UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended:
or
For the transition period from ____________ to _____________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices, Zip Code)
(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 | ||
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | 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
As of October 23, 2023, there were
AERKOMM INC.
Quarterly Report on Form 10-Q
Period Ended March 31, 2023
TABLE OF CONTENTS
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AERKOMM INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1
AERKOMM INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Short-term investment | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Long-term Investment | ||||||||
| Property and Equipment | ||||||||
| Cost | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Prepayment for land | ||||||||
| Prepayment for equipment | ||||||||
| Net Property and Equipment | ||||||||
| Other Assets | ||||||||
| Prepaid expenses – non-current | ||||||||
| Restricted cash | ||||||||
| Intangible asset, net | ||||||||
| Goodwill | ||||||||
| Right-of-use assets, net | ||||||||
| Deposits | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Short-term loans | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Long-term loan - current | ||||||||
| Lease liability – current | ||||||||
| Total Current Liabilities | ||||||||
| Long-term Liabilities | ||||||||
| Long-term bonds payable | ||||||||
| Convertible long-term note payable | ||||||||
| Long-term loan – non-current | ||||||||
| Contract liability – non-current | ||||||||
| Lease liability – non-current | ||||||||
| Restricted stock deposit liability | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficits | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
AERKOMM INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Net sales | $ | $ | ||||||
| Service income – related party | ||||||||
| Total Revenue | ||||||||
| Cost of sales | ||||||||
Gross Profit | ||||||||
| Operating expenses | ||||||||
| Loss from Operations | ( | ) | ( | ) | ||||
| Non-operating loss | ||||||||
| Foreign currency exchange gain (loss) | ( | ) | ||||||
| Unrealized investment loss | ( | ) | ( | ) | ||||
| Bond issuance cost | ( | ) | ( | ) | ||||
| Other gain (loss), net | ( | ) | ||||||
| Net Non-Operating Loss | ( | ) | ( | ) | ||||
| Loss Before Income Taxes | ( | ) | ( | ) | ||||
| Income Tax Expense | ||||||||
| Net Loss | ( | ) | ( | ) | ||||
| Other Comprehensive Income | ||||||||
| Change in foreign currency translation adjustments | ||||||||
| Total Comprehensive Loss | $ | ( | ) | $ | ( | ) | ||
| Net Loss Per Common Share: | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted Average Shares Outstanding - Basic | ||||||||
| Weighted Average Shares Outstanding - Diluted | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
AERKOMM INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the three months ended March 31, 2022
| Common Stock | Additional Paid in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficits | Income (Loss) | Equity | |||||||||||||||||||
| Balance as of January 1, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||
| Other comprehensive income | - | |||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
For the three months ended March 31, 2023
| Common Stock | Additional Paid in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficits | Income (Loss) | Equity | |||||||||||||||||||
| Balance as of January 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||
| Other comprehensive income | - | |||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
AERKOMM INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Unrealized investment loss | ||||||||
| Amortization of bonds issuance costs | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Deposits | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | - | |||||
| Accrued expenses and other current liabilities | ||||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net Cash Used for Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Proceeds from disposal of short-term investment | ||||||||
| Proceeds from disposal of long-term investment | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net Cash (Used) Provided by Investing Activities | ( | ) | ||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from short-term loan | ||||||||
| Repayment of long-term loan | ( | ) | ( | ) | ||||
| Payment on finance lease liability | ( | ) | ( | ) | ||||
| Net Cash Provided by Financing Activities | ||||||||
| Net Decrease in Cash and Restricted Cash | ( | ) | ( | ) | ||||
| Cash and Restricted Cash, Beginning of Period | ||||||||
| Foreign Currency Translation Effect on Cash | ( | ) | ||||||
| Cash and Restricted Cash, End of Period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Cash and Restricted Cash: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited 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. Aerkomm’s common stock is quoted for trading on the OTC Markets Group Inc. OTCQX Market under the symbol “AKOM.” On July 17, 2019, the French Autorité des Marchés Financiers (the “AMF”) granted visa number 19-372 on the prospectus relating to the admission of Aerkomm’s common stock to list and trade on the Professional Segment of the regulated market of Euronext Paris (“Euronext Paris”). Aerkomm’s common stock began trading on Euronext Paris on July 23, 2019 under the symbol “AKOM” and is denominated in Euros on Euronext Paris. This listing did not alter Aerkomm’s share count, capital structure, or current common stock listing on the OTCQX, where it is also traded (in US dollars) under the symbol “AKOM.”
On December 28, 2016, Aircom Pacific
Inc. (“Aircom”) purchased approximately
On February 13, 2017, Aerkomm entered
into a share exchange agreement (“Exchange Agreement”) with Aircom and its shareholders, pursuant to which Aerkomm acquired
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. On November 8, 2021, Aircom Seychelles changed its name to Aerkomm SY Ltd. (“Aerkomm SY”) and the ownership was transferred from Aircom to Aerkomm. Aerkomm SY was formed to facilitate Aircom’s global corporate structure for both business operations and tax planning. Presently, Aerkomm SY has no operations. Aerkomm 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. On November 8, 2021, Aircom HK changed its name to Aerkomm Hong Kong Limited (“Aerkomm HK”) and its ownership was transferred from Aircom to Aerkomm. The purpose of Aerkomm 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. Aerkomm HK is also actively seeking strategic partnerships whom Aerkomm may leverage in order to provide more and better services to its customers. Aerkomm also plans to provide local supports to Hong Kong-based airlines via Aerkomm 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. On November 9, 2021, Aircom Japan changed its name to Aerkomm Japan, Inc. (“Aerkomm Japan”) and its ownership was transferred from Aircom to Aerkomm. The purpose of Aerkomm. The purpose of Aerkomm Japan is to conduct business development and operations located within Japan. Aerkomm Japan is in the process of applying for, and will be the holder of, Satellite Communication Blanket License in Japan, which is necessary for Aerkomm to provide services within Japan. Aerkomm 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 then 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 December 29, 2022, Aerkomm and dMobile System Co., Ltd. (the “Buyer”)
entered into an equity sales contract pursuant to the terms of which Aerkomm sold a majority interest of
On November 15, 2018, Aircom Taiwan
acquired a wholly owned subsidiary, Beijing Yatai Communication Co., Ltd. (“Beijing Yatai”), a corporation formed under the
laws of China. The purpose of 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. 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 Beijing Yatai and teleports located in China. On November 6, 2020,
6
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - Organization - Continued
On October 31, 2019, Aerkomm SY 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 Aerkomm’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:
On September 04, 2022, Aerkomm acquired a wholly owned subsidiary, MEPA Labs Inc. (MEPA), a California corporation. The purpose of the acquisition is to extend business development and operations related to the satellite products.
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, 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
public offerings, private placements, short-term borrowings and equity contributions. Two of the Company’s current shareholders
(the “Lenders”) each committed to provide to the Company a $
With the $
The Company’s common stock is quoted for trading on the OTC Markets Group Inc. OTCQX Market under the symbol “AKOM.” On July 17, 2019, the French Autorité des Marchés Financiers (the “AMF”) granted visa number 19-372 on the prospectus relating to the admission of the Company’s common stock to list and trade on the Professional Segment of the regulated market of Euronext Paris (“Euronext Paris”). The Company’s common stock began trading on Euronext Paris on July 23, 2019 under the symbol “AKOM” and is denominated in Euros on Euronext Paris. This listing did not alter the Company’s share count, capital structure, or current common stock listing on the OTCQX, the Company’s primary trading market for its common stock.
7
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheet as of March 31, 2023, and the condensed consolidated statements of operations and comprehensive loss and cash flows for the three months ended March 31, 2023 and 2022 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 March 31, 2023 and the results of operations and cash flows for the three months ended March 31, 2023 and 2022. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to these three months periods are unaudited. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for any other interim period or other future year.
