||||||||
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 9 - 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 | ||||||||
and Finance Leases - Continued
| 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-monthsix-month periods ended SeptemberJune 30, 20202021 and 20192020 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 | ||||
| June 30, 2021 | June 30, 2020 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash outflows from operating leases | $ | 64,517 | $ | 93,689 | ||||
| Operating cash outflows from finance lease | $ | 5,462 | $ | 5,926 | ||||
| Financing cash outflows from finance lease | $ | 878 | $ | 1,012 | ||||
| Leased assets obtained in exchange for lease liabilities: | ||||||||
| Operating leases | $ | 28,197 | $ | 261,781 | ||||
Maturity of lease liabilities:
Operating Leases
| Related Party | Others | Total | ||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
| July 1, 2021 – June 30, 2022 | $ | 55,757 | $ | 361,327 | $ | 417,084 | ||||||
| July 1, 2022 – June 30, 2023 | - | 83,155 | 83,155 | |||||||||
| July 1, 2023 – June 30, 2024 | - | - | - | |||||||||
| Total lease payments | $ | 55,757 | $ | 444,482 | $ | 500,239 | ||||||
| Less: Imputed interest | (1,521 | ) | (11,826 | ) | (13,347 | ) | ||||||
| Present value of lease liabilities | $ | 54,236 | $ | 432,656 | $ | 486,892 | ||||||
| Current portion | (54,236 | ) | (351,910 | ) | (406,146 | ) | ||||||
| Non-current portion | $ | - | $ | 80,746 | $ | 80,746 | ||||||
Finance Leases
| Total | ||||
| (Unaudited) | ||||
| July 1, 2021 – June 30, 2022 | $ | 12,735 | ||
| July 1, 2022 – June 30, 2023 | 12,735 | |||
| July 1, 2023 – June 30, 2024 | 12,735 | |||
| July 1, 2024 – June 30, 2025 | 7,828 | |||
| Total lease payments | $ | 46,033 | ||
| Less: Imputed interest | (3,079 | ) | ||
| Present value of lease liabilities | $ | 42,954 | ||
| Current portion | (11,291 | ) | ||
| Non-current portion | $ | 31,663 | ||
NOTE 10 - Short-term Loans
In 2020, the Company entered into a loan agreement in the amount of $423,225 with the Company’s insurance service provider in order to pay the Company’s insurance premium. The loan matures on September 25, 2021 with an annual interest rate of 3.3%. Under this loan agreement, the Company is required to make the installment payment monthly. The installment liability as of June 30, 2021 was $111,582.
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 | ||
Additionally, in June 2021, the Company entered into a loan agreement in the amount of $1,433,177 (NT $40,000,000) (unaudited) with a non-related party. This loan, which carries no interest, originally matured on July 16, 2021 and the Company agreed to put 4,000,000 shares of Yuanjiu stocks as collateral. As of August 20, 2021, the Company has repaid $179,147 (NT $5,000,000) (unaudited) of the outstanding loan and the two parties signed the amendment agreement to extend the loan repayment date to September 16, 2021.
14
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 21st21st of each month. Future installment payments as of SeptemberJune 30, 20202021 are as follows:
| Twelve months ending June 30, | (Unaudited) | |||
| 2022 | $ | 13,608 | ||
| 2023 | 13,608 | |||
| 2024 | 12,474 | |||
| Total installment payments | 39,690 | |||
| Less: Imputed interest | (5,244 | ) | ||
| Present value of long-term loan | 34,446 | |||
| Current portion | (10,732 | ) | ||
| Non-current portion | $ | 23,714 | ||
NOTE 12 – Long-term Bonds Payable and Restricted Cash
| (Unaudited) | ||||
| Twelve months ending September 30, | ||||
| 2021 | $ | 13,119 | ||
| 2022 | 13,119 | |||
| 2023 | 13,119 | |||
| 2024 | 8,746 | |||
| Total installment payments | 48,103 | |||
| Less: Imputed interest | (7,751 | ) | ||
| Present value of long-term loan | 40,352 | |||
| Current portion | (9,635 | ) | ||
| Non-current portion | $ | 30,717 | ||
On December 3, 2020, the Company closed a private placement offering consisting of US$10,000,000 in aggregate principal amount of its Credit Enhanced Zero Coupon Convertible Bonds (the “Zero Coupon Bonds”) and US$200,000 in aggregate principal amount of its 7.5% convertible bonds (the “Coupon Bonds”), both due on December 2, 2025 (collectively the “Bonds”). Unless previously redeemed, converted or repurchased and cancelled, the Zero-Coupon Bonds will be redeemed on December 2, 2025 at 105.11% of their principal amount and the Coupon Bonds will be redeemed on December 2, 2025 at 100% of their principal amount plus any accrued and unpaid interest. The Coupon Bonds will bear interest from and including December 2, 2020 at the rate of 7.5% per annum. Interest on the Coupon Bonds is payable semi-annually in arrears on June 1 and December 1 each year, commencing on June 1, 2021.
The Company has the option to redeem the Bonds at a redemption amount equal to the Early Redemption Amount, as defined in the Offering Memorandum, at any time on or after December 2, 2023 and prior to the Maturity Date, if the Closing Price of the Company’s Common Stock listed on the Euronext Paris for 20 trading days in any period of 30 consecutive trading days, the last day of which occurs not more than fifteen trading days prior to the date on which notice of such redemption is given, is greater than 130% of the Conversion Price on each applicable trading day or (ii) in whole or in part of the Bonds on the second anniversary of the issue date or (iii) where 90% or more in principal amount of the Bonds issued have been redeemed, converted or repurchased and cancelled.
Unless previously redeemed, converted or repurchased and cancelled, the Bonds may be converted at any time on or after December 3, 2020 up to November 20, 2025 into shares of Common Stock of the Company with a par value of $0.001 each. The initial conversion price for the Bonds is $13.30 per share and is subject to adjustment in specified circumstances.
Holders of the Bonds may also require the Company to repurchase all or part of the Bonds on the third anniversary of the Issue Date, at the Early Redemption Amount. Unless the Bonds have been previously redeemed, converted or repurchased and cancelled, Holders of the Bonds will also have the right to require the Company to repurchase the Bonds for cash at the Early Redemption Amount if an event of delisting or a change of control occurs.
Pursuant to the agreements of Bonds, Bank of Panhsin Co., Ltd. (the “BG Bank”) committed to issue a bank guarantee for the benefit of the holders of the Bonds. The Bank Guarantee is intended to provide a source of funds for the principal, premium, interest (if any) and any other payment obligations of the Company which shall include the default interest under the Bonds upon the Company’s failure to pay amounts pursuant to the Indenture or upon the Bonds being declared due and payable on the occurrence of an Event of Default pursuant to this Indenture. In order to obtain the guarantee from BG Bank, the Company entered into a line of credit in the amount of $10,700,000 with BG Bank on December 1, 2020. The line of credit will be expired on December 2, 2025. The annual fee is based on 1% of the line of credit amount and due quarterly. The line of credit is guaranteed by one of the Company’s shareholders with his personal property, and the Company’s time deposit of $3,210,000 (the “Deposit”) at BG Bank is pledged as collateral as of June 30, 2021 and December 31, 2020, and the Deposit was recorded as restricted cash.
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 12 – Long-term Bonds Payable and Restricted Cash - Continued
As of June 30, 2021 and December 31, 2020, the long-term bonds payable consisted of the following:
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Credit Enhanced Zero Coupon Convertible Bonds | $ | 10,000,000 | $ | 10,000,000 | ||||
| Coupon Bonds | 200,000 | 200,000 | ||||||
| 10,200,000 | 10,200,000 | |||||||
| Unamortized loan fee | (886,247 | ) | (981,906 | ) | ||||
| Net | $ | 9,313,753 | $ | 9,218,094 | ||||
NOTE 1213 - Prepayment from Customer
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 SeptemberJune 30, 20202021 and December 31, 2019,2020, the Company received $762,000 from Klingon in milestone payments towards the equipment purchase price. As of November 7, 2020,June 30, 2021, the project is still ongoing.
15
On April 25, 2021, the Company entered into a Product Supply Agreement with a customer. As of June 30, 2021, the Company received $1,611,357 from the customer as a prepayment towards the equipment purchase price.
