Aerkomm Inc 10-Q for FY2022 Q3
Aerkomm Inc. (AKOM)
About this 10-Q
Aerkomm Inc filed this 10-Q on December 20, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2855
- down 99.8% from $1.81M a year earlier
- Net loss
- $3.81M
- compared with net income of $1.7M a year earlier
- Diluted EPS
- -$0.39
- compared with $0.18 a year earlier
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:
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| (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 | ||
| None | N/A | N/A |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
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
December 20, 2022, there were
AERKOMM INC.
Quarterly Report on Form 10-Q
Period Ended September 30, 2022
TABLE OF CONTENTS
| Item 1. | Unaudited Condensed Consolidated Financial Statements | 1 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 31 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 45 | ||
| Item 4. | Controls and Procedures | 45 | ||
| Item 1. | Legal Proceedings | 46 | ||
| Item 1A. | Risk Factors | 46 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 46 | ||
| Item 3. | Defaults Upon Senior Securities | 46 | ||
| Item 4. | Mine Safety Disclosures | 46 | ||
| Item 5. | Other Information | 46 | ||
| Item 6. | Exhibits | 47 | ||
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
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Short-term investment | ||||||||
| Accounts receivable – related party | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and 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 | ||||||||
| 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 | ||||||||
| Long-term loan – non-current | ||||||||
| Prepayments from customer – non-current | ||||||||
| Lease liability – non-current | ||||||||
| Restricted stock deposit liability | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments | ||||||||
| 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
| Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Net Sales – Related Party | $ | $ | $ | $ | ||||||||||||
| Service Income – Related Party | ||||||||||||||||
| Total Revenue | ||||||||||||||||
| Cost of Sales | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Loss from Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Non-Operating Income (Loss) | ||||||||||||||||
| Foreign currency exchange (loss) gain | ( | ) | ( | ) | ||||||||||||
| Bond issuance cost | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Unrealized investment (loss) gain | ( | ) | ( | ) | ||||||||||||
| Other income (loss), net | ( | ) | ||||||||||||||
| Net Non-Operating (Loss) Income | ( | ) | ( | ) | ||||||||||||
| Gain (Loss) before Income Taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income Tax Expense | ( | ) | ||||||||||||||
| Net Loss (Income) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other Comprehensive Income (Loss) | ||||||||||||||||
| Change in foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| Total Comprehensive Gain (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
| Common Stock | Additional Paid in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficits | Income | Equity | |||||||||||||||||||
| Balance as of January 1, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||
| Revaluation of stock warrant | - | ( | ) | ( | ) | |||||||||||||||||||
| Other comprehensive income | - | |||||||||||||||||||||||
| Net loss for the period | - | ( | ) | - | ( | ) | ||||||||||||||||||
| Balance as of March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||
| Revaluation of stock warrant | - | ( | ) | ( | ) | |||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||
| Revaluation of stock warrant | - | ( | ) | ( | ) | |||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss for the period | - | |||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| 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 | ( | ) | ( | ) | ||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||
| Other comprehensive income | - | |||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||
| Issuance of common stock | - | |||||||||||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||
| Other comprehensive income | - | |||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
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
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used for operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Consulting expense adjustment from change in fair value of warrants | ( | ) | ||||||
| Unrealized losses on trading security | ( | ) | ||||||
| Amortization of bonds issuance costs | ||||||||
| Gain on disposal of property and equipment | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Deposits | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Prepayment from customer | ||||||||
| Operating lease liability | ( | ) | ||||||
| Net Cash Used for Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Proceeds from disposal of property and equipment | ||||||||
| Proceeds from sales (Purchase) of trading security | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Purchase of short-term investment | ( | ) | ||||||
| Purchase of long-term investment | ( | ) | ||||||
| Net Cash Used for Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from short-term loans | ||||||||
| Repayment of long-term loan | ( | ) | ( | ) | ||||
| Finance lease liability | ( | ) | ( | ) | ||||
| Net Cash Provided by Financing Activities | ||||||||
| Net Increase (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 income taxes | $ | $ | ||||||
| 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 Best Market under the symbol “AKOM.” On July 17, 2019, the French Autorité des Marchés Financiers (the “AMF”) granted visa number 19-372 on the prospectus relating to the admission of Aerkomm’s common stock to list and trade on the Professional Segment of the regulated market of Euronext Paris (“Euronext Paris”). Aerkomm’s common stock began trading on Euronext Paris on July 23, 2019 under the symbol “AKOM” and is denominated in Euros on Euronext Paris. This listing did not alter Aerkomm’s share count, capital structure, or current common stock listing on the OTCQX, where it is also traded (in US dollars) under the symbol “AKOM.”
On
December 28, 2016, Aircom Pacific Inc. (“Aircom”) purchased 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 new wholly owned subsidiary, Aerkomm Taiwan Inc. (“Aerkomm Taiwan”), a corporation formed under the laws of Taiwan. The purpose of Aerkomm Taiwan is to purchase a parcel of land and raise sufficient fund for ground station building and operate the ground station for data processing (although that cannot be guaranteed).
On
November 15, 2018, Aircom Taiwan acquired a wholly owned subsidiary, Beijing Yatai Communication Co., Ltd. (“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,
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.
6
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - Organization - Continued
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.
The Company’s organization structure is as following:
Aerkomm and its subsidiaries (the “Company”) are full-service, development-stage providers of in-flight entertainment and connectivity solutions with their initial market in the Asian Pacific region.
Going Concern
The accompanying financial statements have
been prepared in conformity with U.S. GAAP which contemplates continuation of the Company on a going concern basis. The going concern
basis assumes that assets are realized, and liabilities are settled in the ordinary course of business at amounts disclosed in the financial
statements. The Company’s ability to continue as a going concern depends upon its ability to market and sell its products to generate
positive operating cash flows. For the nine months ended September 30, 2022, the Company reported net loss of $
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
With the $20 million in Loans committed by the Lenders and our holdings of marketable securities in Ejectt (defined below), the Company believes its working capital will be adequate to sustain its operations for the next sixteen months. However, there is no assurance that management will be successful in furthering the Company’s business plan, especially if the Company is not able to raise additional funding from the above sources or from other sources. There are a number of additional factors that could potentially arise that could result in shortfalls in the Company’s business plan, such as general worldwide economic conditions, competitive pricing in the connectivity industry, the continuing impact of the COVID 19 pandemic, the Company’s operating results continuing to deteriorate and the Company’s banks and shareholders not being able to provide continued financial support.
Management’s
plan is to continue improve operations to generate positive cash flows and raise additional capital through private of public offerings.
If the Company is not able to generate positive operating cash flows, and raise additional capital, there is the risk that the Company
may not be able to meet its short-term obligations. On June 28, 2022, the Company entered into a subscription agreement with an investor
who agreed to purchase
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 September 30, 2022, and the condensed consolidated statements of operations and comprehensive loss and cash flows for the nine months ended September 30, 2022 and 2021 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 30, 2022 and the results of operations and cash flows for the nine months ended September 30, 2022 and 2021. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to these six-month periods are unaudited. The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any other interim period or other future year.
Principle of Consolidation
Aerkomm consolidates the accounts of its subsidiaries, Aircom, Aircom Seychelles, Aircom HK, Aircom Japan, Aircom Taiwan, Aerkomm Taiwan, Beijing Yatai, Aerkomm Malta, and MEPA Labs. 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 unaudited condensed 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. On an ongoing basis, management reviews these estimates and assumptions using the currently available information. Changes in facts and circumstances may cause the Company to revise its estimates. The Company bases its estimates on past experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The inputs into our judgments and estimates consider the economic implications of COVID-19 on the Company’s critical and significant accounting estimates. Estimates are used when accounting for items and matters including, but not limited to, revenue recognition, residual values, lease classification and liabilities, finance lease receivables, inventory obsolescence, right-of-use assets, determinations of the useful lives and valuation of long-lived assets, estimates of allowances for doubtful accounts and prepayments, estimates of impairment of long-lived assets, valuation of deferred tax assets, issuance of common stock and warrants exercised and other provisions and contingencies.