Principle of Consolidation
Aerkomm consolidates the accounts of its subsidiaries, MEPA, Aircom, Aircom Seychelles, Aircom HK, Aircom Japan, Aircom Taiwan, Aerkomm Taiwan, Beijing Yatai and Aerkomm Malta. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications of Prior Year Presentation
Certain prior year balance sheet, and cash flow statement amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
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 March 31, 2023 and December
31, 2022, the total balance of cash in bank exceeding the amount insured by the Federal Deposit Insurance Corporation (FDIC) for the Company
was approximately $
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.
8
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
Investment in Equity Securities
According to FASB issued Accounting Standards Updates 2016-01 (ASU 2016-01), it requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value being recorded in current period earnings, impacting the net income. For the investments in equity securities without readily determinable fair values, the investments may be recorded at cost, subject to impairment, and adjusted through net income for observable price changes.
Holdings of marketable equity securities with no significant influence over the investee are accounted for using cost method. Marketable equity security costs are initially recognized at fair value plus transaction costs which are directly attributable to the acquisition. 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.
Accounts receivable
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 write down cost 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 –
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 years ended December 31, 2022 and 2021.
9
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited 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.
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
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.
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 and restricted cash, short-term investment, accounts receivable, inventory, prepaid expenses, other receivable, accounts payable, short-term loan, accrued expenses, and other payable approximated their fair value due to the short-term nature of these financial instruments. The Company’s long-term bonds payable, long-term notes 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 March 31, 2023 and December 31, 2022.
10
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited 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 year ended December 31, 2021 composed of the sales of ground antenna units to a related party and sales of network hardware to a non-related party. 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. The Company adopted the provisions of ASU 2014-09 Revenue from Contracts with Customers (Topic 606) and the principal versus agent guidance within the new revenue standard. 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. Customers may make payments to the Company either in advance or in arrears. If payment is made in advance, the Company will recognize a contract liability under prepayments from customers until which point the Company has satisfied the requisite performance obligations to recognize revenue.
Stock-based Compensation
The Company adopted the modified prospective method to measure stock-based compensation expense. Under the modified prospective method, stock-based compensation expense recognized during the period is based on the portion of the share-based payment awards granted after the effective date and ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company’s statement of income is based on the vesting terms and the estimated fair value of the award at grant date. As stock-based compensation expense recognized in the statement of income is based on awards ultimately expected to vest, it is reduced for estimated forfeiture. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company uses the Black-Scholes option pricing model in its determination of fair value of share-based payment awards on the date of grant. Such option pricing model is affected by assumptions based on a number of highly complex and subjective variables.
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 2018. 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.
11
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
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 loss as a separate component of stockholders’ 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. The Company had
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 adoption of ASU 2020-06 does not have a significant impact on the Company’s consolidated financial statements as of and for the year ended March 31, 2023.
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. In March 2022, the FASB issued ASU 2022-02 and eliminate the Troubled Debt Restructuring recognition and measurement guidance. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements.
Earnings Per Share
In April 2021, the FASB issued ASU 2021-04, which included Topic 260 “Earnings Per Share”. This guidance clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification. The ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021. The adoption of ASU 2021-04 does not have a significant impact on the Company’s consolidated financial statements as of and for the year ended March 31, 2023.
12
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited 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 $
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
As of December 31, 2021,
On September 30, 2022, the Company entered
into a stock purchase agreement (or “Stock Purchase Agreement”) to purchase common stock of Shinbao in a total amount of NT$
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Investment cost – Ejectt – short-term | $ | $ | ||||||
| Investment cost - Liquidity | ||||||||
| Total Investment Cost | ||||||||
| Appreciation in market value (Allowance for value decline) | ||||||||
| Prepaid investment | ||||||||
| Total | $ | $ | ||||||
13
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 5 - Inventories
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Satellite equipment for sale under construction | $ | $ | ||||||
NOTE 6 - Prepaid Expenses
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Prepaid engineering expense | $ | $ | ||||||
| Prepaid professional expense | ||||||||
| Others | ||||||||
| Total | $ | $ | ||||||
| Prepaid expense - current | ||||||||
| Prepaid expense – non-current | ||||||||
NOTE 7 - Property and Equipment
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Ground station equipment | $ | $ | ||||||
| Computer software and equipment | ||||||||
| Satellite equipment | ||||||||
| Vehicle | ||||||||
| Leasehold improvement | ||||||||
| Furniture and fixture | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Net | ||||||||
| Prepayments - land | ||||||||
| Prepaid equipment | ||||||||
| Total | $ | $ | ||||||
Depreciation expense was $
14
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 8 - Long-term Investment
As of March 31, 2023 and December 31,
2022,
Also on September 29, 2022, the Company
entered into a stock purchase agreement (or “Stock Purchase Agreement”) to purchase
In Q1 2023, the Company disposed AnaNaviTek
for amount of $
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Investment cost – Ejectt – long-term | $ | $ | ||||||
| Investment cost – AnaNaviTek | ||||||||
| Net | $ | $ | ||||||
NOTE 9 - Intangible Asset, Net
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Satellite system software | $ | $ | ||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
Amortization expense was $
15
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Note 10 - Goodwill
The Company obtained the goodwill from
various merge and acquisition events described in Note 1. On September 4, 2022, the Company acquired
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Gross amount | $ | $ | ||||||
| Accumulated Impairment | ||||||||
| Net | $ | $ | ||||||
No impairment loss on goodwill were recognized for three-month period ended March 31, 2023 and the year ended December 31, 2022.
The following table summarizes
the fair values of the assets acquired and liabilities assumed at the date of acquisition.
| Total purchase considerations | $ | |||
| Fair Value of tangible assets acquired: | ||||
| Cash | ||||
| Loan receivable | ||||
| Prepaid expenses and other current assets | ||||
| Property and equipment | ||||
| Deposits | ||||
| Total identifiable assets acquired | ||||
| Fair value of liabilities assumed: | ||||
| Accounts payable | ||||
| Loan from stockholder | ( | ) | ||
| Other payable | ( | ) | ||
| Total liabilities assumed | ( | ) | ||
| Net identifiable liabilities assumed | ( | ) | ||
| Goodwill as a result of the acquisition | $ |
NOTE 11 - Operating and Finance Leases
| A. | Lease term and discount rate: |
| 2023 | 2022 | |||||||
| Weighted-average remaining lease term | (Unaudited) | |||||||
| Operating lease | ||||||||
| Finance lease | ||||||||
| Weighted-average discount rate | ||||||||
| Operating lease | % | % | ||||||
| Finance lease | % | % | ||||||
16
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 11 - Operating and Finance Leases - Continued
| B. | The balances for the operating and finance leases are presented as follows within the unaudited condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022: |
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Right-of-use assets | $ | $ | ||||||
| Lease liability – current | $ | $ | ||||||
| Lease liability – non-current | $ | $ | ||||||
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Property and equipment, at cost | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| Lease liability - current | $ | $ | ||||||
| Lease liability – non-current | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
The components of lease expense are as follows within the unaudited condensed consolidated statements of operations and comprehensive loss for the three months periods ended March 31, 2023 and 2022:
| March 31, 2023 | March 31, 2022 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Lease expense | $ | $ | ||||||
| Sublease rental income | ( | ) | ( | ) | ||||
| Net lease expense | $ | $ | ||||||
| March 31, 2023 | March 31, 2022 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Amortization of right-of-use asset | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total finance lease cost | $ | $ | ||||||
17
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 11 - Operating and Finance Leases - Continued
| March 31, 2023 | March 31, 2022 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash outflows from operating leases | $ | $ | ||||||
| Operating cash outflows from finance lease | $ | $ | ||||||
| Financing cash outflows from finance lease | $ | $ | ||||||
| Leased assets obtained in exchange for lease liabilities: | ||||||||
| Operating leases | $ | $ | ||||||
Maturity of lease liabilities:
| Others | Total | |||||||
| (Unaudited) | (Unaudited) | |||||||
| April 1, 2023 – March 31, 2024 | $ | $ | ||||||
| April 1, 2024 – March 31, 2025 | ||||||||
| Total lease payments | $ | $ | ||||||
| Less: Imputed interest | ( | ) | ( | ) | ||||
| Present value of lease liabilities | $ | $ | ||||||
| Current portion | ( | ) | ( | ) | ||||
| Non-current portion | $ | $ | ||||||
| Total | ||||
| (Unaudited) | ||||
| April 1, 2023 – March 31, 2024 | $ | |||
| April 1, 2024 – March 31, 2025 | ||||
| Total lease payments | $ | |||
| Less: Imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
| Current portion | ( | ) | ||
| Non-current portion | $ | |||
18
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 12 - Short-term Loan
In June 2021, the Company entered
into a loan agreement in the amount of $
NOTE 13 - Long-term Loan
The Company has a car loan credit line
of NT$
| Twelve months ending March 31, | (Unaudited) | |||
| 2024 | ||||
| 2025 | ||||
| Total installment payments | ||||
| Less: Imputed interest | ( | ) | ||
| Present value of long-term loan | ||||
| Current portion | ( | ) | ||
| Non-current portion | $ | |||
| Year ending December 31, | ||||
| 2023 | $ | |||
| 2024 | ||||
| Total installment payments | ||||
| Less: Imputed interest | ( | ) | ||
| Present value of long-term loan | ||||
| Current portion | ( | ) | ||
| Non-current portion | $ | |||
NOTE 14 - Convertible Long-term Bonds Payable and Restricted Cash
On December 3, 2020, the Company closed
a private placement offering consisting of US$
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 $
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.