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1314 - Income Taxes
Income tax expense for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20202021 and 20192020 consisted of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Current: | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||
| Federal | $ | - | $ | - | $ | - | $ | - | ||||||||
| State | - | - | 1,600 | 1,600 | ||||||||||||
| Foreign | 12 | - | 1,675 | 1,635 | ||||||||||||
| Total | $ | 12 | $ | - | $ | 3,275 | $ | 3,235 | ||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Current: | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||
| Federal | $ | - | $ | - | $ | - | $ | - | ||||||||
| State | - | - | 1,600 | 1,600 | ||||||||||||
| Foreign | (26 | ) | 11 | 1,669 | 1,663 | |||||||||||
| Total | $ | (26 | ) | $ | 11 | $ | 3,269 | $ | 3,263 | |||||||
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-monthsix-month periods ended SeptemberJune 30, 20202021 and 2019.2020.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Tax benefit at statutory rate | $ | (332,734 | ) | $ | (388,531 | ) | $ | (1,424,074 | ) | $ | (1,003,820 | ) | ||||
| Foreign investment losses (gains) | (8,497 | ) | (37,148 | ) | 443,037 | 98,290 | ||||||||||
| Stock-based compensation expense | 33,100 | 94,300 | 390,500 | 191,900 | ||||||||||||
| Amortization expense | 23,425 | 12,617 | 46,055 | 25,333 | ||||||||||||
| Accrued payroll | 73,800 | 30,800 | 130,700 | 75,900 | ||||||||||||
| Unrealized exchange losses (gains) | (98,807 | ) | (108,870 | ) | 200,896 | (28,194 | ) | |||||||||
| Others | 23,574 | 65,211 | 43,269 | 74,563 | ||||||||||||
| Valuation allowance | 286,113 | 331,632 | 172,886 | 569,291 | ||||||||||||
| Tax expense at effective tax rate | $ | (26 | ) | $ | 11 | $ | 3,269 | $ | 3,263 | |||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Tax benefit at statutory rate | $ | (240,895 | ) | $ | (688,749 | ) | $ | (1,244,715 | ) | $ | (1,703,699 | ) | ||||
| 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 | 59,300 | 154,400 | 251,200 | 292,900 | ||||||||||||
| Amortization and depreciation expense | (22,013 | ) | 58,700 | 3,320 | 33,100 | |||||||||||
| Accrued payroll | 98,900 | 900 | 174,800 | (40,900 | ) | |||||||||||
| Unrealized exchange losses (gains) | (76,526 | ) | 11,653 | (104,720 | ) | 98,920 | ||||||||||
| Accrued consulting expense | - | (122,300 | ) | - | (122,300 | ) | ||||||||||
| Others | 6,212 | (53,713 | ) | 80,775 | 17,825 | |||||||||||
| Tax expense at effective tax rate | $ | 12 | $ | - | $ | 3,275 | $ | 3,235 | ||||||||
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 14 - Income Taxes – Continued
Deferred tax assets (liabilities) as of SeptemberJune 30, 20202021 and December 31, 20192020 consist approximately of:
| September 30, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| Net operating loss carryforwards (NOLs) | $ | 7,688,000 | $ | 6,388,000 | ||||
| Stock-based compensation expense | 1,884,000 | 1,549,000 | ||||||
| Accrued expenses and unpaid expense payable | 312,000 | 53,000 | ||||||
| Tax credit carryforwards | 68,000 | 68,000 | ||||||
| Excess of tax amortization over book amortization | (587,000 | ) | (619,000 | ) | ||||
| Unrealized exchange gain | (230,000 | ) | (106,000 | ) | ||||
| Others | (151,000 | ) | (104,000 | ) | ||||
| Gross | 8,984,000 | 7,229,000 | ||||||
| Valuation allowance | (8,984,000 | ) | (7,229,000 | ) | ||||
| Net | $ | - | $ | - | ||||
| June 30, 2021 | December 31, | |||||||
| (Unaudited) | ||||||||
| Net operating loss carryforwards (NOLs) | $ | 8,931,000 | $ | 8,018,000 | ||||
| Stock-based compensation expense | 2,544,000 | 2,024,000 | ||||||
| Accrued expenses and unpaid expense payable | 500,000 | 309,000 | ||||||
| Tax credit carryforwards | 68,000 | 68,000 | ||||||
| Unrealized investment loss | - | 144,000 | ||||||
| Unrealized exchange losses | (18,000 | ) | (193,000 | ) | ||||
| Excess of tax amortization over book amortization | (475,000 | ) | (577,000 | ) | ||||
| Others | 155,000 | (173,000 | ) | |||||
| Gross | 11,705,000 | 9,620,000 | ||||||
| Valuation allowance | (11,705,000 | ) | (9,620,000 | ) | ||||
| 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 $ 1,755,000$2,085,000 (unaudited) for the ninesix months ended SeptemberJune 30, 2020.2021.
As of SeptemberJune 30, 20202021 and December 31, 2019,2020, 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 $ 14,514,000$18,245,000 (unaudited) and $11,314,000,$16,743,000, respectively, were generated and will be carried forward indefinitely to reduce future federal taxable income. As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the Company had State NOLs of approximately $ 25,144,000$27,363,000 (unaudited) and $21,117,000$27,461,000, respectively, available to reduce future state taxable income, expiring in 2040 and 2039, respectively.2041.
As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the Company has Japan NOLs of approximately $367,000$373,000 (unaudited) and $350,000,$392,000, respectively, available to reduce future Japan taxable income, expiring throughin 2031.
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 13 - Income Taxes - Continued
As of SeptemberJune 30, 20202021 and December 31, 2019,2020, the Company has Taiwan NOLs of approximately $2,701,000$1,687,000 (unaudited) and $1,898,000,$2,405,000, respectively, available to reduce future Taiwan taxable income, expiring in 2030 and 2029, respectively.2031.
As of SeptemberJune 30, 20202021 and December 31, 2019,2020, 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 SeptemberJune 30, 20202021 and December 31, 2019,2020, 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 1415 - Capital Stock
| 1) | Preferred Stock: |
The Company is authorized to issue 50,000,000 shares of preferred stock, with par value of $0.001. As of SeptemberJune 30, 2020,2021, 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.
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 15 - Capital Stock – Continued
| 2) | 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 SeptemberJune 30, 20202021 and December 31, 2019,2020, the restricted shares consisted of the following:
| September 30, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| Restricted stock - vested | 1,802,373 | 1,802,373 | ||||||
| Restricted stock - unvested | 149,162 | 149,162 | ||||||
| Total restricted stock | 1,951,535 | 1,951,535 | ||||||
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Restricted stock - vested | 1,802,373 | 1,802,373 | ||||||
| Restricted stock - unvested | 149,162 | 149,162 | ||||||
| Total restricted stock | 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.
| 3) | 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, 2020 and 2019, Aerkomm has not issued additional stock warrants to the service provider as payment for additional services. As of September 28, 2019, these warrants are equivalent to 4,891 shares of the Company’s common stock. On 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 December 31, 2019, the Company issued total warrants to Boustead to purchase 77,680 shares of the Company’s stock.
For the nine-monthsix-month periods ended SeptemberJune 30, 20202021 and 2019,2020, the Company recorded decrease of $397,600 and an increase of $262,600 and $84,233,$389,300, respectively, in additional paid-in capital as adjustment for the issuance costs of these stock warrants.
NOTE 16 - Major Vendors
The Company has two unrelated major vendors, which represents 10% or more of the total purchases of the Company for the six-month periods ended June 30, 2021 and 2020. Purchase from these vendors for the six-month periods ended June 30, 2021 and 2020, and accounts payable as of June 30, 2021 and December 31, 2020 were as follows:
| Purchase | Accounts Payable | |||||||||||||||
| Vendor | June 30, 2021 | June 30, 2020 | June 30, 2021 | December 31, 2020 | ||||||||||||
| A | $ | 22,906 | $ | - | $ | - | $ | - | ||||||||
| B | - | 1,592,239 | 1,874,339 | 1,874,339 | ||||||||||||
| Total | $ | 22,906 | $ | 1,592,239 | $ | 1,874,339 | $ | 1,874,339 | ||||||||
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1517 - Significant Related Party Transactions
In addition to the information disclosed in other notes, the Company has significant related party transactions as follows:
| A. | Name of related parties and relationships with the Company: |
| Related Party | Relationship | |
| Well Thrive Limited (“WTL”) | Major | |
| Stockholder; Albert Hsu, a Director of Aerkomm, is the Chairman | ||
| AA Twin Associates Ltd. (“AATWIN”) | Georges Caldironi, COO of Aerkomm, is the sole owner | |
| EESquare Japan (“EESquare JP”) | Yih Lieh (Giretsu) Shih, President Aircom Japan, is the Director | |
| Wealth Wide Int’l Ltd. (“WWI”) | Bummy Wu, a stockholder, is the Chairman | |
| dMobile System Co. Ltd. (dMobile) | Sheng-Chun Chang, major stockholder, is the Chairman |
| B. | 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.
