Aerkomm Inc 10-Q for FY2021 Q2
Aerkomm Inc. (AKOM)
About this 10-Q
Aerkomm Inc filed this 10-Q on August 23, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $72K
- Net loss
- $1.54M
- compared with a net loss of $2.12M a year earlier
- Diluted EPS
- -$0.16
- compared with -$0.22 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:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices, Zip Code)
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name
of each exchange on which registered | ||
| 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 August 19, 2021, there were
AERKOMM INC.
Quarterly Report on Form 10-Q
Period Ended June 30, 2021
TABLE OF CONTENTS
| PART
I FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 38 |
| Item 4. | Controls and Procedures | 38 |
| PART
II OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 40 |
| Item 1A. | Risk Factors | 40 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 40 |
| Item 3. | Defaults Upon Senior Securities | 40 |
| Item 4. | Mine Safety Disclosures | 40 |
| Item 5. | Other Information | 40 |
| Item 6. | Exhibits | 41 |
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AERKOMM INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1
AERKOMM INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2021 and December 31, 2020
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Short-term investment | ||||||||
| 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 | ||||||||
| Prepayment from customer - current | - | |||||||
| Long-term loan - current | ||||||||
| Lease liability – current | ||||||||
| Total Current Liabilities | ||||||||
| Long-term Liabilities | ||||||||
| Long-term bonds payable | ||||||||
| Long-term loan – non-current | ||||||||
| Lease liability – non-current | ||||||||
| Prepayment from customer – 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 | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
2
AERKOMM INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
For the Three-Month and Six-Month Periods ended June 30, 2021 and 2020
| Three-Month Period Ended June 30, |
Six-Month Period Ended June 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Net Sales | $ | $ | $ | $ | ||||||||||||
| Cost of Sales | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Loss from Operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Non-Operating Income (Loss) | ||||||||||||||||
| Foreign currency exchange gain | ||||||||||||||||
| Unrealized investment income (loss) | ( |
) | ( |
) | ( |
) | ||||||||||
| Other income (loss), net | ( |
) | ( |
) | ||||||||||||
| Net Non-Operating Income (Loss) | ( |
) | ||||||||||||||
| Loss before Income Taxes | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Income Tax Expense | ( |
) | ||||||||||||||
| Net Loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other Comprehensive Income (Loss) | ||||||||||||||||
| Change in foreign currency translation adjustments | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Total Comprehensive Loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net Loss Per Common Share: | ||||||||||||||||
| Basic | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Diluted | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Weighted Average Shares Outstanding - Basic | ||||||||||||||||
| Weighted Average Shares Outstanding - Diluted | ||||||||||||||||
See accompanying notes to the consolidated financial statements.
3
AERKOMM INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Three-Month and Six-Month Periods ended June 30, 2021 and 2020
| Common Stock | Additional Paid in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficits | Income | Equity | |||||||||||||||||||
| Balance as of January 1, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||
| Revaluation of stock warrant | - | ( | ) | ( | ) | |||||||||||||||||||
| Other comprehensive income | - | |||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of March 31, 2020 (Unaudited) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||
| Revaluation of stock warrant | - | |||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of June 30, 2020 (unaudited) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Common Stock | Additional Paid in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficits | Income (Loss) | 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 (Unaudited) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock compensation expense | - | |||||||||||||||||||||||
| Revaluation of stock warrant | - | ( | ) | ( | ) | |||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of June 30, 2021 (Unaudited) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
See accompanying notes to the consolidated financial statements.
4
AERKOMM INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Six-Month Period ended June 30, 2021 and 2020
| Six Months Ended June 30, |
||||||||
| 2021 | 2020 | |||||||
| (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 | ||||||||
| 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 | ||||||||
| Purchase of trading security | ( |
) | ( |
) | ||||
| Purchase of property and equipment | ( |
) | ( |
) | ||||
| Purchase of long-term investment | ( |
) | ||||||
| Net Cash Used for Investing Activities | ( |
) | ( |
) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from short-term loans | ||||||||
| Payment on long-term loan | ( |
) | ( |
) | ||||
| Payment on finance lease liability | ( |
) | ( |
) | ||||
| Net Cash Provided by Financing Activities | ||||||||
| Net Decrease in Cash and Restricted Cash | ( |
) | ( |
) | ||||
| Cash and Restricted Cash, Beginning of Period | ||||||||
| Foreign Currency Translation Effect on Cash | ( |
) | ( |
) | ||||
| Cash and Restricted Cash, End of Period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for income taxes | $ | $ | ||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Cash and Restricted Cash: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
5
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1 - Organization
Aerkomm Inc. (formerly Maple Tree Kids Inc.) (“Aerkomm”) was incorporated on August 14, 2013 in the State of Nevada. Aerkomm was a retail distribution company selling all of its products over the internet in the United States, operating in the infant and toddler products business market.
On
December 28, 2016, Aircom Pacific Inc. (“Aircom”) purchased approximately
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. Aircom Seychelles was formed to facilitate Aircom’s global corporate structure for both business operations and tax planning. Presently, Aircom Seychelles has no operations. Aircom is working with corporate and tax advisers in finalizing its global corporate structure and has not yet concluded its final plan.
On October 17, 2016, Aircom acquired a wholly owned subsidiary, Aircom Pacific Inc. Limited (“Aircom HK”), a corporation formed under the laws of Hong Kong. The purpose of Aircom HK is to conduct Aircom’s business and operations in Hong Kong. Presently, its primary function is business development, both with respect to airlines as well as content providers and advertisement partners based in Hong Kong. Aircom HK is also actively seeking strategic partnerships whom Aircom may leverage in order to provide more and better services to its customers. Aircom also plans to provide local supports to Hong Kong-based airlines via Aircom HK and teleports located in Hong Kong.
On December 15, 2016, Aircom acquired a wholly owned subsidiary, Aircom Japan, Inc. (“Aircom Japan”), a corporation formed under the laws of Japan. The purpose of Aircom Japan is to conduct business development and operations located within Japan. Aircom Japan is in the process of applying for, and will be the holder of, Satellite Communication Blanket License in Japan, which is necessary for Aircom to provide services within Japan. Aircom Japan will also provide local supports to airlines operating within the territory of Japan.
Aircom Telecom LLC (“Aircom Taiwan”), which became a wholly owned subsidiary of Aircom in December 2017, was organized under the laws of Taiwan on June 29, 2016. Aircom Taiwan is responsible for Aircom’s business development efforts and general operations within Taiwan.
On June 13, 2018, Aerkomm established a new wholly owned subsidiary, Aerkomm Taiwan Inc. (“Aerkomm Taiwan”), a corporation formed under the laws of Taiwan. The purpose of Aerkomm Taiwan is to purchase a parcel of land and raise sufficient fund for ground station building and operate the ground station for data processing (although that cannot be guaranteed).
On
November 15, 2018, Aircom Taiwan acquired a wholly owned subsidiary, Beijing Yatai Communication Co., Ltd. (“Beijing Yatai”),
a corporation formed under the laws of China. The purpose of Beijing Yatai is to conduct Aircom’s business and operations in China.
Presently, its primary function is business development, both with respect to airlines as well as content providers and advertisement
partners based in China as most business conducted in China requires a local registered company. Beijing Yatai is also actively seeking
strategic partnerships whom Aircom may leverage in order to provide more and better services to its customers. Aircom also plans to provide
local supports to China-based airlines via Beijing Yatai and teleports located in China. On November 6, 2020,
6
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1 - Organization - Continued
On October 31, 2019, Aircom Seychelles established a new a wholly owned subsidiary, Aerkomm Pacific Limited (“Aerkomm Malta”), a corporation formed under the laws of Malta. The purpose of Aerkomm Malta is to conduct Aircom’s business and operations and to engage with suppliers and potential airlines customers in the European Union.
The Company’s organization structure is as following:
Aerkomm and its subsidiaries (the “Company”) are full-service, development stage providers of in-flight entertainment and connectivity solutions with their initial market in the Asian Pacific region.
The Company has not generated significant
revenues, excluding non-recurring revenues, and will incur additional expenses as a result of being a public reporting company. Currently,
the Company has taken measures that management believes will improve its financial position by financing activities, including through
ongoing public offerings, short-term borrowings and equity contributions.
On
July 29, 2020,
With the $20 million in Loans committed by the Lenders and the remaining amount of €38 million (not including the 15% over-subscription) to be raised from the effective S-1 and future fund raising, the Company believes its working capital will be adequate to sustain its operations for the next twelve months. 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 capital in its registered public offering 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.
7
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheet as of June 30, 2021, and the condensed consolidated statements of operations and comprehensive loss and cash flows for the six months ended June 30, 2021 and 2020 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 June 30, 2021 and the results of operations and cash flows for the six months ended June 30, 2021 and 2020. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to these three-month periods are unaudited. The results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 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 and Aerkomm Malta. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from these estimates.
Concentrations of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash in banks. As
of June 30, 2021 and December 31, 2020, the total balance of cash in bank was fully insured by the Federal Deposit Insurance Corporation
(FDIC). The balance of cash deposited in foreign financial institutions exceeding the amount insured by local insurance is approximately
$
Short-term investment
The Company’s short-term investment securities are classified as trading security. The securities are stated at fair value within current assets on the Company’s condensed balance sheets. Fair value is calculated based on publicly available market information or other estimates determined by the Company. Changes in fair value are recorded in current income.
Inventories
Inventories are recorded at the lower of weighted-average cost or net realizable value. The Company assesses the impact of changing technology on its inventory on hand and writes off inventories that are considered obsolete. Estimated losses on scrap and slow-moving items are recognized in the allowance for losses.
Long-term Investment
Long-term investment includes holdings of marketable equity securities
with less than
Investments are considered to be impaired when a decline in fair value is judged to be other than temporary. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, as well as its intent and ability to hold the investment, for recording an impairment loss.
8
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
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 six-month period ended June 30, 2021 and 2020.
Right-of-Use Asset and Lease Liability
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”), which modifies lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases and finance leases under previous accounting standards and disclosing key information about leasing arrangements.
A lessee should recognize the lease liability to make lease payments and the right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases and finance leases, a right-of-use asset and a lease liability are initially measured at the present value of the lease payments by discount rates. The Company’s lease discount rates are generally based on its incremental borrowing rate, as the discount rates implicit in the Company’s leases is readily determinable. Operating leases are included in operating lease right-of-use assets and lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment and lease liability in our consolidated balance sheets. Lease expense for operating expense payments is recognized on a straight-line basis over the lease term. Interest and amortization expenses are recognized for finance leases on a straight-line basis over the lease term.
For the leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The Company adopted ASU 2016-02 effective January 1, 2019.
Goodwill and Purchased Intangible Assets
The Company’s goodwill represents the amount by which the total purchase price paid exceeded the estimated fair value of net assets acquired from acquisition of subsidiaries. The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment.
Purchased
intangible assets with finite life are amortized on the straight-line basis over the estimated useful lives of respective assets. Purchased
intangible assets with indefinite life are evaluated for impairment when events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. Purchased intangible asset consists of satellite system software and is amortized over
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.
9
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
Fair Value of Financial Instruments-Continued
Level 2 - Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.
Level 3 - Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions.
The carrying amounts of the Company’s cash 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 June 30, 2021. The Company’s long-term bonds payable, long-term loan and lease payable approximated the carrying amount as its interest rate is considered as approximate to the current rate for comparable loans and leases, respectively. There were no outstanding derivative financial instruments as of June 30, 2021.
Revenue Recognition
The Company adopted the provisions of ASU 2014-09 Revenue from Contract with Customers (Topic 606) and the principal versus agent guidance within the new revenue standard. As such, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenue when (or as) the Company satisfies a performance obligation.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Adjustments to prior period’s income tax liabilities are added to or deducted from the current period’s tax provision.
The Company follows FASB guidance on uncertain tax positions and has analyzed its filing positions in all the federal, state and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in those jurisdictions. The Company files income tax returns in the US federal, state and foreign jurisdictions where it conducts business. It is not subject to income tax examinations by US federal, state and local tax authorities for years before 2016. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on its consolidated financial position, results of operations, or cash flows. Therefore, no reserves for uncertain tax positions have been recorded. The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months.
The Company’s policy for recording interest and penalties associated with any uncertain tax positions is to record such items as a component of income before taxes. Penalties and interest paid or received, if any, are recorded as part of other operating expenses in the consolidated statement of operations.
Foreign Currency Transactions
Foreign currency transactions are recorded in U.S. dollars at the exchange rates in effect when the transactions occur. Exchange gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in current income. At the end of each period, assets and liabilities denominated in foreign currencies are revalued at the prevailing exchange rates with the resulting gains or losses recognized in income for the period.
Translation Adjustments
If a foreign subsidiary’s functional currency is the local currency, translation adjustments will result from the process of translating the subsidiary’s financial statements into the reporting currency of the Company. Such adjustments are accumulated and reported under other comprehensive income (loss) as a separate component of stockholders’ equity.
10
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include stock warrants and outstanding stock options, shares to be purchased by employees under the Company’s employee stock purchase plan.
Subsequent Events
The Company has evaluated events and transactions after the reported period up to August [*], 2021, the date on which these consolidated financial statements were available to be issued. All subsequent events requiring recognition as of June 30, 2021 have been included in these consolidated financial statements.
NOTE 3 - Recent Accounting Pronouncements
Simplifying the Accounting for Debt with Conversion and Other Options.
In June 2020, the FASB issued ASU 2020-06 to simplify the accounting in ASC 470, Debt with Conversion and Other Options and ASC 815, Contracts in Equity’s Own Entity. The guidance simplifies the current guidance for convertible instruments and the derivatives scope exception for contracts in an entity’s own equity. Additionally, the amendments affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2022. Early adoption is permitted. The amendments in this update must be applied on either full retrospective basis or modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements and related disclosures, as well as the timing of adoption.
Financial Instruments
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments. In February 2020, the FASB issued ASU 2020-02 and delayed the effective date of ASU 2016-13 until fiscal year beginning after December 15, 2022. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting in ASC 740, “Income 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 consolidated financial statements as of and for the six-month period ended June 30, 2021.
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. The Company is currently evaluating the impact of adopting ASU 2021-04 on its consolidated financial statements.