Concentrations of Credit Risk
Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist primarily of cash in banks. As of September 30, 2022 and December
31, 2021, the total balance of cash in bank exceeding the amount insured by the Federal Deposit Insurance Corporation (FDIC) for the Company
was $
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.
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.
8
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
Investment in Equity Securities – Continued
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
Accounts receivables are carried at the amounts invoiced to customers less allowance for doubtful accounts. The allowance is an estimate based on a review of individual customer accounts on a quarterly basis. Accounts receivables are written off against allowances when they are deemed uncollectible. Recoveries of accounts receivable previously written off are recorded as other income when received.
The Company’s review on the collectability of accounts receivable is based on an assessment of historical experience, current economic conditions, future expectation regarding customer solvency, and other collection indicators.
Inventories
Inventories are recorded at the lower of weighted-average cost or net realizable value. The Company assesses the impact of changing technology on its inventory on hand and writes off inventories that are considered obsolete. Estimated losses on scrap and slow-moving items are recognized in the allowance for losses.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. When value impairment is determined, the related assets are stated at the lower of fair value or book value. Significant additions, renewals and betterments are capitalized. Maintenance and repairs are expensed as incurred.
Depreciation
is computed by using the straight-line and double declining methods over the following estimated service lives: ground station equipment
–
Upon sale or disposal of property and equipment, the related cost and accumulated depreciation are removed from the corresponding accounts, with any gain or loss credited or charged to income in the period of sale or disposal.
The Company reviews the carrying amount of property and equipment for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. It determined that there was no impairment loss for the nine months ended September 30, 2022 and 2021.
Right-of-Use Asset and Lease Liability
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”), which modifies lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases and finance leases under previous accounting standards and disclosing key information about leasing arrangements.
A lessee should recognize the lease liability to make lease payments and the right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases and finance leases, a right-of-use asset and a lease liability are initially measured at the present value of the lease payments by discount rates. The Company’s lease discount rates are generally based on its incremental borrowing rate, as the discount rates implicit in the Company’s leases is readily determinable. Operating leases are included in operating lease right-of-use assets and lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment and lease liability in our consolidated balance sheets. Lease expense for operating expense payments is recognized on a straight-line basis over the lease term. Interest and amortization expenses are recognized for finance leases on a straight-line basis over the lease term.
For the leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The Company adopted ASU 2016-02 effective January 1, 2019.
9
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
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 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 September 30, 2022 and December 31, 2021.
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.
10
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
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.
The Company’s policy for recording interest and penalties associated with any uncertain tax positions is to record such items as a component of income before taxes. Penalties and interest paid or received, if any, are recorded as part of other operating expenses in the consolidated statement of operations.
Foreign Currency Transactions
Foreign currency transactions are recorded in U.S. dollars at the exchange rates in effect when the transactions occur. Exchange gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in current income. At the end of each period, assets and liabilities denominated in foreign currencies are revalued at the prevailing exchange rates with the resulting gains or losses recognized in income for the period.
Translation Adjustments
If a foreign subsidiary’s functional currency is the local currency, translation adjustments will result from the process of translating the subsidiary’s financial statements into the reporting currency of the Company. Such adjustments are accumulated and reported under other comprehensive income (loss) as a separate component of stockholders’ equity.
Loss Per Share
Basic
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
11
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 3 - Recent Accounting Pronouncements
Simplifying the Accounting for Debt with Conversion and Other Options.
In June 2020, the FASB issued ASU 2020-06 to simplify the accounting in ASC 470, Debt with Conversion and Other Options and ASC 815, Contracts in Equity’s Own Entity. The guidance simplifies the current guidance for convertible instruments and the derivatives scope exception for contracts in an entity’s own equity. Additionally, the amendments affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2022. Early adoption is permitted. The amendments in this update must be applied on either full retrospective basis or modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company adopted ASU 2020-06 as of September 30, 2022 and the adoption does not have significant impact on its condensed consolidated financial statements and related disclosures as of and for the nine months ended September 30, 2022.
Financial Instruments
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments. In February 2020, the FASB issued ASU 2020-02 and delayed the effective date of ASU 2016-13 until fiscal year beginning after December 15, 2022. The Company is currently evaluating the impact of adopting ASU 2016-13 on its 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 the Company’s unaudited condensed consolidated financial statements as of and for the nine months ended September 30, 2022.
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 was consistent with customary practice in the French securities market. The liquidity agreement complied with applicable laws and
regulations in France and authorized 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 September 30, 2022,
12
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 4 - Short-term Investment – Continued
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$
Also
on September 29, 2022, the Company entered into a stock purchase agreement (or “Stock Purchase Agreement”) to purchase
As of September 30, 2022 and December 31, 2021, the fair value of the investment was as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| Investment cost – Ejectt – short-term | $ | $ | ||||||
| Investment cost - Liquidity | ||||||||
| Total Investment Cost | ||||||||
| Appreciation in market value (Allowance for value decline) | ||||||||
| Net | ||||||||
| Prepaid investment | ||||||||
| $ | $ | |||||||
NOTE 5 - Inventories
As of September 30, 2022 and December 31, 2021, inventories consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Satellite equipment for sale under construction | $ | $ | ||||||
| Supplies | ||||||||
| Allowance for inventory loss | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
NOTE 6 - Prepaid Expenses and Other Current Assets
As of September 30, 2022 and December 31, 2021, prepaid expenses and other current assets consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Prepaid expense | $ | $ | ||||||
| Other receivable – related parties | ||||||||
| Other current assets | ||||||||
| Total | $ | $ | ||||||
13
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 7 - Property and Equipment
As of September 30, 2022 and December 31, 2021, the balances of property and equipment were as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Ground station equipment | $ | $ | ||||||
| Computer software and equipment | ||||||||
| Satellite equipment | ||||||||
| Vehicle | ||||||||
| Leasehold improvement | ||||||||
| Furniture and fixture | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Net | ||||||||
| Prepayments - land | ||||||||
| Prepaid equipment | ||||||||
| Total | $ | $ | ||||||
On July 10, 2018, the Company and Aerkomm Taiwan entered into a real estate sale contract (the “Land Purchase Contract”) with Tsai Ming-Yin (the “Seller”) with respect to the acquisition by Aerkomm Taiwan of a parcel of land located in Taiwan. The land is expected to be used to build a satellite ground station and data center. Pursuant to the terms of the Land Purchase Contract, and subsequent amendments on July 30, 2018, September 4, 2018, November 2, 2018 and January 3, 2019, the Company paid to the seller in installments refundable prepayments of $34,474,462 in total. As of September 30, 2022 and December 31, 2021, the estimated commission payable for the land purchase in the amount of $1,387,127 was recorded to the cost of land and the payment to be paid after the full payment of the Land acquisition price no later than September 30, 2022. According to the amended Land Purchase Contract dated on November 10, 2020, the transaction may be terminated at any time by both the buyer and the seller and agreed by all parties if the Company is unable to obtain the qualified satellite license issued by Taiwan authority before July 31, 2021. As of December 20, 2022, the license applications are still in progress.
Depreciation expense was $
NOTE 8 - Long-term Investment
On August 20, 2021, the Company entered
into Stock Subscription Agreement (or “Subscription Agreement”) with tz-Comm Inc. (or “tz-Comm”), a Nevada company,
to purchase
As of September 30, 2022,
NOTE 9 - Intangible Asset, Net
As of September 30, 2022 and December 31, 2021, the cost and accumulated amortization for intangible asset were as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Satellite system software | $ | $ | ||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
Amortization expense was $
14
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
As of September 30, 2022 and December 31, 2021, the goodwill were as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Gross amount | $ | $ | ||||||
| Accumulated impairment | ||||||||
| Net | $ | $ | ||||||
No impairment loss on goodwill were recognized for the nine-month period ended September 30, 2022 and for the year ended December 31, 2021.