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 17 - Significant Related Party Transactions – Continued
| a. | As of June 30, 2021 and December 31, 2020: |
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Inventory prepayment to: | ||||||||
| dMobile1 | $ | 331,400 | $ | - | ||||
| Yuanjiu2 | - | 542,130 | ||||||
| Total | $ | 331,400 | $ | 542,130 | ||||
| Loan from WTL3 | $ | - | $ | 527,066 | ||||
| Other payable to: | ||||||||
| AATWIN4 | $ | 255,741 | $ | 146,673 | ||||
| Interest payable to WTL3 | 44,825 | 7,623 | ||||||
| Others5 | 404,005 | 296,890 | ||||||
| Total | $ | 704,571 | $ | 451,186 | ||||
| Lease liability to WWI6 | $ | 54,236 | $ | 68,661 | ||||
In June 2021, the Company ordered antenna equipment of $331,400 (NT $9,500,000) (unaudited) from dMobile. As of |
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 | ||||
| 2. | Represents inventory prepayment paid to |
3. | The Company |
| |
| 4. | Represents payable to AATWIN due to a consulting agreement |
| 5. | Represents |
| 6. | Aircom Hong Kong has a lease agreement with WWI for warehouse space with a monthly rental cost of $450. The lease term on this property is from July 1, 2020 to June 30, 2022. Aircom Hong Kong has another lease agreement with WWI for its office space in Hong Kong. The original lease term was from June 28, 2018 to June 27, 2020 with a monthly rental cost of HKD 29,897 (approximately $3,847). The Company renewed this lease on June 27, 2020 and the current lease term is from June 28, 2020 to June 27, 2022 with a monthly rental cost of HKD 30,000 (approximately $3,829). |
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1517 - Significant Related Party Transactions -– Continued
| b. | For the six-month periods ended June 30, 2021 and 2020: |
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Purchase from Yuanjiu1 | $ | - | $ | - | $ | 1,807,100 | $ | - | ||||||||
| Consulting expense charged by AATWIN2 | 54,388 | 50,110 | 109,068 | 100,221 | ||||||||||||
| Interest expense charged by WTL3 | 17,951 | 9,067 | 38,778 | 9,067 | ||||||||||||
| Rental expense charged by WWI4 | 11,988 | - | 2,396 | - | ||||||||||||
| Sales to YuanJiu5 | 72,000 | - | 72,000 | - | ||||||||||||
| Rental income from EESqaure JP6 | 2,826 | - | 5,563 | - | ||||||||||||
Represents inventory prepayment paid to Yuanjiu. On May 11, 2020, the |
| 2. | Represents payable to AATWIN due to a consulting agreement dated January 1, 2019. The monthly consulting fee is EUR 15,120 (approximately $17,000). This agreement will expire on December 31, 2021. |
| 3. | The Company borrowed funds to meet operational needs from WTL under the Loans (discussed in Note 1). The original loan amount was approximately $2.64 million (NT$80,000,000). The loan agreement, which allows the Company to borrow additional funds and which carries an interest rate of 5% per annum, will terminate on December 31, 2021. The Company had fully repaid the outstanding loan amount as of June 30, 2021. |
| 4. | Aircom Hong Kong has a lease agreement with WWI for warehouse space with a monthly rental cost of $450. The lease term on this property is from July 1, 2020 to June 30, 2022. Aircom Hong Kong has another lease agreement with WWI for its office space in Hong Kong. The original lease term was from June 28, 2018 to June 27, 2020 with a monthly rental cost of HKD 29,897 (approximately $3,847). The Company renewed this lease on June 27, 2020 and |
| 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 | ||||||||||||
| 5. | On April 18, 2021, the Company entered into a memorandum of understanding with YuanJiu pursuant to which YuanJiu will serve as the exclusive service provider to the Company in Asia with respect to the installation and service of the Company’s Aerkomm AirCinema Cube (“ACC”) product and the related software platform (“Rayfin”) on which AAC will operate. In 2021, the Company sold ground antenna equipment to YuanJiu for the cooperation purpose. |
| 6. | Aircom Japan entered into a sublease agreement with EESquare JP for the period between March 5, 2019 and March 4, 2021. Pursuant to the terms of this lease agreement, EESquare JP pays Aircom Japan a rental fee of approximately $920 per month. |
Aerkomm had short-term loans from Dmedia with an annual interest rate of 3% during the nine-month period ended September 30, 2019. The Company repaid the short-term loan in full on July 1, 2019.
NOTE 1618 - 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 issue options for an aggregate of 1,088,882 shares to Aircom’s stock option holders.
One-third of stock option shares will be vested as of the first anniversary of the time the option shares are granted or the employee’s acceptance to serve the Company, and 1/36th of the shares will be vested each month thereafter. Option price is determined by 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 common stock for 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 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).
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 18 - Stock Based Compensation – Continued
On June 23, 2017, the Board of Directors agreed to issue options 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 schedule, which 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.
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 16 - 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 September 16, 2018, the Compensation Committee approved to issue options for 4,000 shares under the Aerkomm 2017 Plan to one of the Company’s independent directors. These options shall be vested immediately.
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 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.
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 February 19, 2020, the Board of Directors approved to issue options for 2,000 shares under the Aerkomm 2017 Plan to one of the Company’s consultants for service provided in 2019. These options shall be vested immediately.
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 vestbe vested at the date of 1/12th each month for the next 12 months on the same day of September 2020.
On December 11, 2020, the Board of Directors approved the grant of options to purchase an aggregate of 284,997 shares under the Aerkomm 2017 Plan to 37 of its directors, officers, employees and consultants. Shares shall be vested in full on the earlier of the filing date of the Company’s Form 10-K for the year ended December 31, 2020 or March 31, 2021.
On January 23, 2021, 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 1/12th each month for the next 12 months at the end of each month up to December 2021. On January 23, 2021, the Board of Directors approved to issue options for 2,000 shares under the Aerkomm 2017 Plan to one of the Company’s consultants for service provided in 2020. These options vested immediately.
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.
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 18 - Stock Based Compensation – Continued
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 $1,196,386$1,859,696 and $1,394,670$913,814 for the nine-monthsix-month periods ended SeptemberJune 30, 20202021 and 2019,2020, 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
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.
The Company used the following assumptions to estimate the fair value of options granted in nine-monthsix-month period ended SeptemberJune 30, 20202021 and year ended December 31, 20192020 under the Plans as follows:
| Assumptions | ||||
| Expected term | 5-10 years | |||
| Expected volatility | % | |||
| Expected dividends | 0 | % | ||
| Risk-free interest rate | % | |||
| Forfeiture rate | 0 - 5 | % | ||
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 18 - Stock Based Compensation – Continued
Aircom 2014 Plan
Activities related to options for the Aircom 2014 Plan for the ninethree months ended SeptemberJune 30, 20202021 and the year ended December 31, 20192020 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 | |||||||||
| Number of Shares | Weighted Average Exercise Price Per Share | Weighted Average Fair Value Per Share | ||||||||||
| Options outstanding at January 1, 2020 | 932,262 | $ | 0.4081 | $ | 0.1282 | |||||||
| Granted | - | - | - | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited/Cancelled | - | - | - | |||||||||
| Options outstanding at December 31, 2020 | 932,262 | 0.4081 | 0.1282 | |||||||||
| Granted | - | - | - | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited/Cancelled | - | - | - | |||||||||
| Options outstanding at June 30, 2021 (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 toThere are no unvested stock awards under Aircom 2014 Plan for the nine-monthsix-month period ended SeptemberJune 30, 20202021 and the year ended December 31, 2019 are as follows:2020.