11
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 4 – Short-term Investment
On September 9, 2019, the Company entered
into a liquidity agreement with a security company (“the Liquidity Provider”) in France, which is consistent with customary
practice in the French securities market. The liquidity agreement complies with applicable laws and regulations in France and authorizes
the Liquidity Provider to carry out market purchases and sales of shares of the Company’s common stock on the Euronext Paris market.
To enable the Liquidity Provider to carry out the interventions provided for in the contract, the Company contributed approximately $
NOTE 5 - Inventories
As of June 30, 2021 and December 31, 2020, inventories consisted of the following:
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Satellite equipment for sale under construction | $ | $ | ||||||
| Supplies | ||||||||
| Allowance for inventory loss | ( | ) | ( | ) | ||||
| Net | ||||||||
| Prepayment for inventory | ||||||||
| Total | $ | $ | ||||||
NOTE 6 - Property and Equipment
As of June 30, 2021 and December 31, 2020, the balances of property and equipment were as follows:
| June
30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Ground station equipment | $ | $ | ||||||
| Computer software and equipment | ||||||||
| Satellite equipment | ||||||||
| Vehicle | ||||||||
| Leasehold improvement | ||||||||
| Furniture and fixture | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Net | ||||||||
| Prepayments - land | ||||||||
| Prepaid equipment | ||||||||
| Net | $ | $ | ||||||
On July 10, 2018,
Depreciation
expense was $
12
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 7 – Long-term Investment
On December 3, 2020, the Company entered into three separate stock
purchase agreements (or “Stock Purchase Agreement”) from three individuals to purchase an aggregate of
In the Stock Purchase Agreement, there
was a restriction on the stock title transfer until May 13, 2021. As of August 12, 2021, this restriction on the stock transfer was released
and the stock title transfer process has been completed. As of June 30, 2021 and December 31, 2020, this investment totaled approximately
a
On March 24, 2021, the Company purchased
additional
As of June 30, 2021 and December 31, 2020, the fair value of the investment was as follows:
| June
30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Investment cost | $ | $ | ||||||
| Less: Allowance for value decline | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
NOTE 8 - Intangible Asset, Net
As of June 30, 2021 and December 31, 2020, the cost and accumulated amortization for intangible asset were as follows:
| June
30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Satellite system software | $ | $ | ||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
Amortization
expense was $
NOTE 9 - 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:
| 2021 | 2020 | |||||||
| Weighted-average remaining lease term | (Unaudited) | |||||||
| Operating lease | ||||||||
| Finance lease | ||||||||
| Weighted-average discount rate | ||||||||
| Operating lease | % | % | ||||||
| Finance lease | % | % | ||||||
13
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 9 - Operating and Finance Leases - Continued
| B. | The balances for the operating and finance leases are presented as follows within the consolidated balance sheets as of June 30, 2021 and December 31, 2020: |
Operating Leases
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Right-of-use assets | $ | $ | ||||||
| Lease liability – current | $ | $ | ||||||
| Lease liability – non-current | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
Finance Leases
| June 30, 2021 |
December 31, 2020 |
|||||||
| (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 consolidated statements of operations and comprehensive loss for the six-month periods ended June 30, 2021 and 2020:
Operating Leases
| Three Months Ended | Six Months Ended | |||||||||||||||
| June
30, 2021 | June
30, 2020 | June
30, 2021 | June
30, 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Lease expense | $ | $ | $ | $ | ||||||||||||
| Sublease rental income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net lease expense | $ | $ | $ | $ | ||||||||||||
Finance Leases
| Three Months Ended | Six Months Ended | |||||||||||||||
| June
30, 2021 | June
30, 2020 | June
30, 2021 | June
30, 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Amortization of right-of-use asset | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Total finance lease cost | $ | $ | $ | $ | ||||||||||||
14
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 9 - Operating and Finance Leases - Continued
Supplemental cash flow information related to leases for the six-month periods ended June 30, 2021 and 2020 is as follows:
| June
30, 2021 | June
30, 2020 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash outflows from operating leases | $ | $ | ||||||
| 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) | ||||||||||
| July 1, 2021 – June 30, 2022 | $ | $ | $ | |||||||||
| July 1, 2022 – June 30, 2023 | ||||||||||||
| July 1, 2023 – June 30, 2024 | ||||||||||||
| Total lease payments | $ | $ | $ | |||||||||
| Less: Imputed interest | ( | ) | ( | ) | ( | ) | ||||||
| Present value of lease liabilities | $ | $ | $ | |||||||||
| Current portion | ( | ) | ( | ) | ( | ) | ||||||
| Non-current portion | $ | $ | $ | |||||||||
Finance Leases
| Total | ||||
| (Unaudited) | ||||
| July 1, 2021 – June 30, 2022 | $ | |||
| July 1, 2022 – June 30, 2023 | ||||
| July 1, 2023 – June 30, 2024 | ||||
| July 1, 2024 – June 30, 2025 | ||||
| Total lease payments | $ | |||
| Less: Imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
| Current portion | ( | ) | ||
| Non-current portion | $ | |||
NOTE 10 - Short-term Loans
In 2020, the Company entered into a
loan agreement in the amount of $
Additionally, in June 2021, the Company
entered into a loan agreement in the amount of $
15
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 11 - Long-term Loan
The
Company has a car loan credit line of NT$
| Twelve months ending June 30, | (Unaudited) | |||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| Total installment payments | ||||
| Less: Imputed interest | ( | ) | ||
| Present value of long-term loan | ||||
| Current portion | ( | ) | ||
| Non-current portion | $ | |||
NOTE 12 – 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
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.
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 $
16
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 12 – Long-term Bonds Payable and Restricted Cash - Continued
As of June 30, 2021 and December 31, 2020, the long-term bonds payable consisted of the following:
| June
30, 2021 | December
31, 2020 | |||||||
| (Unaudited) | ||||||||
| Credit Enhanced Zero Coupon Convertible Bonds | $ | $ | ||||||
| Coupon Bonds | ||||||||
| Unamortized loan fee | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
NOTE 13 - Prepayment from Customer
On
March 9, 2015, the Company entered into a 10-year purchase agreement with Klingon Aerospace, Inc. (“Klingon”), which was
formerly named as Luxe Electronic Co., Ltd. In accordance with the terms of this agreement, Klingon agreed to purchase from the Company
an initial order of onboard equipment comprising an onboard system for a purchase price of $
On April 25, 2021, the Company entered into a Product Supply Agreement
with a customer. As of June 30, 2021, the Company received $
NOTE 14 - Income Taxes
Income tax expense for the three-month and six-month periods ended June 30, 2021 and 2020 consisted of the following:
| Three
Months Ended June 30, | Six
Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Current: | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||
| Federal | $ | $ | $ | $ | ||||||||||||
| State | ||||||||||||||||
| Foreign | ( | ) | ||||||||||||||
| Total | $ | ( | ) | $ | $ | $ | ||||||||||
The following table presents a reconciliation of the Company’s income tax at statutory tax rate and income tax at effective tax rate for the three-month and six-month periods ended June 30, 2021 and 2020.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Tax benefit at statutory rate | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Foreign investment losses (gains) | ( | ) | ( | ) | ||||||||||||
| Stock-based compensation expense | ||||||||||||||||
| Amortization expense | ||||||||||||||||
| Accrued payroll | ||||||||||||||||
| Unrealized exchange losses (gains) | ( | ) | ( | ) | ( | ) | ||||||||||
| Others | ||||||||||||||||
| Valuation allowance | ||||||||||||||||
| Tax expense at effective tax rate | $ | ( | ) | $ | $ | $ | ||||||||||
17
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 14 - Income Taxes – Continued
Deferred tax assets (liabilities) as of June 30, 2021 and December 31, 2020 consist approximately of:
| June
30, 2021 | December 31, | |||||||
| (Unaudited) | ||||||||
| Net operating loss carryforwards (NOLs) | $ | $ | ||||||
| Stock-based compensation expense | ||||||||
| Accrued expenses and unpaid expense payable | ||||||||
| Tax credit carryforwards | ||||||||
| Unrealized investment loss | ||||||||
| Unrealized exchange losses | ( | ) | ( | ) | ||||
| 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 June 30, 2021 and December 31, 2020, the Company has Japan NOLs of approximately $
As
of June 30, 2021 and December 31, 2020, the Company has Taiwan NOLs of approximately $
As
of June 30, 2021 and December 31, 2020, 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.
NOTE 15 - Capital Stock
| 1) | Preferred Stock: |
The
Company is authorized to issue
18
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 15 - Capital Stock – Continued
| 2) | Common Stock: |
The Company is authorized to issue
As of June 30, 2021 and December 31, 2020, the restricted shares consisted of the following:
| June 30, 2021 | December 31, 2020 | |||||||
| (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
For
the six-month periods ended June 30, 2021 and 2020, the Company recorded decrease of $
NOTE 16 - Major Vendors
The Company has two unrelated major vendors, which represents
| Purchase | Accounts Payable | |||||||||||||||
| Vendor | June 30, 2021 | June 30, 2020 | June 30, 2021 | December 31, 2020 | ||||||||||||
| A | $ | $ | $ | $ | ||||||||||||
| B | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
NOTE 17 - 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”) | ||
| Yuanjiu Inc. (“Yuanjiu”) | ||
| AA Twin Associates Ltd. (“AATWIN”) | ||
| EESquare Japan (“EESquare JP”) | ||
| Wealth Wide Int’l Ltd. (“WWI”) | ||
| dMobile System Co. Ltd. (dMobile) |
| 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.
19
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 17 - Significant Related Party Transactions – Continued
| a. | As of June 30, 2021 and December 31, 2020: |
| June 30, 2021 |
December 31, 2020 |
|||||||
| (Unaudited) | ||||||||
| Inventory prepayment to: | ||||||||
| dMobile1 | $ | $ | ||||||
| Yuanjiu2 | ||||||||
| Total | $ | $ | ||||||
| Loan from WTL3 | $ | $ | ||||||
| Other payable to: | ||||||||
| AATWIN4 | $ | $ | ||||||
| Interest payable to WTL3 | ||||||||
| Others5 | ||||||||
| Total | $ | $ | ||||||
| Lease liability to WWI6 | $ | $ | ||||||
| 1. |
| 2. |
| 3. |
| 4. |
| 5. |
| 6. |
20
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 17 - Significant Related Party Transactions – Continued
| b. | For the six-month periods ended June 30, 2021 and 2020: |
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Purchase from Yuanjiu1 | $ | $ | $ | $ | ||||||||||||
| Consulting expense charged by AATWIN2 | ||||||||||||||||
| Interest expense charged by WTL3 | ||||||||||||||||
| Rental expense charged by WWI4 | ||||||||||||||||
| Sales to YuanJiu5 | ||||||||||||||||
| Rental income from EESqaure JP6 | ||||||||||||||||
| 1. |
| 2. |
| 3. |
| 4. |
| 5. |
| 6. |
NOTE 18 - 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 10 years unless sooner terminated under the terms of Aircom 2014 Plan.
On
May 5, 2017, the Board of Directors of Aerkomm adopted the Aerkomm Inc. 2017 Equity Incentive Plan (the “Aerkomm 2017 Plan”
and together with the Aircom 2015 Plan, the “Plans”) and the reservation of
21
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 18 - Stock Based Compensation – Continued
On
June 23, 2017, the Board of Directors agreed to issue options for an aggregate of 291,000 shares under the Aerkomm 2017 Plan to certain
officers and directors of the Company.
On July 31, 2017, the Board of Directors
approved to issue options for an aggregate of
On
December 29, 2017, the Board of Directors approved to issue options for an aggregate of
On
June 19, 2018, the Compensation Committee approved to issue options for
On
September 16, 2018, the Compensation Committee approved to issue options for
On
December 29, 2018, the Compensation Committee approved to issue options for an aggregate of
On
July 2, 2019, the Board of Directors approved the grant of options to purchase an aggregate of
On
October 4, 2019, the Board of Directors approved the grant of options to purchase an aggregate of
On
December 29, 2019, the Board of Directors approved to issue options for an aggregate of
On
February 19, 2020, the Board of Directors approved to issue options for
On
September 17, 2020, the Board of Directors approved to issue options for
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
Option
price is determined by the Compensation Committee. The Aerkomm 2017 Plan has been adopted by the Board and shall continue in effect for
a term of
22
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 18 - Stock Based Compensation – Continued
Valuation and Expense Information
Measurement
and recognition of compensation expense based on estimated fair values is required for all share-based payment awards made to its employees
and directors including employee stock options. The Company recognized compensation expense of $
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 June 30, 2021 and year ended December 31, 2020 under the Plans as follows:
| Assumptions | ||||
| Expected term | ||||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk-free interest rate | % | |||
| Forfeiture rate | % | |||
23
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 18 - Stock Based Compensation – Continued
Aircom 2014 Plan
Activities related to options for the Aircom 2014 Plan for the three months ended June 30, 2021 and the year ended December 31, 2020 are as follows:
| Number
of Shares | Weighted Average Exercise Price Per Share | Weighted Average Fair Value Per Share | ||||||||||
| Options outstanding at January 1, 2020 | $ | | $ | | ||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/Cancelled | ||||||||||||
| Options outstanding at December 31, 2020 | | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/Cancelled | ||||||||||||
| Options outstanding at June 30, 2021 (unaudited) | ||||||||||||
There are no unvested stock awards under Aircom 2014 Plan for the six-month period ended June 30, 2021 and the year ended December 31, 2020.
Of
the shares covered by options outstanding as of June 30, 2021,
| Options Outstanding (Unaudited) | Options Exercisable (Unaudited) | |||||||||||||||||||||||||
Range
of | Shares Outstanding at 6/30/2021 | Weighted
Average Remaining Contractual Life (years) | Weighted Average Exercise Price | Shares Exercisable at 6/30/2021 | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | ||||||||||||||||||||
| $ | 0.0067 | $ | $ | |||||||||||||||||||||||
| 3.3521 | ||||||||||||||||||||||||||
As of June 30, 2021, there was no unrecognized stock-based compensation expense for the Aircom 2014 Plan. No option was exercised during the three-month periods ended June 30, 2021 and 2020.