Cash payment for the acquisition of subsidiary for the nine months ended September 30, 2022 and 2021 is as follows:
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash | $ | $ | ||||||
| Loan receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Property and equipment | ||||||||
| Deposits | ||||||||
| Goodwill | ||||||||
| Accounts payable | ||||||||
| Loan payable | ( | ) | ||||||
| Other payable | ( | ) | ||||||
| Total Cash paid for the acquisition of the subsidiary | $ | $ | ||||||
15
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 11 - Operating and Finance Leases
| A. | Lease term and discount rate: |
The weighted-average remaining lease term and discount rate related to the leases were as follows:
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Weighted-average remaining lease term | ||||||||
| Operating lease | ||||||||
| Finance lease | ||||||||
| Weighted-average discount rate | ||||||||
| Operating lease | % | % | ||||||
| Finance lease | % | % | ||||||
| B. | The balances for the operating and finance leases are presented as follows within the consolidated balance sheets as of September 30, 2022 and December 31, 2021: |
Operating Leases
| September
30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Right-of-use assets | $ | $ | ||||||
| Lease liability – current | $ | $ | ||||||
| Lease liability – non-current | $ | $ | ||||||
Finance Leases
| September
30, 2022 | December 31, 2021 | |||||||
| (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 consolidated statements of operations and comprehensive loss for the three months and nine months periods ended September 30, 2022 and 2021:
Operating Leases
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September
30, 2022 | September
30, 2021 | September
30, 2022 | September
30, 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Lease expense | $ | $ | $ | $ | ||||||||||||
| Sublease rental income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net lease expense | $ | $ | $ | $ | ||||||||||||
16
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 11 - Operating and Finance Leases - Continued
Finance Leases
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Amortization of right-of-use asset | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Total finance lease cost | $ | $ | $ | $ | ||||||||||||
Supplemental cash flow information related to leases for the nine-month periods ended September 30, 2022 and 2021 is as follows:
| September 30, 2022 | September 30, 2021 | |||||||
| (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:
Operating Leases
| Related Party | Others | Total | ||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
| October 1, 2022 – September 30, 2023 | $ | $ | $ | |||||||||
| October 1, 2023 – September 30, 2024 | ||||||||||||
| Total lease payments | $ | $ | $ | |||||||||
| Less: Imputed interest | ( | ) | ( | ) | ||||||||
| Present value of lease liabilities | $ | $ | $ | |||||||||
| Current portion | ( | ) | ( | ) | ||||||||
| Non-current portion | $ | $ | $ | |||||||||
Finance Leases
| Total | ||||
| (Unaudited) | ||||
| October 1, 2022 – September 30, 2023 | $ | |||
| October 1, 2023 – September 30, 2024 | ||||
| October 1, 2024 – September 30, 2025 | ||||
| Total lease payments | $ | |||
| Less: Imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
| Current portion | ( | ) | ||
| Non-current portion | $ | |||
17
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 12 - Short-term Loans
In June 2021, the Company entered into a
loan agreement in the amount of $
On June 28, 2022, the Company entered
into a subscription agreement with an investor who agreed to purchase
On July 29,2022, MEPA Lab. entered into an additional subscription agreement with the investor who agreed to purchase 4,400,000 shares of MEPA Lab’s common stock for an aggregate purchase price of $4,400,000. To date, the investor has paid the Company $4,324,000 against the purchase price. Despite the fact that the Company have received a substantial portion of the subscribed for investment, the subscription agreement is subject to a cooling off period pursuant to which it may be terminated prior to December 31, 2022 by either party at any time and for any reason. If the subscription agreement is terminated by the investor, the Company will be required to return the funds paid by the investor against the subscription amount to the investor, without interest. Additionally, if the final installment on the subscription amount is not received by the Company by December 31, 2022, as that date may be further extended by mutual agreement of the parties, the subscription agreement will terminate and the Company will be required to return all funds received to the investor. Because of the wording of the subscription agreement, the Company cannot assure you at this time that the Company will not be required to return the invested funds to the investor.
On September 15, 2022, the Company entered into an additional subscription agreement with the investor referenced who agreed to purchase 966,669 shares of the Company’s common stock for 6.00 Euros per share for an aggregate purchase price of 5,800,000 Euros ($5,810,458 at the agreed upon exchange rate of EUR/USD 0.9982). To date, this investor has paid the Company $5,674,000 against the purchase price. Despite the fact that the Company have received a substantial portion of the subscribed for investment, the subscription agreement is subject to a cooling off period pursuant to which it may be terminated prior to December 31, 2022 by either party at any time and for any reason. If the subscription agreement is terminated by the investor, the Company will be required to return the funds paid by the investor against the subscription amount to the investor, without interest. Additionally, if the final installment on the subscription amount is not received by the Company by December 31, 2022, as that date may be further extended by mutual agreement of the parties, the subscription agreement will terminate and the Company will be required to return all funds received to the investor. Because of the wording of the subscription agreement, the Company cannot assure you at this time that the Company will not be required to return the invested funds to the investor.
The Company have not issued any shares to the investor for either of these two subscriptions and the Company are temporarily accounting for these investment as short-term loans to us.
18
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 13 - Long-term Loan
The Company has a car loan credit line
of NT$
| Twelve months ending September 30, | (Unaudited) | |||
| 2023 | $ | |||
| 2024 | ||||
| Total installment payments | ||||
| Less: Imputed interest | ( | ) | ||
| Present value of long-term loan | ||||
| Current portion | ( | ) | ||
| Non-current portion | $ | |||
NOTE 14 - Long-term Bonds Payable and Restricted Cash
On December 3, 2020, the Company closed
a private placement offering consisting of US$
The Company has the option to redeem the Bonds at a redemption amount equal to the Early Redemption Amount, as defined in the Offering Memorandum, at any time on or after December 2, 2023 and prior to the Maturity Date, if the Closing Price of the Company’s Common Stock listed on the Euronext Paris for 20 trading days in any period of 30 consecutive trading days, the last day of which occurs not more than fifteen trading days prior to the date on which notice of such redemption is given, is greater than 130% of the Conversion Price on each applicable trading day or (ii) in whole or in part of the Bonds on the second anniversary of the issue date or (iii) where 90% or more in principal amount of the Bonds issued have been redeemed, converted or repurchased and cancelled.
Unless previously redeemed, converted
or repurchased and cancelled, the Bonds may be converted at any time on or after December 3, 2020 up to November 20, 2025 into shares
of Common Stock of the Company with a par value of $
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
As of September 30, 2022 and December 31, 2021, the long-term bonds payable consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Credit Enhanced Zero Coupon Convertible Bonds | $ | $ | ||||||
| Coupon Bonds | ||||||||
| Unamortized loan fee | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
Bond issuance cost was $
NOTE 15 - Prepayment from Customer
On March 9, 2015, the Company entered
into a
NOTE 16 - Income Taxes
Income tax expense for the three-month and six-month periods ended September 30, 2022 and 2021 consisted of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Current: | ||||||||||||||||
| Federal | $ | $ | $ | - | $ | - | ||||||||||
| State | ||||||||||||||||
| Foreign | ( | ) | - | |||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ||||||||||
20
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 16 - Income Taxes - Continued
The following table presents a reconciliation of the Company’s income tax at statutory tax rate and income tax at effective tax rate for the three months and nine months periods ended September 30, 2022 and 2021.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Tax expense (benefit) at statutory rate | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Net operating loss carryforwards (NOLs) | ||||||||||||||||
| Foreign investment losses (gains) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Stock-based compensation expense | ||||||||||||||||
| Amortization expense | ||||||||||||||||
| Accrued payroll | ( | ) | ||||||||||||||
| Unrealized exchange losses (gains) | ( | ) | ||||||||||||||
| Others | ( | ) | ( | ) | ||||||||||||
| Valuation allowance | ||||||||||||||||
| Tax expense (benefit) at effective tax rate | $ | $ | ( | ) | $ | $ | ||||||||||
Deferred tax assets (liability) as of September 30, 2022 and December 31, 2021 consist approximately of:
| September 30, 2022 | December 31, 2021 | |||||||
| (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 September 30, 2022 and December
31, 2021, the Company had federal NOLs of approximately $
As of September 30, 2022 and December
31, 2021, the Company has Japan NOLs of approximately $
As of September 30, 2022 and December
31, 2021, the Company has Taiwan NOLs of approximately $
As of September 30, 2022 and December
31, 2021, 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.