19
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 14 - Long-term Bonds Payable and Restricted Cash - Continued
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 $
Management has accounted for the convertible bonds by assuming that they will be repaid and redeemed at maturity; accordingly, the Company has included the redemption premium as part of the accretion tables and calculation of interest and issuance cost to be amortized over the life of the bond. Any value borne from the conversion feature of the bond and or issuance costs related to the origination and distribution of these bonds have been accounted for as debt discounts to be amortized using the effective interest method over the life of the bond.
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Credit Enhanced Zero Coupon Convertible Bonds | $ | $ | ||||||
| Coupon Bonds | ||||||||
| Unamortized loan fee | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
Bond issuance cost was $
NOTE 15 - Convertible Long-term notes Payable and Restricted Cash
On December 7, 2022, Aerkomm Inc. (the
“Company”) entered into an investment conversion and note purchase agreement (the “Agreement”) with World Praise
Limited, a Samoa registered company (“WPL”). Pursuant to the terms of this agreement, (i) a subscription for the common stock
of the Company in the amount of $
In addition, and as indicated in the
Agreement, WPL agreed to lend an additional $
The Convertible Note allows for loans
to the Company up to an aggregate principal amount of $
20
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 16 - Contract Liability
On March 9, 2015, the Company entered
into a
NOTE 17 - Income Taxes
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Current: | (Unaudited) | (Unaudited) | ||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Foreign | ||||||||
| Total | $ | $ | ||||||
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Tax benefit at statutory rate | $ | ( | ) | $ | ( | ) | ||
| Net operating loss carryforwards (NOLs) | ||||||||
| Foreign investment losses | ( | ) | ( | ) | ||||
| Stock-based compensation expense | ||||||||
| Amortization expense | ||||||||
| Accrued payroll | ||||||||
| Unrealized exchange losses | ( | ) | ||||||
| Others | ( | ) | ( | ) | ||||
| Tax expense at effective tax rate | $ | $ | ||||||
21
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 17 - Income Taxes - Continued
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Net operating loss carryforwards (NOLs) | $ | $ | ||||||
| Stock-based compensation expense | ||||||||
| Accrued expenses and unpaid expense payable | ||||||||
| Tax credit carryforwards | ||||||||
| Unrealized exchange losses (gain) | ||||||||
| Excess of tax amortization over book amortization | ( | ) | ( | ) | ||||
| Others | ( | ) | ( | ) | ||||
| Gross | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| 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 $
As of March 31, 2023 and December 31,
2022, the Company had federal NOLs of approximately $
As of March 31, 2023 and December 31,
2022, the Company has Japan NOLs of approximately $
As of March 31, 2023 and December 31,
2022, the Company has Taiwan NOLs of approximately $
As of March 31, 2023 and December 31,
2022, the Company had approximately $
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.
22
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 18 - Capital Stock
| 1) | Preferred Stock: |
The Company is authorized to issue
| 2) | Common Stock: |
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Restricted stock - vested | ||||||||
| Restricted stock - unvested | ||||||||
| Total restricted stock | ||||||||
The unvested shares of restricted stock were recorded under a deposit liability account awaiting future conversion to common stock when they become vested.
On June 16, 2022, the Company issued
| 3) | Stock Warrant: |
For the years ended December 31, 2022,
the Company recorded an increase of $
23
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 19 - Significant Related Party Transactions
In addition to the information disclosed in other notes, the Company has significant related party transactions as follows:
| Related Party | Relationship | |
| Well Thrive Limited (“WTL”) | ||
| Ejectt Inc. (“Ejectt”) | ||
| STAR JEC INC. (“StarJec”) | ||
| AA Twin Associates Ltd. (“AATWIN”) | ||
| EESquare Japan (“EESquare JP”) |
| 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.
| March 31, 2023 | December 31, 2022 | |||||||
(Unaudited) | ||||||||
| Other receivable from: | ||||||||
| EESquare JP 1 | $ | $ | ||||||
| StarJec2 | ||||||||
| Others6 | ||||||||
| Total | $ | $ | ||||||
| Rent deposit to Ejectt3 | ||||||||
| Loan from WTL 4 | $ | $ | ||||||
| Prepayment from Ejectt 3 | $ | $ | ||||||
| Other payable to: | ||||||||
| AATWIN 5 | $ | $ | ||||||
| Interest payable to WTL4 | ||||||||
| Others 6 | ||||||||
| Total | $ | $ | ||||||
| 1. | |
| 2. | |
| 3. | |
| 4. | |
| 5. | |
| 6. |
24
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 19 - Significant Related Party Transactions - Continued
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Purchase from Ejectt1 | $ | $ | ||||||
| Revenue from Star Jec 2 | ||||||||
| Interest expense charged by WTL 3 | ||||||||
| Rental income from EESqaure JP 4 | ( | ) | ( | ) | ||||
| 1. |
| 2. | |
| 3. | |
| 4. |
NOTE 20 - 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
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
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 2014
Plan, the “Plans”) and the reservation of
25
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 20 - Stock Based Compensation - Continued
On June 23, 2017, the Board of Directors
agreed to issue options for an aggregate of
On July 31, 2017, the Board of Directors
approved to issue options for an aggregate of
On December 29, 2017, the Board of Directors
approved to issue options for an aggregate of
On June 19, 2018, the Compensation Committee
approved to issue options for
On September 16, 2018, the Compensation
Committee approved to issue options for
On December 29, 2018, the Compensation
Committee approved to issue options for an aggregate of
On July 2, 2019, the Board of Directors
approved the grant of options to purchase an aggregate of
On October 4, 2019, the Board of Directors
approved the grant of options to purchase an aggregate of
On December 29, 2019, the Board of Directors
approved to issue options for an aggregate of
On February 19, 2020, the Board of Directors
approved to issue options for
On September 17, 2020, the Board of
Directors approved to issue options for
26
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 20 - Stock Based Compensation - Continued
On December 11, 2020, the Board of Directors
approved the grant of options to purchase an aggregate of
On January 23, 2021, the Board of Directors
approved to issue options for an aggregate of
On September 1, 2021, the Board of Directors
approved to issue options for
On September 17, 2021, the Board of
Directors approved to issue options for
On October 21, 2021, the Board of Directors
approved to issue options for
On December 1, 2021, the Board of Directors
approved to issue options for
On December 29, 2021, the Board of Directors
approved to issue options for an aggregate of
On December 31, 2021, the Board of Directors
approved to issue options for
On March 1, 2022, the Board of Directors
approved to issue options for
On June 1, 2022, the Board of Directors
approved to issue options for
On September 1, 2022, the Board of Directors
approved to issue options for
On September 17, 2022, the Board of
Directors approved to issue options for
On December 1, 2022, the Board of Directors
approved to issue options for
On December 29, 2022, the Board of Directors
approved to issue options for an aggregate of
On March 1, 2023, the Board of Directors
approved to issue options for
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 $
27
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 20 - Stock Based Compensation - Continued
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.