Aerkomm 2017 Plan
Activities related to options outstanding under Aerkomm 2017 Plan for the six months ended June 30, 2021 and the year ended December 31, 2020 are as follows:
| Number
of Shares | Weighted Average Exercise Price Per Share | Weighted Average Fair Value Per Share | ||||||||||
| Options outstanding at January 1, 2020 | | $ | | $ | | |||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/Cancelled | ( | ) | ||||||||||
| Options outstanding at December 31, 2020 | ||||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/Cancelled | ||||||||||||
| Options outstanding at June 30, 2021 (unaudited) | ||||||||||||
24
AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 18 - Stock Based Compensation – Continued
Activities related to unvested stock awards under Aerkomm 2017 Plan for the six-month period ended June 30, 2021 and the year ended December 31, 2020 are as follows:
| Number
of Shares | Weighted Per Share | |||||||
| Options unvested at January 1, 2020 | $ | | ||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited/Cancelled | ( | ) | ||||||
| Options unvested at December 31, 2020 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited/Cancelled | ||||||||
| Options unvested at June 30, 2021 (unaudited) | ||||||||
| Options Outstanding (Unaudited) | Options Exercisable (Unaudited) | |||||||||||||||||||||
| Range
of Exercise Prices | Shares Outstanding at 6/30/2021 | Weighted | Weighted Average Exercise Price | Shares Exercisable at 6/30/2021 | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | ||||||||||||||||
| $ | 3.96 | $ | $ | |||||||||||||||||||
| 7.00 – 9.00 | ||||||||||||||||||||||
| 11.00 – 14.20 | ||||||||||||||||||||||
| 20.50 – 27.50 | ||||||||||||||||||||||
| 30.00 – 35.00 | ||||||||||||||||||||||
As of June 30, 2021, total unrecognized
stock-based compensation expense related to stock options was approximately $
NOTE 19 – Commitments
As of June 30, 2021, the Company’s significant commitment is summarized as follows:
| Airbus SAS Agreement: |
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AERKOMM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 19 – Commitments - Continued
| Airbus Interior Service Agreement: On July 24, 2020, | ||
| Hong Kong Airlines Agreement: |
| 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 | ||
| US trademark: On December 1, 2020, |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Use of Terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our,” or “our company” are to the combined business of Aerkomm Inc., a Nevada corporation, and its consolidated subsidiaries, including Aircom Pacific, Inc., a California corporation and wholly-owned subsidiary, or Aircom; Aircom Pacific Ltd., a Republic of Seychelles company and wholly-owned subsidiary of Aircom; Aerkomm Pacific Limited, a Malta company and wholly owned subsidiary of Aircom Pacific Ltd.; Aircom Pacific Inc. Limited, a Hong Kong company and wholly-owned subsidiary of Aircom; Aircom Japan, Inc., a Japanese company and wholly-owned subsidiary of Aircom; and Aircom Telecom LLC, a Taiwanese company and wholly-owned subsidiary of Aircom, Aircom Taiwan, or Aircom Beijing.
Special Note Regarding Forward Looking Statements
Certain information contained in this report includes forward-looking statements. The statements herein which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our interpretation of what is believed to be significant factors affecting the businesses, including many assumptions regarding future events. The following factors, among others, may affect our forward-looking statements:
| ● | our future financial and operating results; |
| ● | our intentions, expectations and beliefs regarding anticipated growth, market penetration and trends in our business; |
| ● | the impact and effects of the global outbreak of the coronavirus (COVID-19) pandemic, and other potential pandemics or contagious diseases or fear of such outbreaks, on the global airline and tourist industries, especially in the Asia Pacific region; |
| ● | our ability to attract and retain customers; |
| ● | our dependence on growth in our customers’ businesses; |
| ● | the effects of changing customer needs in our market; |
| ● | the effects of market conditions on our stock price and operating results; |
| ● | our ability to successfully complete the development, testing and initial implementation of our product offerings; |
| ● | our ability to maintain our competitive advantages against competitors in our industry; |
| ● | our ability to timely and effectively adapt our existing technology and have our technology solutions gain market acceptance; |
| ● | our ability to introduce new product offerings and bring them to market in a timely manner; |
| ● | our ability to obtain required telecommunications, aviation and other licenses and approvals necessary for our operations |
| ● | our ability to maintain, protect and enhance our intellectual property; |
| ● | the effects of increased competition in our market and our ability to compete effectively; |
| ● | our expectations concerning relationship with customers and other third parties; |
| ● | the attraction and retention of qualified employees and key personnel; |
| ● | future acquisitions of our investments in complementary companies or technologies; and |
| ● | our ability to comply with evolving legal standards and regulations. |
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Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors, including the ability to raise sufficient capital to continue our operations. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2019, and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur.
Potential investors should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
The specific discussions herein about our company include financial projections and future estimates and expectations about our business. The projections, estimates and expectations are presented in this report only as a guide about future possibilities and do not represent actual amounts or assured events. All the projections and estimates are based exclusively on our management’s own assessment of our business, the industry in which we work and the economy at large and other operational factors, including capital resources and liquidity, financial condition, fulfillment of contracts and opportunities. The actual results may differ significantly from the projections.
Potential investors should not make an investment decision based solely on our company’s projections, estimates or expectations.
Overview
With advanced technologies and a unique business model, we, as a development stage service provider of IFEC solutions, intend to provide airline passengers with a broadband in-flight experience that encompasses a wide range of service options. Such options include Wi-Fi, cellular, movies, gaming, live TV, and music. We plan to offer these core services, which we are currently still developing, through both built-in in-flight entertainment systems, such as 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.
We plan to partner with airlines and offer airline passengers free IFEC services. We expect to generate revenue through advertising and in-flight transactions. We believe that this is an innovative approach that differentiates us from existing market players.
To complement and facilitate our planned IFEC service offerings, we intend to build satellite ground stations and related data centers within the geographic regions where we expect to be providing IFEC airline services.
Additionally, we have developed and begun to market two internet connectivity systems, one for hotels primarily located in remote regions and the other for maritime use. Both systems operate through a Ku/Ku high throughput satellite, or HTS. We also expect to develop a remote connectivity system that will be applicable to the highspeed rail industry.
Our total sales were $35,523 and $0 for the six months ended June 30, 2021 and the year ended December 31, 2020.
Business Development
We are actively working with prospective airline customers to provide services to their passengers utilizing the Airbus certified AERKOMM K++ system. We have entered into non-binding memoranda of understanding with a number of airlines, including Air Malta Airlines of Malta and Onur Air of Turkey. There can be no assurances, however, that these will lead to actual purchase agreements.
In view of the increasing demand by the airlines for a bigger data throughput, during the course of discussions between us and Airbus, we have revised our strategy to focus primarily on Ka-band IFEC solutions for airlines and have suspended work on our dual band (Ka/Ku) satellite inflight connectivity solution. The Ku-band system will, however, still be retained for other product applications such as remote locations and maritime use.
In connection with the Airbus project, we also identified owners of ACJ aircraft, as potential customers of our AERKOMM 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 would generate additional revenue and income for our company. We are currently in advanced discussions with a number of ACJ customers, some of whom have more than one aircraft in their fleets.
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Our AERKOMM K++ System
Following the course of discussions between us and Airbus and in view of the increasing demand by the airlines for a bigger data throughput, we have revised our strategy to focus primarily on Ka-band satellite connectivity solutions for aviation customers and have suspended work on our dual band satellite connectivity solution. Our AERKOMM K++ system will operate through Ka/Ka High Throughput Satellites. The Ku-band system will, however, still be retained for the other applications such as remote locations and maritime use.
Our AERKOMM K++ system will contain a low-profile radome (that is, a dome or similar structure protecting our radio equipment) containing two Ka-band antennas, one for transmitting and the other for receiving, and will comply with the ARINC 791 standard of Aeronautical Radio, Incorporated. Our AERKOMM K++ system also meets Airbus Design Organization Approval.
GEO (Geostationary Earth Orbiting) and LEO (Low Earth Orbiting) Ka-band Satellites
Our initial AERKOMM K++ system will work only with geostationary earth orbiting, or GEO, Ka-band satellites. Performance of GEO satellites diminishes greatly in the areas near the Earth’s poles. Only low earth orbiting, or LEO, satellites can collect high quality data over the North and South poles. We are developing technologies to work with LEO satellites and plans to partner with Airbus to develop aircraft installation solutions. As new GEO and LEO Ka-band satellites are being regularly launched over the next few years, which, we expect, will enable the provision of worldwide aircraft coverage, we plan to have the necessary technology ready to take advantage of this new trend in Ka-band aviation connectivity, although it cannot assure you that it will be successful in this new area of endeavor.
Ground-based Satellite System Sales
Since our acquisition of Aircom Taiwan in December 2017, this wholly owned subsidiary has been developing ground-based satellite connectivity components which have an application in remote regions that lack regular affordable ground-based communications. In September 2018, Aircom Taiwan consummated its first sale of such a component, a small cell server terminal, in the amount of $1,730,000. This server terminal will be utilized by the purchaser in the construction of a satellite-based ground communication system which will act as a multicast service extension of existing networks. The system is designed to extend local existing networks, such as ISPs and mobile operators, into rural areas and create better coverage and affordable connectivity in these areas. Aircom Taiwan expects to sell additional satellite connectivity components, systems and services to be used in ground mobile units in the future, although there can be no assurances that it will be successful in these endeavors.
In addition, in September 2018, Aircom Taiwan provided installation and testing services of a satellite-based ground connectivity system to a remote island resort and received service income related to this project in the amount of $15,000. Upon the completion of this system’s testing phase, and assuming that the system operates satisfactorily, Aircom Taiwan expects to begin to sell this system to multiple, remotely located resorts. We can make no assurances at this time however, that this system will operate satisfactorily, that we will be successful in introducing this system as a viable product offering or that we will be able to generate any additional revenue from the sale and deployment of this system.
Recent Events
Short Term Loan
In June 2021, we entered into a loan agreement in the amount of $1,433,177 (NT $40,000,000) with a non-related party. This loan, which carries no interest, originally matured on July 16, 2021. As of August 20, 2021, the loan is still outstanding we and the lender signed an amendment agreement to extend the loan repayment date to September 16, 2021.
Product Supply Agreement
On April 25, 2021, we entered into a product supply agreement with a customer. As of June 30, 2021, we received $1,611,357 from the customer towards the purchase price of this equipment.
Definitive Agreement with YuanJiu
On June 1, 2021, we entered into a definitive contractor agreement with YuanJiu pursuant to the terms of which YuanJiu will serve the exclusive service provider to us in Asia with respect to the installation and service of our Aerkomm AirCinema Cube (“ACC”) product and the related Rayfin software platform on which AAC will operate.
Taiwan Land Acquisition
On July 10, 2018, our Company and Aerkomm Taiwan entered into a real estate sale contract (the “Land Purchase Contract”) with Tsai Ming-Yin (the “Seller”) with respect to the acquisition by Aerkomm Taiwan of a parcel of land located in Taiwan. The 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, we paid to the seller in installments refundable prepayments of $34,474,462 in total. As of June 30, 2021 and December 31, 2020, the estimated commission payable for the land purchase in the amount of $1,387,127 was recorded to the cost of land and the payment to be paid after the full payment of the Land acquisition price no later than December 31, 2021. According to the amended Land Purchase Contract dated on November 10, 2020, the transaction may be terminated any time by both the buyer and the seller and agreed by all parties if we are unable to obtain the qualified satellite license issued by Taiwan authority before July 31, 2021. As of August 20, 2021, the license applications are still in progress.
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Employment Agreement with Louis Giordimaina
On May 25, 2021, we entered into an employment agreement with Mr. Giordimaina, pursuant to which Mr. Giordimaina was hired to serve as our Chief Executive Officer. Pursuant to the employment agreement, Mr. Giordimaina will receive an annual salary of €540,000, approximately $636,984. Mr. Giordimaina will also receive signing bonus of €60,000, approximately $70,776, and 150,000 shares of our stock options to be issued as soon as a new equity incentive plan has been authorized by our shareholders. A bonus will be considered, comparable to those that may be offered to other executives once a satisfactory revenue stream is established at Aerkomm as a result of Mr. Giordimaina’s efforts. Mr. Giordimaina will be granted an option to purchase 18,750 shares of our common stock each calendar quarter in arrears on the last working day of the three-month period starting on June 1, 2021 and vest when issued. We will cover and pay any premium up to a maximum of €2,500, approximately $2,949, per annum for any international private health insurance which Mr. Giordimaina may have in place from time to time covering Mr. Giordimaina and his wife; we will recommend board approval for life insurance coverage for Mr. Giordimaina comparable with our other executives; we will pay Mr. Giordimaina the sum of €6,000, approximately $7,078, per year to any private pension fund scheme/s designated by Mr. Giordimaina, we will pay Mr. Giordimaina €18,000, approximately $21,233, per annum as an allowance for a leased car and fuel expenses, to be paid in equal monthly instalments, we will provide Mr. Giordimaina with a mobile telephone for his business use, as well as a lap top computer and an iPad, and we will reimburse Mr. Giordimaina for all actual, necessary and reasonable expenses incurred by him in the course of his performance of services for the Company. The employment agreement contains customary confidentiality provisions and covenants prohibiting Mr. Giordimaina from competing with us during his employment, and from soliciting any of our employees or consultants for a period of one year after his employment end. If Mr. Giordimaina’s employment is terminated by us without cause, he shall be entitled to one-half of his full salary for the remainder of the initial three-year term of his agreement.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic is having a particularly adverse impact on the airline industry. The outbreak in China and throughout the world since December 2019 has led to a precipitous decrease in the number of daily departures and arrivals for domestic and international flights.
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. |
Emerging Growth Company
We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
| ● | have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; |
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| ● | comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis); |
| ● | submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and |
| ● | disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. |
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards.