21
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 17 - Capital Stock
| 1) | Preferred Stock: |
The Company is authorized to issue
| 2) | Common Stock: |
The Company is authorized to issue
On February 13, 2017, all of Aircom’s
| September 30, 2022 | December 31, 2021 | |||||||
| (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.
| 3) | Stock Warrant: |
In connection with the Underwriting Agreement
with Boustead Securities, LLC, or Boustead, the Company agreed to issue to Boustead warrants to purchase a number of the Company’s
shares equal to
On October 31, 2021, following approval
by the Board of Directors, the Company issued a warrant to Mr. Sheng-Chun Chang for the purchase of up to
NOTE 18 - Significant Related Party Transactions
In addition to the information disclosed in other notes, the Company has significant related party transactions as follows:
| A. | Name of related parties and relationships with the Company: |
| Related Party | Relationship | |
| Well Thrive Limited (“WTL”) | ||
| Ejectt Inc. (“Ejectt”) | ||
| Star Jec Inc. (“Star Jec”) | ||
| AA Twin Associates Ltd. (“AATWIN”) | ||
| EESquare Japan (“EESquare JP”) | ||
| Wealth Wide Int’l Ltd. (“WWI”) | ||
| MEPA Labs Inc. (“MEPA”) |
22
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 18 - Significant Related Party Transactions - Continued
| 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.
| a. | As of September 30, 2022 and December 31, 2021: |
| September 30, 2022 | December 31, 2021 | |||||||
| Other receivable from: | ||||||||
| Star Jec 1 | $ | $ | ||||||
| EESquare JP 2 | ||||||||
| Others | - | |||||||
| Total | $ | $ | ||||||
| Customer Prepayment from Ejectt 3 | $ | $ | ||||||
| Loan from WTL 4 | $ | $ | ||||||
| Other payable to: | ||||||||
| AATWIN 5 | $ | $ | ||||||
| Interest payable to WTL4 | ||||||||
| Others 7 | ||||||||
| Total | $ | $ | ||||||
| Lease liability to WWI 6 | $ | $ | ||||||
| 1. | |
| 2. | |
| 3. | |
| 4. | |
| 5. | |
| 6. | |
| 7. |
23
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 18 - Significant Related Party Transactions - Continued
| b. | For the three months and nine months periods ended September 30, 2022 and 2021: |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Purchase from Ejectt 1 | $ | $ | $ | $ | ||||||||||||
| Service income from Star Jec 2 | ||||||||||||||||
| Consulting expense charged by AATWIN 3 | ||||||||||||||||
| Interest expense charged by WTL 4 | ||||||||||||||||
| Rental expense charged by WWI 5 | ||||||||||||||||
| Sales to Ejectt 6 | ||||||||||||||||
| Rental income from EESqaure JP 7 | ||||||||||||||||
| Other income from MEPA 8 | ||||||||||||||||
| Rental income from MEPA 8 | ||||||||||||||||
| 1. | |
| 2. | |
| 3. | |
| 4. | |
| 5. | |
| 6. | |
| 7. | |
| 8. |
24
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 19 - 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
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
25
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 19 - Stock Based Compensation - Continued
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
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
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 $
26
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 19 - 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.
The Company used the following assumptions to estimate the fair value of options granted in six-month period ended September 30, 2022 and year ended December 31, 2021 under the Plans as follows:
| Assumptions | ||||
| Expected term | ||||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk-free interest rate | % | |||
| Forfeiture rate | % | |||
27
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 19 - Stock Based Compensation - Continued
Aircom 2014 Plan
Activities related to options for the Aircom 2014 Plan for the nine months ended September 30, 2022 and the year ended December 31, 2021 are as follows:
| Number of Shares | Weighted Average Exercise Price Per Share | Weighted Average Fair Value Per Share | ||||||||||
| Options outstanding at January 1, 2021 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/Cancelled | ( | ) | ||||||||||
| Options outstanding at December 31, 2021 | ||||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/Cancelled | ||||||||||||
| Options outstanding at September 30, 2022 (unaudited) | ||||||||||||
There are no unvested stock awards under Aircom 2014 Plan for the nine months period ended September 30, 2022 and the year ended December 31, 2021.
Of the shares covered by options outstanding as of September 30, 2022, 111,871 are now exercisable. Information related to stock options outstanding and exercisable on September 30, 2022, is as follows:
| Options Outstanding (Unaudited) | Options Exercisable (Unaudited) | |||||||||||||||||||||||||
| Range of Exercise Prices | Shares Outstanding at 9/30/2022 | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | Shares Exercisable at 9/30/2022 | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||||
As of September 30, 2022, there was no unrecognized stock-based compensation expense for the Aircom 2014 Plan. No option was exercised during the nine months periods ended September 30, 2022 and 2021.
Aerkomm 2017 Plan
Activities related to options outstanding under Aerkomm 2017 Plan for the nine months ended September 30, 2022 and the year ended December 31, 2021 are as follows:
| Number of Shares | Weighted Average Exercise Price Per Share | Weighted Average Fair Value Per Share | ||||||||||
| Options outstanding at January 1, 2021 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/Cancelled | ||||||||||||
| Options outstanding at December 31, 2021 | ||||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/Cancelled | ( | ) | ||||||||||
| Options outstanding at September 30, 2022 (unaudited) | ||||||||||||
28
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 19 - Stock Based Compensation - Continued
Activities related to unvested stock awards under Aerkomm 2017 Plan for the nine months period ended September 30, 2022 and the year ended December 31, 2021 are as follows:
| Number of Shares | Weighted Average Fair Value Per Share | |||||||
| Options unvested at January 1, 2021 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited/Cancelled | ||||||||
| Options unvested at December 31, 2021 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited/Cancelled | ( | ) | ||||||
| Options unvested at September 30, 2022 (unaudited) | ||||||||
| Options Outstanding (Unaudited) | Options Exercisable (Unaudited) | |||||||||||||||||||||||||
| Range of Exercise Prices | Shares Outstanding at 9/30/2022 | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | Shares Exercisable at 9/30/2022 | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | ||||||||||||||||||||
| $ | 2.72 – 4.20 | $ | $ | |||||||||||||||||||||||
| 6.00 – 10.00 | ||||||||||||||||||||||||||
| 11.00 – 14.20 | ||||||||||||||||||||||||||
| 20.50 – 27.50 | ||||||||||||||||||||||||||
| 30.00 – 35.00 | ||||||||||||||||||||||||||
As of September 30, 2022, total unrecognized
stock-based compensation expense related to stock options was approximately $
NOTE 20 - Commitments
As of September 30, 2022, 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 provide 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 2022, although there is no guarantee that the project will be successfully completed in the projected timeframe.