Expected dividends
The Company does not plan to pay cash dividends before the options are expired. Therefore, the expected dividend yield used in the Black-Scholes option valuation model is zero.
Expected volatility
Since the Company has no historical volatility, it used the calculated value method which substitutes the historical volatility of a public company in the same industry to estimate the expected volatility of the Company’s share price to measure the fair value of options granted under the Plans.
Risk-free interest rate
The Company based the risk-free interest rate used in the Black-Scholes option valuation model on the market yield in effect at the time of option grant provided in the Federal Reserve Board’s Statistical Releases and historical publications on the Treasury constant maturities rates for the equivalent remaining terms for the Plans.
Forfeitures
The Company is required to estimate forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate option forfeitures and records share-based compensation expense only for those awards that are expected to vest.
| Assumptions | ||||
| Expected term | ||||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk-free interest rate | % | |||
| Forfeiture rate | % | |||
28
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 20 - Stock Based Compensation - Continued
Aircom 2014 Plan
| Number of Shares | Weighted Average Exercise Price Per Share | Weighted Average Fair Value Per Share | ||||||||||
| Options outstanding at January 1, 2022 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/Cancelled | ||||||||||||
| Options outstanding at December 31, 2022 | ||||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/Cancelled | ||||||||||||
| Options outstanding at March 31, 2023 (unaudited) | ||||||||||||
There are no unvested stock awards under Aircom 2014 Plan for the three months period ended March 31, 2023 and the year ended December 31, 2022.
| Options Outstanding (Unaudited) | Options Exercisable (Unaudited) | |||||||||||||||||||||||||
| Range of Exercise Prices | Shares Outstanding at 3/31/2023 | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | Shares Exercisable at 3/31/2023 | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | ||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
As of March 31, 2023, there was no unrecognized stock-based compensation expense for the Aircom 2014 Plan. No option was exercised during the three months periods ended March 31, 2023 and 2022.
Aerkomm 2017 Plan
| Number of Shares | Weighted Average Exercise Price Per Share | Weighted Average Fair Value Per Share | ||||||||||
| Options outstanding at January 1, 2022 | ||||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/Cancelled | ( | ) | ||||||||||
| Options outstanding at December 31, 2022 | ||||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/Cancelled | ||||||||||||
| Options outstanding at March 31, 2023 (unaudited) | ||||||||||||
29
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 20 - Stock Based Compensation - Continued
| Number of Shares | Weighted Average Fair Value Per Share | |||||||
| Options unvested at January 1, 2022 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited/Cancelled | ( | ) | ||||||
| Options unvested at December 31, 2022 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited/Cancelled | ||||||||
| Options unvested at March 31, 2023 (unaudited) | ||||||||
Of the shares covered by options outstanding
under the Aerkomm2017 Plan as of March 31, 2023,
| Options Outstanding (Unaudited) | Options Exercisable (Unaudited) | |||||||||||||||||||||||||
| Range of Exercise Prices |
Shares Outstanding at 3/31/2023 |
Weighted Average Remaining Contractual Life (years) |
Weighted Average Exercise Price |
Shares Exercisable at 3/31/2023 |
Weighted Average Remaining Contractual Life (years) |
Weighted Average Exercise Price |
||||||||||||||||||||
| $ | 2.72 – 4.30 | $ | $ | |||||||||||||||||||||||
| 6.00 – 10.00 | ||||||||||||||||||||||||||
| 11.00 – 14.20 | ||||||||||||||||||||||||||
| 20.50 – 27.50 | ||||||||||||||||||||||||||
| 30.00 – 35.00 | ||||||||||||||||||||||||||
As of March 31, 2023, total unrecognized
stock-based compensation expense related to stock options was approximately $
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AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 21 - Commitments
As of March 31, 2023, 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 fourth quarter of 2024, although there is no guarantee that the project will be successfully completed in the projected timeframe. | ||
| 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. | ||
| Vietjet Air: On October 25, 2021, the Company signed an agreement with Vietjet Air (“Vietjet”) to provide them with our Aerkomm AirCinema In-Flight Entertainment and Connectivity (“IFEC”) solutions. Under the terms of the agreement, the Company will provide to Vietjet our Aerkomm AirCinema Cube IFEC system for installation on Vietjet’s fleet of Airbus A320, A321 and Airbus A330-300 aircraft. | ||
| 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 $ |
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AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 21 - Commitments - Continued
| 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 | ||
| 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 successfully appealed this USPTO action and the USPTO issued to the Company a trademark registration for the service mark AERKOMM under Trademark Class 38 (telecommunications) on November 2, 2021 and Trademark Class 41 (entertainment services) on November 23, 2021.
Equity Contract: On December 29, 2022, Aerkomm Inc. (the “Company” or the “Seller”) and dMobile System Co., Ltd. (the “Buyer”) entered into an equity sales contract (the “Equity Sales Contract”). Pursuant to the terms of the Equity Sales Contract, (i) the Company will sell
The Buyer, dMobile System Co., Ltd., is owned by Sheng-Chun Chang, a more than
The purpose of this transaction was to have Aerkomm Taiwan become a qualified company to apply for a telecommunication license in Taiwan. |
NOTE 22 - Subsequent Events
The Company has evaluated subsequent events through the filing of this Form 10-Q, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements.
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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, 2021, 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.
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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
Aerkomm Inc., is a development stage Non-Geostationary Orbit NGSO Low Earth Orbit and Medium Earth Orbit (LEO/MEO) satellite communication technology provider, focusing on B5G / 6G communications. With our advanced technology, we intend to provide our partners the benefits of E / V / Ka / Ku and X band unique solutions that encompasses a wide range of service options. Such options include connectivity solutions (IVI) on Vehicles (RVs, EVs….etc), Internet of Things (IOT) scenarios, internet in rural and remote sites to complement mobile communication weakness, maritime market and aviation market, including Government UAVs, as well as the provision of in-flight broadband entertainment and connectivity (IFEC) for commercial airlines and corporate jets.
Our technology will have several uses including:
| 1. |
Aviation: Target customers will be Government UAVs, commercial airlines and corporate jet operators. For Government UAVs we plan to generate revenue from the product price and monthly subscription fee for satellite bandwidth. We plan to generate revenue from e-commerce and monthly subscription fee for satellite bandwidth from commercial airlines. From corporate jet operators we plan to generate revenue from the product price and monthly subscription fee for satellite bandwidth.
| |
| 2. | Vehicles and Autopilot Trucks: Target customers will be all autopilot vehicles, using B5G, LEO satellites. We plan to generate revenue from the product price and monthly subscription fee for satellite bandwidth. |
| 3. | Trains and Fixed Infrastructure: Target customers will be train operators and associated infrastructure. We plan to generate revenue from the product price and monthly subscription fee for satellite bandwidth. |
| 4. | Remote Locations: Target customers will be remote islands and mountain regions. We plan to generate revenue from the product price and monthly subscription fee for satellite bandwidth. |
| 5. | Maritime: Target customers will be cruise liners, freighters, tankers, ferry boats, yachts, and oilrigs. We plan to generate revenue from the product price and monthly subscription fee for satellite bandwidth. |
With our advanced technologies and a unique business model, our initial focus has been to become a service provider of IFEC solutions through which we 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 seat-back 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.