| Number of Shares | Weighted 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 SeptemberJune 30, 2020,2021, 932,262 shares of stock option under 2014 Plan are now exercisable. Information related to stock options outstanding and exercisable at SeptemberJune 30, 2020,2021, is as follows:
| Options Outstanding (Unaudited) | Options Exercisable (Unaudited) | |||||||||||||||||||||||||
Range of Exercise | 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 | |||||||||||||||||||||
| Options Outstanding (Unaudited) | Options Exercisable (Unaudited) | |||||||||||||||||||||||||
Range of | Shares Outstanding at 6/30/2021 | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | Shares Exercisable at 6/30/2021 | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | ||||||||||||||||||||
| $ | 0.0067 | 820,391 | 3.67 | $ | 0.0067 | 820,391 | 3.67 | $ | 0.0067 | |||||||||||||||||
| 3.3521 | 111,871 | 5.00 | 3.3521 | 111,871 | 5.00 | 3.3521 | ||||||||||||||||||||
| 932,262 | 3.83 | 0.4081 | 932,262 | 3.83 | 0.4081 | |||||||||||||||||||||
As of SeptemberJune 30, 2020,2021, there was no unrecognized stock-based compensation expense for the Aircom 2014 Plan. No option was exercised during the nine-monththree-month periods ended SeptemberJune 30, 20202021 and 2019.2020.
Aerkomm 2017 Plan
Activities related to options outstanding under Aerkomm 2017 Plan for the ninesix months ended SeptemberJune 30, 20202021 and the year ended December 31, 20192020 are as follows:
| Number of Shares | Weighted Average Exercise Price Per Share | Weighted Average Fair Value Per Share | ||||||||||
| Options outstanding at January 1, 2020 | 719,400 | $ | 14.4889 | $ | 9.2431 | |||||||
| Granted | 290,997 | 8.3880 | 6.3769 | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited/Cancelled | (18,000 | ) | 11.8067 | 7.3457 | ||||||||
| Options outstanding at December 31, 2020 | 992,397 | 12.7486 | 8.4370 | |||||||||
| Granted | 14,000 | 7.2465 | 5.5352 | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited/Cancelled | - | - | - | |||||||||
| Options outstanding at June 30, 2021 (unaudited) | 1,006,397 | 12.6721 | 8.3967 | |||||||||
| 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 1618 - Stock Based Compensation -– Continued
Activities related to unvested stock awards under Aerkomm 2017 Plan for the nine-monthsix-month period ended SeptemberJune 30, 20202021 and the year ended December 31, 20192020 are as follows:
| Number of Shares | Weighted 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 | ||||||
| Number of Shares | Weighted Per Share | |||||||
| Options unvested at January 1, 2020 | 340,128 | $ | 7.8313 | |||||
| Granted | 290,997 | 6.3769 | ||||||
| Vested | (186,209 | ) | 9.3191 | |||||
| Forfeited/Cancelled | (6,625 | ) | 4.0779 | |||||
| Options unvested at December 31, 2020 | 438,291 | 6.2904 | ||||||
| Granted | 14,000 | 5.5352 | ||||||
| Vested | (312,997 | ) | 6.7790 | |||||
| Forfeited/Cancelled | - | - | ||||||
| Options unvested at June 30, 2021 (unaudited) | 139,294 | 5.1164 | ||||||
Of the shares covered by options outstanding under the Aircom 2017 Plan as of SeptemberJune 30, 2020, 528,756 shares2021, 953,517 (unaudited) are now exercisable; 127,944117,944 (unaudited) shares will be exercisable for the twelve-month period ending SeptemberJune 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 SeptemberJune 30, 2023. Information related to stock options outstanding and exercisable at SeptemberJune 30, 2020,2021, is as follows:
| 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 | |||||||||||||||||||||
| Options Outstanding (Unaudited) | Options Exercisable (Unaudited) | |||||||||||||||||||||
| Range of Exercise Prices | Shares Outstanding at 6/30/2021 | Weighted | Weighted Average Exercise Price | Shares Exercisable at 6/30/2021 | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | ||||||||||||||||
| $ | 3.96 | 327,000 | 8.01 | $ | 3.9600 | 245,250 | 8.01 | $ | 3.9600 | |||||||||||||
| 7.00 – 9.00 | 310,997 | 9.42 | 8.2766 | 304,997 | 9.41 | 8.2968 | ||||||||||||||||
| 11.00 – 14.20 | 103,400 | 8.22 | 11.4426 | 59,856 | 8.17 | 11.9196 | ||||||||||||||||
| 20.50 – 27.50 | 141,000 | 6.41 | 24.3638 | 133,000 | 6.38 | 24.5962 | ||||||||||||||||
| 30.00 – 35.00 | 124,000 | 6.00 | 34.4012 | 124,000 | 6.00 | 34.4012 | ||||||||||||||||
| 1,006,397 | 7.99 | 12.6721 | 867,103 | 7.98 | 13.5534 | |||||||||||||||||
As of SeptemberJune 30, 2020,2021, total unrecognized stock-based compensation expense related to stock options was approximately $800,000,$334,000 (unaudited), which is expected to be recognized on a straight-line basis over a weighted average period of approximately 1.471.05 years. No option was exercised during the nine-monthsix-month period ended SeptemberJune 30, 20202021 and the year ended December 31, 2019.
2020.
23
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1719 – Commitments and Contingencies
As of SeptemberJune 30, 2020,2021, the Company’s significant commitment is summarized as follows:
| 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 retrofit solution allowing the installation of the Company’s “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 the Company’s 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 AERKOMM K++ system. The EU-China Bilateral Aviation Safety Agreement, or BASA, went into effect on September 3, 2020, giving a boost to the regions’ aviation manufacturers by simplifying the process of gaining product approvals from the European Union Aviation Safety Agency, or EASA, and the Civil Aviation Administration of China, or CAAC, while also ensuring high safety and environment standards will continue to be met. Pursuant to the terms of our Airbus agreement, Airbus agreed to 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 expected to be in the third quarter of 2021, 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
AERKOMM INC. AND SUBSIDIARIES
Notes 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.Condensed Consolidated Financial Statements
NOTE 19 – Commitments - Continued
| Airbus Interior Service Agreement: On July 24, 2020, Aerkomm Malta, entered into an agreement with Airbus Interior Services, a wholly-owned subsidiary of Airbus. This new agreement follows the agreement that Aircom signed with Airbus on November 30, 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. | ||
| Hong 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 that certain 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 its RMB 8 million payment to Yihe. The Company received notice from the Arbitration Court on October 16, 2020 of receipt of its arbitration filing and the requirement to pay the Arbitration Court RMB 190,000 in fees relating to the arbitration. These fees were paid on October 28, 2020. The Company intends to aggressively pursue this matter. As of June 30, 2021, the Company reclassified this prepayment to Other Receivable and provided an allowance for the full amount of $1,155,623. | ||
| US trademark: On December 1, 2020, the United States Patent and Trademark Office (the “USPTO”) issued a Final Office Action relating to Aerkomm Inc. indicating that the Company’s US trademark application (Serial No. 88464588) for the name “AERKOMM,” which was originally filed with the USPTO on June 7, 2019, was being rejected because of a likelihood of confusion with a similarly sounding name trademarked at, and in use from, an earlier date. The Company is appealing this USPTO Final Office Action but there can be no guarantee that the USPTO will find on appeal in favor of the Company. The Company is actively considering changing the name and may determine to do so prior to any appeal decision by the USPTO. |
Hong 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; 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 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, Aircom Taiwan, or Aircom 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 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.
Overview
We are a full-service development stage provider of 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 in seat-back displays,display, 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 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 have purchased an approximately 6.3-acre parcel of land in Taiwan where wealso expect to 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 filingdevelop a plan of usage with the local authorities and obtaining a required license and authorization for our intended land usage, we are not sure at this time when weremote connectivity system that will receive the official certificate of titlebe applicable to the land. Once that title transfer process is completed, we intend to mortgagehighspeed rail industry.
Our total sales were $35,523 and $0 for the property to financesix months ended June 30, 2021 and the cost of the first ground station construction.year ended December 31, 2020.