29
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 20 - Commitments - Continued
Airbus Interior Service Agreement: On July 24, 2020, Aerkomm Malta, entered into an agreement with Airbus Interior Services, a wholly-owned subsidiary of Airbus. This new agreement follows the agreement that Aircom signed with Airbus on November 30, 2018 pursuant to which Airbus agreed to develop, install and certify the Aerkomm K++ System on a prototype A320 aircraft to EASA and FAA certification standards.
Hong Kong Airlines Agreement: On January 30, 2020, Aircom signed an agreement with Hong Kong Airlines Ltd. (HKA) to provide to Hong Kong Airlines both of its Aerkomm AirCinema and AERKOMM K++ IFEC solutions. Under the terms of this new agreement, Aircom will provide HKA its Ka-band AERKOMM K++ IFEC system and its AERKOMM AirCinema system. HKA will become the first commercial airliner launch customer for Aircom. On November 17, 2021, we signed a new agreement with Hong Kong Airlines Ltd and Ejectt Inc. Based on the long-term relationship and anticipated further co-operation between Aerkomm and Hong Kong Airlines, Aerkomm agreed that it will provide to Hong Kong Airlines the Low Earth Orbit (LEO) satellite version of the Aerkomm K++ System with the Telesat Lightspeed service when available. The Aerkomm K++ System will be delivered with a full certified Service Bulletin by Airbus.
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 $
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
NOTE 21 - Subsequent Events
tz-Comm
On August 20, 2021, the Company entered
into Stock Subscription Agreement (or “Subscription Agreement”) with tz-Comm Inc. (or “tz-Comm”), a Nevada company,
to purchase
30
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Use of Terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our,” or “our company” are to the combined business of Aerkomm Inc., a Nevada corporation, and its consolidated subsidiaries, including Aircom Pacific, Inc., a California corporation and wholly-owned subsidiary, or Aircom; Aerkomm SY Ltd., a Republic of Seychelles company and wholly-owned subsidiary of Aerkomm, or Aerkomm SY; Aerkomm Taiwan Inc., a Taiwanese company and wholly-owned company of Aerkomm, or Aerkomm Taiwan; Aerkomm Pacific Limited, a Malta company and wholly owned subsidiary of Aerkomm SY Ltd., or Aerkomm Malta; Aerkomm Hong Kong Limited, a Hong Kong company and wholly-owned subsidiary of Aerkomm, or Aerkomm HK; Aerkomm Japan, Inc., a Japanese company and wholly-owned subsidiary of Aerkomm, or Aerkomm Japan; and Aircom Telecom LLC, a Taiwanese company and wholly-owned subsidiary of Aircom, or Aircom Taiwan; MEPA Lab Inc., a California company and wholly-owned subsidiary of Aerkomm, or MEPA; or Beijing Yatai Communication Co., Ltd., a Chinese company and wholly -owned subsidiary of Aerkomm Taiwan, or Beijing Yatai.
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. |
31
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.
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.
32
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 $2,953 and $0 for the nine months ended September 30, 2022 and the year ended December 31, 2021.
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 an 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.
33
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
Termination of Joint Venture Agreement
On January 10, 2022, we entered into a joint venture (the “Joint Venture”) agreement with Sakai Display Products Corporation, a company incorporated under the laws of Japan (“SDPJ”), and PanelSemi Corporation, a company incorporated under the laws of Taiwan, to develop and commercialize a tile antenna. The Joint Venture was operated through MEPA Labs Inc., a California corporation (“MEPA”) wholly owned by SDPJ. On September 4, 2022, we entered into a stock purchase agreement with SDPJ to acquire 100% of the outstanding capital stock of MEPA for a purchase price of $100,000. We closed this acquisition on September 4, 2022, and, as of that date, the Joint Venture terminated and MEPA became our wholly owned subsidiary.
Changes in our Executive Officers
On August 29, 2022, Y. Tristan Kuo resigned from his position as our Chief Financial Officer. Mr. Kuo’s resignation was not the result of any disagreement with us on any matter relating to its operation, policies (including accounting or financial policies) or practices. On that same day, we entered into an independent contractor agreement with Mr. Kuo pursuant to which he agreed to assist and advise us, until the earlier of February 28, 2023 and our hiring of a new chief financial officer. Mr. Kuo will be assisting us with the following matters: SEC reporting, financial, accounting and SOX issues, and public offering and financing issues. We agreed to pay Mr. Kuo a fee of $15,000 per month with a one-time $15,000 signing bonus and will reimburse Mr. Kuo for certain out-of-pocket expenses. On September 1, 2022, our board of directors appointed Louis Giordimaina, our Chief Executive Officer, as Interim Chief Financial Officer.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic was unprecedented notably because of the policy response which involved the shutdown of much economic activity including the halt to airline traffic. It produced the sharpest global recession since the Great Depression. However, in its wake, the macro-economic performance has generally speaking been less dire than initially feared. It produced the shortest recession in US history, for instance, limited to two months. US unemployment spiked to 14.7% in April 2020 and few expected the rate to drop as swiftly as has been the case; the unemployment rate declined to 3.6% in May 2022 and thus basically back to the pre-crises low.
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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.
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Results of Operations
Comparison of Three Months Ended September 30, 2022 and 2021
The following table sets forth key components of our results of operations during the three-month periods ended September 30, 2022 and 2021.
| Three Months Ended September 30, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Revenue | $ | 2,855 | $ | 1,810,000 | $ | (1,807,145 | ) | (99.8 | )% | |||||||
| Cost of revenue | - | 1,807,100 | (1,807,100 | ) | (100.0 | )% | ||||||||||
| Operating expenses | 2,380,851 | 1,676,214 | 704,637 | 42.0 | % | |||||||||||
| Loss from operations | (2,377,996 | ) | (1,673,314 | ) | (704,682 | ) | 42.1 | % | ||||||||
| Net non-operating income (loss) | (1,428,543 | ) | 3,374,616 | (4,803,159 | ) | (142.3 | )% | |||||||||
| Loss before income taxes | (3,806,539 | ) | 1,701,302 | (5,507,841 | ) | (323.7 | )% | |||||||||
| Income tax expense | - | (12 | ) | 12 | (100.0 | )% | ||||||||||
| Net Loss | (3,806,539 | ) | 1,701,314 | (5,507,853 | ) | (323.7 | )% | |||||||||
| Other comprehensive income (loss) | 1,290,912 | (30,294 | ) | 1,321,206 | (4,361.3 | )% | ||||||||||
| Total comprehensive loss | $ | (2,515,627 | ) | $ | 1,671,020 | ) | $ | (4,186,647 | ) | (250.5 | )% | |||||
Revenue. Our total revenue was $2,855 and $1,810,000 for the three months periods ended September 30, 2022 and 2021, respectively. Our total revenue was $2,855 for the three months ended September 30, 2022 for providing satellite service to one of our related parties. Our total revenue of $1,810,000 for the three months ended September 30, 2021 due to our sale of network hardware to a non-related party.
Cost of revenue. Our cost of revenue was $0 and $1,807,100 for the three-month periods ended September 30, 2022 and 2021, respectively. The cost of revenue for the three months ended September 30, 2022 was $0 as it was a small service provided to one of our related parties. The cost of sales for the three months ended September 30, 2021 of $1,807,100 was the costs of our sale of network hardware to a non-related party.
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 $704,637, or 42.0%, to $2,380,851 for the three-month period ended September 30, 2022, from $1,676,214 for the three months ended September 30, 2021. The increase was mainly due to the increase in professional services, payroll and related expenses and amortization expense of $619,688, $344,004, and $79,000, respectively, which was offset by the decrease in equipment leasing, stock-based compensation expense and insurance expense of $210,000, $101,624 and $94,533, respectively. The increases in payroll and related expenses and professional fee were partially related to the consolidation of newly acquired subsidiary, MEPA.