Traditionally, providers of in-flight connectivity have focused primarily on the profit margin derived from the sale of hardware to airlines and of bandwidth to passengers. Both airlines and passengers must “pay to play,” which results in low participation and usage rates.
We break away from this model and expect to set a new trend with our innovative business approach which, we believe, will set us apart from our competitors by our partnering with airlines and other strategic partners, such as online advertisers and content providers. We plan to offer a choice of different business models of our IFEC system to commercial airlines. We plan to offer the choice of free hardware while the airline will pay for the monthly connectivity cost. We will also offer the option of the airline paying for the hardware while we pay for the connectivity cost. Airlines will potentially be able to generate new revenues through participating in our different revenue sharing model depending on which model they select, while passengers will not be required to pay for connectivity. That is, for passengers, connectivity will be free. We believe that, taken together, this novel approach will create an incentive for airlines to work with us, and this collaboration should act to drive up passenger usage rates. We believe that this is an innovative approach that will differentiate us from most existing market players.
Our main source of revenue is expected to be derived from fees related to the content channeled through our IFEC network from selected partners including internet companies, content providers, advertisers, telecom service providers, e-commerce participants, and premium sponsors. In other words, we plan to use connectivity as a tool rather than as a commodity for sale, which we believe will allow us to achieve a greater return.
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. We expect that our first such ground station will be built in Taiwan, on land that we have acquired, to service our East Asia market.
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 LEO/MEO satellite connectivity. We also expect to develop a remote connectivity system that will be applicable to the highspeed rail industry.
Our total sales were $454,281 and $0 for the three months ended March 31, 2023 and the year ended December 31, 2022.
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Business Development
We are actively working with prospective airline customers to provide them with the Airbus to-be-certified AERKOMM K++ system. We have entered into non-binding memoranda of understanding, or MOUs, including, most recently, with Thai Smile which operates a fleet of 20 Airbus A320 aircrafts. There can be no assurances, however, that any MOUs we entered into 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 LEO/MEO connectivity IFEC solutions for airlines and have suspended work on our dual band (Ka/Ku) satellite inflight connectivity solution.
In connection with the Airbus project, we also identified owners of Airbus Corporate Jet, or ACJ, aircraft, as potential customers of our 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 K++ system hardware for installation on ACJ corporate jets and provide connectivity through subscription-based plans. This new corporate jet market could generate additional revenue and income for our company.
Our AERKOMM K++ System
Our proprietary IFEC system, which is called the AERKOMM K++ system, will contain a ultra-low-profile radome (that is, a dome or similar structure protecting our radio equipment) containing two antennas, one for transmitting and the other for receiving, and will comply with the ARINC 791 standard of Aeronautical Radio, Incorporated. Our AERKOMM K++ system also meets Airbus Design Organisation Approval.
GEO (Geostationary Earth Orbiting) and NGSO (Non-Stationary Orbit) MEO (Medium Earth Orbiting) / LEO (Low Earth Orbiting) Satellites
Our initial AERKOMM K++ system will work with geostationary earth orbiting, or GEO satellites. Performance of GEO satellites diminishes greatly in the areas near the Earth’s poles. One of the main advantages of NGSO satellites over GEO satellites is considerably lower latency as well as worldwide coverage, particularly over the poles. Whereas GEO satellites have roughly 550 milliseconds of round-trip latency time, LEO satellites boast a latency of 240 milliseconds, signifying a distinct advantage in the sphere of real-time applications. Only LEO satellites can collect high quality data over the North and South poles. We are developing technologies to work with MEO/LEO satellites and plans to partner with Airbus to develop aircraft installation solutions. As new MEO and LEO 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 MEO/LEO satellite connectivity, although it cannot assure you that it will be successful in this new area of endeavor. We have two cooperation agreements in place with LEO/MEO satellite providers. On June 23, 2020, we entered into a cooperation agreement with Telesat LEO Inc., a wholly owned subsidiary of Telesat Canada. Telesat is one of the world’s largest and most successful satellite operators providing critical connectivity solutions that tackle complex communications challenges. Through this agreement, Aircom and Telesat will jointly collaborate to develop a test program for the Telesat low-Earth-orbit (LEO) Network, Telesat’s network of low-earth orbit satellites for aircraft connectivity, to assess the technical and commercial viability of incorporating the Telesat LEO Network capacity into Aircom’s IFEC product portfolio and network. Aircom and Telesat will collaborate in both technical and commercial activity. On January 10, 2022, Aerkomm entered into a cooperation agreement with New Skies Satellites B.V., a Dutch company with its principal offices located at Rooseveltplantsoen The Hague, Netherlands (“SES”). SES is one of the world leaders in satellite operations and is operating a constellation of satellites in medium-earth orbit (MEO) and geostationary-earth orbit (GEO) with a multi-terabit, high-throughput, low-latency network infrastructure (the “SES Satellite Network”), used for the global mobility market, including aviation, maritime, and the global fixed location market, including equipment, mobile back haul, teleport and data center co-location. SES has launched SES-17, a GEO satellite, and a series of MEO satellites (O3b), and will launch additional MEO satellites (“O3b mPOWER”) as part of the SES Satellite Network. Through this agreement, Aerkomm and SES will jointly collaborate both technically and commercially.
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.
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Recent Events
Overview
Our current business plan reflects the impact created as a result of the global COVID 19 pandemic, and how it afforded Aerkomm the development time needed to shift its focus to becoming a multi-orbit LEO/MEO/GEO/HEO space technology provider. With air travel for the most part being halted during the pandemic, a negative impact in the inflight entertainment and connectivity, or IFEC, market was experienced globally, Aerkomm at that time identified these weaknesses in marketing and business expectations, and, thus, we saw the opportunity to utilize LEO/MEO satellites to address overwhelmed networks as usage skyrocketed globally.
As the IFEC market is expected to experience a slow recovery, Aerkomm expects to be able to create new business opportunities and new revenue streams, to address past business scope endeavors while the IFEC market recovers. Prior to the global pandemic, connectivity was primarily offered via fiber line, creating bottlenecks in most networks as traffic increased over time. With the increased desire to utilize LEO satellite systems for connectivity, intensified by the ongoing conflict in Ukraine, Aerkomm is positioning itself to provide solutions with what we believe to be never seen before resilience. This sudden and globally experienced impact of the pandemic as well as increasing international tensions has created the opportunity for Aerkomm to develop our proprietary Full-Dominance-Glass-Semiconductor Antenna, or FGSA, technology.
New FGSA Antenna Development
From Aerkomm’s experience preparing to service the IFEC markets and focusing on delivering Ka/Ku connectivity, we have been able to utilize our industry expertise and engineering capabilities to develop a state-of-the-art technology to apply across multiple sectors of satellite communications. Aerkomm has successfully invented a proprietary Full-Dominance Glass Semiconductor Antenna (FGSA) technology which, we believe, is a game changer in the current satellite ecosystem. During our proof-of-concept stage, which we expect to exit during the next six to nine months, we have been able to design our new FGSA antenna using multilayered panel display glass with a semiconductor process and integrated circuit, or IC, designed by Aerkomm and intended to be manufactured by Taiwan Semiconductor Manufacturing Company Limited, or TSMC, and WIN Semiconductor Corp. The results of our proof-of-concept testing phase, in laboratory, show that our FGSA antenna is able to successfully connect to LEO/MEO/GEO satellite beams.