Business Development.Development
We are actively working with prospective airline customers to provide services to their passengers utilizing the Airbus 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 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 profilelow-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 it cannot assure you that it 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, 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,Short Term Loan
In June 2021, we receivedentered into a loan proceedsagreement in the amount of $163,200 under$1,433,177 (NT $40,000,000) with a non-related party. This loan, which carries no interest, originally matured on July 16, 2021. As of August 20, 2021, the Paycheck Protection Programloan is still outstanding we and the lender signed an amendment agreement to extend the loan repayment date to September 16, 2021.
Product Supply Agreement
On April 25, 2021, we entered into a product supply agreement with a customer. As of June 30, 2021, we received $1,611,357 from the customer towards the purchase price of this equipment.
Definitive Agreement with YuanJiu
On June 1, 2021, we entered into a definitive contractor agreement with YuanJiu pursuant to the terms of which YuanJiu will serve the exclusive service provider to us in Asia with respect to the installation and service of our Aerkomm AirCinema Cube (“PPP”ACC”). product and the related Rayfin software platform on which AAC will operate.
Taiwan Land Acquisition
On July 10, 2018, our Company and Aerkomm Taiwan entered into a real estate sale contract (the “Land Purchase Contract”) with Tsai Ming-Yin (the “Seller”) with respect to the acquisition by Aerkomm Taiwan of a parcel of land located in Taiwan. The PPP, established as partland is expected to be used to build a satellite ground station and data center. Pursuant to the terms of the Coronavirus Aid, ReliefLand Purchase Contract, and Economic Security Act (“CARES Act”), providessubsequent amendments on July 30, 2018, September 4, 2018, November 2, 2018 and January 3, 2019, we paid to the seller in installments refundable prepayments of $34,474,462 in total. As of June 30, 2021 and December 31, 2020, the estimated commission payable for loansthe land purchase in the amount of $1,387,127 was recorded to qualifying businesses for amounts upthe cost of land and the payment to 2.5 timesbe paid after the full payment 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 fullLand acquisition price no later than one year fromDecember 31, 2021. According to the date of such advance oramended Land Purchase Contract dated on November 10, 2020, the termination oftransaction may be terminated any time by both the agreement, whichever comes first.buyer and the seller and agreed by all parties if we are unable to obtain the qualified satellite license issued by Taiwan authority before July 31, 2021. As of November 7, 2020, we have drawn down $1,100,000 under this loan agreement. August 20, 2021, the license applications are still in progress.
27
Employment Agreement with Louis Giordimaina
On April 30, 2020,May 25, 2021, we filed a Registration Statement on Form S-1with the Securities and Exchange Commission, or the SEC,entered into an employment agreement with Mr. Giordimaina, pursuant to Section 5which Mr. Giordimaina was hired to serve as our Chief Executive Officer. Pursuant to the employment agreement, Mr. Giordimaina will receive an annual salary of the Securities Act€540,000, approximately $636,984. Mr. Giordimaina will also receive signing bonus of 1933, or the Securities Act,€60,000, approximately $70,776, and 150,000 shares of our stock options to register for salebe issued as soon as a new equity incentive plan has been authorized by our shareholders. A bonus will be considered, comparable to those that may be offered to other executives once a satisfactory revenue stream is established at Aerkomm as a result of upMr. Giordimaina’s efforts. Mr. Giordimaina will be granted an option to 1,951,219purchase 18,750 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 toeach calendar quarter in arrears on 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 onelast working day of the world’s largestthree-month period starting on June 1, 2021 and most successful satellite operators providing critical connectivity solutions that tackle complex communications challenges. Through this agreement, Aircomvest when issued. We will cover and Telesatpay any premium up to a maximum of €2,500, approximately $2,949, per annum for any international private health insurance which Mr. Giordimaina may have in place from time to time covering Mr. Giordimaina and his wife; we will jointly collaboraterecommend board approval for life insurance coverage for Mr. Giordimaina comparable with our other executives; we will pay Mr. Giordimaina the sum of €6,000, approximately $7,078, per year to developany private pension fund scheme/s designated by Mr. Giordimaina, we will pay Mr. Giordimaina €18,000, approximately $21,233, per annum as an allowance for a test program for the Telesat low-Earth-orbit (LEO) Network, Telesat’s network of low-earth orbit satellites for aircraft connectivity,leased car and fuel expenses, 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 collaboratebe paid 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 Servicesequal monthly instalments, we will provide and certify, in accordanceMr. Giordimaina 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 supportmobile telephone 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,his business use, as well as on-site technical support ata lap top computer and an iPad, and we will reimburse Mr. Giordimaina for all actual, necessary and reasonable expenses incurred by him in the Maintenance Repair Organization (MRO) basecourse of his performance of services for the aircraft retrofit.
On October 15, 2018, Aircom Telecom LLC,Company. The employment agreement contains customary confidentiality provisions and covenants prohibiting Mr. Giordimaina from competing with us during his employment, and from soliciting any of our employees or Aircom Telecom,consultants for a Taiwanese limited liability company and a wholly owned subsidiaryperiod of Aircom, entered into a product purchase agreement, orone year after his employment end. If Mr. Giordimaina’s employment is terminated by us without cause, he shall be entitled to one-half of his full salary for 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. We refer to this new agreement as the November 30th PPA and, together with the October 15th PPA, the PPA. Under the termsremainder of the PPA, Republic Engineers committed to the purchaseinitial three-year term of a minimum of 10 shipsetshis agreement.
Impact 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 submittedCOVID-19 Pandemic
The COVID-19 pandemic is having 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 workparticularly adverse impact on the ordered shipsets. On July 7, 2020, Republic Engineersairline industry. The outbreak in China and Mr. Raja filedthroughout the world since December 2019 has led to a complaint against Aerkomm, Aircom and Aircom Telecomprecipitous decrease in the Superior Courtnumber of the State of Californiadaily departures and arrivals for the County of Almeda, or the Court, seeking declaratory relief onlydomestic 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.international flights.
Principal Factors Affecting Financial Performance
We believe that our operating and business performance iswill be 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 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; |
| ● | 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 AprilNovember - MayDecember 2020, published on May 20, 2020,January 21, 2021, the following key points were highlighted:
| ● | The | |
| ● | Initial Q4 2020 earnings announcements indicate that airlines continued to burn cash as the recovery in | |
| ● | The global airline share price index rose in December 2020 but still lagged wider equity markets as the resurgence of the | |
| ● | Looking forward, the widespread |
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 progressfuture of the COVID-19 pandemic is so unpredictable, the future of airline and air traffic recovery is extremely unpredictable as well.
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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 SeptemberJune 30, 20202021 and 20192020
The following table sets forth key components of our results of operations during the three-month periods ended SeptemberJune 30, 20202021 and 2019.2020.
| Three Months Ended June 30, | Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Sales | $ | 72,000 | $ | - | $ | 72,000 | 100.0 | % | ||||||||
| Cost of sales | 43,878 | - | 43,878 | 100.0 | % | |||||||||||
| Operating expenses | 1,996,515 | 2,686,549 | (690,034 | ) | (25.7 | )% | ||||||||||
| Loss from operations | (1,968,393 | ) | (2,686,549 | ) | 718,156 | (26.7 | )% | |||||||||
| Net non-operating income (expense) | 432,466 | 565,354 | (132,888 | ) | (23.5 | )% | ||||||||||
| Loss before income taxes | (1,535,927 | ) | (2,121,195 | ) | 585,268 | (27.6 | )% | |||||||||
| Income tax expense | (26 | ) | 11 | (37 | ) | (336.4 | )% | |||||||||
| Net Loss | (1,535,901 | ) | (2,121,206 | ) | 585,305 | (27.6 | )% | |||||||||
| Other comprehensive income (loss) | (524,181 | ) | (571,592 | ) | 47,411 | (8.3 | )% | |||||||||
| Total comprehensive loss | $ | (2,060,082 | ) | $ | (2,692,798 | ) | $ | 632,716 | (23.5 | % | ||||||
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 $72,000 and $0 for each of the three-month periods ended SeptemberJune 30, 2021 and 2020, and 2019 as we are still developing our core business in in-flight entertainment and connectivity and thererespectively. Our total revenue 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$72,000 for the three-month period ended SeptemberJune 30, 2020, from $2,733,3502021 due to our sale of ground antenna units to one of our related parties. Our total revenue of $0 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 $1,599,864 for the nine-month periods ended September 30, 2020 and 2019. Our total revenue was $0 for the nine-month period ended SeptemberJune 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 $1,599,864 for the nine-month period ended September 30, 2019 was a non-recurring sale 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 as we are still developing our core business in in-flight entertainment and connectivity.