In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our shares of common stock that are held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
Recent Market Information
In the IATA (International Air Transportation Association) Airlines Financial Monitor dated November - December 2020, published on January 21, 2021, the following key points were highlighted:
| ● | The final Q3 2020 financial results show that airlines continued to suffer from very weak travel demand and burnt cash, albeit at a slower rate compared to Q2 with the help of cost cutting measures and robust cargo revenues. | |
| ● | Initial Q4 2020 earnings announcements indicate that airlines continued to burn cash as the recovery in demand stalled. However, the vaccine news makes IATA estimate that airlines could achieve cash break-even towards the end of 2021. | |
| ● | The global airline share price index rose in December 2020 but still lagged wider equity markets as the resurgence of the virus weighed on the travel demand recovery. | |
| ● | Looking forward, the widespread availability of vaccines and implementation of successful testing regimes will be key for the recovery in travel demand and airline share prices. |
In general, because the future of the COVID-19 pandemic is so unpredictable, the future of airline and air traffic recovery is extremely unpredictable as well.
Results of Operations
Comparison of Three Months Ended June 30, 2021 and 2020
The following table sets forth key components of our results of operations during the three-month periods ended June 30, 2021 and 2020.
| Three Months Ended June 30, | Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Sales | $ | 72,000 | $ | - | $ | 72,000 | 100.0 | % | ||||||||
| Cost of sales | 43,878 | - | 43,878 | 100.0 | % | |||||||||||
| Operating expenses | 1,996,515 | 2,686,549 | (690,034 | ) | (25.7 | )% | ||||||||||
| Loss from operations | (1,968,393 | ) | (2,686,549 | ) | 718,156 | (26.7 | )% | |||||||||
| Net non-operating income (expense) | 432,466 | 565,354 | (132,888 | ) | (23.5 | )% | ||||||||||
| Loss before income taxes | (1,535,927 | ) | (2,121,195 | ) | 585,268 | (27.6 | )% | |||||||||
| Income tax expense | (26 | ) | 11 | (37 | ) | (336.4 | )% | |||||||||
| Net Loss | (1,535,901 | ) | (2,121,206 | ) | 585,305 | (27.6 | )% | |||||||||
| Other comprehensive income (loss) | (524,181 | ) | (571,592 | ) | 47,411 | (8.3 | )% | |||||||||
| Total comprehensive loss | $ | (2,060,082 | ) | $ | (2,692,798 | ) | $ | 632,716 | (23.5 | % | ||||||
Revenue. Our total revenue was $72,000 and $0 for the three-month periods ended June 30, 2021 and 2020, respectively. Our total revenue was $72,000 for the three-month period ended June 30, 2021 due to our sale of ground antenna units to one of our related parties. Our total revenue of $0 for the three-month period ended June 30, 2020 as we are still developing our core business in in-flight entertainment and connectivity and there was no non-recurring sale of equipment to related parties during the period.
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Cost of sales. Our cost of sales was $43,878 and $0 for the three-month periods ended June 30, 2021 and 2020, respectively. The cost of sales for the three-month period ended June 30, 2021 was $43,878 was the costs of our sale of ground antenna units to one of our related parties. The cost of sales for the three-month period ended June 30, 2020 was $0 as we did not have any sales during the periods.
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 $690,034, or 25.7%, to $1,996,515 for the three-month period ended June 30, 2021, from $2,686,549 for the three-month period ended June 30, 2020. This decrease was mainly due to a decrease in consulting fees as the result of warrant re-valuation, non-cash stock-based compensation expense, travel expense and accounting and auditing related expense and insurance expense of $535,152, $269,657, $93,133 and $61,760, respectively, which was offset by the increase in payroll and payroll related expense, legal expense, insurance expense and amortization expense of $93,032, $76,199, $40,605 and $38,872, respectively. The increase in insurance expense was mainly related to the amortization of D&O insurance during the period.
Net non-operating expense. We had $432,466 in net non-operating income for the three-month period ended June 30, 2021, as compared to net non-operating expense of $565,354 for the three-month period ended June 30, 2020. Net non-operating income in the three-month period ended June 30, 2021 represents a gain of $512,418 in foreign exchange translation, a net interest expense of $29,791, financing cost of $48,094 from the amortization of bond issuing costs and unrealized loss in investment of $18,741. The net non-operating expense in the three-month period ended June 30, 2020 was mainly due to a gain on foreign exchange translation of $536,461, unrealized gain from the transactions of our liquidity contract of $20,514 and a Covid-19 subsidy that Aircom Japan received from the Japanese government in the amount of $18,482.
Loss before income taxes. Our loss before income taxes decreased by $585,268, or 27.6%, to $1,535,927 for the three-month period ended June 30, 2021, from a loss of $2,121,195 for the three-month period ended June 30, 2020, 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 decreased by $632,716, or 23.5%, to $2,060,082 for the three-month period ended June 30, 2021, from $2,692,798 for the three-month period ended June 30, 2020.
Comparison of Six Months Ended June 30, 2021 and 2020
The following table sets forth key components of our results of operations during the three-month periods ended June 30, 2021 and 2020.
| Six Months Ended June 30, | Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Sales | $ | 72,000 | $ | - | $ | 72,000 | 100.0 | % | ||||||||
| Cost of sales | 43,878 | - | 43,878 | 100.0 | % | |||||||||||
| Operating expenses | 5,167,514 | 4,642,594 | 524,920 | 11.3 | % | |||||||||||
| Loss from operations | (5,139,392 | ) | (4,642,594 | ) | (496,798 | ) | 10.7 | % | ||||||||
| Net non-operating income (expense) | (621,366 | ) | 158,157 | (779,523 | ) | (492.9 | )% | |||||||||
| Loss before income taxes | (5,760,758 | ) | (4,484,437 | ) | (1,276,321 | ) | 28.5 | % | ||||||||
| Income tax expense | 3,269 | 3,263 | 6 | 0.2 | % | |||||||||||
| Net Loss | (5,764,027 | ) | (4,487,700 | ) | (1,276,327 | ) | 28.4 | % | ||||||||
| Other comprehensive income (loss) | (130,414 | ) | (227,817 | ) | 97,403 | (42.8 | )% | |||||||||
| Total comprehensive loss | $ | (5,894,441 | ) | $ | (4,715,517 | ) | $ | (1,178,924 | ) | 25.0 | % | |||||
Revenue. Our total revenue was $72,000 and $0 for the six-month periods ended June 30, 2021 and 2020, respectively. Our total revenue was $72,000 for the six-month period ended June 30, 2021 because due to our sale of ground antenna units to one of our related parties. Our total revenue was $0 for the six-month period ended June 30, 2020 as we are still developing our core business in in-flight entertainment and connectivity and there was no non-recurring sale of equipment to related parties during the period.
Cost of sales. Our cost of sales was $43,878 and $0 for the six-month periods ended June 30, 2021 and 2020, respectively. The cost of sales for the six-month period ended June 30, 2021 was $43,878 which was the cost of our sale of ground antenna units to one of our related parties. The cost of sales for the six-month period ended June 30, 2020 was $0 as we did not have any sales during that period.
Operating expenses. Our operating expenses consist primarily of compensation and benefits, professional advisor fees, research and development expenses, cost of promotion, business development, business travel, transportation costs, and other expenses incurred in connection with general operations. Our operating expenses increased by $524,920, or 11.3%, to $5,167,514 for the six-month period ended June 30, 2021, from $4,642,594 for the six-month period ended June 30, 2020. This increase was mainly due to the increase in non-cash stock-based compensation expense, payroll and payroll related expense, accounting and audit fees and insurance expense of $945,881, $242,871, $152,810 and $116,424, respectively, which was offset by the decrease in consulting fees as the result of warrant re-valuation and travel expense of $861,056 and $106,772. The increase in insurance expense was mainly related to the amortization of D&O insurance during the period.
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Net non-operating expense. We had $621,366 in net non-operating expense for the six-month period ended June 30, 2021, as compared to net non-operating income of $158,157 for the six-month period ended June 30, 2020. Net non-operating expense in the six-month period ended June 30, 2021 represents an unrealized loss in investment of $643,480, amortization of financing cost of $95,660 from bond issuing, net interest expense of $53,810, gain in foreign exchange translation of $141,914 and government subsidies of $29,669 from the Japanese and Hong Kong governments. Net non-operating income in the six-month period ended June 30, 2020 represents gain on foreign exchange translation of $215,760 and a Covid-19 subsidy Aircom Japan received from the Japanese government in the amount of $18,482, which was offset by the unrealized loss from the transactions of our liquidity contract of $60,170.
Loss before income taxes. Our loss before income taxes increased by $1,276,321, or 28.5%, to $5,760,758 for the six-month period ended June 30, 2021, from a loss of $4,484,437 for the six-month period ended June 30, 2020, as a result of the factors described above.
Income tax expense. Income tax expense was $3,269 and $3,263 for the six-month period ended June 30, 2021 and 2020, respectively, mainly due to a California franchise tax and foreign 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 $1,178,924, or 25.0%, to $5,894,441 for the six-month period ended June 30, 2021, from $4,715,517 for the six-month period ended June 30, 2020.
Liquidity and Capital Resources
As of June 30, 2021, we had cash and cash equivalents of $3,250,487. To date, we have financed our operations primarily through cash proceeds from financing activities, including through our completed public offering, short-term borrowings and equity contributions by our stockholders.
The following table provides detailed information about our net cash flow:
Cash Flow
|
Six Months Ended June 30, |
||||||||
| 2021 | 2020 | |||||||
| Net cash used for operating activities | $ | (1,418,381 | ) | $ | (1,523,935 | ) | ||
| Net cash used for investing activity | (5,078 | ) | (186,680 | ) | ||||
| Net cash provided by financing activity | 1,009,769 | 1,375,917 | ||||||
| Net decrease in cash and cash equivalents | (413,690 | ) | (334,698 | ) | ||||
| Cash at beginning of year | 3,794,591 | 976,829 | ||||||
| Foreign currency translation effect on cash | (130,414 | ) | (227,817 | ) | ||||
| Cash at end of the periods | $ | 3,250,487 | $ | 414,314 | ||||
Operating Activities
Net cash used for operating activities was $1,418,381 for the six months ended June 30, 2021, as compared to $1,523,935 for the six months ended June 30, 2020. In addition to the net loss of $5,764,027, the increase in net cash used for operating activities during the six-month period ended June 30, 2021 was mainly due to increase in inventory and prepaid expenses and other current assets of $1,575,436 and $355,764, respectively, offset by the increase in accrued expense and other current liabilities and prepayment from a customer of $1,908,033 and $1,611,357, respectively. In addition to the net loss of $4,487,700, the increase in net cash used for operating activities during the six-month period ended June 30, 2020 was mainly due to an increase in inventory of $1,811,443, which was offset by a decrease in accounts receivable of $451,130 and increase in accounts payable and accrued expense and other current liabilities of $961,610 and $1,280,837, respectively.
Investing Activities
Net cash used by investing activities for the six months ended June 30, 2021 was $5,078 as compared to net cash used by investing activities of $186,680 for the six months ended June 30, 2020. The net cash provided by investing activities for the six months ended June 30, 2020 was mainly due to the purchase of property and equipment of $3,521. The net cash used for investing activities for the six months ended June 30, 2020 was mainly for the purchase of trading securities of $157,756 and the purchase of property and equipment of $28,924.
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Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2021 and 2020 was $1,009,769 and $1,375,917 respectively. Net cash provided by financing activities for the six months ended June 30, 2021 was mainly attributable to proceeds from short-term loan of $1,017,693. Net cash provided by financing activities for the six months ended June 30, 2020 was mainly attributable to net proceeds from the borrowing of a short-term bank loan under the PPP program in the amount of $163,200 and short-term loans of $1,221,211.
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 a parcel of our Taiwan land parcel which we have recently purchased. The Taiwan land parcel consists of approximately 6.36 acres of undeveloped land located at the Taishui Grottoes in the Xinyi District of Keelung City, Taiwan. Aerkomm Taiwan contracted to purchase the Taiwan land parcel for NT$1,056,297,507, or US$34,474,462, and as of July 3, 2019 we completed payment of the purchase price for the Taiwan land parcel in full. We are now waiting for title to the Taiwan land parcel to be transferred to us pending the completion of a local governmental land office re-titling process. The Loans will be secured by the Taiwan land parcel with the initial closing date of the Loans to be a date, designated by us, within 30 days following the date that the title for the Taiwan land parcel is fully transferred to and vested in our subsidiary, Aerkomm Taiwan. The Loans will bear interest, non-compounding, at the Bank of America Prime Rate plus 1%, annually, calculated on the actual number of days the Loans are outstanding and based on a 365-day year and will be due and payable upon the earlier of (1) the date of our obtaining a mortgage loan secured by the Taiwan land parcel with a principal amount of not less than $20 million and (2) one year following the initial closing date of the Loans. The Lenders also agreed to an earlier closing of up to 25% of the principal amounts of the Loans upon our request prior to the time that title to the 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. As of the date of this annual report, we have not drawn down any portion of the Loans.
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 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 9, 2019, we amended the binding letter of commitment with MIGL to extend the payment to be paid after the full payment of the Land acquisition price until no later than December 31, 2020. 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 December 31, 2021.
On December 3, 2020, the Company closed a private placement offering (the “Bond Offering”) consisting of US$10,000,000 in aggregate principal amount of its Credit Enhanced Zero Coupon Convertible Bond due 2025 (the “Credit Enhanced Bonds”) and US$200,000 in aggregate principal amount of its 7.5% convertible bonds due 2025 (the “Coupon Bonds,” and together with the Credited Enhanced Bonds, the “Bonds”).
Payments of principal, premium, interest in respect of the Credit Enhanced Bonds are protected by a bank guarantee denominated in U.S. dollars and issued by Bank of Panhsin Co., Ltd., based in Taiwan. Unless previously redeemed, converted or repurchased and canceled, the Credit Enhanced Bonds will be redeemed on December 2, 2025 at 105.11% of their principal amount and the Coupon Bonds will be redeemed on December 2, 2025 at 100% of their principal amount plus any accrued and unpaid interest. The Coupon Bonds will bear interest from and including December 2, 2020 at the rate of 7.5% per annum. Interest on the Coupon Bonds is payable semi-annually in arrears on June 1 and December 1 each year, commencing on June 1, 2021. Unless previously redeemed, converted or repurchased and cancelled, the Bonds may be converted at any time on or after December 3, 2020 up to November 20, 2025 into shares of Common Stock of the Company with a par value US$0.001 each (such shares of Common Stock, the “Conversion Shares”). The initial conversion price for the Bonds is US$13.30 per Conversion Share and is subject to adjustment in specified circumstances. Please refer to our Current Report on Form 8-K filed with SEC on December 4, 2020.