FGSA technology revolutionizes the way phased array antenna technology is applied, taking it from PCB-based systems to semiconductor-based. This innovation is far ahead of industry standards and the most unique technology utilizing semiconductor scale-down capabilities to create a new era of full-functioned satellite mobile communications.
FGSA can be installed on satellites and used in ground equipment. By utilizing this high-efficiency antenna, we believe that current satellite operators can significantly reduce their capital expenditures, or CAPEX, and offer lower cost antennas to customers by increasing the effective bandwidth capacity of each satellite to provide services. FGSA can achieve simultaneous multi-orbit tracking of satellite communication links. This ability paves the way for AERKOMM to innovate the broadcast TV market by offering this unique antenna for versatile satellite services catering to the existing and expanding global customer base.
Satellite License Awards
On April 27th, 2023, Aerkomm was awarded a regional satellite operator license by the Taiwan Ministry of Digital Affairs.
We believe that with this satellite operator license along with our proprietary FGSA technology, Aerkomm has created a much stronger position to define specifications for satellite communications and that will enable us to create a revenue stream from FGSA related satellite services. This now positions Aerkomm as not only a hardware supplier, but also a value-added service and ISP provider, and expands the markets in which we can participate in.
As a licensed operator in Taiwan, AERKOMM is legally authorized to provide satellite services in mobile backhaul market, aero/maritime markets, automotive, and numerous network resiliency contracts.
With this license, Aerkomm will be able to offer high-throughput, ultra-flexible and carrier-grade connectivity services delivered via O3b mPOWER, SES’s second-generation MEO communications system, from even the most remote regions across Taiwan.
Board of Director Changes
On May 5, 2023, Mr. Jan-Yueng Lin resigned from his position as a member of our board of directors, effective as of that date. Also on May 5, 2023, our board of directors appointed Mr. Jeff T. C. Hsu to become a member of the board of directors effectively immediately, to fill the vacancy created by the resignation of Mr. Lin.
Sale of Equity Securities
On July 20, 2023, we entered into a subscription agreement with one investor (the “Investor”) who agreed to purchase an aggregate of 800,000 shares of the Company’s common stock, $0.001 par value per share, at a price of $12.50 per share (the “Shares”) for an aggregate purchase of $10,000,000. The Shares were offered and sold by the Company in a private placement offering (the “Offering”) under Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The investor represented in its subscription agreement that it not a resident of the United States or otherwise a “U.S. Person,” as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
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Pursuant to the terms of the subscription agreement, the parties have agreed that if the Company has not met the following conditions relating to the development of its new Full-Dominance Glass Semiconductor Antenna (the “FGSA Antenna”) by the end of business on June 30, 2024, the Subscriber shall have the right to sell the Shares back to the Company for the full amount the Subscriber originally paid for the Shares:
i. The Company shall have completed a “Design Release” meaning that it shall have an engineering sample of the FGSA Antenna publicly available and ready for sale;
ii. The Company shall have passed the “small batch market test” meaning that it shall have sold 5,000 sample units of the designed released FGSA Antenna; and
iii. The Company shall be ready for the “commercial release” of the FGSA Antenna meaning that the Company shall be ready to take orders for the mass production of the FGSA Antenna.
The Company and the Investor will separately agree on the timing of the Investor’s cash payments to the Company under the subscription agreement and the related issuances upon payment of the Shares to the Investor.
Letter of Intent with Ejectt, Inc.
On July 28, 2023, we and Ejectt, Inc. (“Ejectt”), a publicly traded Taiwan company, signed a non-binding letter of intent (the “LOI”) with respect to a possible merger between Aerkomm and Ejectt.
The LOI signing marks a decisive step towards consolidation and growth in Taiwan's satellite communication industry. We and Ejectt are committed to synergizing our strengths and expertise to maximize our impact in the market and strengthen our joint position in the satellite communications sector.
Mesh Tech Acquisition
On July 31, 2023, we entered into a share purchase agreement (the “Share Purchase Agreement”) with Mesh Technology Taiwan Limited (“Mesh Tech”) and Mixnet Technology Limited (“Mixnet”). Mesh Tech is a Taiwan based company that creates products to accelerate data transfer and distribution across different geographical locations through its hybrid CDN technology.
Pursuant to the terms of the Share Purchase Agreement, the Company will acquire all of the outstanding capital stock of Mesh Tech and Mixnet. The shares of Mesh Tech will be held through Mixnet, a Seychelles organized company. As consideration for this acquisition the Company will issue to the shareholders of Mesh Tech (the “Sellers”) 7,000,448 shares of its common stock (the “Consideration Shares”) valued at approximately $2.36 per share for an aggregate valuation of $16,500,000. The Company has agreed to register the Consideration Shares for resale under a Form S-1 registration statement (the “Resale Registration Statement”) and the Sellers have given the Chief Executive Officer of the Company an irrevocable proxy to vote the Consideration Shares on behalf of the Sellers until the Consideration Shares are sold through the Resale Registration Statement.
The 7,000,448 Consideration Shares have been issued and are currently being held in escrow until this acquisition closes.
Taiwan Telecommunications Project Bid
On August 9, 2023, our Taiwan based subsidiary, Aerkomm Taiwan Inc., and its exclusive agent in Taiwan, Ejectt, successfully obtained a first-stage bid for the verification project of “Emerging Technology Application for Enhancing Communication Network Resilience in Emergencies or War” (the “Verification Project”) from the Taiwan Telecom Technology Center (TTC). The Ministry of Digital Affairs (MoDA) in Taiwan has actively promoted the Verification Project in recent months. MoDA is dedicated to building a diverse and robust satellite communication system in Taiwan to ensure seamless communication during emergencies.
To fortify the resilience of communication networks, Taiwan’s MODA has initiated the two-year Verification Project. This initiative is being carried out by the TTC, a government-funded foundation in Taiwan. The project’s goal is to establish a total of 773 sites both domestically and internationally by the end of 2024. This comprehensive network setup aims to validate the effectiveness of a heterogeneous resilient network architecture.
In this first-stage winning bid, titled “Asynchronous Satellite Network Leasing and Transmission Service Procurement Project,” Aerkomm Taiwan and Ejectt will collaborate with SES, utilizing SES’s O3b Medium Earth Orbit satellite constellation. We expect that this ongoing collaboration will continue to strengthen the partnership between us and SES in the Taiwan market. Our joint effort aims to expand and deepen our satellite communication business in Taiwan, capture new business opportunities, and solidify our positions as key players in the satellite communications landscape.
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Principal Factors Affecting Financial Performance
We believe that our operating and business performance will 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. |
Smaller Reporting Company
Although we no longer qualify as an Emerging Growth Company, or EGC, we continue to qualify as a smaller reporting company, which allows us to take advantage of many of the same exemptions from disclosure requirements, including reduced disclosure obligations regarding executive compensation that are available to an EGC. In addition, as a smaller reporting company with less than $100 million in annual revenue, we are not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. In reliance on these exemptions, we have taken advantage of reduced reporting obligations in this quarterly report on Form 10-Q.