Cost of sales. Our cost of sales was $0$43,878 and $1,587,222$0 for the nine-monththree-month periods ended SeptemberJune 30, 2021 and 2020, and 2019.respectively. The cost of sales for the nine-monththree-month period ended SeptemberJune 30, 2021 was $43,878 was the costs of our sale of ground antenna units to one of our related parties. The cost of sales for the three-month period ended June 30, 2020 was $0 as we did not have any sales during the periods. 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.
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 $156,838$690,034, or 25.7%, to $6,199,323$1,996,515 for the nine-monththree-month period ended SeptemberJune 30, 2020,2021, from $6,365,161$2,686,549 for the nine-monththree-month period ended SeptemberJune 30, 2019. Such2020. This decrease was mainly due to thea decrease in R&D expense, non-cash stock-based compensation expense, legal expense and stock transfer and filing fee of $416,230, $198,284, $172,247 and $79,223, respectively, which was offset by the increase in consulting fees as the result of warrant re-valuation, non-cash stock-based compensation expense, insurance expense, outside services, travel expense, payroll and related expense and accounting and audit feesauditing related expense and insurance expense of $187,707, $164,191, $137,044, $97,145, $74,274$535,152, $269,657, $93,133 and $60,767,$61,760, respectively, which was offset by the increase in payroll and payroll related expense, legal expense, insurance expense and amortization expense of $93,032, $76,199, $40,605 and $38,872, respectively. The increase in insurance expense was mainly related to the amortization of D&O insurance during the period.
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Net non-operating expense. We had $655,065$432,466 in net non-operating expenseincome for the nine-monththree-month period ended SeptemberJune 30, 2020,2021, as compared to net non-operating expense of $533,459$565,354 for the nine-monththree-month period ended SeptemberJune 30, 2019.2020. Net non-operating income in the three-month period ended June 30, 2021 represents a gain of $512,418 in foreign exchange translation, a net interest expense of $29,791, financing cost of $48,094 from the amortization of bond issuing costs and unrealized loss in investment of $18,741. The net non-operating expense in the nine-monththree-month period ended SeptemberJune 30, 2020 representswas mainly due to a loss from allowance for other receivable, as explained under the Legal Proceedings section below, net interest expense andgain on foreign exchange translation of $536,461, unrealized lossgain from the transactions of our liquidity contract of $1,155,623, $31,690$20,514 and $68,912, respectively, which was offset by a gain on foreign exchange translation of $551,591 and Covid-19 subsidy that Aircom Japan received from the 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 translationamount of $528,734 and interest expense of $4,741.$18,482.
Loss before income taxes. Our loss before income taxes decreased by $22,590$585,268, or 27.6%, to $6,854,388$1,535,927 for the nine-monththree-month period ended SeptemberJune 30, 2020,2021, from a loss of $6,876,978$2,121,195 for the nine-monththree-month period ended SeptemberJune 30, 2019,2020, as a result of the factors described above.
Income tax expense.Income tax expense was $3,275 and $3,235 for the nine-month period ended September 30, 2020 and 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, our total comprehensive loss decreased by $632,716, or 23.5%, to $2,060,082 for the three-month period ended June 30, 2021, from $2,692,798 for the three-month period ended June 30, 2020.
Comparison of Six Months Ended June 30, 2021 and 2020
The following table sets forth key components of our results of operations during the three-month periods ended June 30, 2021 and 2020.
| Six Months Ended June 30, | Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Sales | $ | 72,000 | $ | - | $ | 72,000 | 100.0 | % | ||||||||
| Cost of sales | 43,878 | - | 43,878 | 100.0 | % | |||||||||||
| Operating expenses | 5,167,514 | 4,642,594 | 524,920 | 11.3 | % | |||||||||||
| Loss from operations | (5,139,392 | ) | (4,642,594 | ) | (496,798 | ) | 10.7 | % | ||||||||
| Net non-operating income (expense) | (621,366 | ) | 158,157 | (779,523 | ) | (492.9 | )% | |||||||||
| Loss before income taxes | (5,760,758 | ) | (4,484,437 | ) | (1,276,321 | ) | 28.5 | % | ||||||||
| Income tax expense | 3,269 | 3,263 | 6 | 0.2 | % | |||||||||||
| Net Loss | (5,764,027 | ) | (4,487,700 | ) | (1,276,327 | ) | 28.4 | % | ||||||||
| Other comprehensive income (loss) | (130,414 | ) | (227,817 | ) | 97,403 | (42.8 | )% | |||||||||
| Total comprehensive loss | $ | (5,894,441 | ) | $ | (4,715,517 | ) | $ | (1,178,924 | ) | 25.0 | % | |||||
Revenue.Our total revenue was $72,000 and $0 for the six-month periods ended June 30, 2021 and 2020, respectively. Our total revenue was $72,000 for the six-month period ended June 30, 2021 because due to our sale of ground antenna units to one of our related parties. Our total revenue was $0 for the six-month period ended June 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.
Cost of sales. Our cost of sales was $43,878 and $0 for the six-month periods ended June 30, 2021 and 2020, respectively. The cost of sales for the six-month period ended June 30, 2021 was $43,878 which was the cost of our sale of ground antenna units to one of our related parties. The cost of sales for the six-month period ended June 30, 2020 was $0 as we did not have any sales during that period.
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 $524,920, or 11.3%, to $5,167,514 for the six-month period ended June 30, 2021, from $4,642,594 for the six-month period ended June 30, 2020. This increase was mainly due to the increase in non-cash stock-based compensation expense, payroll and payroll related expense, accounting and audit fees and insurance expense of $945,881, $242,871, $152,810 and $116,424, respectively, which was offset by the decrease in consulting fees as the result of warrant re-valuation and travel expense of $861,056 and $106,772. The increase in insurance expense was mainly related to the amortization of D&O insurance during the period.
Net non-operating expense. We had $621,366 in net non-operating expense for the six-month period ended June 30, 2021, as compared to net non-operating income of $158,157 for the six-month period ended June 30, 2020. Net non-operating expense in the six-month period ended June 30, 2021 represents an unrealized loss in investment of $643,480, amortization of financing cost of $95,660 from bond issuing, net interest expense of $53,810, gain in foreign exchange translation of $141,914 and government subsidies of $29,669 from the Japanese and Hong Kong governments. Net non-operating income in the six-month period ended June 30, 2020 represents gain on foreign exchange translation of $215,760 and a Covid-19 subsidy Aircom Japan received from the Japanese government in the amount of $18,482, which was offset by the unrealized loss infrom the transactions of our liquidity contract of $60,170.
Loss before income taxes. Our loss before income taxes increased by $1,276,321, or 28.5%, to $5,760,758 for the six-month period ended June 30, 2021, from a loss of $4,484,437 for the six-month period ended June 30, 2020, as a result of the factors described above.
Income tax expense. Income tax expense was $3,269 and $3,263 for the six-month period ended June 30, 2021 and 2020, respectively, mainly due to a California franchise tax and foreign currency translation adjustmentsubsidiary’s income tax expenses.
Total comprehensive loss. As a result of $595,097,the cumulative effect of the factors described above, our total comprehensive loss increased by $1,097,078$1,178,924, or 25.0%, to $7,452,760$5,894,441 for the nine-monthsix-month period ended SeptemberJune 30, 2020,2021, from $6,355,682$4,715,517 for the nine-monthsix-month period ended SeptemberJune 30, 2019.2020.