On December 31, 2020, we entered into an underwriting agreement (the “Underwriting Agreement”) with Invest Securities SA (“Invest Securities”) in connection with our public offering (the “2020/2021 Offering”), issuance and sale of up to 1,951,219 shares of our common stock on a best-efforts basis at the public offering price of €20.50 (approximately $25.07) per share, less underwriting discounts, for up to a maximum of €40 million (approximately $48.9 million). On December 31, 2020, we completed our first closing of the 2020/2021 Offering and issued an aggregate of 96,160 shares of our common stock for gross proceeds of €1.97 million (approximately $2.41 million), or net proceeds of €1.4 million (approximately $1.7 million). The Underwriting Agreement with Invest Securities has expired and we are currently exploring whether to attempt to extend the Underwriting Agreement with Invest Securities or engage a different investment banker to assist us in proceeding with the 2020/2021 Offering. We can provide no assurances, however, that we will be successful in these efforts.
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We have not generated significant revenues, excluding non-recurring revenues from affiliates in the second quarter of fiscal 2021, and we will incur additional expenses as a result of being a public reporting company. For the six-month period ended June 30, 2021, we incurred a comprehensive loss of $5,868,162 and had a negative working capital of $3,169,689 as of June 30, 2021. Currently, we have taken measures, as discussed above, that management believes will improve our financial position by financing activities, including through our ongoing public offering, short-term and long-term borrowings and fund raisings. However, there is no assurance that we will be successful in achieving our financial and business objectives. There are a number of factors that could potentially arise that could result in shortfalls in achieving the objectives in our business plan, such as general, worldwide economic conditions, the competitive pricing in the connectivity industry, the ongoing impact of the COVID-19 pandemic, our operating results continuing to deteriorate and our bank and shareholders not being able to provide continued financial support.
Capital Expenditures
Our operations continue to require significant capital expenditures primarily for technology development, equipment and capacity expansion. Capital expenditures are associated with the supply of airborne equipment to our prospective airline partners, which correlates directly to the roll out and/or upgrade of service to our prospective airline partners’ fleets. Capital spending is also associated with the expansion of our network, ground stations and data centers and includes design, permitting, network equipment and installation costs.
Capital expenditures for the six months ended June 30, 2021 and 2020 were $5,078 and $186,680, respectively.
We anticipate an increase in capital spending in our fiscal year ended December 31, 2021 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.
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:
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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, 2020 and 2019, the total balance of cash in bank exceeding the amount insured by the Federal Deposit Insurance Corporation (FDIC) for the Company was approximately $0 and $0, respectively. The balance of cash deposited in foreign financial institutions exceeding the amount insured by local insurance is approximately $3,107,000 and $3,514,000 as of June 30, 2021 and December 31, 2020, respectively. We 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.
Short-term investment. The Company’s short-term investment securities are classified as trading security. The securities are stated at fair value within current assets on the Company’s condensed balance sheets. Fair value is calculated based on publicly available market information or other estimates determined by the Company. Changes in fair value are recorded in current income.
Inventories. Inventories are recorded at the lower of weighted-average cost or net realizable value. 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.
Long-term Investment. Long-term investment includes holdings of marketable equity securities with less than 20% of ownership of the investee. Marketable equity securities include equity securities which are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Changes in fair value from subsequent remeasurement are reported under non-operating income in the statement of income. The accumulated gains or losses are recognized in earnings when the securities are derecognized from the balance sheet. The cost of the securities sold is based on the weighted average cost method. Stock dividend from the investee is included to recalculate the cost basis of the investment based on the total number of shares. Investments are considered to be impaired when a decline in fair value is judged to be other than temporary. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, as well as its intent and ability to hold the investment, for recording an impairment loss.
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 six-month periods ended June 30, 2021 and 2020.
Right-of-Use Asset and Lease Liability. In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”), which modifies lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases and finance leases under previous accounting standards and disclosing key information about leasing arrangements. A lessee should recognize the lease liability to make lease payments and the right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases and finance leases, a right-of-use asset and a lease liability are initially measured at the present value of the lease payments by discount rates. The Company’s lease discount rates are generally based on its incremental borrowing rate, as the discount rates implicit in the Company’s leases is readily determinable. Operating leases are included in operating lease right-of-use assets and lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment and lease liability in our consolidated balance sheets. Lease expense for operating expense payments is recognized on a straight-line basis over the lease term. Interest and amortization expenses are recognized for finance leases on a straight-line basis over the lease term. For the leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. We adopted ASU 2016-02 effective January 1, 2019.
Goodwill and Purchased Intangible Assets. Goodwill represents the amount by which the total purchase price paid exceeded the estimated fair value of net assets acquired from acquisition of subsidiaries. We test goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. Purchased intangible assets with finite life are amortized on the straight-line basis over the estimated useful lives of respective assets. Purchased intangible assets with indefinite life are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Purchased intangible asset consists of satellite system software and is amortized over 10 years.
Fair Value of Financial Instruments. We utilize the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:
Level 1 - Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2 - Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.
Level 3 - Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions.
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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 June 30, 2021. The Company’s long-term bonds payable, long-term loan and lease payable approximated the carrying amount as its interest rate is considered as approximate to the current rate for comparable loans and leases, respectively. There were no outstanding derivative financial instruments as of June 30, 2021.
Revenue Recognition. The Company adopted the provisions of ASU 2014-09 Revenue from Contract with Customers (Topic 606) and the principal versus agent guidance within the new revenue standard. As such, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenue when (or as) the Company satisfies a performance obligation.
Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Adjustments to prior period’s income tax liabilities are added to or deducted from the current period’s tax provision.
The Company follows FASB guidance on uncertain tax positions and has analyzed its filing positions in all the federal, state and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in those jurisdictions. The Company files income tax returns in the US federal, state and foreign jurisdictions where it conducts business. It is not subject to income tax examinations by US federal, state and local tax authorities for years before 2016. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on its consolidated financial position, results of operations, or cash flows. Therefore, no reserves for uncertain tax positions have been recorded. The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months.
The Company’s policy for recording interest and penalties associated with any uncertain tax positions is to record such items as a component of income before taxes. Penalties and interest paid or received, if any, are recorded as part of other operating expenses in the consolidated statement of operations.
Foreign Currency Transactions. Foreign currency transactions are recorded in U.S. dollars at the exchange rates in effect when the transactions occur. Exchange gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in current income. At the end of each period, assets and liabilities denominated in foreign currencies are revalued at the prevailing exchange rates with the resulting gains or losses recognized in income for the period.
Translation Adjustments. If a foreign subsidiary’s functional currency is the local currency, translation adjustments will result from the process of translating the subsidiary’s financial statements into the reporting currency of our company. Such adjustments are accumulated and reported under other comprehensive income (loss) as a separate component of stockholder’s equity.
Earnings (Loss) Per Share. Basic earnings (loss) per share is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include stock warrants and outstanding stock options, shares to be purchased by employees under the Company’s employee stock purchase plan.
Subsequent Events. The Company has evaluated events and transactions after the reported period up to August [*], 2021, the date on which these consolidated financial statements were available to be issued. All subsequent events requiring recognition as of June 30, 2021 have been included in these consolidated financial statements.
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Recent Accounting Pronouncements
Simplifying the Accounting for Debt with Conversion and Other Options.
In June 2020, the FASB issued ASU 2020-06 to simplify the accounting in ASC 470, Debt with Conversion and Other Options and ASC 815, Contracts in Equity’s Own Entity. The guidance simplifies the current guidance for convertible instruments and the derivatives scope exception for contracts in an entity’s own equity. Additionally, the amendments affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2022. Early adoption is permitted. The amendments in this update must be applied on either full retrospective basis or modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements and related disclosures, as well as the timing of adoption.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2021. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company is currently evaluating the impact this ASU will have on the financial statements and related disclosures, as well as the timing of adoption.
Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments. In February 2020, the FASB issued ASU 2020-02 and delayed the effective date of ASU 2016-13 until fiscal year beginning after December 15, 2022. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements.
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. The Company is currently evaluating the impact of adopting ASU 2021-04 on its consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
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As required by Rule 13a-15(e) of the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of June 30, 2021.
Based upon, and as of the date of this evaluation, our chief executive officer and chief financial officer determined that, because of the material weaknesses described in Item 9A “Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 24, 2021, and further referenced below, which we are still in the process of remediating as of June 30, 2021, our disclosure controls and procedures were not effective.
Changes in Internal Control Over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
During its evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2021, our management identified the following material weaknesses:
| ● | We do not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of accounting principles generally accepted in the United States commensurate with our financial reporting requirements. To mitigate the current limited resources and limited employees, we rely heavily on the use of external legal and accounting professionals. |
In order to cure the foregoing material weakness, we have taken or plan to take the following remediation measures:
| ● | On November 5, 2018, we added a staff accountant with a CPA and technical accounting expertise to further support our current accounting personnel. As necessary, we will continue to engage consultants or outside accounting firms in order to ensure proper accounting for our consolidated financial statements. |
We intend to complete the remediation of the material weakness discussed above as soon as practicable, but we can give no assurance that we will be able to do so. Designing and implementing an effective disclosure controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to devote significant resources to maintain a financial reporting system that adequately satisfies our reporting obligations. The remedial measures that we have taken and intend to take may not fully address the material weakness that we have identified, and material weaknesses in our disclosure controls and procedures may be identified in the future. Should we discover such conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Other than in connection with the implementation of the remedial measures described above, there were no changes in our internal controls over financial reporting during quarter ended June 30, 2021 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 June 30, 2021 to the legal proceedings previously disclosed in Item 3 “Legal Proceedings” of our Annual Report on Form 10-K filed on March 24, 2021.
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, 2020 filed with the SEC on March 24, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any equity securities during the quarter ended June 30, 2021 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 June 30, 2021 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: August 23, 2021 | AERKOMM INC. |
| /s/ Louis Giordimaina | |
| Name: Louis Giordimaina | |
| Title: Chief Executive Officer | |
| (Principal Executive Officer) | |
| /s/ Y. Tristan Kuo | |
| Name: Y. Tristan Kuo | |
| Title: Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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Exhibit 10.1
Exhibit 10.2
CONTRACTOR AGREEMENT
This Contractor Agreement, dated as of June 1, 2021, is entered into by and between:
Yuanjiu Inc., having its registered office at 4F., No. 118, Sec. 1, Neihu Rd., Neihu District, Taipei City 114, Taiwan, a company duly incorporated under the laws of Taiwan, Republic of China (“Yuanjiu”),
and
Aerkomm Inc., a company duly incorporated under the laws of the State of Nevada, United States of America (“Aerkomm”).
WHEREAS:
Aerkomm specializes, among other things, in connectivity solutions, including but not limited to, for the aviation and maritime sectors.
Yuanjiu acts, among other things, as a one-stop-shop maintenance solutions and services provider for commercial aviation, serving customers in Asia.
Both Aerkomm and Yuanjiu wish to expand their businesses to new territories and new products.
THEREFORE:
The parties agree as follows:
1. CONTRACTOR STATUS
1.1 The parties expressly intend that Yuanjiu is a contractor and not an employee, agent, joint venturer or partner of Aerkomm, or any of its subsidiaries or affiliates, for any purpose whatsoever. Yuanjiu will determine the method, details and means of performing the services set forth in this Agreement. None of the provisions of this Agreement shall be interpreted or construed as creating or establishing a relationship of employer and employee between Yuanjiu and Aerkomm, or any of its subsidiaries or affiliates, for any purpose whatsoever.
1.2 Yuanjiu acknowledges and understands that during the term of this Agreement Aerkomm may from time to time contract with others to perform similar services.
1.3 Notwithstanding any other provision in this Agreement, Yuanjiu does not have the power to enter into any contracts on behalf of Aerkomm or any of its subsidiaries or affiliates, and, without limiting the generality of the foregoing, to authorize any borrowing, financial commitments, lending, pledging, selling, assigning or employment by Aerkomm or any of its subsidiaries or affiliates.
2. SERVICES TO BE PERFORMED BY YUANJIU
| 2.1 | ||
2.2 Yuanjiu will determine the method, details and means of performing the service referred to in paragraph 2.1, provided, however, that Aerkomm retains the right to approve or disapprove the activities of Yuanjiu in connection with the foregoing services. Yuanjiu shall immediately cease any activity disapproved of by Aerkomm.
2.3 Aerkomm will make available to Yuanjiu sales and marketing materials reasonably requested by Yuanjiu in order for Yuanjiu to carry out its obligations under this Agreement. Aerkomm may, at its sole discretion, make available and provide Yuanjiu, at Yuanjiu’s request and free of any charge or fee, with any software, information, documentation, resources and/or equipment relating to Aerkomm’s business for use by Yuanjiu during any trade shows or meetings which Yuanjiu may attend in furtherance of this Agreement.
3. FURTHER OBLIGATIONS OF YUANJIU
3.1 Yuanjiu shall be solely responsible for providing its own insurance, including third party liability insurance.
3.2 Except as set forth in paragraph 2.3, Yuanjiu shall be solely responsible for providing all tools, materials and equipment necessary for completion of its obligations under this Agreement.
3.3 Upon termination of this Agreement for any reason whatsoever, Yuanjiu shall immediately return to Aerkomm all equipment, documentation, information and other property provided by Aerkomm or any of its subsidiaries or affiliates, without retaining any copy, specifically including, but not limited to, any software, information, documentation, resources and/or equipment referred to in paragraph 2.3 or otherwise received by Yuanjiu from or on behalf of Aerkomm.
4. COSTS
4.1 Costs incurred pursuant to this Agreement shall be divided as set out in Appendix 1.
5. COMPENSATION
5.1 Compensation to each of Aerkomm and Yuanjiu pursuant to this Agreement shall be as set out in Appendix 1.
6. REPORTING
Yuanjiu shall report directly to the Chief Executive Officer of Aerkomm. Yuanjiu shall make monthly reports to the management of Aerkomm, and/or such other persons as Aerkomm may direct, of its activities and planned activities pursuant to this Agreement. Yuanjiu acknowledges that such reporting may be to employees or directors of companies which are subsidiaries or affiliates of Aerkomm.