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Net non-operating loss. We had $1,428,543 in net non-operating loss for the three months ended September 30, 2022, as compared to net non-operating income of $3,374,616 for the three months ended September 30, 2021. Net non-operating loss in the three months ended September 30, 2022 represents a loss of $1,318,614 in foreign exchange translation and financing cost of $121,703 from the amortization of bond issuing costs, which was offset by a net other income of $11,799. Net non-operating income in the three months ended September 30, 2021 represents a gain of $27,402 in foreign exchange translation, financing cost of $47,775 from the amortization of bond issuing costs, unrealized gain in investment of $3,375,049 and a net other income of $19,940.
Loss before income taxes. Our loss before income taxes increased by $5,507841, or 323.7%, to $3,806,539 for the three months ended September 30, 2022, from an income of $1,701,314 for the three months ended September 30, 2021, as a result of the factors described above.
Total comprehensive loss. As a result of the cumulative effect of the factors described above, our total comprehensive loss increased by $4,186,647 to $,2515,627 for the three months ended September 30, 2022, from the total comprehensive income of $1,671,020 for the three months ended September 30, 2021.
Comparison of Nine months ended September 30, 2022 and 2021
The following table sets forth key components of our results of operations during the nine-month periods ended September 30, 2022 and 2021.
| Nine Months Ended September 30, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Revenue – related party | $ | 6,073 | $ | 1,882,000 | $ | (1,875,927 | ) | (99.7 | )% | |||||||
| Cost of revenue | - | 1,850,978 | (1,850,978 | ) | (100.0 | )% | ||||||||||
| Operating expenses | 6,075,775 | 6,843,728 | (767,953 | ) | (11.2 | )% | ||||||||||
| Loss from operations | (6,069,702 | ) | (6,812,706 | ) | 743,004 | (10.9 | )% | |||||||||
| Net non-operating loss | (2,949,378 | ) | 2,753,250 | (5,702,628 | ) | (207.1 | )% | |||||||||
| Loss before income taxes | (9,019,080 | ) | (4,059,456 | ) | (4,959,624 | ) | 122.2 | % | ||||||||
| Income tax expense | 1,600 | 3,257 | (1,657 | ) | (50.9 | )% | ||||||||||
| Net Loss | (9,020,680 | ) | (4,062,713 | ) | (4,957,967 | ) | (122.0 | )% | ||||||||
| Other comprehensive income (loss) | 2,482,003 | (160,708 | ) | 2,642,711 | (1,644.4 | )% | ||||||||||
| Total comprehensive loss | $ | (6,538,677 | ) | $ | (4,223,421 | ) | $ | (2,315,256 | ) | 54.8 | % | |||||
Revenue. Our total revenue was $6,073 and $1,882,000 for the nine months periods ended September 30, 2022 and 2021, respectively. Our total revenue was $6,073 for the nine months period ended September 30, 2022 represents an income from providing satellite service to one of our related parties. Our total revenue of $1,882,000 for the nine months period ended September 30, 2021 composed of the sales of ground antenna units to one of our related parties and sales of network hardware to a non-related party.
Cost of revenue. Our cost of sales was $0 and $1,850,978 for the nine-month periods ended September 30, 2022 and 2021, respectively. The cost of sales for the nine months ended September 30, 2022 was $0 as there is no cost directly associated with providing satellite service to one of our related parties. The cost of sales for the nine months ended September 30, 2021 of $1,850,978 was for the sales of ground antenna units to one of our related parties and sales of network hardware to a non-related party.
Operating expenses. Our operating expenses consist primarily of compensation and benefits, professional advisor fees, research and development expenses, cost of promotion, business development, business travel, transportation costs, and other expenses incurred in connection with general operations. Our operating expenses decreased by $767,953, or 11.2%, to $6,075,775 for the nine months ended September 30, 2022, from $6,843,728 for the nine months ended September 30, 2021. This decrease was mainly due to the decrease in non-cash stock-based compensation expense, insurance expense, legal expense, equipment leasing and accounting and audit fees of $1,001,979, $314387, $217,181, $210,000 and $148,129, respectively, which was offset by the increase in professional services, consulting fee and payroll and related expenses as the result of warrant re-valuation of $900,407, $118,327 and $120,442.
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Net non-operating loss. We had $2,949,378 in net non-operating loss for the nine months ended September 30, 2022, as compared to net non-operating income of $2,753,250 for the nine months ended September 30, 2021. Net non-operating income in the nine months ended September 30, 2022 represents loss on foreign exchange translation of $2,602,872, amortization of financing cost of $360,089, unrealized loss in investment of $21,157 and net other income of $34,740. Net non-operating expense in the nine months ended September 30, 2021 represents an unrealized gain in investment of $2,731,569, amortization of financing cost of $143,434 from bond issuing, gain in foreign exchange translation of $169,316 and net other loss of $4,201.
Loss before income taxes. Our loss before income taxes decreased by $4,959,624, or 122.2%, to $9,019,080 for the nine months ended September 30, 2022, from a loss of $4,059,456 for the nine months ended September 30, 2021, as a result of the factors described above.
Income tax expense. Income tax expense was $1,600 and $3,257 for the nine-month periods ended September 30, 2022 and 2021, respectively, mainly due to a California franchise tax and foreign subsidiary’s income tax expenses.
Total comprehensive loss. As a result of the cumulative effect of the factors described above, our total comprehensive loss increased by $2,315,256, or 54.8%, to $6,538,677 for the nine months ended September 30, 2022, from $4,223,421 for the nine months ended September 30, 2021.
Liquidity and Capital Resources
As of September 30, 2022, we had cash and cash equivalents of $5,966,294. To date, we have financed our operations primarily through cash proceeds from financing activities, including through our completed public offering, short-term borrowings and equity contributions by our stockholders.
The following table provides detailed information about our net cash flow:
Cash Flow
Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used for operating activities | $ | (7,379,758 | ) | $ | (1,415,507 | ) | ||
| Net cash used for investing activity | (1,419,781 | ) | (63,010 | ) | ||||
| Net cash provided by financing activity | 8,995,017 | 1,152,769 | ||||||
| Net decrease in cash and cash equivalents | 195,478 | (325,748 | ) | |||||
| Cash at beginning of year | 3,288,813 | 3,794,591 | ||||||
| Foreign currency translation effect on cash | 2,482,003 | (160,708 | ) | |||||
| Cash at end of the periods | $ | 5,966,294 | $ | 3,308,135 | ||||
Operating Activities
Net cash used for operating activities was $7,379,758 for the nine months ended September 30, 2022, as compared to $1,415,507 for the nine months ended September 30, 2021. In addition to the net loss of $9,020,680, the increase in net cash used for operating activities during the nine months ended September 30, 2022 was mainly due to an increase in prepaid expenses and other current assets of $2,216,352 and a decrease in operating lease liability of $195,544, which was offset by a decrease in accounts receivable of $75,180, increase in accounts payable of $262,419 and increase in accrued expense and other current liabilities of $1,526,171. In addition to the net loss of $4,062,713, the increase in net cash used for operating activities during the nine-month period ended September 30, 2021 was mainly due to decrease in accounts payable and increase of prepaid expenses and other current assets of $309,712 and $46,248, respectively, offset by the increase in accrued expenses and other current liabilities, prepayment from customer and operating lease liability of $1,903,246, $1,231,200 and $43,464, respectively, and decrease in inventory of $50,332.
Investing Activities
Net cash used for investing activities for the nine months ended September 30, 2022 was $1,419,781 as compared to net cash used for investing activities of $63,010 for the nine months ended September 30, 2021. The net cash used for investing activities for the nine months ended September 30, 2022 was mainly due to the acquisition of short-term investment of $1,416,142 and acquisition of property and equipment of $11,462, which was offset by proceeds from disposal of trading security of $7,823. The net cash used for investing activities for the nine months ended September 30, 2021 was mainly due to the purchase of property and equipment of $85,628, which was offset by the proceeds from disposal of property and equipment of $26,063.