Liquidity and Capital Resources
As of SeptemberJune 30, 2020,2021, we had cash and cash equivalents of $115,534.$3,250,487. To date, we have financed our operations primarily through cash proceeds from financing activities, including through our 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, | ||||||||
| 2020 | 2019 | |||||||
| Net cash provided by (used for) operating activities | $ | (1,516,414 | ) | $ | (8,035,353 | ) | ||
| Net cash used for investing activity | (213,074 | ) | (630,917 | ) | ||||
| Net cash provided by financing activity | 1,463,290 | 10,861,453 | ||||||
| Net increase (decrease) in cash and cash equivalents | (266,198 | ) | 2,195,183 | |||||
| Cash at beginning of year | 976,829 | 88,309 | ||||||
| Foreign currency translation effect on cash | (595,097 | ) | 524,531 | |||||
| Cash at end of the periods | $ | 115,534 | $ | 2,808,023 | ||||
Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash used for operating activities | $ | (1,418,381 | ) | $ | (1,523,935 | ) | ||
| Net cash used for investing activity | (5,078 | ) | (186,680 | ) | ||||
| Net cash provided by financing activity | 1,009,769 | 1,375,917 | ||||||
| Net decrease in cash and cash equivalents | (413,690 | ) | (334,698 | ) | ||||
| Cash at beginning of year | 3,794,591 | 976,829 | ||||||
| Foreign currency translation effect on cash | (130,414 | ) | (227,817 | ) | ||||
| Cash at end of the periods | $ | 3,250,487 | $ | 414,314 | ||||
Operating Activities
Net cash used for operating activities was $1,516,414$1,418,381 for the ninesix months ended SeptemberJune 30, 2020,2021, as compared to $8,030,353$1,523,935 for the ninesix months ended SeptemberJune 30, 2019.2020. In addition to the net loss of $6,857,663,$5,764,027, the increase in net cash used for operating activities during the nine-monthsix-month period ended SeptemberJune 30, 20202021 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$1,575,436 and 1,292,279,$355,764, respectively, andoffset by the increase in accounts payable, accrued expense and other current liabilities and operating lease liabilityprepayment from a customer of $961,610, $2,143,258$1,908,033 and $179,372,$1,611,357, respectively.In addition to the net loss of $6,880,213,$4,487,700, the increase in net cash used for operating activities during the nine-monthsix-month period ended SeptemberJune 30, 20192020 was mainly due to an increase in inventory and prepaid expenses of $1,485,350 and $985,849, respectively, and decrease in accounts payable, accrued expenses and other current liabilities and operating lease liability of $840,092, $1,650,867 and $41,069, respectively,$1,811,443, which was offset by thea decrease in accounts receivable of $1,095,061.$451,130 and increase in accounts payable and accrued expense and other current liabilities of $961,610 and $1,280,837, respectively.
Investing Activities
Net cash used forby investing activities for the ninesix months ended SeptemberJune 30, 2021 was $5,078 as compared to net cash used by investing activities of $186,680 for the six months ended June 30, 2020. The net cash provided by investing activities for the six months ended June 30, 2020 was $213,074 as comparedmainly due to $630,917 for the nine months ended September 30, 2019.purchase of property and equipment of $3,521. The net cash used for investing activities for the ninesix months ended SeptemberJune 30, 2020 was mainly for the purchase of trading securities of $184,150$157,756 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.
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Financing Activities
Net cash provided by financing activities for the ninesix months ended SeptemberJune 30, 2021 and 2020 was $1,009,769 and 2019 was $1,463,290 and $10,856,453,$1,375,917 respectively. Net cash provided by financing activities for the ninesix months ended SeptemberJune 30, 2021 was mainly attributable to proceeds from short-term loan of $1,017,693. Net cash provided by financing activities for the six months ended June 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,$1,221,211.
On May 9, 2019, 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.
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, 2020, the Company incurred a comprehensive loss of $7,452,760 and had negative working capital of $1,090,180 as of September 30, 2020. Currently, we have taken measures that management believes will improve our financial position by financing activities, including through our 2018/2019 public offering, short-term borrowings and 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
Twotwo of our current shareholders, (the “Lenders”)whom we refer to as the Lenders, each committed to provide to the Companyus with a $10 million bridge loan, (together,or together, the “Loans”)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 thea parcel of our Taiwan land (the “Land”)parcel which we purchasedhave recently purchased. The Taiwan land parcel consists of approximately 6.36 acres of undeveloped land located at the Taishui Grottoes in the Xinyi District of Keelung City, Taiwan. Aerkomm Taiwan contracted to purchase the Taiwan land parcel for NT$1,056,297,507, or US$34,474,462, and as of July 3, 2019 we completed payment of the purchase price for the Taiwan land parcel in full. We are now waiting for title to the Taiwan land parcel to be transferred to us pending the completion of a local governmental land office re-titling process. The Loans will be secured by the Taiwan land parcel 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 Taiwan land parcel is fully transferred to and vested in our subsidiary, Aerkomm Taiwan. The Loans will 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 will be due and payable upon the earlier of (1) the date of our obtaining a mortgage loan secured by the Taiwan land parcel 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 LandTaiwan land parcel is vested intransferred to 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 down outstanding payables to our vendors. We, of course, cannot provide any assurances that we will be able to obtain a mortgage on the Taiwan land parcel once the acquisition is completed. As of November 7, 2002,the date of this annual report, we have borrowed approximately $390,328 (NTD 11,300,000) from onenot drawn down any portion of the Lenders underLoans.
On July 10, 2018, in conjunction with our agreement to acquire the Loans.
Paycheck Protection Program Loan
On April 16, 2020,Taiwan land parcel, we received loan proceeds in the amountentered into a binding letter of $163,200 under the Paycheck Protection Program (“PPP”commitment with Metro Investment Group Limited, or MIGL, pursuant to which we agreed to pay MIGL an agent commission of four percent (4%). 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 timesfull purchase price of the average monthly payroll expensesTaiwan land parcel, equivalent to approximately US$1,387,127, for MIGL’s services provided with respect to the acquisition. Under the terms of the qualifying business. Accordinginitial with MIGL, we agreed 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 datepay this commission no later than 90 days following payment in full of the loan. If borrowers do not apply for forgiveness within 10 monthsTaiwan land parcel purchase price. On May 9, 2019, we amended the binding letter of commitment with MIGL to extend the payment to be paid after the lastfull payment of the Land acquisition price until no later than December 31, 2020. 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 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 becommission was due and payable in fullupon 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 one year fromDecember 31, 2021.
On December 3, 2020, the dateCompany closed a private placement offering (the “Bond Offering”) consisting of such advance orUS$10,000,000 in aggregate principal amount of its Credit Enhanced Zero Coupon Convertible Bond due 2025 (the “Credit Enhanced Bonds”) and US$200,000 in aggregate principal amount of its 7.5% convertible bonds due 2025 (the “Coupon Bonds,” and together with the terminationCredited Enhanced Bonds, the “Bonds”).
Payments of principal, premium, interest in respect of the agreement, whichever comes first. AsCredit Enhanced Bonds are protected by a bank guarantee denominated in U.S. dollars and issued by Bank of Panhsin Co., Ltd., based in Taiwan. Unless previously redeemed, converted or repurchased and canceled, the Credit Enhanced Bonds will be redeemed on December 2, 2025 at 105.11% of their principal amount and the Coupon Bonds will be redeemed on December 2, 2025 at 100% of their principal amount plus any accrued and unpaid interest. The Coupon Bonds will bear interest from and including December 2, 2020 at the rate of 7.5% per annum. Interest on the Coupon Bonds is payable semi-annually in arrears on June 1 and December 1 each year, commencing on June 1, 2021. Unless previously redeemed, converted or repurchased and cancelled, the Bonds may be converted at any time on or after December 3, 2020 up to November 6,20, 2025 into shares of Common Stock of the Company with a par value US$0.001 each (such shares of Common Stock, the “Conversion Shares”). The initial conversion price for the Bonds is US$13.30 per Conversion Share and is subject to adjustment in specified circumstances. Please refer to our Current Report on Form 8-K filed with SEC on December 4, 2020.