Recent Market Information
The IATA (International Air Transport Association) in August 2023 issued the report entitled Passenger Market Analysis.
| ● | Industry-wide revenue passenger-kilometers (RPKs) increased 28.4% year-on-year (YoY) in August. Compared to 2019 levels, passenger traffic recovered to 95.7%. |
| ● | Available seat-kilometers (ASKs) rose at a slower annual pace of 24.9%, lifting passenger load factors (PLFs) close to pre-pandemic levels. The PLF in August was 84.6%, 1.1 ppts lower than the PLF for the same month in 2019. |
| ● | Domestic passenger traffic grew 9.2% over pre-pandemic levels. Most monitored markets saw stable growth in domestic traffic, while Japan experienced disruptions due to Typhoon Khanun. |
| ● | The recovery of international RPKs remained at 88.5% of 2019 levels. Regions experienced different outcomes while Asia Pacific carriers continued to restore international traffic. |
| ● | Ticket sales data signaled unwinding domestic demand while international bookings remained on the same positive trend. |
Passenger traffic expanded further in August 2023, with industry-wide revenue passenger kilometers (RPKs) growing 28.4% year-on0year (YoY) and reaching 95.7% of August 2019 levels. In seasonally-adjusted terms, passenger traffic increased 1.0% month-on-month (MoM), indicating a slowing but still positive trend globally.
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Results of Operations
Comparison of Three Months Ended March 31, 2023 and 2022
The following table sets forth key components of our results of operations during the three months periods ended March 31, 2023 and 2022.
| Three Months Ended March 31, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Net Sales | $ | 454,281 | $ | - | $ | 454,281 | 100.0 | % | ||||||||
| Service income – related party | - | 2,953 | (2,953 | ) | (100.0 | )% | ||||||||||
| Cost of sales | 447,781 | - | 447,781 | 100.0 | % | |||||||||||
| Operating expenses | 3,643,426 | 1,780,438 | 1,862,988 | 104.6 | % | |||||||||||
| Loss from operations | (3,636,926 | ) | (1,777,485 | ) | (1,859,410 | ) | 104.6 | % | ||||||||
| Net non-operating expense | (117,510 | ) | (700,128 | ) | 582,618 | (83.2 | )% | |||||||||
| Loss before income taxes | (3,754,436 | ) | (2,477,613 | ) | (1,276,823 | ) | (51.5 | )% | ||||||||
| Income tax expense | - | 1,600 | (1,600 | ) | (100.0 | )% | ||||||||||
| Net Loss | (3,754,436 | ) | (2,479,213 | ) | (1,275,223 | ) | 51.4 | % | ||||||||
| Other comprehensive income | 134,254 | 518,027 | (383,773 | ) | (74.1 | )% | ||||||||||
| Total comprehensive loss | $ | (3,620,182 | ) | $ | (1,961,186 | ) | $ | (1,658,996 | ) | (84.6 | )% | |||||
Revenue. We have $ 454,281 of net sales for the three-month period ended March 31, 2023 and $2,953 service income for the three-month period ended March 31, 2022, respectively. Our revenue for the three months ended March 31, 2023 was $454,281 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. The service income of $2,953 ended March 31, 2022 represents an income from providing satellite service to one of our related parties.
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 $1,862,988, or 104.6% to $3,643,426 for the three-month period ended March 31, 2023, from $1,780,438 for the three-month period ended March 31, 2022. Such increase was mainly due to increases in salary expenses, R&D expenses and consulting fees of $969,311, $834,271 and $177,158, respectively, which was offset by the decreases in professional fees and stock compensation expense of $236,856 and $192,108.
Net non-operating expense. We had $117,510 in net non-operating expense for the three-month period ended March 31, 2023, as compared to net non-operating expense of $700,128 for the three-month period ended March 31, 2022. Net non-operating expense in the three-month period ended Mach 31, 2023 represents gain on foreign exchange translation of $179,589, unrealized loss from the transactions of our liquidity contract and prepaid investment of $7,829, other financing cost due to amortization of convertible bonds issuing cost of $125,134 and net interest expense of $236,073, which was offset by the interest income and other incomes of $71,937. The net non-operating expense in the three-month period ended March 31, 2022 includes foreign exchange loss of $578,654, amortization of bond issuing costs of $118,365 and net interest expense of $7,381.
Loss before income taxes. Our loss before income taxes increased by $1,276,823, or 51.5%, to $ 3,754,436 for the three-month period ended March 31, 2023, from a loss of $2,477,613 for the three-month period ended March 31, 2022, as a result of the factors described above.
Income tax expense. Income tax expense was $0 for the three-month period ended March 31, 2023, as compared to the income tax expense of $1,600 for the three-month period ended March 31, 2022.
Total comprehensive loss. As a result of the cumulative effect of the factors described above, our total comprehensive loss increased by $1,658,996, or 84.6%, to $3,620,182 for the three-month period ended March 31, 2023, from $1,961,186 for the three-month period ended March 31, 2022.
Liquidity and Capital Resources
As of March 31, 2023, we had cash and cash equivalents of $2,299,190 and restricted cash of $3,224,357. We have financed our operations primarily through cash proceeds from financing activities, including from our 2020 Offering, the issuance of convertible bonds, short-term borrowings and equity contributions by our stockholders.
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The following table provides detailed information about our net cash flow:
Cash Flow
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used for operating activities | $ | (5,110,931 | ) | $ | (679,551 | ) | ||
| Net cash provided by investing activity | (10,247 | ) | 6,658 | |||||
| Net cash provided by financing activity | 752,910 | 154,585 | ||||||
| Net decrease in cash and cash equivalents | (4,368,268 | ) | (518,308 | ) | ||||
| Cash at beginning of year | 10,101,920 | 3,288,813 | ||||||
| Foreign currency translation effect on cash | (210,105 | ) | 518,027 | |||||
| Cash at end of year | $ | 5,523,547 | $ | 3,288,532 | ||||
Operating Activities
Net cash used for operating activities was $5,110,931 for the three months ended March 31, 2023, as compared to $679,551 for the three months ended March 31, 2022. In addition to the net loss of $3,754,436, the increase in net cash used for operating activities during the three-month period ended March 31, 2023 was mainly due to increase in prepaid expenses, accounts payable, and other payable of $2,068,638, $353,703, and $425,562, respectively, offset by the increase in accrued payroll liability and prepayment from customer, interest payable of $152,518, $352,081, and $235,482. In addition to the net loss of $2,479,213, the decrease in net cash used for operating activities during the three-month period ended March 31, 2022 was mainly due to the decrease in accounts receivable and the increase in accrued expenses and other current liabilities of $136,800 and $1,225,046, respectively, offset by the decrease in prepaid expenses and other current assets and deposits of $121,913 and $45,548, respectively.
Investing Activities
Net cash provided by investing activities for the three months ended March 31, 2023 was $10,247 as compared to net cash used by investing activities of $6,658 for the three months ended March 31, 2022. The net cash provided by investing activities for the three months ended March 31, 2023 was mainly for the proceeds from disposal of long term investment of $325,578, which was offset by the purchase of property and equipment of $335,825. The net cash provided by investing activities for the three months ended March 31, 2022 was mainly the proceeds from disposal of trading securities of $7,823, which was offset by the cash used for the purchase of property and equipment of $1,165.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2023 and 2022 was $752,910 and $154,585, respectively. Net cash provided by financing activities for the three months ended March 31, 2023 were mainly attributable to proceeds from the increase in short-term loans in the amount of $758,439. Net cash provided by financing activities for the three months ended March 31, 2022 were mainly attributable to net proceeds from the borrowing of short-term loan in the amount of $161,298.
On May 9, 2019, two of our current shareholders, whom we refer to as the Lenders, each committed to provide us with a $10 million bridge loan, or together, the Loans, for an aggregate principal amount of $20 million, to bridge our cash flow needs prior to our obtaining a mortgage loan to be secured by our Taiwan land parcel which we 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 our satellite ground station licensing 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 Taiwan land parcel is transferred 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 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. On April 25, 2022, the Lenders amended the commitment and agreed to increase the percentage of earlier closing amount from 25% to 100%. As of the date of this report, we have drawn down approximately $190,000 (approximately NTD 5,640,000) under the Loans from one of the Lenders.