7. TERMINATION OF AGREEMENT
7.1 Notwithstanding any other provision of this Agreement, this Agreement shall terminate automatically on the occurrence of any of the following events, whichever occurs the earliest (the “Termination Date”): (a) December 31, 2024; (b) Yuanjiu’s bankruptcy, dissolution or otherwise winding up of its business or affairs, (c) arrest of any officer or director of Yuanjiu and his or her charge, or the charge of Yuanjiu, with any serious crime, (d) assignment of this Agreement or any duties or obligations under this Agreement by either party without the express written consent of the other party, or (e) termination pursuant to paragraphs 7.2 or 7.3.
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7.2 Should Aerkomm default in the performance of this Agreement, or materially breach any of its provisions, Yuanjiu may terminate this Agreement immediately by giving written notice to Aerkomm.
7.3 Should Yuanjiu default in the performance of this Agreement, or materially breach any of its provisions, Aerkomm may terminate this Agreement immediately by giving written notice to Yuanjiu.
7.4 In the event of a termination of this Agreement prior to December 31, 2024, the sole financial obligation of either party shall be to pay any amounts then due under Section 4 and any amounts then due under Section 5.
8. FOREIGN CORRUPT PRACTICES ACT COMPLIANCE
Aerkomm advises Yuanjiu that the United States Foreign Corrupt Practices Act (“FCPA”) prohibits any offer, payment, promise to pay, or authorization of the payment of money or anything of value (including money, gifts, preferential treatment and any other sort of advantage), either directly or indirectly, by a United States person, including Aerkomm, or any of its contractors, such as Yuanjiu, subsidiaries, affiliates or agents, to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.
Yuanjiu understands and agrees that Yuanjiu may not and will not, directly or indirectly, offer, promise, grant or authorize the giving of money or anything else of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.
Yuanjiu understands that these legal restrictions apply fully to Yuanjiu with regard to Yuanjiu’s activities in the course of or in relation to Yuanjiu’s retention by Aerkomm. Yuanjiu represents and warrants that Yuanjiu fully understands and will act in accordance with all applicable laws regarding anti-corruption, including the FCPA, the U.K. Bribery Act, and any other applicable national, state and international laws related to anti-corruption. Yuanjiu agrees that it will not take any action which would cause Aerkomm to be in violation of the FCPA or any other applicable anti-corruption law, regulation or Aerkomm policy or procedure.
Yuanjiu further represents and warrants that Yuanjiu will know and understand, and act in accordance with, all Aerkomm policies and procedures related to anti-corruption and business conduct. Yuanjiu agrees to attend all mandatory compliance training. Yuanjiu undertakes to duly notify Aerkomm if Yuanjiu becomes aware of any such violation of Aerkomm policies or procedures, or any other violation of law, committed by Yuanjiu or any other person or entity, and to indemnify Aerkomm for any losses, damages, fines and/or penalties which Aerkomm may suffer or incur arising out of or incidental to any such violation committed by Yuanjiu. Yuanjiu also represents and warrants that Yuanjiu will disclose to Aerkomm if any employee, officer or director of Yuanjiu, or any member of their family, is an official of a foreign government or foreign political party, or is a candidate for foreign political office.
In case of any breach of this Section 8, Aerkomm may suspend or terminate this Agreement at any time without notice, indemnity or further obligation to Yuanjiu by Aerkomm.
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9. CONFIDENTIALITY
9.1 For purposes of this Agreement, “Confidential Information” includes any information in any form or medium, including without limitation written records, documents, computer-readable disks, tapes, printouts, sound recordings, photographs, reproductions, sketches, notes, or copies or excerpts of them, or other documents or materials that Aerkomm considers (acting at all times reasonably and in good faith) confidential, whether or not marked as confidential. Confidential Information includes inventions, software, source code, object code, algorithms, procedures, databases, compilations, technical data, formulas, theories, methods, equipment, samples, designs, data, specifications, drawings, blueprints, prototypes, models, business plans, customer lists, contacts and information, sales and marketing reports, proposals, prices, costs, personnel and payroll records, mailing lists, accounting records, and other trade secrets and information concerning the businesses and other ventures which Aerkomm or Yuanjiu or their respective subsidiaries or affiliates now operate or may operate in the future.
9.2 In regard to the above, Yuanjiu agrees as follows:
(a) during the term of this Agreement, Yuanjiu will not disclose or make use of any Confidential Information of Aerkomm or its subsidiaries or affiliates except as authorized in writing by Aerkomm;
(b) after the termination of this Agreement, Yuanjiu will not disclose or make use of any Confidential Information of Aerkomm or its subsidiaries or affiliates for any purpose, either on its own behalf or on behalf of another person, entity or business;
(c) during the term of this Agreement, Yuanjiu will not provide to Aerkomm or make use of any trade secrets or other confidential information belonging to a third party without the express written approval of both Aerkomm and such third party;
(d) Yuanjiu represents that it, and none of its employees, officers or directors, is not subject to any confidentiality, non-competition or other agreement with any third party that would conflict with this Agreement or prevent Yuanjiu from performing all its obligations under this Agreement;
(e) upon demand by Aerkomm or upon termination of this Agreement for any reason, Yuanjiu will immediately assemble all property and records of Aerkomm or its subsidiaries or affiliates in its possession or under its control, including all copies, excerpts, derivations and duplications thereof and all Confidential Information of Aerkomm or its subsidiaries or affiliates, and return them promptly and unconditionally to Aerkomm; and
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(f) Yuanjiu agrees that during the term of this Agreement and for a period of one (1) year after the Termination Date, it will not, either directly or indirectly, for itself or for any other person or entity, hire, solicit or induce any independent contractor, consultant or employee of Aerkomm or its subsidiaries or affiliates to leave their employment or engagement or to cease doing business with Aerkomm or its subsidiaries or affiliates.
9.3 In regard to the above, Aerkomm agrees as follows:
(a) during the term of this Agreement, Aerkomm will not disclose or make use of any Confidential Information of Yuanjiu or its subsidiaries or affiliates except as authorized in writing by Yuanjiu;
(b) after the termination of this Agreement, Aerkomm will not disclose or make use of any Confidential Information of Yuanjiu or its subsidiaries or affiliates for any purpose, either on its own behalf or on behalf of another person, entity or business;
(c) during the term of this Agreement, Aerkomm will not provide to Yuanjiu or make use of any trade secrets or other confidential information belonging to a third party without the express written approval of both Yuanjiu and such third party;
(d) Aerkomm represents that it, and none of its employees, officers or directors, is not subject to any confidentiality, non-competition or other agreement with any third party that would conflict with this Agreement or prevent Aerkomm from performing all its obligations under this Agreement;
(e) upon demand by Yuanjiu or upon termination of this Agreement for any reason, Aerkomm will immediately assemble all property and records of Yuanjiu or its subsidiaries or affiliates in its possession or under its control, including all copies, excerpts, derivations and duplications thereof and all Confidential Information of Yuanjiu or its subsidiaries or affiliates, and return them promptly and unconditionally to Yuanjiu; and
(f) Aerkomm agrees that during the term of this Agreement and for a period of one (1) year after the Termination Date, it will not, either directly or indirectly, for itself or for any other person or entity, hire, solicit or induce any independent consultant, consultant or employee of Yuanjiu or its subsidiaries or affiliates to leave their employment or engagement or to cease doing business with Yuanjiu or its subsidiaries or affiliates.
10. TRADE SECRETS
10.1 Yuanjiu covenants and agrees with Aerkomm that it will not at any time, including after the Termination Date, without the prior written consent of Aerkomm, directly or indirectly use or disclose to any person, except duly authorized officers or directors of Aerkomm or its subsidiaries or affiliates entitled thereto, any trade secret, business data or other information acquired by Yuanjiu by reason of Yuanjiu’s involvement and association with Aerkomm.
10.2 Aerkomm covenants and agrees with Yuanjiu that it will not at any time, including after the Termination Date, without the prior written consent of Yuanjiu, directly or indirectly use or disclose to any person, except duly authorized officers or directors of Yuanjiu or its subsidiaries or affiliates entitled thereto, any trade secret, business data or other information acquired by Aerkomm by reason of Aerkomm’s involvement and association with Yuanjiu.
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10.3 As it is recognized by all the parties to this Agreement that irreparable damage would result from any violation of paragraphs 10.1 and 10.2, it is expressly agreed that, in addition to any and all of the remedies available to it, each party will have the immediate remedy of injunction or such other equitable relief as may be decreed or issued by any arbitral panel or court of competent jurisdiction to enforce paragraph 10.1 or 10.2.
10.4 In the event that any clause or operation of paragraphs 10.1, 10.2 or 10.3 is unenforceable or declared invalid for any reason whatever, such unenforceability or invalidity will not affect the enforceability or validity of the remaining portions of paragraphs 10.1, 10.2 or 10.3 and such unenforceability or invalidity will be severable from such paragraphs and this Agreement.
11. NON-COMPETE CLAUSE
11.1 Yuanjiu shall not own, manage, operate, consult or be employed in a business substantially similar to, or competitive with, the present business of Aerkomm or its subsidiaries or affiliates or such other business activity in which Aerkomm or its subsidiaries or affiliates may substantially engage during the term of this Agreement.
11.2 For a period of one (1) year after the Termination Date, Yuanjiu shall not, directly or indirectly, in Asia and Australasia, manage, operate, consult or be employed in a business substantially similar to, or competitive with, the present business of Aerkomm or its subsidiaries or affiliates or such other business activity in which Aerkomm or its subsidiaries or affiliates may substantially engage during the term of this Agreement. This post-contractual non-competition provision is included because Aerkomm may, in reliance on this provision, provide Yuanjiu access to trade secrets, customers and other confidential data, technologies, proprietary management or production methods, sensitive information regarding Aerkomm accounts, future products, marketing plans and good will. Yuanjiu acknowledges that sharing of such trade secrets, proprietary technology and valuable relationships, inter alia, would cause irreparable material damage to Aerkomm. Yuanjiu agrees to treat said information as confidential and not to use said information on its own behalf or disclose same to any third party. Yuanjiu also agrees to take reasonable security measures to prevent accidental disclosure.
11.3 Yuanjiu acknowledges and agrees that any actual or potential opportunity within the scope of business of Aerkomm, which comes to the attention of Yuanjiu during the term of this Agreement, shall be made available to Aerkomm.
11.4 In the event that any clause or operation of paragraph 11.2 is unenforceable or declared invalid for any reason whatever, such unenforceability or invalidity will not affect the enforceability or validity of the remaining portions of paragraph 11.2 and such unenforceability or invalidity will be severable from such paragraph and this Agreement.
Agreement.
12. INDEMNIFICATION
12.1 Yuanjiu shall hold harmless and indemnify Aerkomm against any and all liability imposed or claimed, including attorneys’ fees and other legal expenses, arising directly or indirectly from any act or failure of Yuanjiu, including all claims relating to the injury, disability or death of any person, or damage to any property suffered or experienced in the course of fulfilling Yuanjiu’s obligations under this Agreement, except if and to the extent that such liability arises or results from Aerkomm’s or its employees’ or agents’ fraud, willful default or gross negligence.
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12.2 Yuanjiu will indemnify and hold harmless Aerkomm from and against:
(a) any and all liabilities, whether accrued, absolute, contingent or otherwise, in regard to any taxes, government withholdings and similar liabilities or deductions for amounts paid to Yuanjiu;
(b) any and all damage or deficiencies resulting from any misrepresentation or material breach of this Agreement by Yuanjiu; and
(c) any and all actions, suits, proceedings, demands, assessments, judgments, costs and attorneys’ fees and other legal expenses incident to any of the foregoing.
12.3 Aerkomm shall hold harmless and indemnify Yuanjiu against any and all liability imposed or claimed, including attorneys’ fees and other legal expenses, arising directly or indirectly from any act or failure of Aerkomm, including all claims relating to the injury, disability or death of any person, or damage to any property suffered or experienced in the course of fulfilling Aerkomm’s obligations under this Agreement, except if and to the extent that such liability arises or results from Yuanjiu’s or its employees’ or agents’ fraud, willful default or gross negligence.
12.4 Aerkomm will indemnify and hold harmless Yuanjiu from and against:
(a) any and all liabilities, whether accrued, absolute, contingent or otherwise, in regard to any taxes, government withholdings and similar liabilities or deductions for amounts paid to Aerkomm;
(b) any and all damage or deficiencies resulting from any misrepresentation or material breach of this Agreement by Aerkomm; and
(c) any and all actions, suits, proceedings, demands, assessments, judgments, costs and attorneys’ fees and other legal expenses incident to any of the foregoing.
13. GENERAL PROVISIONS
13.1 Entire Agreement. This Agreement supersedes any and all agreements, either oral or in writing, with respect to the services of Yuanjiu, and contains all of the covenants and agreements with respect to such services in any manner whatsoever. Each party to this Agreement acknowledges that no representations, inducement, promises or agreements, oral or otherwise, with regard to this Agreement or the services to be rendered under it have been made by anyone which are not embodied herein. Any modification of this Agreement, including to extend or bring forward the date referred to in paragraph 7.1(a), must be made in writing and signed by both Yuanjiu and Aerkomm. Without limiting the foregoing, the “Memorandum of Understanding for an Independent Contractor Agreement” between Aerkomm and Yuanjiu dated as of April 18, 2021 is null and void.
13.2 Partial Invalidity. If any provision of this Agreement is held to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way. The parties shall use all reasonable endeavors to replace the invalid, void or unenforceable provision by a valid provision the effect of which is as close as possible to the intended effect of the invalid, void or unenforceable provision.
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13.3 Headings. The headings in this Agreement form no part of the agreement between the parties and will be deemed to have been inserted for convenience only and will not affect the construction hereof.
13.4 Advice of Counsel. The parties each agree that they have consulted with counsel of their choosing, or have been given a reasonable opportunity to consult with counsel of their choosing and voluntarily have elected not to do so, prior to entering into this Agreement
13.5 Voluntary Agreement. The parties agree, represent and declare that they have carefully read this Agreement, know the contents of this Agreement, and that they sign this Agreement freely and voluntarily.
13.6 Notices. Any notices required by this Agreement to be given shall be delivered personally or mailed as follows:
| To Yuanjiu: | the registered office for the time being of Yuanjiu |
| To Aerkomm: | Aerkomm Malta Ltd |
C3006 Balluta Terrace
St. Julian’s Ramp
St. Julian’s STJ 1062
Malta
with a copy to:
CFO, Aircom Pacific, Inc.