On December 31, 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 theentered into an underwriting agreement (the “Underwriting Agreement”) with Invest Securities Act to register forSA (“Invest Securities”) in connection with our public offering (the “2020/2021 Offering”), issuance and sale of up to 1,951,219 shares (approximately €40 million or $47,276,000) of our common stock on a best-efforts basis at a per sharethe public offering price of €20.50 (approximately $24.23)$25.07) per share, less underwriting discounts, for up to a maximum of €40 million (approximately $48.9 million). On July 29, October 21 and November 5,December 31, 2020, we filed amendmentscompleted our first closing of the 2020/2021 Offering and issued an aggregate of 96,160 shares of our common stock for gross proceeds of €1.97 million (approximately $2.41 million), or net proceeds of €1.4 million (approximately $1.7 million). The Underwriting Agreement with Invest Securities has expired and we are currently exploring whether to attempt to extend the Registration StatementUnderwriting Agreement with Invest Securities or engage a different investment banker to respond to certain SEC comments. The Form S-1 was declared effective on November 6, 2020.assist us in proceeding with the 2020/2021 Offering. We cannotcan provide any assurance,no assurances, however, that we will be successful in these efforts.
We have not generated significant revenues, excluding non-recurring revenues from affiliates in the second quarter of fiscal 2021, and we will incur additional expenses as a result of being a public reporting company. For the six-month period ended June 30, 2021, we incurred a comprehensive loss of $5,868,162 and had a negative working capital of $3,169,689 as of June 30, 2021. Currently, we have taken measures, as discussed above, that management believes will improve our financial position by financing activities, including through our ongoing public offering, short-term and long-term borrowings and fund raisings. However, there is no assurance that we will be successful in achieving our financial and business objectives. There are a number of factors that could potentially arise that could result in shortfalls in achieving the objectives in our business plan, such as general, worldwide economic conditions, the competitive pricing in the connectivity industry, the ongoing impact of the COVID-19 pandemic, our operating results continuing to deteriorate and our bank and shareholders not being able to raise any funds under the registered offering.provide continued financial support.
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 ninesix months ended SeptemberJune 30, 2021 and 2020 were $5,078 and 2019 were $213,074 and $630,917,$186,680, respectively.
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 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, 20202021 and estimate that capital expenditures will range from $6$10 million to $40$50 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 balanceoff-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:
Revenue RecognitionConcentrations of Credit Risk.. Financial instruments that potentially subject to significant concentrations of credit risk consist primarily of cash in banks. As of December 31, 2020 and 2019, the total balance of cash in bank exceeding the amount insured by the Federal Deposit Insurance Corporation (FDIC) for the Company was approximately $0 and $0, respectively. The balance of cash deposited in foreign financial institutions exceeding the amount insured by local insurance is approximately $3,107,000 and $3,514,000 as of June 30, 2021 and December 31, 2020, respectively. We recognize revenue when performance obligations identified under the termsperform ongoing credit evaluation of contracts with ourits customers are satisfied, which generally occurs upon the transfer of control in accordance with the contractual terms and conditionsrequires no collateral. An allowance for doubtful accounts is provided based on a review of the sale. Our major revenue for the three-month period ended March 31, 2020 was the developmentcollectability of a small cell server terminal which will be utilized in the construction of a satellite-based ground communication system networks.accounts receivable. We also had minor revenue from providing installation and testing services of a satellite-based ground connectivity 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 asdetermine the amount of consideration we expect to receiveallowance for doubtful accounts by examining its historical collection experience and current trends in exchange for transferring goods, which includesthe credit quality of its customers as well as its internal credit policies. Actual credit losses may differ from our estimates.
Short-term investment. 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 for variable consideration.determined by the Company. Changes in fair value are recorded in current income.
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.
ResearchLong-term Investment. Long-term investment includes holdings of marketable equity securities with less than 20% of ownership of the investee. Marketable equity securities include equity securities which are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Changes in fair value from subsequent remeasurement are reported under non-operating income in the statement of income. The accumulated gains or losses are recognized in earnings when the securities are derecognized from the balance sheet. The cost of the securities sold is based on the weighted average cost method. Stock dividend from the investee is included to recalculate the cost basis of the investment based on the total number of shares. Investments are considered to be impaired when a decline in fair value is judged to be other than temporary. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and Development Costs. Researchextent to which the fair value is less than cost, as well as its intent and development costs are chargedability to operating expenses as incurred. Forhold the nine-month periods ended September 30, 2020 and 2019, we incurred approximately $0 (unaudited) and $416,231 (unaudited) of research and development costs, respectively.investment, for recording an impairment loss.
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 three-monthsix-month periods ended March 31, 2020June 30, 2021 and 2019.2020.
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 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 by discount rates. The 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 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 recognized on a straight-line basis over the lease term. Interest and amortization expenses are recognized for finance leases on a straight-line basis over the lease term. For the 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. We adopted ASU 2016-02 effective January 1, 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.
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 ourthe Company’s cash and restricted cash, accounts receivable, other receivable,payable, short-term loans, accounts payable,loan and other payable approximated their fair value due to the short-term nature of these financial instruments. The Company’s short-term investment and long-term investment are classified within Level 1 of the fair value hierarchy on June 30, 2021. The Company’s long-term bonds payable, 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 and leases, respectively. There were no outstanding derivative financial instruments as of June 30, 2021.
Revenue Recognition. The Company adopted the provisions of ASU 2014-09 Revenue from Contract with Customers (Topic 606) and the principal versus agent guidance within the new revenue standard. As such, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenue when (or as) the Company satisfies a performance obligation.
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. It is not subject to income tax examinations by US federal, state and local tax authorities for years before 2016. 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. 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.
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.
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.
Subsequent Events. The Company has evaluated events and transactions after the reported period up to August [*], 2021, the date on which these consolidated financial statements were available to be issued. All subsequent events requiring recognition as of June 30, 2021 have been included in these consolidated financial statements.
Recent Accounting Pronouncements
Simplifying the Accounting for Debt with Conversion and Other Options.
In June 2020, the FASB issued ASU 2020-06 to simplify the accounting in ASC 470, Debt with Conversion and Other Options and ASC 815, Contracts in Equity’s Own Entity. The guidance simplifies the current guidance for convertible instruments and the derivatives scope exception for contracts in an entity’s own equity. Additionally, the amendments affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2022. Early adoption is permitted. The amendments in this update must be applied on either full retrospective basis or modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements and related disclosures, as well as the timing of adoption.
Simplifying the Accounting for Income Taxes
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 the financial statements and related disclosures, as well as the timing of adoption.
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” (“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 foruntil fiscal yearsyear beginning after December 15, 2019, including interim periods within those fiscal years. We are2022. The Company is currently evaluating the impact of adopting ASU 2016-13 on ourits consolidated financial statements.
Intangibles. Earnings Per Share
In January 2017,April 2021, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill2021-04, which included Topic 260 “Earnings Per Share”. This guidance clarifies and Other” (Topic 350): Simplifying the Testreduces diversity in an issuer’s accounting for Goodwill Impairment, which goodwill shall be tested at least annually for impairment atmodifications or exchanges of freestanding equity-classified written call options due to a levellack 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,explicit guidance in the FASB issuedCodification. The 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 adoption2021-04 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 are2021. Early adoption is permitted. The Company is currently evaluating the timing of adoption and the impact of adopting ASU 2018-022021-04 on ourits 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 SeptemberJune 30, 2020.2021.
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 Annual Report on Form 10-K for the fiscal year ended December 31, 2019,2020, filed with the SEC on March 20, 2020,24, 2021, and further referenced below, which we are still in the process of remediating as of SeptemberJune 30, 2020,2021, 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 SeptemberJune 30, 2020,2021, 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 SeptemberJune 30, 20202021 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 SeptemberJune 30, 20202021 to the legal proceedings previously disclosed in Item 3 “Legal Proceedings” of our Annual Report on Form 10-K filed on March 30, 2020.24, 2021.
ITEM 1A. RISK FACTORS.
For information regarding additional risk factors, relating to us, please refer to our Amendment No. 3 to our Registration StatementAnnual Report on Form S-110-K for the year ended December 31, 2020 filed with the SEC on November 5, 2020.March 24, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any equity securities during the quarter ended SeptemberJune 30, 20202021 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.
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 15, 2020, the Company signed a second product purchase agreement with Yuan Jiu for an additional 100 sets of the AirCinema Cube for the same purchase amount and paid a 10% initial deposit ($180,710) on this agreement as well.
Other than disclosed above, weWe have no information to disclose that was required to be in a report on Form 8-K during the quarter ended SeptemberJune 30, 20202021 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
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
| * | Filed herewith |
| † | Executive Compensation Plan or Agreement |
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: | AERKOMM INC. | |
| /s/ Louis Giordimaina | ||
| Name: | 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) |
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