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Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2022 and 2021 was $8,995,017 and $1,152,769, respectively. Net cash provided by financing activities for the nine months ended September 30, 2022 was mainly attributable to net proceeds from short-term loans of $9,015,361, which was offset by the repayment on long-term loan and finance lease liability of $11,065 and $9,279, respectively. Net cash provided by financing activities for the nine months ended September 30, 2021 was mainly attributable to the proceeds from short-term loans of $1,169,561.
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 don’t have any outstanding balance under the Loans from the Lenders.
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.
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, in 2022, having successfully completed 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.
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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 $3,175,200, equivalent to 3,000,000 Euros, from this investor. Despite the fact that we have received the investor’s funds, the subscription agreement, as amended on July 29, 2022, is subject to a cooling off period pursuant to which it may be terminated prior to December 31, 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. Additionally, if the final installment on the Euro 3,100,000 subscription amount is not received by us by December 31, 2022, as that date may be further extended by mutual agreement of the parties, the subscription agreement will terminate and we will be required to return all Purchase Price funds received to the investor. 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.
On July 29,2022, MEPA Lab. entered into an additional subscription agreement with the investor who agreed to purchase 4,400,000 shares of MEPA Lab’s common stock for an aggregate purchase price of $4,400,000. To date, the investor has paid the Company $4,324,000 against the purchase price. Despite the fact that we have received a substantial portion of the subscribed for investment, the subscription agreement is subject to a cooling off period pursuant to which it may be terminated prior to December 31, 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 funds paid by the investor against the subscription amount to the investor, without interest. Additionally, if the final installment on the subscription amount is not received by us by December 31, 2022, as that date may be further extended by mutual agreement of the parties, the subscription agreement will terminate and we will be required to return all funds received to the investor. Because of the wording of the subscription agreement, we cannot assure you at this time that we will not be required to return the invested funds to the investor.
On September 15, 2022, we entered into an additional subscription agreement with the investor referenced above who agreed to purchase 966,669 shares of our common stock for 6.00 Euros per share for an aggregate purchase price of 5,800,000 Euros ($5,810,458 at the agreed upon exchange rate of EUR/USD 0.9982). To date, this investor has paid us $5,000,000 against the purchase price. Despite the fact that we have received a substantial portion of the subscribed for investment, the subscription agreement is subject to a cooling off period pursuant to which it may be terminated prior to December 31, 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 funds paid by the investor against the subscription amount to the investor, without interest. Additionally, if the final installment on the subscription amount is not received by us by December 31, 2022, as that date may be further extended by mutual agreement of the parties, the subscription agreement will terminate and we will be required to return all funds received to the investor. Because of the wording of the subscription agreement, we cannot assure you at this time that we will not be required to return the invested funds to the investor.
We have not issued any shares to the investor for either of these two subscriptions and we are temporarily accounting for these investment as short-term loans to us.
Capital Expenditures
Our operations continue to require significant capital expenditures primarily for technology development, equipment and capacity expansion. Capital expenditures are associated with the supply of airborne equipment to our prospective airline partners, which correlates directly to the roll out and/or upgrade of service to our prospective airline partners’ fleets. Capital spending is also associated with the expansion of our network, ground stations and data centers and includes design, permitting, network equipment and installation costs.
Capital expenditures for the nine months ended September 30, 2022 and 2021 were $11,462 and $62,298, respectively.
We anticipate an increase in capital spending in our fiscal year ended December 31, 2022 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.
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.
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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 December 31, 2021 and 2020, the total balance of cash in bank exceeding the amount insured by the Federal Deposit Insurance Corporation (FDIC) for the Company was approximately $2,134,000 and $0, respectively. The balance of cash deposited in foreign financial institutions exceeding the amount insured by local insurance is approximately $3,265,000 and $3,106,000 as of September 30, 2022 and December 31, 2021, 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 nine months ended September 30, 2022 and 2021, 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 nine months ended September 30, 2022 and 2021.
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.
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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 September 30, 2022. 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 September 30, 2022.
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 nine months ended September 30, 2022 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.
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.
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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 August 17, 2022, the date on which these unaudited condensed consolidated financial statements were available to be issued. All subsequent events requiring recognition as of September 30, 2022 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 September 30, 2022 and the adoption does not have significant impact on our consolidated financial statements and related disclosures as of and for the nine months ended September 30, 2022.
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 nine months ended September 30, 2022.
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 September 30, 2022 and the adoption does not have significant impact on our condensed consolidated financial statements as of and for the nine months ended September 30, 2022.
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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 interim 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 and interim chief financial officer, Louis Giordimaina, of the effectiveness of the design and operation of our disclosure controls and procedures, as of September 30, 2022.
Based upon, and as of the date of this evaluation, our chief executive and interim chief financial officer, Louis Giordimaina, 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 September 30, 2022, our disclosure controls and procedures were not effective.
Changes in Internal Control Over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
During its evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2022, 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.
There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2022 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 September 30, 2022 to the legal proceedings previously disclosed in Item 3 “Legal Proceedings” of our Annual Report on Form 10-K filed on July 1, 2022.
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, 2021 filed with the SEC on July 1, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any equity securities during the quarter ended September 30, 2022 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 September 30, 2022 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 |
| † | Executive Compensation Plan or Agreement |
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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: December 20, 2022 | 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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Exhibit 10.2
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT dated as of September 04, 2022 (the “Agreement”), is made by and between SAKAI DISPLAY PRODUCTS CORPORATION, a Japanese legal entity duly set up in accordance with the law of Japan (the “Seller” or “Stockholder”), and AERKOMM INC., a Nevada corporation duly set up in accordance with the law of Nevada (the “Buyer”), will be effective upon the latest of the signature affixed hereunder.
RECITALS
MEPA Labs Inc. (the “Company”), a California corporation, duly set up under the the law of California in 2022, is authorized to issue FIFTY MILLION (50,000,000) shares of Common Stock with a par value at US$0.001 per share.
Seller signed a Subscription Agreement, attached herewith as Exhibit A, dated January 19, 2022 with the Company, that Seller subscribed, invested and purchased FIFTY MILLION (50,000,000) shares of Common Stock of the Company (the “Shares”) at a price of US$0.002 per share, which bears the face value at $0.001 per share; as such all shares authorized to issue were issued and outstanding. Therefore Seller paid cash in the aggregate amount of US$100,000 for the Shares under the Subscription Agreement.
Stockholder now is to sell the entire shareholding of the Shares to Buyer, and Buyer agrees to purchase from the Stockholder the Shares under the terms and conditions as follows. After the transaction under this Agreement is consummated, Buyer will retain ONE HUNDRED PERCENT (100%) of the Shares of the Company.
AGREEMENT
1. Purchase of Stock. At the Closing (defined below), Buyer shall purchase and arrange payment to the Stockholder, and the Stockholder delivers the Stock Certificate, if any, it currently held to the Company, and declares that the Shares so held are free and clear of all claims, liens, mortgages, security interests, encumbrances, transfer restrictions, charges, obligations, assignments, rights of third parties and any other defect in title or restriction of any kind (collectively, the “Encumbrances”).
2. Closing. The closing of the sale of the Shares (the “Closing”) shall occur in the following sequence:
(a) Buyer and the Stockholder fully sign this Agreement and deliver a copy to the other Party. A copy of the fully signed Agreement shall be delivered and deposited with the Company immediately upon execution; all information collected shall be used solely and absolutely for payment of Purchase Price and for purposes required by law.