44043 Fremont Blvd
Fremont, California 94538-6045
USA
or as otherwise notified to the other party from time to time.
13.7 Governing Law. This Agreement and the rights of the parties hereunder shall be governed by and construed in accordance with the laws of the State of California, USA, exclusive of conflict or choice of law rules.
13.8 Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement, including the formation, interpretation, breach or termination thereof, including whether the claims asserted are arbitrable, will be referred to and finally determined by arbitration in accordance with the JAMS International Arbitration Rules as those Rules exist on the effective date of this Agreement. Any arbitration arising out of or related to this Agreement shall be conducted in accordance with the JAMS Efficiency Guidelines for the Pre-Hearing Phase of International Arbitrations and the Expedited Procedures set forth in the JAMS International Arbitration Rules, including Article 22 of those Rules.
The Tribunal will consist of one (1) arbitrator. The place of arbitration will be San José, California, USA. The language to be used in the arbitral proceedings will be English. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Each party to any arbitration arising out of or related to this Agreement shall bear its own legal fees and costs of arbitration.
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In any arbitration arising out of or related to this Agreement, the arbitrator is not empowered to award punitive or exemplary damages, except where permitted by statute, and the parties waive any right to recover any such damages. In any arbitration arising out of or related to this Agreement, the arbitrator may not award any incidental, indirect or consequential damages, including damages for lost profits.
The parties shall maintain the confidential nature of any arbitration proceeding, including the Hearing, and the Award except as may be necessary to prepare for or conduct the arbitration hearing on the merits, or except as may be necessary in connection with a court application for a preliminary remedy, a judicial challenge to an Award or its enforcement, or unless otherwise required by law or judicial decision.
The parties acknowledge that this Agreement evidences a transaction involving interstate commerce. Notwithstanding the provision in paragraph 13.4 with respect to applicable substantive law, any arbitration conducted pursuant to the terms of this Agreement shall be governed by the Federal Arbitration Act (9 U.S.C., Secs. 1-16).
13.9 Counterparts. This agreement may be signed in counterparts, and a facsimile or PDF signature has the same effect as an original signature.
13.10 Survival of provisions. The provisions of paragraph 7.4, Section 9, Section 10, Section 11, Section 12 and Section 13 and Part C of Appendix 1 shall survive the termination of this Agreement.
| Aerkomm Inc. | ||
| By: | /s/ Louis Giordimaina | |
| Name: Louis Giordimaina | ||
| Title: CEO | ||
| Yuanjiu Inc. | ||
| By: | /s/ Albert Hsu | |
| Name: Albert Hsu | ||
| Title: Chairman | ||
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Exhibit 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement dated as of May 25, 2021 is entered into by and between Louis Giordimaina (the “Employee”), of 36 Verdala Mansions, Porta Vilhena, Inguanez Street, Rabat RBT2418, Malta, and Aerkomm Inc., a company duly incorporated in the State of Nevada, United States of America (the “Company”).
The parties agree as follows:
1. TERM AND EFFECT OF CONTRACT
1.1 The Company hereby appoints the Employee, and the Employee hereby accepts such appointment, to serve as Chief Executive Officer of the Company and to perform the services specified in paragraph 2.1 from the date hereof through the Termination Date (as defined in paragraph 4.1), pursuant to the terms and conditions of this Agreement.
1.2 The parties expressly intend that the Employee is an employee and not an agent, joint venturer or partner of the Company, its subsidiary, Aircom Pacific, Inc., a California corporation with its principal place of business at 44043 Fremont Boulevard, Fremont, California 94538-6045, United States of America (“Aircom”) or the Company’s subsidiaries or affiliates (collectively, the “Aerkomm Group”), for any purpose whatsoever.
2. POSITION AND RESPONSIBILITIES
2.1 The Employee shall perform such duties as shall from time to time be assigned by the Company or Aircom, on the terms and conditions set forth in this Agreement. Notwithstanding the foregoing, the Employee shall be an employee only of the Company and shall be paid only by the Company.
2.2 All of the Employee’s services shall be performed conscientiously and to the full extent of the Employee’s ability. The Employee shall devote his skill, ability and attention to the business of the Company and of Aircom until the Termination Date. Until the Termination Date, the Employee shall not directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether for compensation or otherwise, without the prior written consent of the Company.
2.3 Notwithstanding paragraph 2.2, the Company shall not unreasonably withhold its consent to the Employee accepting and undertaking directorships in any other organization which is not conducting a similar or competing business to the Aerkomm Group and which does not require significant day to day attention or management on the Employee’s part and that otherwise do not conflict with the Employee’s employment.
EMPLOYMENT AGREEMENT
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3. COMPENSATION AND BENEFITS
The Company shall pay as full consideration to the Employee for the Employee’s services to be rendered pursuant to this Agreement until the Termination Date compensation consisting of the following:
3.1 Signing Bonus - The Company shall (i) pay the Employee the gross sum of sxty thousand euros (€60,000) on the date of this Agreement and (ii) arrange that stock options for one hundred fifty thousand (150,000) shares of the Company shall be granted to the Employee (to be issued as soon as a new equity incentive plan has been authorized by the Company’s shareholders; the options will be priced at the Euronext closing price and shall vest upon issuance).
3.2 Salary - The Company shall pay the Employee the gross sum of five hundred forty thousand euros (€540,000) per year (the “Salary”). The Employee’s annual remuneration shall be payable by the Company with effect from the date of this Agreement in twelve (12) consecutive monthly instalments, in arrears on the last working day of each calendar month. The Salary will be reviewed on an annual basis; such reviews are not a guarantee of increases, which may be granted solely in the Company’s discretion.
3.3 Options – The Compnay shall arrange that the Employee will be granted options on eighteen thousand seven hundred-fifty (18,750) shares of common stock of the Company each calendar quarter, in arrears on the last working day of the three-month period starting on June 1, 2021, at the prevailing market price on Euronext at the time of grant in accordance with the equity incentive plan of the Company. These options will vest when issued.
3.4 Bonus - A bonus will be considered once a satisfactory revenue stream starts as a direct result of the Employee’s efforts and will be comparable with other executives of the Company.
3.5 Benefits - The benefits set out in this paragraph 3.5 are collectively referred to as the “Benefits”.
3.5.1 Health Insurance - The Company will pay any premium up to a maximum of two thousand five hundred euros (€2,500) per annum in relation to any international private health insurance which the Employee may have in place from time to time and providing international health insurance coverage for the Employee and his wife, subject to the production of relative invoices by the Employee to the Company.
3.5.2 Life Insurance - The Company will recommend board approval for life insurance coverage for the Employee comparable with other executives of the Company.
3.5.3 Pension Fund - The Company will pay the Employee the sum of six thousand euros (€6,000) per year to any private pension fund scheme/s designated by the Employee, in such instalments and on such dates as shall be instructed by the Employee.
EMPLOYMENT AGREEMENT
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3.5.4 Leased Car - The Company will pay the Employee the sum of eighteen thousand euros (€18,000) per annum as an allowance for leased car and fuel expenses, to be paid in equal monthly instalments.
3.5.5 Equipment - the Company shall provide the Employee with a mobile telephone for the Employee’s use in performing the Employee’s obligations under this Agreement, and shall reimburse the Employee for any and all mobile telephone service costs relating to usage in the course of the Employee’s employment with the Company as well as reasonable personal usage. The Company shall also provide the Employee with a laptop and iPad for Employee’s use in the course of executing his obligations under this Agreement. All such equipment shall be returned immediately to the Company upon termination of the Employee’s employment with the Company pursuant to this Agreement.
3.5.6 Vacation Leave – The Employee will be entitled to twenty-six (26) days paid annual leave. The Employee shall not be entitled to carry forward any leave entitlement not utilized unless the said entitlement was not utilized due to Company exigencies. If the said entitlement was not utilized due to Company exigencies, the parties may agree to carry forward a maximum of fifty percent (50%) of the vacation leave entitlement of that particular calendar year. The Employee shall make use of his vacation leave having regard to the exigencies of the Company’s business.
3.5.7 Sick Leave - The Employee shall be entitled to twenty (20) days sick leave per annum on full Salary and Benefits, all entitlements being reduced by any social benefits the Employee may be entitled to receive and by any amounts received by the Employee under any disability insurance policy or plan provided to the Employee and paid for by Company. Provided that payment of sick leave is conditional upon a medical certificate certifying the Employee’s incapacity to work to be produced by the Employee and subject to certification and confirmation, at the sole option of the Company, by the medical advisor of the Company.
3.5.8 Expenses - Company will reimburse the Employee for all actual, necessary and reasonable expenses incurred by the Employee in the course of his performance of services hereunder, including inter alia any reasonable expenses relating to overseas transport, sustenance and client entertainment as may be incurred by the Employee in the course of the provision of his services in terms of this Agreement. The Employee will properly account for all such expenses. Specifically, but without prejudice to the generality of the aforesaid:
3.5.8.1 Air Fare - The Company shall reimburse the Employee for air fares incurred by the Employee on the Company’s behalf upon presentation to the Company of suitable receipts. In this respect, for any flight lasting less than three (3) scheduled hours such reimbursement shall be at the economy class rate; for any flight lasting three (3) or more scheduled hours such reimbursement shall be at the business class rate. For the avoidance of any doubt, it is agreed that connecting flights shall not be deemed as being individual flights and, accordingly, the flight time of all connecting flights shall be aggregated and considered as being one flight for the purposes of this paragraph 3.5.8.1.
3.5.8.2 Hotel - The Company shall reimburse the Employee in an amount not to exceed four hundred euros (€400) per night (exclusive of any taxes or similar charges as may be applicable) for lodging expenses incurred by the Employee on the Company’s behalf upon presentation to the Company of suitable receipts for overseas travel requiring overnight stays.
EMPLOYMENT AGREEMENT
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3.5.8.3 La Valette Club Card - The Company will provide the Employee a Malta International Airport La Valette Club Card (covering lounge and parking), for a maximum cost of three hundred euros (€300) per year upon presentation to the Company of suitable receipts. The aforementioned Malta International Airport La Valette Club Card shall be returned immediately to the Company upon termination of the Employee’s employment with the Company.
3.5.8.4 Credit Card - The Company shall provide the Employee with a credit card for the Employee’s use in the course of the provision of his services pursuant to this Agreement. The aforementioned credit card shall be returned immediately to the Company upon termination of the Employee’s employment with the Company.
3.6 Prior Agreement – The parties acknowledge that “Salary” and “Benefits” as defined under the Employment Agreement between the partes dated May 25, 2018 (the “Prior Agreement”) are owed by the Company to the Employee pursuant to the Prior Agreement.
3.7 Tax - The Employee shall be responsible for all personal income taxes, government withholdings and similar liabilities or deductions for amounts paid to the Employee during the Term of this Agreement.
4. TERMINATION OF AGREEMENT
4.1 Termination Date - Notwithstanding any other provision of this Agreement, this Agreement shall terminate automatically on the occurrence of any of the following events, whichever occurs the earliest (the “Termination Date”): (1) May 24, 2024; (2) the bankruptcy or otherwise winding up of the Employee’s or the Company’s business or affairs, (3) arrest of the Employee and his charge with any serious crime, or (4) the occurrence of the events set out in paragraph 4.2, paragraph 4.3, paragraph 4.4, paragraph 4.5 or paragraph 4.6.
4.2 Termination for cause - The Company may dismiss the Employee and the Employee may abandon the service of the Company, without any notice period and without any liability to make any payment in terms of applicable law, if there is good and sufficient cause for such dismissal or abandonment of service in accordance with applicable law.
“Good and sufficient cause” for dismissal of the Employee is defined as including any act of dishonesty, disloyalty, misrepresentation to the Company of any kind irrespective of when the misrepresentation is made, falsifying any Company document, misuse, abuse, or misappropriation of any Company property, conviction of any crime, failure after warning and an opportunity to improve to perform the duties and responsibilities assigned in a manner or to the level required by the Company, insubordination, discrimination against or harassment of any employee, customer or vendor of the Company on the basis of race, age, gender, including pregnancy, national origin, religion, ethnicity, physical or mental disability, marital status, sexual preference, veteran’s status, or any other basis prohibited by law, intentionally engaging in conduct injurious to the business or reputation of the Company, or intentionally engaging in any other conduct that, in the judgment of the Company, is contrary to the best interests of the Company.
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“Good and sufficient cause” for abandonment of service by the Employee is defined as including any act of discrimination against or harassment of the Employee on any basis prohibited by law, directing the Employee to engage in any conduct that is prohibited by law, intentionally engaging in conduct injurious to the material economic interests or reputation of the Employee.
Written notice of termination shall be given indicating the reasons for such termination. In the event of termination for good and sufficient cause as aforesaid, the Employee shall be entitled to compensation the Salary and the Benefits through to the date of written notice of termination and nothing more.
4.3 Termination without cause by Employer – The Employee may be terminated at any time without cause with thirty (30) days’ written notice, whereupon the Company shall pay to the Employee one-half of the full Salary that would have accrued to the Employee in respect of the remainder of the time specifically agreed upon.
4.4 Termination without cause by the Employee – The Employee may terminate his employment at any time without cause with thirty (30) days’ written notice, whereupon the Employee shall pay to the Company one-quarter of the full Salary that would have accrued to the Employee in respect of the remainder of the time specifically agreed upon.
4.5 Termination by Death - If the Employee dies, then this Agreement will terminate immediately, and the Employee’s rights to the Salary and Benefits hereunder will terminate as of the date of death, except that the Employee’s heirs, personal representatives or estate will be entitled to any unpaid portion of the Employee’s Salary and accrued Benefits up to the date of death and any Benefits which are to be continued or paid after the date of termination in accordance with the terms of the corresponding Benefit plans or programs.