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On July 10, 2018, in conjunction with our agreement to acquire the Taiwan land parcel, we entered into a binding letter of commitment with Metro Investment Group Limited, or MIGL, pursuant to which we agreed to pay MIGL an agent commission of four percent (4%) of the full purchase price of the Taiwan land parcel, equivalent to approximately US$1,387,127, for MIGL’s services provided with respect to the acquisition. Under the terms of the initial agreement with MIGL, we agreed to pay this commission no later than 90 days following payment in full of the Taiwan land parcel purchase price. On May 2019 and December 2021, we amended the binding letter of commitment with MIGL to extend the payment to be paid after the full payment of the Land acquisition price until no later than June 30, 2022. If there is a delay in payment, we shall be responsible for punitive liquidated damages at the rate of one tenth of one percent (0.1%) of the commission per day of delay with a maximum cap to these damages of five percent (5%). Under applicable Taiwanese law, the commission was due and payable upon signing of the letter of commitment even if the contract is cancelled for any reason and the acquisition is not completed. We have recorded the estimated commission to the cost of land and will be paying the amount no later than June 30, 2022. We are currently negotiating with MIGL to amend the agreement to further extend the payment term.
On December 3, 2020, the Company closed a private placement offering (the “Bond Offering”) consisting of US$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 Credited Enhanced Bonds, the “Bonds”).
Payments of principal, premium, interest and any payments thereof in respect of the Credit Enhanced Bonds will have the benefit of 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 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.
We have not generated significant revenues, excluding non-recurring revenues in 2021 and 2019, and will incur additional expenses as a result of being a public reporting company. Currently, we have taken measures that management believes will improve our financial position by financing activities, including having successfully completed our Bond Offering, 2020 Offering, short-term borrowings and other private loan commitments, including the Loans from our investors, discussed above. With our current available cash, the $20 million in loan commitments from the Lenders 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.
However, even if we successfully raise sufficient capital to satisfy our needs over the next twelve months, following that period we will require additional cash resources for the implementation of our strategy to expand our business or for other investments or acquisitions we may decide to pursue. If our internal financial resources are insufficient to satisfy our capital requirements, we will need seek to sell additional equity or debt securities or obtain additional credit facilities, although there can be no assurances that we will be successful in these efforts. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
On June 28, 2022, we entered into a subscription agreement with an investor who agreed to purchase 516,666 shares of our common stock for 6.00 Euros per share for an aggregate purchase price of 3,100,000 Euros (the “Purchase Price”). On June 29, 2022, we received the first installment of the Purchase Price of $3,175,201, equivalent to 3,000,000 Euros, from this investor. Despite the fact that we have received the investor’s funds, the subscription agreement is subject to a cooling off period pursuant to which it may be terminated prior to July 29, 2022 by either party at any time and for any reason. If the subscription agreement is terminated by the investor, we will be required to return the Purchase Price funds to the investor, without interest. Because of the wording of the subscription agreement, we cannot assure you at this time that we will not be required to return the Purchase Price funds to the investor.
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 three months ended March 31, 2023 and 2022 were $335,825 and $1,165, respectively.
We anticipate an increase in capital spending in our fiscal year ended December 31, 2023 and estimate that capital expenditures will range from $10 million to $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.
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Inflation
Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in our industry and continually maintain effective cost control in operations.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.
Seasonality
Our operating results and operating cash flows historically have not been subject to significant seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:
Concentrations of Credit Risk. Financial instruments that potentially subject to significant concentrations of credit risk consist primarily of cash in banks. As of March 31, 2023 and December 31, 2022, the total balance of cash in bank exceeding the amount insured by the Federal Deposit Insurance Corporation (FDIC) for the Company was approximately $1,518,000 and $6,153,000, respectively. The balance of cash deposited in foreign financial institutions exceeding the amount insured by local insurance is approximately $3,148,000 and $3,134,000 as of March 31, 2023 and December 31, 2022, respectively. We perform 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. We determine 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 our estimates.
Inventories. Inventories are recorded at the lower of weighted-average cost or net realizable value. We assess the impact of changing technology on our inventory on hand and writes off inventories that are considered obsolete. Estimated losses on scrap and slow-moving items are recognized in the allowance for losses.
Research and Development Costs. Research and development costs are charged to operating expenses as incurred. For the three-month periods ended March 31, 2023 and 2022, we incurred approximately $0 and $0 of research and development costs, respectively.
Property and Equipment. Property and equipment are stated at cost less accumulated depreciation. When value impairment is determined, the related assets are stated at the lower of fair value or book value. Significant additions, renewals and betterments are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed by using the straight-line and double declining method over the following estimated service lives: computer equipment - 3 to 5 years, furniture and fixtures - 5 years, satellite equipment – 5 years, vehicles – 5 years and lease improvement – 5 years. Construction costs for on-flight entertainment equipment not yet in service are recorded under construction in progress. Upon sale or disposal of property and equipment, the related cost and accumulated depreciation are removed from the corresponding accounts, with any gain or loss credited or charged to income in the period of sale or disposal. We review the carrying amount of property and equipment for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We determined that there was no impairment loss for the three-month periods ended March 31, 2023 and 2022.
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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 the Company’s cash and restricted cash, accounts payable, short-term 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 March 31, 2023. 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 March 31, 2023.
Revenue Recognition. We recognize revenue when performance obligations identified under the terms of contracts with our customers are satisfied, which generally occurs upon the transfer of control in accordance with the contractual terms and conditions of the sale. Our revenue for the three months ended March 31, 2023 composed of the service income to one of our related parties. The majority of our revenue is recognized at a point in time when product is shipped or service is provided to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods, which includes estimates for variable consideration. We 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) we satisfy a performance obligation. Customers may make payments to the Company either in advance or in arrears. If payment is made in advance, the Company will recognize a contract liability under prepayments from customers until which point the Company has satisfied the requisite performance obligations to recognize revenue.
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 2017. 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.
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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 stockholders’ 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 October 23, 2023, the date on which these consolidated financial statements were available to be issued. All subsequent events requiring recognition as of March 31, 2023 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. We adopted ASU 2020-06 as of March 31, 2023 and the adoption does not have significant impact on our consolidated financial statements and related disclosures as of and for the three months period ended March 31, 2023.
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 until fiscal year beginning after December 15, 2022. We are currently evaluating the impact of adopting ASU 2016-13 on our unaudited condensed 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 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 adoption of ASU 2019-12 does not have a significant impact on our unaudited condensed consolidated financial statements as of and for the three months period ended March 31, 2023.
Earnings Per Share
In April 2021, the FASB issued ASU 2021-04, which included Topic 260 “Earnings Per Share”. This guidance clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification. The ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021. Early adoption is permitted. we adopted ASU 2021-04 as of March 31, 2023 and the adoption does not have significant impact on our condensed consolidated financial statements as of and for the three months period ended March 31, 2023.
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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 March 31, 2023.
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, 2021, filed with the SEC on July 1, 2022, and further referenced below, which we are still in the process of remediating as of March 31, 2023, 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 March 31, 2023, 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 March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There were no material developments during the quarter ended March 31, 2023 to the legal proceedings previously disclosed in Item 3 “Legal Proceedings” of our Annual Report on Form 10-K filed on July 14, 2023.
ITEM 1A. RISK FACTORS.
For information regarding additional risk factors, please refer to our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on July 14, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any equity securities during the quarter ended March 31, 2023 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.
We have no information to disclose that was required to be in a report on Form 8-K during the quarter ended March 31, 2023 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.
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ITEM 6. EXHIBITS
| * | Filed herewith |
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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: October 25, 2023 | AERKOMM INC. | |
| /s/ Louis Giordimaina | ||
| Name: | Louis Giordimaina | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| /s/ Louis Giordimaina | ||
| Name: | Louis Giordimaina | |
| Title: | Interim Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
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