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(b) (i) After receiving fully executed Agreement, Buyer shall deliver ONE HUNDRED THOUSNAD Dollars (US$100,000.00) (“Purchase Price”) in U. S. currency to Stockholder, pay to the order of Stockholder; (ii) After receiving fully executed Agreement, the Stockholder shall surrender the Stock Certificate, if any, it was issued and currently held to the Company; (iii) Upon receipt of fully executed Agreement and Stock Certificate from Stockholder, the Company shall cancel the Stock Certificate received from Stockholder; and (iv) The Company shall issue one new Stock Certificate to Buyer representing FIFTY MILLION (50,000,000) shares of stock of the Company.
(c) Time is of the essence. The Parties hereby agree that the process of the Closing shall start as soon as the Agreement is signed, and Section 2(b) shall be finalized no later than August 31, 2022, 5 O’Clock in the afternoon California Time (“Closing Date”) in the principal executive office of the Company at 44043 Fremont Blvd., Fremont, California, U. S. A. If for whatever reason the delay is necessary, both Parties shall discuss and reach consensus within ONE business day in writing, and a new Closing Date shall be designated at the same time. Each Party will bear their own costs and expenses, including but not limited to bank service charges, professional fees and other associated expenses in consummation and execution of the Agreement.
3. Further Actions. Buyer and the Stockholder shall assist each other to take all further actions and sign and deliver any additional instruments on or after the Closing as the Parties hereto deem reasonably necessary to complete the transactions contemplated under this Agreement.
4. Representations and Warranties of the Stockholder. The Stockholder represents and warrants to Buyer that:
(a) The Stockholder has full capacity, power and authority to execute and deliver this Agreement and perform its obligations hereunder and to consummate the transactions contemplated by this Agreement.
(b) This Agreement constitutes a legal, valid and binding obligation of the Stockholder and is enforceable against the Stockholder in accordance with the terms of this Agreement.
(c) The Stockholder is the sole legal and beneficial owner of the Shares free and clear of all Encumbrances. Buyer shall receive good title to such Shares so purchased at the Closing.
5. Representations and Warranties of the Buyer. Buyer represents and warrants to the Stockholder that:
(a) Buyer has full capacity, power and authority to execute and deliver this Agreement and perform its obligations hereunder and to consummate the transactions contemplated by this Agreement.
(b) This Agreement constitutes a legal, valid and binding obligation of Buyer and is enforceable against Buyer in accordance with the terms of this Agreement.
6. Representations. The Parties acknowledge and represent that the Agreement is collectively drafted, and in executing this Agreement the Parties have not relied on any inducements, promises or representations made by another Party or any parties representing or serving the Parties. Each Party acknowledges that they have been afforded a reasonable opportunity to consult with legal, tax and other professional advisors of their own choosing, and is solely responsible for their own professional fees and expenses thereto, regarding the transactions contemplated hereby prior to executing this Agreement.
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Each Party acknowledges that each of them makes no representation or warranty to the other Party regarding the federal, state or other tax treatment in connection with the transactions contemplated herein. Each Party will be solely responsible for reporting, filing and paying all applicable taxes in their own jurisdictions. Each Party will not reply nor comment to the other Party for legal or tax advice. Parties may, but not require to, issue certain tax forms to the other Party with the advice of their respective advisers.
Each Party further acknowledges that each of them makes no representation or warranty to the other Party, except as expressly set forth in this Agreement, with respect to the Company or any of its subsidiaries or with respect to any other information provided or made available to Buyer in connection with the transactions contemplated by this Agreement.
7. Notices. Unless otherwise specifically prescribed, all notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given and received immediately if delivered in person or through electronic mail, or on the earlier of actual receipt of the written notice or five (5) days after deposit of the written notice with a carrier with tracking system, postage prepaid, addressed to the receiving Party at such Party’s address under its signature or its last known address. Any Party may change its address by prior written notice to the other Party in accordance with this Section.
8. Entire Agreement. This Agreement by and between the Stockholder and Buyer set forth the entire agreement and understandings of the Parties with respect to the transactions contemplated by this Agreement, and supersede all prior agreements, arrangements and understandings related to the subject matter of this Agreement. Sections 3, 4, 5, 6, 7, 8 and 14 set forth in this Agreement shall survive Closing, and shall continue to be true and binding after Closing Date.
9. Amendment. This Agreement may be amended, modified, superseded or canceled, and any of the terms, covenants, representations, warranties or conditions of this Agreement may be waived, only by a written instrument signed by all Parties to this Agreement, or, in the case of a waiver, by or on behalf of the Party waiving compliance.
10. Counterparts. This Agreement may be signed by traditional wet-pen, fax/PDF, or electronically generated signature, and delivered counterparts to the other Parties, each of which shall be deemed an original, and the counterparts shall together constitute one complete document.
11. Governing Law. This Agreement shall be governed by the laws of California, without regard to conflict of law principles.
12 Successors and Assigns. This Agreement, and the rights and obligations of the Parties, shall be binding upon, and inure to the benefit of, the Parties and their respective successors and assigns. No assignment shall be valid or effective unless a prior written consent is given to the Party proposing the assignment.
13. Third Party Beneficiaries. Except as may be specifically stated in this Agreement, no person or entity other than the undersigned Parties is intended to be a beneficiary of this Agreement.
14. Others. At the time of Closing completed, a Joint Venture Agreement dated as January 10, 2022 and subsequent Amendments thereof between Seller and Buyer (collectively, the “JVA”) in respect of the Company shall be terminated in its entirety. Seller and Buyer shall acknowledge and confirm that Seller and Buyer shall have no further obligations, duties or liabilities thereunder and Buyer and the Company hereby releases, waives and forever discharges Seller from all obligations, duties or liabilities of whatever nature arising under or in connection with the JVA and the Company.
IN WITNESS WHEREOF, the Parties have executed this Stock Purchase Agreement.
[Followed by Signature Page only]
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| BUYER | ||
| Aerkomm Inc. | ||
| /s/ Louis Giordimaina | ||
| Name: | Louis Giordimaina | |
| Title: | Chief Executive Officer | |
| Address: 44043 Fremont Blvd | ||
| Fremont, CA 94538, USA | ||
| SELLER | ||
| Sakai Display Products Corporation | ||
| /s/ John Chung | ||
| Name: | John Chung | |
| Title: | Chairman | |
| Address: 1 Takumi-Cho, Sakai-Ku, Saki-shi | ||
| Osaka 590-8522, Japan | ||
| Receipt Acknowledged by COMPANY MEPA Labs Inc. |
||
| /s/ Jeffrey Wun | ||
| Name: | Jeffrey Wun | |
| Title: | CEO | |
| Address: 44043 Fremont Blvd Fremont, CA 94538, USA |
||
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Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 31.1
CERTIFICATIONS
I, Louis Giordimaina, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Aerkomm Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: December 20, 2022
| /s/ Louis Giordimaina | |
| Louis Giordimaina | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, Louis Gkordimaina, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Aerkomm Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: December 20, 2022
| /s/ Louis Giordimaina | |
| Louis Giordimaina | |
| Interim Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Louis Giordimaina, the Chief Executive Officer of AERKOMM INC. (the “Company”), DOES HEREBY CERTIFY that:
| 1. | The Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. |
IN WITNESS WHEREOF, the undersigned has executed this statement this 20th day of December, 2022.
| /s/ Louis Giordimaina | |
| Louis Giordimaina | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
A signed original of this written statement required by Section 906 has been provided to Aerkomm Inc. and will be retained by Aerkomm Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Louis Giordimaina, the Interim Chief Financial Officer of AERKOMM INC. (the “Company”), DOES HEREBY CERTIFY that:
| 1. | The Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. |
IN WITNESS WHEREOF, the undersigned has executed this statement this 20th day of December, 2022.
| /s/ Louis Giordimaina | |
| Louis Giordimaina | |
| Interim Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
A signed original of this written statement required by Section 906 has been provided to Aerkomm Inc. and will be retained by Aerkomm Inc. and furnished to the Securities and Exchange Commission or its staff upon request.