4.6 Termination by Disability - If, as a result of Injury or Sickness (as respectively defined in this paragraph 4.6), the Employee is unable to perform the essential duties of his employment on a full-time basis for a continuous period of more than ninety (90) days in any twelve (12) month period following the Onset of Disability (as defined in this paragraph 4.6), then the Company may, upon written notice to the Employee, terminate the Employee’s employment and his rights to Salary and Benefits hereunder, except that the Employee will be entitled to any unpaid portion of his Salary and accrued Benefits up to the date of termination and to any Benefits which are to be continued or paid after the date of termination in accordance with the terms of the corresponding Benefit plans or programs. Any amounts due to the Employee under this paragraph 4.6 will be reduced, euro-for-euro, by any amounts received by the Employee under any disability insurance policy or plan provided to the Employee and paid for by Company. For the purposes of this paragraph 4.6, the following terms will have the following meanings: (i) “Injury” means bodily impairment resulting directly from an accident and independent of all other causes; (ii) “Sickness” means an illness (including Mental Illness, as defined below) or disease, which require treatment by a Physician (as defined below); (iii) “Mental Illness” means any psychological, behavioral or emotional disorder or ailment of the mind, including physical manifestations of psychological, behavioral or emotional disorders, but excluding demonstrable, structural brain damage; (iv) “Physician” means a practitioner of the healing arts who is properly licensed, and practicing within the scope of that license; and (v) “Onset of Disability” means the first day on which the Employee is unable to perform the essential duties of his employment on a full-time basis by reason of Injury or Sickness.
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Provided that this Agreement shall not be terminated by the Company during any period of incapacity for work of the Employee caused by personal injury by accident arising out of and in the course of his employment with the Company or by any of the occupational diseases specified in the Social Security Act, Chapter 318 of the laws of Malta, in each case occurring in the service of the Company, and not due to contributory negligence on the Employee’s part or to any contravention of safety rules established by the Company, and further provided that such period shall not exceed one (1) year.
4.7 Cooperation with the Company after Termination - Following any notice of termination of employment, the Employee shall cooperate fully with the Company in all matters relating to the winding up of his pending work on behalf of the Aerkomm Group and the orderly transfer of any such pending work to other employees of the Aerkomm Group as may be designated by the Company. The Company shall be entitled to such services of the Employee as the Company may reasonably require during the period of six (6) months following any notice of termination to effectuate the terms of this paragraph 4.7. The Company shall compensate the Employee for any services provided by the Employee to the Company pursuant to this paragraph 4.7 at a rate which is pro rata to the Salary, exclusive of value added tax if applicable.
5. CONDUCT
Prior and subsequent to theTermination Date, the Employee shall not, and shall not attempt to, in any manner: (i) interfere with any of the Aerkomm Group’s business; (ii) interfere in any manner with any of the Aerkomm Group’s employees or independent contractors; (iii) use any of the Aerkomm Group’s trade secrets, including, but not limited to, its customer lists, or other property, except in the best interests of the Company; or (iv) withhold any premiums, deposits or other forms of payments, applications, financial or confidential information appertaining to the Aerkomm Group or its customers.
6. Return of Company Property
In the event of the Employee’s termination, whether voluntary or involuntary, the Employee shall immediately take all reasonable steps promptly to deliver to the Company all property of any and every kind belonging to the Company which is in the Employee’s possession or under the Employee’s control, including any and all copies of such property. The Employee shall also inform the Company of the whereabouts of any such items the location of which is known to the Employee but not to the Company. The Employee shall not retain any copies in any form whatsoever of any such property.
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7. Trade Secrets, Company Property, Rights and Duties
7.1 Trade secrets and confidential information – The Employee specifically agrees that he shall not at any time, either during or subsequent to the Term of the Employee’s employment with the Company, in any fashion, form or manner, either directly or indirectly, unless expressly consented to in writing by the Company or otherwise required by any applicable law or competent court or government authority, department or other entity, use, divulge, disclose or communicate to any person or entity any confidential information of any kind, nature or description concerning any matters affecting or relating to the business of the Aerkomm Group, including, but not limited to, the Aerkomm Group’s computer processes, programs and codes; the names, addresses, buying habits or practices or points of contact of the Aerkomm Group or its customers; the Aerkomm Group’s sales and marketing methods, programs and related data; the Aerkomm Group’s pricing or cost information; information relating to any contract or agreement to which any member of the Aerkomm Group is a party; compensation paid to other employees and independent employees and other terms of their employment or contractual relationships with the Aerkomm Group; production methods; product designs; or any other confidential information of, about or concerning the business of the Aerkomm Group, its manner of operations, or other data of any kind, nature or description. The parties to this Agreement hereby stipulate that, as between them, the above information and items are important, material and confidential trade secrets and proprietary and confidential information that affect the successful conduct of the Aerkomm Group’s business and its goodwill, and that any breach of any term of this Section 7 is a material breach of this Agreement. All equipment, notebooks, documents, memoranda, reports, files, samples, books, correspondence, lists or other written and graphic records, and the like, including tangible or intangible computer programs, records and data, affecting or relating to the business of the Aerkomm Group, which the Employee might prepare, use, construct, observe, possess or control, shall be and shall remain the Aerkomm Group’s sole property. Any and all obligations under this Section 7 are in addition to and cumulative with those obligations undertaken by the Employee under the Aerkomm Group’s Conflict of Interest, Proprietary Information and Inventions agreement, which is incorporated herein by reference.
7.2 Business acquired by the Employee – The Employee agrees that all business procured by the Employee for the Aerkomm Group while employed by the Company in furtherance of the Employee’s services hereunder is and shall remain the permanent and exclusive property of the Aerkomm Group.
7.3 Material breach - Any interference with the Aerkomm Group’s business, property, confidential information, trade secrets, or with the Aerkomm Group’s customers, or employees by the Employee, or any of the Employee’s agents, shall be treated and acknowledged by the parties as a material breach of this Agreement.
7.4 Non-Solicitation, Non-Raiding – The Employee hereby acknowledges and agrees that he will be exposed to a significant amount of confidential information concerning the Aerkomm Group’s business methods, operations and customers while employed under this Agreement, that such information might be retained by the Employee in tangible form or simply retained in the Employee’s memory, and that the protection of the Aerkomm Group’s exclusive rights to such confidential information and trade secrets can best be ensured by means of a restriction on the Employee’s activities after termination of employment. Therefore, the Employee agrees that, for a one (1) year period following the Termination Date he shall not solicit, divert or initiate any contact with (or attempt to solicit, divert or initiate any contact with) any customer of the Aerkomm Group or employee or contractor of the Aerkomm Group with whom the Employee had contact on behalf of the Aerkomm Group in the twelve (12) months prior to the Termination Date, for any commercial or business reason whatsoever.
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8. NO EXISTING RESTRICTIONS ON THE EMPLOYEE’S EMPLOYMENT; NO CONFIDENTIAL INFORMATION OF ANOTHER
The Employee represents that he is not party to any agreement or other restriction upon his ability to become fully and effectively employed by the Company. The Employee further represents that he does not have in his possession or under his control, any trade secret information of any prior employer, and that he will not disclose any such information to the Company or use any such information for the benefit of the Company.
9. THE EMPLOYEE’S DUE DILIGENCE
The Employee has had the opportunity to investigate fully the employment offered by the Company and the Employee has exercised due diligence in investigating the Company’s offer. The Employee acknowledges that the position offered to him reflects the present plans of the Company. The Employee therefore acknowledges that, except for the terms and conditions set forth in this Agreement, no representations of any kind have been made to him with respect to the nature of his work, the duration of his employment, his expected compensation, or any other conditions of or involving his employment by the Company.
10. FOREIGN CORRUPT PRACTICES ACT COMPLIANCE
The Company advises the Employee that the United States Foreign Corrupt Practices Act (“FCPA”) prohibits any offer, payment, promise to pay, or authorization of the payment of money or anything of value (including money, gifts, preferential treatment and any other sort of advantage), either directly or indirectly, by a United States person, including the Company, or any of its employees, such as the Employee, or contractors, subsidiaries, affiliates or agents, to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.
The Employee understands and agrees that the Employee may not and will not, directly or indirectly, offer, promise, grant or authorize the giving of money or anything else of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.
The Employee understands that these legal restrictions apply fully to the Employee with regard to the Employee’s activities in the course of or in relation to the Employee’s employment by the Company, regardless of the Employee’s physical location. The Employee represents and warrants that the Employee fully understands and will act in accordance with all applicable laws regarding anti-corruption, including the FCPA, the U.K. Bribery Act, and any other applicable national, state and international laws related to anti-corruption. The Employee agrees that it will not take any action which would cause the Company to be in violation of the FCPA or any other applicable anti-corruption law, regulation or the Company’s policy or procedure.
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The Employee further represents and warrants that the Employee will know and understand, and act in accordance with, all Company policies and procedures related to anti-corruption and business conduct. The Employee agrees to attend all mandatory compliance training. The Employee undertakes to duly notify the Company if the Employee becomes aware of any such violation of the Company’s policies or procedures, or any other violation of law, committed by the Employee or any other person or entity, and to indemnify the Company for any losses, damages, fines and/or penalties which the Company may suffer or incur arising out of or incidental to any such violation committed by the Employee. The Employee also represents and warrants that the Employee will disclose to the Company if the Employee or any member of the Employee’s family is an official of a foreign government or foreign political party, or is a candidate for foreign political office.
In case of any breach of this Section 10, the Company may suspend or terminate this Agreement at any time without notice, indemnity or further obligation to the Employee by the Company.
11. GENERAL PROVISIONS
11.1 Entire Agreement - This Agreement supersedes any and all agreements, either oral or in writing, between the parties hereto with respect to the services of the Employee, and contains all of the covenants and agreements between the parties with respect to such services in any manner whatsoever. Each party to this Agreement acknowledges that no representations, inducement, promises or agreements, oral or otherwise, with regard to this Agreement or the services to be rendered under it have been made by any party, or anyone acting on behalf of any party, which are not embodied herein. Any modification of this Agreement must be made in writing and signed by the Employee and the Company.
11.2 Survival of Provisions - The provisions of Section 4, Section 5, Section 6, Section 7 and Section 10 shall survive the termination of this Agreement.
11.3 Partial Invalidity/Severability - If any provision of this Agreement is held to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way. The parties shall use all reasonable endeavors to replace the invalid, void or unenforceable provision by a valid provision the effect of which is as close as possible to the intended effect of the invalid, void or unenforceable provision.
11.4 Headings - The headings in this Agreement form no part of the agreement between the parties and will be deemed to have been inserted for convenience only and will not affect the construction hereof.
11.5 Governing Law - This Agreement and the rights of the parties hereunder shall be governed by and construed in accordance with the laws of the State of Nevada, USA, exclusive of conflict or choice of law rules.
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11.6 Arbitration - Any dispute, controversy or claim arising out of or relating to this Agreement, including the formation, interpretation, breach or termination thereof, including whether the claims asserted are arbitrable, will be referred to and finally determined by arbitration in accordance with the JAMS International Arbitration Rules as those Rules exist on the effective date of this Agreement. Any arbitration arising out of or related to this Agreement shall be conducted in accordance with the JAMS Efficiency Guidelines for the Pre-Hearing Phase of International Arbitrations and the Expedited Procedures set forth in the JAMS International Arbitration Rules, including Article 22 of those Rules.
The Tribunal will consist of one (1) arbitrator. The place of arbitration will be Las Vegas, Nevada, USA. The language to be used in the arbitral proceedings will be English. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Each party to any arbitration arising out of or related to this Agreement shall bear its own legal fees and costs of arbitration.
In any arbitration arising out of or related to this Agreement, the arbitrator is not empowered to award punitive or exemplary damages, except where permitted by statute, and the parties waive any right to recover any such damages. In any arbitration arising out of or related to this Agreement, the arbitrator may not award any incidental, indirect or consequential damages, including damages for lost profits.
The parties shall maintain the confidential nature of any arbitration proceeding, including the Hearing, and the Award except as may be necessary to prepare for or conduct the arbitration hearing on the merits, or except as may be necessary in connection with a court application for a preliminary remedy, a judicial challenge to an Award or its enforcement, or unless otherwise required by law or judicial decision.
The parties acknowledge that this Agreement evidences a transaction involving interstate commerce. Notwithstanding the provision in paragraph 11.5 with respect to applicable substantive law, any arbitration conducted pursuant to the terms of this Agreement shall be governed by the Federal Arbitration Act (9 U.S.C., Secs. 1-16).
11.7 Advice of Counsel - The parties each agree that they have consulted with counsel of their choosing, or have been given a reasonable opportunity to consult with counsel of their choosing and voluntarily have elected not to do so, prior to entering into this Agreement
11.8 Voluntary Agreement - The parties agree, represent and declare that they have carefully read this Agreement, know the contents of this Agreement, and that they sign this Agreement freely and voluntarily.
11.9 Notices - Any notices required by this Agreement to be given shall be delivered personally or mailed as follows:
| To the Employee: | Louis Giordimaina | |
| 36 Verdala Mansions | ||
| Porta Vilhena | ||
| Inguanez Street | ||
| Rabat RBT2418 | ||
| Malta | ||
| To the Company: | the registered office for the time being of the Company, | |
| with a copy to: | ||
| Aircom Pacific, Inc. | ||
| 44043 Fremont Blvd | ||
| Fremont, CA 94538-6045 | ||
| United States of America |
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11.10 Counterparts - This agreement may be signed in counterparts, and a facsimile or PDF signature has the same effect as an original signature.
| By: | ||
| Louis Giordimaina | ||
| By: | ||
| James J. Busuttil | ||
| Chairman | ||
| Aerkomm Inc. | ||
EMPLOYMENT AGREEMENT
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Exhibit 31.1
CERTIFICATIONS
I, Louis Giordimaina, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Aerkomm Inc.; |
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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; |
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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; |
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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: |
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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; |
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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 | |
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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 |
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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): |
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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 |
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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: August 23, 2021
| /s/ Louis Giordimaina | |
| Louis Giordimaina | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, Y. Tristan Kuo, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Aerkomm Inc.; |
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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; |
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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; |
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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; |
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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 | |
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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 |
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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): |
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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 |
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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: August 23, 2021
| /s/ Y. Tristan Kuo | |
| Y. Tristan Kuo | |
| 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 June 30, 2021 (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 23rd day of August 2021.
| /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, Y. Tristan Kuo, the 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 June 30, 2021 (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 23rd day of August 2021.
| /s/ Y. Tristan Kuo | |
| Y. Tristan Kuo | |
| 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.